AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-00200
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HOWMET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3324 13-2838093
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
HOWMET CORPORATION
475 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06836-1960
(203) 661-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROLAND PAUL
HOWMET CORPORATION
475 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06836-1960
(203) 625-8770
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
MARK STEGEMOELLER
LATHAM & WATKINS
SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60606
(312) 876-7700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE PRICE(1) FEE
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10% Senior Subordinated Notes
due 2003...................... $125,000,000 100% $125,000,000 $43,750
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(1) Estimated in accordance with Rule 457(a) solely for the purpose of
calculating the registration fee.
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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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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HOWMET CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF ITEMS OF FORM S-4
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration
Statement and Outside Front Facing Page of Registration Statement;
Cover Page of Prospectus....... Cross Reference Sheet; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover Page of Prospectus;
Outside Back Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings
to Fixed Charges, and Other Prospectus Summary; Risk Factors; Summary
Information.................... Historical and Unaudited Pro Forma
Financial and Other Data; Selected
Historical and Pro Forma Financial Data
4. Terms of the Transaction....... The Exchange Offer; Description of Senior
Subordinated Notes; Certain Federal Income
Tax Considerations
5. Pro Forma Financial Summary Historical and Unaudited Pro Forma
Information.................... Financial and Other Data; Unaudited Pro
Forma Statement of Operations; Selected
Historical and Pro Forma Financial Data
6. Material Contracts with the
Company Being Acquired......... Not Applicable
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters................... Not Applicable
8. Interests of Named Experts and Not Applicable
Counsel........................
9. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.................... Not Applicable
11. Incorporation of Certain
Information by Reference....... Not Applicable
12. Information with Respect to S-2
or S-3 Registrants............. Not Applicable
13. Incorporation of Certain
Information by Reference....... Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or Prospectus Summary; Unaudited Pro Forma
S-2 Registrants................ Statement of Operations; The Acquisition;
Selected Historical and Pro Forma Financial
Data; Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; The Acquisition;
Description of Senior Subordinated Notes;
Principal Stockholders; Financial
Statements
1
C. INFORMATION ABOUT THE COMPANY TO BE ACQUIRED
15. Information with Respect to S-3 Not Applicable
Companies......................
16. Information with Respect to S-2
or S-3 Companies............... Not Applicable
17. Information with Respect to
Companies Other Than S-3 or S-2
Companies...................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies,
Consents or Authorizations Are
To Be Solicited................ Not Applicable
19. Information if Proxies,
Consents or Authorizations Are Management; Certain Transactions; Principal
Not to Be Solicited or in an Stockholders
Exchange Offer.................
2
PROSPECTUS
OFFER TO EXCHANGE
10% SENIOR SUBORDINATED NOTES DUE 2003 (THE "EXCHANGE NOTES")
FOR ALL OUTSTANDING 10% SENIOR SUBORDINATED NOTES DUE 2003 (THE "ORIGINAL
NOTES")
OF
HOWMET CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON AUGUST 5,
1996 UNLESS EXTENDED.
Howmet Corporation, a Delaware corporation (the "Company" or "Howmet"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 10% Senior Subordinated Notes due 2003 (the "Exchange Notes"), which
exchange has been registered under the Securities Act of 1933, as amended (the
"Securities Act") pursuant to a registration statement of which this
Prospectus is a part (the "Registration Statement"), for each $1,000 principal
amount of its outstanding 10% Senior Subordinated Notes due 2003 (the
"Original Notes"), of which $125.0 million in aggregate principal amount are
outstanding as of the date hereof. The form and terms of the Exchange Notes
are the same as the form and terms of the Original Notes except that (i) the
exchange will have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and hence the Exchange Notes will not bear
legends restricting the transfer thereof, and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Original Notes
under the Registration Rights Agreement (as defined herein), which rights will
terminate upon the consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Original Notes (which they replace) and will be
entitled to the benefits of an indenture dated as of December 7, 1995
governing the Original Notes and the Exchange Notes (the "Indenture"). The
Original Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Senior Subordinated Notes" or the "Notes." See "The
Exchange Offer" and "Description of Senior Subordinated Notes."
The Senior Subordinated Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined) of the Company and effectively subordinated
to all outstanding Indebtedness of the Company's subsidiaries. At December 31,
1995, the Company had approximately $365.1 million of Senior Indebtedness and
$2.5 million of subsidiary indebtedness outstanding. Upon consummation of the
Acquisition, the Company had $109.3 million (minus standby letters of credit)
of remaining borrowing availability under its revolving credit facility
(subject to compliance with the Indenture) and the Indenture permits the
Company to incur additional Senior Indebtedness subject to certain
limitations. In addition, the Indenture permits the Senior Indebtedness to be
secured. As of the date of this Prospectus, none of the Company's subsidiaries
is a Subsidiary Guarantor (as defined) guaranteeing the Notes, nor is there a
plan for or event contemplated which would cause any subsidiary to become a
Subsidiary Guarantor guaranteeing the Notes following this Exchange Offer.
The Exchange Notes will bear interest at the same rate and on the same terms
as the Original Notes. Consequently, the Exchange Notes will bear interest at
the rate of 10% per annum and the interest will be payable semi-annually on
June 1 and December 1 of each year commencing on the first such date following
their date of issuance. The Exchange Notes will bear interest from and
including June 1, 1996. Holders whose Original Notes are accepted for exchange
will be deemed to have waived the right to receive any interest accrued on the
Original Notes and must acknowledge that they are not affiliates of the
Company to participate in this Exchange Offer. Broker-dealers who acquired the
Original Notes from the Company are not eligible to use this prospectus for
resale but must comply with the registration and prospectus delivery
requirements of the Securities Act.
The Exchange Notes may be redeemed at the option of the Company, in whole or
in part, on or after December 1, 1999 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, through the date of
redemption. The Company is a wholly owned subsidiary of Howmet Holdings
Corporation ("Holdings"), which in turn is a wholly-owned subsidiary of Blade
Acquisition Corp. ("Blade"). Thiokol Holding Company, a wholly-owned
subsidiary of Thiokol Corporation (Thiokol Corporation, together with its
subsidiaries, "Thiokol"), is the beneficial owner of 49% of the common stock
of Blade. The Carlyle Group and its affiliates (collectively, "Carlyle") are
the beneficial owners of 51% of the common stock of Blade. Thiokol has a three
year option to acquire Carlyle's Blade equity beginning after December 13,
1998. See "Description of Capital Stock--Stockholders Agreement." Thiokol has
publicly indicated that, subject to favorable Howmet financial and operating
performance and favorable conditions in the financial markets, it expects to
exercise its option to acquire Carlyle's interest in Blade and thereafter, to
cause Howmet to redeem the Senior Subordinated Notes. If Thiokol acquires
beneficial ownership of the Company, the Senior Subordinated Notes will be
prepayable, at Thiokol's option, on or after December 1, 1997 and before
December 1, 1999, at the Make-Whole Price (defined as the greater of (i) the
sum of the principal amount of the Notes and the Make-Whole Amount (as
defined), or (ii) the optional redemption price of the Notes on December 1,
1999). In addition, on or prior to December 1, 1998, the Company may, at its
option, redeem up to $45.0 million of the aggregate principal amount of the
Senior Subordinated Notes originally issued with the net cash proceeds
received from one or more Public Equity Offerings (as defined) at the
redemption prices set forth herein plus accrued interest to the date of
redemption; provided that at least $80.0 million aggregate principal amount of
Notes remains outstanding after any such redemption. In the event of a Change
of Control (as defined in the Indenture), the Company will be obligated to
offer to purchase all outstanding Senior Subordinated Notes at a price equal
to 101% of the principal amount thereof plus accrued and unpaid interest to
the date of purchase. There can be no assurance the Company will have the
financial resources necessary to purchase the Notes upon a Change of Control.
Thiokol's exercise of its option to acquire Blade will not constitute a Change
of Control.
SEE "RISK FACTORS" COMMENCING ON PAGE 15 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS WHICH HOLDERS OF ORIGINAL NOTES AND PROSPECTIVE PURCHASERS
OF EXCHANGE NOTES SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE OFFER.
The Company will accept for exchange any and all validly tendered Notes not
withdrawn prior to 5:00 p.m., New York City time, on August 5, 1996 unless
extended by the Company, in its sole discretion (the "Expiration Date").
Tenders of Notes may be withdrawn at any time prior to the Expiration Date.
The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer--Conditions." Notes may be tendered only in integral multiples
of $1,000.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is July 5, 1996
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to this
Exchange Offer in exchange for Original Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) a broker-
dealer who purchases such Exchange Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the Company within the meaning of
Rule 405 under the Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that the
holder is acquiring the Exchange Notes in the ordinary course of its business
and is not participating, and had no arrangement or understanding with any
person to participate, in the distribution of the Exchange Notes. Holders of
Original Notes wishing to accept the Exchange Offer must represent to the
Company, as required by the Registration Rights Agreement, that such
conditions have been met.
Each broker-dealer that receives the Exchange Notes for its own account in
exchange for the Original Notes, where such Original Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Original Notes where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has indicated its
intention to make this Prospectus (as it may be amended or supplemented)
available to any broker-dealer for use in connection with any such resale for
a period of 180 days after the Expiration Date. See "Plan of Distribution."
The Company believes that none of the registered holders of the Original Notes
is an affiliate (as such term is defined in Rule 405 under the Securities Act)
of the Company.
Prior to this Exchange Offer, there has been no public market for the Senior
Subordinated Notes. The Company does not intend to list the Senior
Subordinated Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. There can be no assurance
that an active market for the Senior Subordinated Notes will develop. To the
extent that a market for the Senior Subordinated Notes does develop, the
market value of the Senior Subordinated Notes will depend on market conditions
(such as yields on alternative investments), general economic conditions, the
Company's financial condition and other conditions. Such conditions might
cause the Senior Subordinated Notes, to the extent that they are actively
traded, to trade at a significant discount from face value. See "Risk
Factors--Lack of Public Market."
The Company will not receive any proceeds from this Exchange Offer. The
Company has agreed to bear the expenses of this Exchange Offer. No underwriter
is being used in connection with this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF ORIGINAL NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL OCTOBER 3, 1996 (90 DAYS AFTER THE DATE OF THIS EXCHANGE OFFER), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED
2
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of one or more fully registered global notes which
will be deposited with, or on behalf of, the Depositary (as defined) and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the global note or notes representing the Exchange Notes will be
shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. After the initial issuance
of such global note, Exchange Notes in certificated form will be issued in
exchange for the global note only as set forth in the Indenture. See
"Description of Senior Subordinated Notes--Book Entry; Delivery and Form."
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in
the Registration Statement. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. As result of the
Exchange Offer, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Registration Statement (and the exhibits and schedules thereto), as
well as the periodic reports and other information filed by the Company with
the Commission, may be inspected and copied at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at Room 1400, 75 Park Place, New York, New York 10007 and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-
2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois at the prescribed rates. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Senior Subordinated Notes, without cost to
the Trustee or such registered holders, copies of all reports and other
information that would be required to be filed by the Company with the
Commission under the Exchange Act, whether or not the Company is then required
to file reports with the Commission. As a result of the Exchange Offer, the
Company will become subject to the periodic reporting and other informational
requirements of the Exchange Act. The Company has agreed that, whether or not
the Company is subject to filing requirements under Section 13 or 15(d) of the
Exchange Act, and so long as any Senior Subordinated Notes remain outstanding,
it will file with the Commission (but only if the Commission at such time is
accepting such voluntary filings) and will send the Trustee copies of the
financial information, documents, and reports that would have been required to
be filed with the Commission pursuant to the Exchange Act. The Company will
also furnish such other reports as it may determine or as may be required by
law.
The principal address of the Company is 475 Steamboat Road, Greenwich,
Connecticut 06836-1960, telephone number (203) 661-4600.
---------------- ----------------
Management is not aware of any definitive information about growth rates or
shares for the Company's markets. The market share estimates contained in this
Prospectus have been developed by the Company and reflect the Company's
current estimates. These estimates were based primarily on (1) information
drawn from the collective expertise and industry knowledge held by Company
employees, particularly with respect to the
3
numbers of engines delivered by manufacturers and the aggregate value of cast
components of those engines, (2) information obtained from the Company's
customers with respect to the Company's share of their orders in the Company's
product categories, (3) general and industry-specific periodicals, (4)
industry forecasting group publications, (5) reports by professional financial
analysts, and (6) public information published by the Company's competitors.
The market for aerospace airfoils excludes the airfoils produced by two of the
Company's customers for their own use. Global or worldwide market share
estimates and references exclude former Soviet bloc countries and China.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................. 5
Risk Factors........................ 16
The Exchange Offer.................. 21
Use of Proceeds..................... 30
The Acquisition..................... 31
Capitalization...................... 33
Unaudited Pro Forma Statement of
Operations......................... 34
Selected Historical and Pro Forma
Financial Data..................... 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 38
PAGE
----
Business.............................................................. 47
Management............................................................ 60
Principal Stockholders................................................ 66
Certain Transactions.................................................. 67
Description of Capital Stock.......................................... 67
Description of Senior Subordinated Notes.............................. 69
Description of Senior Credit Facilities............................... 97
Description of Receivables Facility................................... 99
Certain Federal Income Tax Considerations............................. 101
Plan of Distribution.................................................. 102
Legal Matters......................................................... 102
Experts............................................................... 102
Index to Financial Statements and Financial Statement Schedule........ F-1
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto included elsewhere in
this Prospectus. For purposes of this Prospectus, unless otherwise indicated or
the context otherwise requires, references to the "Company" refer to Howmet
Corporation ("Howmet") and its consolidated subsidiaries after giving effect to
the Acquisition Transactions (as defined), including the Cercast Group
("Cercast"), and financial and statistical data are combined for Howmet and
Cercast. Certain capitalized terms used in this summary are defined elsewhere
herein. See "Additional Information" for the bases of statements relating to
market share estimates and industry trends set forth in this Prospectus. See
"Risk Factors" for a discussion of certain factors that should be considered in
connection with an investment in the Senior Subordinated Notes.
THE COMPANY
Management believes that Howmet, founded in 1926, is the largest manufacturer
in the world of investment cast turbine engine components for the jet aircraft
and industrial gas power generation markets. The Company uses investment
casting techniques to produce high-performance and high-reliability superalloy
and titanium components to the exacting specifications of the major turbine
engine manufacturers. In 1995, the Company generated revenues of $945.5 million
and pro forma operating income, net loss and Adjusted EBITDA (as defined) of
$31.3 million, $(19.1 million) and $86.3 million, respectively, and cash flows
from (used in) operating, investing and financing activities, after eliminating
the effects of advances and payment of dividends to Pechiney Corporation of
$22.5 million, $(784.0 million) and $742.4 million, respectively. For the three
months ended March 31, 1996, the Company generated revenues of $261.4 million,
and operating income, net income and Adjusted EBITDA (as defined) of $20.7
million, $2.3 million and $35.3 million, respectively, and cash flows from
(used in) operating, investing and financing activities of $33.3 million,
$(8.3) million and $(17.4) million, respectively. For the three months ended
April 2, 1995, revenues amounted to $235.9 million. Operating income, net
income and Adjusted EBITDA (as defined) were $17.0 million, $9.4 million and
$27.7 million, respectively, and cash flows from (used in) operating, investing
and financing activities (excluding the effects of advances and dividends to
Pechiney Corporation) were $(12.8) million, $(7.4) million and $0.7 million,
respectively. EBITDA is the sum of (i) income before cumulative effect of
change in accounting, (ii) provision for income taxes, (iii) depreciation and
amortization expense, (iv) goodwill write-offs and (v) interest income
(expense), net. Adjusted EBITDA includes EBITDA and (x) a restructuring credit
of $1.6 million in 1995, (y) LIFO inventory valuation adjustments of $4.4
million in 1995, $0.0 and $1.2 million, respectively, for the periods ended
April 2, 1995 and March 31, 1996, respectively, and (z) a $4.8 million accrual
in 1995 for workers' compensation claims incurred but not reported.
Howmet's major customers are the world's largest jet aircraft engine
manufacturers, including General Electric Aircraft Engines and Pratt & Whitney
Aircraft, and the largest industrial gas turbine ("IGT") engine manufacturers,
including General Electric Power Systems, European Gas Turbine, Asea Brown
Boveri AG, Siemens AG and Westinghouse. The Company is a leader in
technological advancement and refinements of components for new and existing
turbine engines. Through its Cercast subsidiaries, the Company is also the
world's largest producer of aluminum investment castings. The Company operates
in four major business areas described below:
Aerospace Castings. Management believes that the Company is the world's
largest manufacturer of turbine airfoils (both moving blades and stationary
vanes) used in the hot gas path of an aircraft turbine engine, the area of the
engine with the most severe operating conditions where performance and
reliability are critical. Howmet estimates that it has an approximate 60%
market share for aerospace turbine airfoils. The Company manufactures airfoils
for every major jet aircraft turbine engine program currently in production or
under development by its major customers. The aerospace castings market is
strongly influenced by both the level of new aircraft
5
construction and demand for commercial air travel. Although the cyclical
downturn in the airline industry that began in the early 1990s adversely
impacted revenues in this business area, the commercial aerospace market has
shown signs of recovery during the past few years. For example, industry
publications indicate a recovery in world airline operating performance from an
approximate $1.0 billion operating deficit in 1992 to an approximate $1.9
billion operating profit in 1993, and in 1994, the leading nine publicly traded
airlines reported aggregate operating profits of $1.4 billion. In addition,
Boeing has publicly announced that it has increased its production rates to
meet increasing demand for aircraft. The Company's 1995 net income was
favorably affected by these upward trends. Approximately half of Howmet's
airfoil sales are for use in new engines and half are used in the airfoil
replacement market. In addition to airfoils, the Company also produces large
structural cast components and integral castings (multiple components in a
single circular casting) for engine and airframe manufacturers. During 1995,
the Company had aerospace castings revenues of approximately $498.5 million, or
approximately 53% of total Company revenues.
Industrial Gas Turbine Castings. Management believes that Howmet is the
largest producer in the world of airfoils for land-based gas turbine engines.
These engines are primarily used in utility power generation, as well as in
mechanical drive applications for oil and gas processing and off-shore
drilling. Growth in demand for efficient, lower cost electrical generation
facilities with shorter construction lead times has resulted in expansion of
demand for IGT engines, which management believes account for approximately 25%
of new electric utility engines ordered worldwide. Airfoil products
manufactured by the Company for the IGT market have performance and reliability
requirements similar to those produced for the aerospace market, but generally
are significantly larger in size. Howmet estimates that it produces
approximately 70% of all IGT investment cast components sold in the world
today. Management believes that the Company is currently the only manufacturer
in production of technologically advanced directionally solidified ("DS") and
single crystal ("SC") airfoils now required for the most advanced, higher
efficiency IGT engines. During 1995, the Company had IGT casting revenues of
approximately $300.6 million, or approximately 32% of total Company revenues.
Aluminum Castings. Management believes that the Company, through Cercast, is
the largest producer of aluminum investment castings for the defense
electronics and commercial aerospace industries. Cast aluminum components, such
as doors, pump housings and gear and electronic boxes, are produced for use in
missiles, helicopters and military and commercial aircraft. During 1995,
Cercast had revenues of $72.0 million, or approximately 7% of total Company
revenues.
In addition to its castings businesses, Howmet refurbishes precision turbine
engine components for a wide range of jet aircraft end-users such as airlines,
other aircraft operators and engine overhaulers. Aircraft engine overhaul and
maintenance operations are required at regular intervals and normally use a
combination of new engine components and worn or damaged components that are
refurbished. Separately, the Company provides various products and services to
third parties, including machining, component coating, and specialty alloys.
During 1995, component repair and other businesses had revenues of
approximately $74.4 million, or approximately 8% of total Company revenues.
Howmet has initiated a process that may result in the sale of its refurbishment
business, although no agreement has been reached. If the refurbishment business
is sold, proceeds will be used to reduce indebtedness or invest in available
opportunities in Howmet's remaining businesses. The Company will retain its
Thermatech coating operations in any disposition of its refurbishment business.
STRATEGY
In 1992, Howmet began an extensive strategic review to address significant
weakness in the aerospace industry and increased competitiveness in its core
markets. Based on this review, the Company undertook a significant
restructuring program to increase cost competitiveness, improve productivity
and product quality, and reduce manufacturing cycle and delivery times. The
restructuring program involved several corporate initiatives which included
introducing synchronous manufacturing techniques, numerous process
improvements, delayering
6
of the management structure, and closer cooperation with key customers. The
Company has made significant progress in achieving its goals. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company's ongoing business strategy is to (i) enhance its worldwide market
leadership position, (ii) lead the market in producing technologically complex,
value added investment castings, (iii) provide its customers with the highest
possible product quality and customer service, (iv) emphasize new applications
for investment castings which replace components that would otherwise be
forged, fabricated or assembled and (v) continue its cost reduction and
productivity improvement programs. Management believes that, as a result of the
Company's cost rationalization and quality improvement program and continuing
business strategy, the Company is well positioned to capitalize on any
improvements in the commercial aerospace industry and any additional growth in
its IGT and other markets.
THE ACQUISITION
Blade Acquisition Corp. ("Blade") was created in October 1995 by The Carlyle
Group (collectively with its affiliates (as defined in Rule 405 under the
Securities Act), "Carlyle") and Thiokol Corporation (together with its
subsidiaries, "Thiokol"; Thiokol, together with Carlyle, the "Investors") to
acquire Pechiney Corporation, the parent corporation of Howmet, from Pechiney
International, S.A. ("Pechiney International") and the Cercast group of
companies from Howmet Cercast S.A., a subsidiary of Pechiney International.
Carlyle and Thiokol Holding Company, a wholly-owned subsidiary of Thiokol
Corporation, own 51% and 49%, respectively, of Blade's common stock. The
Carlyle Group is a Washington D.C.-based private merchant bank founded in 1987.
Since its inception, Carlyle has made equity investments in more than 25
companies, many of which are focused in the aerospace and defense industries.
Thiokol, a New York Stock Exchange-listed company, is a leader in the
development and production of high-technology solid rocket motors for
aerospace, defense, and commercial applications and is a major manufacturer of
precision fastening systems for aerospace and industrial markets worldwide.
Strategically, Thiokol desires to continue to expand its commercial and
industrial businesses and views its investment in Howmet as a key strategic
opportunity to achieve this goal. As part of the agreement between Carlyle and
Thiokol, Thiokol will have the option to purchase Carlyle's interest in the
Company after three years. See "Description of Capital Stock--Stockholders
Agreement." Thiokol has publicly indicated that, subject to favorable Howmet
financial and operating performance and favorable conditions in the financial
markets, it expects to exercise its option to acquire Carlyle's interest in
Blade and thereafter, to cause Howmet to redeem the Senior Subordinated Notes.
Neither Carlyle nor Thiokol has any obligation with respect to the Senior
Subordinated Notes.
The Acquisition was completed on December 13, 1995 for a total purchase
price, including transaction fees and expenses, of approximately $776.6 million
(net of certain adjustments for assumed capitalized lease and other obligations
of $2.9 million). The Acquisition is being accounted for as a purchase. The
Stock Purchase Agreement provides for an adjustment to the purchase price based
on the change in net working capital from June 30, 1995 to December 13, 1995.
In June 1996, this adjustment was agreed upon in the amount of $3.6 million,
payable to the Company. Financing for the Acquisition included (i) borrowings
of $300.0 million under a senior term loan facility (the "Senior Term
Facility"), (ii) the sale of $125.0 million aggregate principal amount of the
Senior Subordinated Notes, (iii) $51.4 million of proceeds from a special
purpose receivables facility (the "Receivables Facility"), (iv) $15.2 million
in borrowings under a $125.0 million (minus standby letters of credit)
revolving credit facility ("Revolving Credit Facility" and, together with the
Senior Term Facility, the "Senior Credit Facilities"), (v) $10.0 million of
Canadian borrowings (the "Canadian Borrowings"), and (vi) a $250.0 million cash
equity investment from the proceeds of the issuance of $200.0 million of Blade
common stock to the Investors and $50.0 million of Blade pay-in-kind preferred
stock to Thiokol. The Acquisition financing also included a $25.0 million pay-
in-kind junior subordinated purchaser note ("PIK Note") issued to Pechiney
International by Howmet Holdings Acquisition Corporation ("HHAC"), a wholly
owned subsidiary of Blade, which is reflected as equity of the Company because,
even though the amount
7
of the PIK Note is part of the purchase price paid for Howmet, it is not a
liability of Howmet and the holder of the PIK Note has no recourse to Howmet or
its assets; therefore, the PIK Note does not reduce Howmet's net assets that
resulted from the Acquisition. The Acquisition was effected through a series of
transactions, including the purchase of Pechiney Corporation by HHAC, the
purchase of the capital stock of certain Cercast companies by Howmet
Acquisition Corp. ("HAC"), a wholly owned subsidiary of HHAC, and the mergers
(the "Mergers") of HHAC with and into Pechiney Corporation and of HAC with and
into the Company (the "Acquisition Transactions"). After the Mergers, Pechiney
Corporation's name was changed to Howmet Holdings Corporation ("Holdings"). The
only subsidiary of Holdings other than the Company is Howmet Insurance Co.,
Inc. The sources and uses of funds relating to the Acquisition are set forth in
the following table (dollars in millions):
SOURCES OF FUNDS (BEFORE FEES AND
EXPENSES)
- ---------------------------------
Revolving Credit Borrowings...... $ 15.2
Senior Term Facility............. 300.0
Canadian Borrowings.............. 10.0
Receivables Facility............. 51.4
Senior Subordinated Notes........ 125.0
Equity Investment................ 250.0
------
Total Cash Sources............. $751.6
HHAC Purchaser Note.............. 25.0
------
Total Sources.................. $776.6
======
USES OF FUNDS
- -------------
Acquisition Purchase Price.......................................... $746.6
Fees and Expenses................................................... 30.0
------
Total Uses........................................................ $776.6
======
The original Senior Subordinated Notes were issued by HAC, and the Senior
Credit Facilities were entered into by HAC. The Company assumed such
obligations through the merger of HAC with and into the Company. However, the
Revolving Credit Facility permits amounts in excess of $100.0 million to be
borrowed only if such amounts could otherwise be borrowed under the limitations
on indebtedness in the Indenture. See "Description of Senior Credit
Facilities."
THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Original Notes that
are properly tendered and accepted. The Company
will issue Exchange Notes on or promptly after
the Expiration Date. There is $125.0 million
aggregate principal amount of Original Notes
outstanding. See "The Exchange Offer."
Based on an interpretation by the staff of the
Securities and Exchange Commission (the
"Commission") set forth in no-action letters
issued to third parties, the Company believes
that the Exchange Notes issued pursuant to this
Exchange Offer in exchange for Original Notes may
be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to
Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an
affiliate (as defined in Rule 405 under the
Securities Act) of the Company), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the holder is acquiring the
Exchange Notes in the ordinary course of its
business and is not participating, and had no
arrangement or understanding with any person to
participate, in the distribution of the Exchange
Notes. Each broker-
8
dealer that receives the Exchange Notes for its
own account in exchange for the Original Notes,
where such Notes were acquired by such broker-
dealer as a result of market-making activities or
other trading activities, must acknowledge that
it will deliver a prospectus in connection with
any resale of such Exchange Notes.
Registration Rights The Original Notes were sold by the Company on
Agreement................... December 7, 1995 to the Initial Purchasers
pursuant to a Purchase Agreement dated November
22, 1995 by and among the Company and the Initial
Purchasers (the "Purchase Agreement"). Pursuant
to the Purchase Agreement, the Company and the
Initial Purchasers entered into a Registration
Rights Agreement dated as of December 7, 1995
(the "Registration Rights Agreement") which
grants the holders of the Original Notes certain
exchange and registration rights. See "The
Exchange Offer--Termination of Certain Rights."
This Exchange Offer is intended to satisfy such
rights, which terminate upon the consummation of
the Exchange Offer. The holders of the Exchange
Notes are not entitled to any exchange or
registration rights with respect to the Exchange
Notes.
Expiration Date.............
The Exchange Offer will expire at 5:00 p.m., New
York City time, on August 5, 1996, unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term
"Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and Original
Notes.......................
The Exchange Notes will bear interest from and
including June 1, 1996. Holders whose Original
Notes are accepted for exchange will be deemed to
have waived the right to receive any interest
accrued on the Original Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange.
Procedures for Tendering Each holder of Original Notes wishing to accept
Notes....................... the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Original Notes
and any other required documentation to Marine
Midland Bank, as Exchange Agent, at the address
set forth herein. By executing the Letter of
Transmittal, each holder will represent to the
Company that, among other things, (i) the
Exchange Notes to be acquired by the holder of
the Original Notes in connection with the
Exchange Offer are being acquired by the holder
in the ordinary course of business of the holder,
(ii) the holder has no arrangement or
understanding with any person to participate in
the distribution of Exchange Notes, (iii) the
holder acknowledges and agrees that any
9
person who is a broker-dealer registered under
the Exchange Act or is participating in the
Exchange Offer for the purposes of distributing
the Exchange Notes must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with a
secondary resale transaction of the Exchange
Notes acquired by such person and cannot rely on
the position of the staff of the Commission set
forth in no-action letters (See "The Exchange
Offer--Resale of Exchange Notes") (iv) the holder
understands that a secondary resale transaction
described in clause (iii) above and any resales
of Exchange Notes obtained by such holder in
exchange for Original Notes acquired by such
holder directly from the Company should be
covered by an effective registration statement
containing the selling security holder
information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission,
and (v) the holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of
the Company. If the holder is a broker-dealer
that will receive Exchange Notes for its own
account in exchange for Original Notes that were
acquired as a result of market-making activities
or other trading activities, the holder is
required to acknowledge in the Letter of
Transmittal that it will deliver a prospectus in
connection with any resale of such Exchange
Notes; however, by so acknowledging and by
delivering a prospectus, the holder will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners...........
Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Original Notes in
the Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. See "The Exchange Offer--Procedures for
Tendering." If such beneficial owner wishes to
tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering such owner's
Original Notes, either make appropriate
arrangements to register ownership of the
Original Notes in such owner's name or obtain a
properly completed assignment from the registered
holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date.
Guaranteed Delivery Holders of Original Notes who wish to tender
Procedures.................. their Original Notes and whose Original Notes are
not immediately available or who cannot deliver
their Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to Marine Midland Bank, as Exchange
Agent, prior to the Expiration Date, must
tender their Original Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
10
Acceptance of the Original
Notes and Delivery of the
Exchange Notes..............
Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Original
Notes which are properly tendered in the Exchange
Offer prior to the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer will
be delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights........... Tenders of Original Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations..............
For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Original Notes, see
"Certain Federal Income Tax Considerations."
Exchange Agent.............. Marine Midland Bank is serving as the exchange
agent (the "Exchange Agent") in connection with
the Exchange Offer.
THE NOTES
The Exchange Notes.......... The Exchange Offer applies to $125.0 million
aggregate principal amount of the Original Notes.
The form and terms of the Exchange Notes are the
same as the form and terms of the Original Notes
except that (i) the exchange will have been
registered under the Securities Act and,
therefore, the Exchange Notes will not bear
legends restricting their transfer pursuant to
the Securities Act, and (ii) holders of the
Exchange Notes will not be entitled to certain
rights of holders of the Original Notes under the
Registration Rights Agreement, which rights will
terminate upon consummation of the Exchange
Offer. The Exchange Notes will evidence the same
debt as the Notes (which they replace) and will
be issued under, and be entitled to the benefits
of, the Indenture. See "Description of Senior
Subordinated Notes" for further information and
for definitions of certain capitalized terms used
below.
Maturity.................... December 1, 2003.
Interest.................... The Exchange Notes will bear interest at the rate
of 10% per annum, payable semiannually on June 1
and December 1, commencing June 1, 1996.
Optional Redemption......... The Exchange Notes may be redeemed at the option
of the Company, in whole or in part, on or after
December 1, 1999, at the redemption prices set
forth herein, plus accrued and unpaid interest,
if any, through the redemption date. Thiokol
currently owns 49% of the Common Stock of Blade,
which indirectly owns the entire equity interest
in the Company, and has an option to acquire the
interests in Blade which it does not own,
beginning December 13, 1998. If Thiokol acquires
the Company (including upon exercise of an option
to acquire Carlyle's interest in Blade), whether
directly or indirectly
11
(excluding up to 10% ownership of the common
stock of the Company or of a holding company
which directly or indirectly owns the entire
equity interest in the Company), the Senior
Subordinated Notes will be prepayable, at
Thiokol's option, on or after December 1, 1997
and before December 1, 1999, at the Make-Whole
Price (as defined herein). Thiokol has publicly
indicated that, subject to favorable Howmet
financial and operating performance and favorable
conditions in the financial markets, it expects
to exercise its option to acquire Carlyle's
interest in Blade and thereafter, to cause Howmet
to redeem the Senior Subordinated Notes. In
addition, on or prior to December 1, 1998, the
Company may, at its option, redeem up to $45.0
million of the aggregate principal amount of the
Senior Subordinated Notes originally issued with
the net cash proceeds received from one or more
Public Equity Offerings (as defined) at the
redemption prices set forth herein plus accrued
interest to the date of redemption; provided that
at least $80.0 million aggregate principal amount
of Notes remains outstanding after any such
redemption. Any prepayment summarized above would
require the consent of the Company's lenders
under the Credit Agreement.
Change of Control........... A "Change of Control" includes the occurrence of
one or more of the following events: (i) any
sale, lease, exchange or other transfer (in one
transaction or a series of related transactions)
of all or substantially all of the assets of the
Company to any person or group; (ii) the approval
of any plan or proposal for the liquidation or
dissolution of the Company; or (iii) the
acquisition in one or more transactions, of
beneficial ownership by (x) any person or entity
(other than any Permitted Holder) or (y) any
group of persons or entities (excluding any
Permitted Holders, as defined), in either case,
of any securities of the Company such that, as a
result of such acquisition, such person, entity
or group either (A) beneficially owns at least
35% of the Company's then outstanding voting
securities entitled to vote on a regular basis
for the Board of Directors of the Company (but
only to the extent that (x) such beneficial
ownership is not shared with any Permitted Holder
who has the power to direct the vote thereof and
(y) Permitted Holders beneficially own less than
a majority of such voting securities), or (B)
otherwise has the ability to elect, directly or
indirectly, a majority of the members of the
Company's Board of Directors. In the event of a
Change of Control, the Company will be obligated
to offer to purchase all outstanding Senior
Subordinated Notes at a price equal to 101% of
the principal amount thereof plus accrued and
unpaid interest to the date of purchase. Thiokol
is a "Permitted Holder" and therefore Thiokol's
exercise of its option to acquire the remaining
common stock of Blade will not constitute a
Change of Control under the Indenture. Payments
upon a Change of Control are limited by
requirements that payments or offers thereof be
made, or consents obtained, under the Company's
Credit Agreement; however, failure to make
payments when required by the Indenture would
constitute an Event of Default.
12
Ranking..................... The Exchange Notes will be general unsecured
obligations of the Company and will be
subordinated in right of payment to all existing
and future Senior Indebtedness (as defined) and
are effectively subordinated to the existing and
future indebtedness of all of the Company's
subsidiaries. At December 31, 1995, the Company
had approximately $365.1 million of Senior
Indebtedness and $2.5 million of subsidiary
indebtedness outstanding.
Covenants................... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to incur additional
Indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase
Equity Interests or subordinated Indebtedness,
create certain Liens, enter into certain
transactions with Affiliates, sell assets of the
Company or its subsidiaries, issue or sell Equity
Interests of the Company's subsidiaries or enter
into certain mergers and consolidations. In
addition, under certain circumstances, the
Company will be required to offer to purchase
Senior Subordinated Notes at a price equal to
100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date
of purchase, with the proceeds of certain Asset
Sales. See "Description of Senior Subordinated
Notes." Under the Indenture, subject to limited
exceptions, the Company and its Restricted
Subsidiaries (as defined) may not incur
additional indebtedness unless the Company
maintains a 2.0 to 1.0 Operating Coverage Ratio
(as defined). Except for this provision and the
Change of Control provisions summarized above
(neither of which may be waived by the Company),
the Indenture contains no provisions which may
afford holders of the Notes specific protection
in the event of a highly leveraged transaction
involving the Company.
13
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL AND OTHER DATA
The following table sets forth summary historical combined financial data of
Howmet and Cercast for each of the two years in the period ended December 31,
1994, which have been derived from the Predecessor Company Combined Financial
Statements audited by Price Waterhouse LLP, independent accountants. The
summary financial data as of December 31, 1995 and for the periods from January
1, 1995 to December 13, 1995 and December 14, 1995 to December 31, 1995 have
been derived from the Predecessor Company Combined and the Successor Company
Consolidated Financial Statements audited by Ernst & Young LLP, independent
auditors. The summary financial data as of March 31, 1996 and for the thirteen
weeks ended April 2, 1995 and March 31, 1996 have been derived from unaudited
interim financial statements which, in the opinion of management, reflect all
material adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim
periods.The unaudited pro forma financial data set forth below are not
necessarily indicative of the results that may be achieved in the future. The
following financial data should be read in conjunction with the "Unaudited Pro
Forma Statement of Operations" and the notes thereto (which include a
description of the pro forma adjustments), "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements of the Company, together with the related notes thereto, included
elsewhere in this Prospectus (excluding the number of employees specified under
"Other Data"). The combined operations of Howmet and Cercast prior to the
consummation of the Acquisition Transactions are referred to as the
"Predecessor Company Combined" and Howmet and its subsidiaries after the
consummation of the Acquisition Transactions are referred to as the "Successor
Company Consolidated."
PREDECESSOR SUCCESSOR
PREDECESSOR COMPANY SUCCESSOR COMPANY COMPANY COMPANY
COMBINED CONSOLIDATED COMBINED CONSOLIDATED
---------------------------- ---------------------------- ----------- ------------
YEAR ENDED PERIOD FROM PERIOD FROM (UNAUDITED) (UNAUDITED) THIRTEEN
DECEMBER 31, JANUARY 1, DECEMBER 14, YEAR ENDED WEEKS ENDED
-------------- 1995 TO 1995 TO DECEMBER 31, ------------------------
DECEMBER 13, DECEMBER 31, 1995 APRIL 2, MARCH 31,
1993 1994 1995(A) 1995(A) PRO FORMA(A)(B) 1995 1996
------ ------ ------------ ------------ --------------- ----------- ------------
(DOLLARS IN MILLIONS)
STATEMENTS OF OPERATIONS
DATA:
Net sales.............. $832.7 $858.3 $894.1 $ 51.4 $945.5 $235.9 $ 261.4
Gross profit........... 229.3 211.0 212.7 13.4 226.1 57.5 71.5
Selling, general and
administrative........ 104.5 90.9 105.0 4.6 111.5 26.3 29.5
Depreciation and
amortization.......... 31.0 33.1 32.6 2.8 58.5 8.3 15.1
Research and
development........... 23.3 19.2 25.0 1.4 26.4 5.9 6.2
Restructuring charges
(credit).............. -- 2.5 (1.6) -- (1.6) -- --
Goodwill write-off..... -- 47.4 -- -- -- -- --
------ ------ ------ -------- ------ ------ --------
Operating Income....... 70.5 17.9 51.7 4.6 31.3 17.0 20.7
Interest income--
affiliates............ 5.3 9.4 8.6 -- -- 3.5 --
Interest income--third
parties............... 0.8 0.6 1.3 -- -- -- 0.3
Interest expense--
affiliates............ (0.9) (0.8) (2.1) -- -- (0.3) --
Interest expense--third
parties............... (4.8) (4.0) (3.7) (2.9) (45.2) (0.8) (11.4)
Other--net............. (0.1) (0.1) (5.8) (1.0) (11.1) (1.2) (2.0)
Provision (credit) for
income taxes.......... 27.8 46.0 23.7 0.5 (5.9) 8.8 5.3
------ ------ ------ -------- ------ ------ --------
Income (loss) before
cumulative effect of
change in accounting.. $ 43.0 $(23.0) $ 26.3 $ 0.2 $(19.1) $ 9.4 $ 2.3
====== ====== ====== ======== ====== ====== ========
BALANCE SHEET DATA (END
OF PERIOD)(C):
Total assets....................................... $1,099.5 $ -- $ -- $1,096.3
Total debt......................................... 463.5 -- -- 446.7
Working capital (deficit).......................... 0.9 -- -- (0.7)
Stockholders' equity............................... 276.3 -- -- 275.7
OTHER DATA:
Adjusted EBITDA(d)..... 85.4 105.2 91.1 6.5 86.3 27.7 35.3
Capital expenditures... 33.1 38.0 41.2 1.6 -- 6.8 5.2
Number of employees
(end of period)....... 8,990 8,702 -- 9,577 -- 8,897 9,821
Ratio of earnings to
fixed charges(e)...... 10.4x 4.4x 7.7x 1.2x (e) 11.9x 1.7x
Ratio of Adjusted
EBITDA to interest
expense(d)............ -- -- 15.7x 2.2x 1.9x 23.6x 3.1x
Net cash provided by
(used in) operating
activities............ 95.4 91.4 35.2 (12.7) 22.5 (12.8) 33.3
Net cash (used in)
provided by investing
activities(c)......... (31.7) (33.4) (43.8) (740.2) (784.0) (7.4) (8.3)
Net cash (used in)
provided by financing
activities(c)......... (8.5) 4.5 (20.0) 762.4 742.4 0.7 (17.4)
- -------
(a) Includes the results of operations of Turbine Components Corporation
("TCC"), acquired in April 1995.
14
(b) The unaudited pro forma financial data for the year ended December 31, 1995
gives effect to the Acquisition Transactions and the combination of Howmet
and Cercast as if such transactions had occurred on January 1, 1995 with
respect to the pro forma operating and other data. See "The Acquisition"
and "Unaudited Pro Forma Statement of Operations."
(c) Excludes the effects of advances to Pechiney Corporation and dividends to
Pechiney Corporation, as set forth below:
YEAR ENDED
DECEMBER PERIOD FROM
31, JANUARY 1, 1995
----------- TO
1993 1994 DECEMBER 13, 1995
----- ----- -----------------
(DOLLARS IN MILLIONS)
CASH FLOW DATA:
Increase (decrease) in advances to Pechiney
Corporation................................. $43.0 $34.9 $(237.4)
Payment of dividends......................... 11.5 28.6 200.0
(d) EBITDA is the sum of (i) income before cumulative effect of change in
accounting, (ii) provision for income taxes, (iii) depreciation and
amortization expense, (iv) a goodwill write-off of $47.4 million in 1994,
and (v) interest income (expense), net. Adjusted EBITDA is defined as the
sum of EBITDA and (x) restructuring expense of $2.5 million in 1994, and a
restructuring credit of $1.6 million, actual and pro forma, in 1995, (y)
LIFO inventory valuation adjustments of $(15.9), $4.0, $4.4 and $4.4
million in 1993, 1994, 1995, actual and pro forma, respectively, and (z) a
$4.8 million accrual in 1995 for workers' compensation claims incurred but
not reported. Adjusted EBITDA is similar to Consolidated EBITDA, as defined
in the Indenture, which is used in connection with certain covenants that
limit the ability of the Company to incur additional indebtedness, make
restricted payments and effect certain mergers and other transactions. The
ratio of Adjusted EBITDA to interest expense is calculated by dividing
Adjusted EBITDA by interest expense, and the ratio is similar to the
Operating Coverage Ratio in the Indenture that limits the Company's ability
to incur debt. Neither EBITDA, Adjusted EBITDA nor the ratio of Adjusted
EBITDA to interest expense should be considered as alternative measures of
operating results or cash flow from operations (as determined in accordance
with generally accepted accounting principles) or ratios of earnings to
fixed charges, but are presented because management understands that some
investors consider such additional information in evaluating an issuer's
ability to service debt. See "Description of Senior Subordinated Notes."
(e) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and cumulative
effect of change in accounting plus fixed charges. "Fixed charges" consist
of interest expense, amortization of deferred financing costs and the
portion of rental expense deemed representative of the interest factor. Pro
forma for the Acquisition Transactions, earnings, as so defined, would have
been inadequate to cover fixed charges, as so defined, for the year ended
December 31, 1995 by $25.0 million.
15
RISK FACTORS
Prospective investors should carefully consider the following factors,
together with the other information contained in this Prospectus, in
connection with an investment in the Senior Subordinated Notes.
LIMITATIONS AND RISKS DUE TO SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company incurred significant indebtedness in connection with the
Acquisition (as defined). See "The Acquisition." At December 31, 1995, the
Company's consolidated total indebtedness and total stockholders' equity was
$492.6 million and $276.3 million, respectively. The Company's indebtedness
under the Senior Credit Facilities is secured by guarantees of the Company's
domestic subsidiaries and by Blade and Holdings, and the stock of Holdings and
the Company is pledged to secure the Blade and Holdings guarantees,
respectively. See "Description of Senior Credit Facilities." Pro forma for the
Acquisition, the Company's earnings for the year ended December 31, 1995 would
have been inadequate to cover fixed charges by $25.0 million. See "Unaudited
Pro Forma Statement of Operations." In addition, upon consummation of the
Acquisition, the Company entered into the Receivables Facility pursuant to
which the Company sold certain accounts receivable to a special purpose trust
for aggregate cash proceeds of $51.4 million. See "Description of the
Receivables Facility." The Company intends to continue such sales of eligible
accounts receivable in the future. The Indenture does not contain significant
restrictions on the Company's ability to sell its accounts receivable pursuant
to any such facility or with respect to the use of proceeds thereof. The
Company's ability to make any scheduled payments of the principal of, or
interest on, or to refinance, its indebtedness (including the Notes) depends
on its future performance, which to a certain extent is subject to economic,
financial, competitive and other factors beyond its control, and there can be
no assurance that such payments will be made. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
debt and make necessary capital expenditures, the Company may be required to
refinance all or a portion of its existing debt, including the Notes, to sell
assets or to obtain additional financing. There can be no assurance that any
such refinancing or refinancing of the Senior Credit Facilities at maturity
would be possible, on reasonable terms if at all, or that any such sales of
assets or additional financing could be achieved.
The Company's high level of debt will have several important effects on its
future operations, including the following: (a) the Company will have
significant cash requirements to service debt, reducing funds available for
operations, for capital expenditures and research and development (which are
important factors in the Company's technological leadership role), and for
acquisitions and future business opportunities, thus possibly increasing the
Company's vulnerability to adverse general economic and industry conditions
which could be exacerbated by the cyclical nature of certain of the Company's
businesses (see "Effects of Aerospace Industry Economic Conditions and
Cyclicality," below) and greater capital resources of its principal competitor
after giving effect to the Acquisition (see "Business--Competition"); and (b)
the financial covenants and other restrictions contained in the Senior Credit
Facilities and other agreements relating to the Company's Senior Indebtedness
and in the Indenture will require the Company to meet certain financial tests
and will restrict its ability to borrow additional funds, to dispose of assets
or to pay cash dividends.
EFFECTS OF AEROSPACE INDUSTRY ECONOMIC CONDITIONS AND CYCLICALITY
The commercial aerospace industry is a cyclical business, and the demand by
commercial airlines for new aircraft historically has been highly related to
the stability and health of the United States and world economies. Aircraft
delivery trends vary in direct relation to the general economic cycle, with an
approximate two year lag. Aircraft are delivered when completed, regardless of
economic conditions at that time, because substantial deposits are required at
the time of the orders. Although the United States economy entered a period of
slow growth and recession in 1989 and 1990, the aerospace industry made record
deliveries of large commercial aircraft during these years. In fact, aircraft
deliveries continued to increase through 1991 even though the world airline
industry reported record operating losses in the early 1990s.
16
The large number of aircraft delivered in the early 1990s and the industry's
widespread losses created excess capacity in the air carrier system, evidenced
by a substantial number of inactive new and used aircraft. Operating losses
and excess capacity, combined with the high cost of new aircraft, placed
economic stress on the airlines and aircraft leasing companies. During this
period, airlines and leasing companies deferred existing new aircraft orders
and, to a lesser degree, canceled orders. These deferrals and cancellations
had a negative impact on the volume and price of orders placed with the
manufacturers of commercial aircraft components, including the Company.
Although the United States airline industry as a whole has reported a return
to profitability in 1994 and 1995 and excess capacity has been reduced, there
can be no assurance that the improved operating performance of the commercial
airlines will continue or that deliveries of engines for large commercial
aircraft will not decline in the future. Any developments in the commercial
aerospace market resulting in a reduction in the rate of aircraft engine
deliveries in the future, including future cancellations and deferrals of
scheduled deliveries, could materially adversely affect the Company's
financial condition and results of operations.
REDUCED GOVERNMENT SALES
Military and defense contractor sales comprised approximately 16% of the
Company's 1995 sales. United States defense spending in markets served by the
Company has been declining since the 1980s, and continued reductions in
defense budgets or military aircraft procurement could adversely affect the
Company's financial condition and results of operations.
CONCENTRATED CUSTOMER BASE; COMPETITION
A substantial portion of the Company's business is conducted with a
relatively small number of large aerospace and industrial gas turbine
customers, including General Electric Aircraft Engines ("GEAE"), General
Electric Power Systems ("GEPS") and Pratt & Whitney Aircraft ("PWA"). GEAE and
GEPS accounted for approximately 21% of 1995 net sales, with GEPS accounting
for 10% of 1995 net sales. PWA and its Canadian affiliate accounted for
approximately 15% of the Company's 1995 net sales. The current three year
contract with PWA is scheduled to expire in 1997 consistent with industry
practice regarding contract lifecycles. The Company's top ten customers
accounted in the aggregate for approximately 65% of 1995 net sales.
Approximately half of Howmet's business is based on multi-year contracts with
its customers, usually for a three-year period, that generally give the
Company the right and obligation to fill a specified percentage of the
customer's requirements but generally do not provide the Company with any
minimum order commitments. The Company typically renegotiates these contracts
during the last year of the contract period and, during this process,
customers frequently solicit bids from the Company's competitors, principally
from its strongest competitor, Precision Castparts Corporation ("PCC"). Most
of such contracts include provisions requiring specified price reductions over
the term of the contract based on lower production costs as programs mature,
shared benefits from other cost reductions resulting from joint production
decisions, and negotiated reductions. The Company has made significant price
concessions to customers in recent years, and management expects customer
pressure for such pricing concessions to continue.
One of Howmet's largest customers, GEPS, in connection with its corporate-
level policy decision to reduce sole sourcing, has exercised its right to
terminate its long-term sole source contract with Howmet effective in early
1997, and has placed orders for certain components with the Company's
principal competitor, PCC. While Pechiney was in the process of selling
Howmet's parent to HHAC, and before the terms of the Acquisition were known,
one of the Company's largest customers expressed concerns about the potential
impact of a leveraged acquisition on the Company's ability to continue to meet
this customer's requirements, and indicated that its relationship with the
Company would be reassessed if a leveraged acquisition were consummated. Based
on subsequent discussions with the customer regarding the proposed terms of
the Acquisition and its financing, management believes that these concerns
have largely been addressed. Management believes that the Company will be able
to continue to provide the customer the high level of service that it has
provided in the past. However, the Company's financial condition and results
of operations could be materially adversely affected if one or more of the
Company's key customers shifted a material amount of its work from the
Company. In addition, the Company could also be materially adversely affected
by any substantial work stoppage or interruption of production at any of its
major customers or at any of the major aircraft manufacturers, and could
17
be materially adversely affected if one or more key customers reduce or cease
conducting operations. Furthermore, competition is based to a significant
extent on technological capabilities and innovations, and there can be no
assurance that one or more of the Company's competitors will not develop
products and/or processes that would give them competitive advantages in the
Company's markets. See "Business."
SUBORDINATION AND RANKING OF THE NOTES
The Notes are general unsecured obligations of the Company and are
subordinate in right of payment to all Senior Indebtedness, including all
indebtedness of the Company under the Senior Credit Facilities. As of December
31, 1995, approximately $365.1 million of Senior Indebtedness was outstanding
and the Company had no senior subordinated indebtedness outstanding other than
the Notes. Upon consummation of the Acquisition, the Company had $109.3
million (minus standby letters of credit) of remaining borrowing availability
under the Revolving Credit Facility (subject to compliance with the
Indenture). The Indenture permits the Company to incur additional Senior
Indebtedness provided certain conditions are met, and the Company expects from
time to time to incur additional Senior Indebtedness. In addition, the
Indenture permits Senior Indebtedness to be secured. By reason of the
subordination provisions of the Indenture, in the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of the Company or
upon a default in payment with respect to, or the acceleration of, or if a
judicial proceeding is pending with respect to any default under, any Senior
Indebtedness, the lenders under the Senior Credit Facilities and other
creditors who are holders of Senior Indebtedness must be paid in full before a
holder of the Notes may be paid; accordingly, there may be insufficient assets
remaining after such payments to pay amounts due on the Notes. See
"Description of Senior Subordinated Notes--Subordination."
The Company operates a substantial portion of its business through
subsidiaries, including its foreign operations, its component repair business
and its aluminum investment casting business. The Notes are effectively
subordinated to the claims of all creditors of these subsidiaries, including
trade creditors. At December 31, 1995, aggregate liabilities of such
subsidiaries were $135.2 million. The Company's subsidiaries may incur
additional debt under the Indenture in limited circumstances.
FRAUDULENT CONVEYANCE RISKS
The Company's incurrence of the indebtedness evidenced by the Notes is
subject to review under relevant U.S. federal and state fraudulent conveyance
statutes ("Fraudulent Conveyance Statutes") in a bankruptcy case or a lawsuit
by or on behalf of creditors of the Company. The statutes provide that if a
court determines that at the time the Notes were issued and the proceeds
applied, (i) the Company issued the Notes and applied the proceeds with the
intent of hindering, delaying or defrauding creditors or (ii) the Company
received less than a reasonably equivalent value or fair consideration for
issuing the Notes, and, after so applying the proceeds, the Company (a) was
insolvent or rendered insolvent by reason of such transactions, (b) was
engaged in a business or transaction for which its assets constituted
unreasonably small capital or (c) intended to incur, or believed that it would
incur, debts beyond its ability to pay as they matured (as the foregoing terms
are defined in or interpreted under Fraudulent Conveyance Statutes), such
court could subordinate all or a part of the Notes to existing and future
indebtedness of the Company, recover any payments made on the Notes or take
other action detrimental to the holders of the Notes, including, under certain
circumstances, invalidating the Notes.
Based upon the financial and other information currently available to it,
the Company believes that the indebtedness and obligations evidenced by the
Notes has been incurred and proceeds of the Notes has been used for proper
purposes and in good faith. The Company believes that at the time of, and
after giving effect to, the incurrence of the indebtedness and obligations
evidenced by the Notes, it was solvent and had sufficient capital to carry on
its business and that it has paid and will pay its debts as they mature. No
assurance can be given, however, that a court would concur with such beliefs
and positions.
18
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, a company will be considered
insolvent for these purposes if the company is unable to pay its debts as they
become due in the usual course of its business or the sum of the company's
debts is greater than all of the company's property at a fair valuation, or if
the present fair saleable value of the company's assets is less than the
amount that will be required to pay its probable liability on its existing
debts as they become absolute and mature. In rendering their opinion on the
validity of the Notes, counsel for the Company will express no opinion as to
the effect of Fraudulent Conveyance Statutes or affecting the enforcement of
creditors' rights generally.
CONCENTRATION OF OWNERSHIP
Carlyle and Thiokol have beneficial ownership of 51% and 49%, respectively,
of the voting capital stock of Blade. Pursuant to a stockholders agreement
(the "Stockholders Agreement"), Blade has a board of directors consisting of
seven members, and Carlyle and Thiokol each appointed three directors to the
board. Under the Stockholders Agreement, Blade and its subsidiaries, including
the Company, may not take certain actions, including, but not limited to,
certain mergers, sale transactions, transactions with affiliates, issuances of
capital stock, incurrence of debt, and payments of dividends on or repurchases
of capital stock, without the approval of a supermajority of the board of
directors. The Stockholders Agreement provides that Thiokol may purchase all
of Carlyle's interest in Blade, beginning from the third anniversary through
the sixth anniversary after the closing of the Acquisition on December 13,
1995 (the "Closing Date"). Thiokol has publicly indicated that, subject to
favorable Howmet financial and operating performance and favorable conditions
in the financial markets, it expects to exercise its option to acquire
Carlyle's interest in Blade and thereafter, to cause Howmet to redeem the
Senior Subordinated Notes. As a result of the ownership structure of Blade and
the contractual rights described above, the voting and management control of
Blade, which indirectly controls the Company, is highly concentrated. Carlyle,
acting with the consent of Thiokol, has the ability to direct the actions of
Blade with respect to matters such as the payment of dividends, material
acquisitions, dispositions and certain other corporate transactions. Thiokol
and Carlyle are in a position to exercise control over Blade and ultimately
over the Company, to determine the outcome of all matters required to be
submitted to stockholders for approval, and to otherwise direct and control
the operations of Blade and, indirectly, the Company. Carlyle and Thiokol are
also parties to management agreements with the Company, pursuant to which
Carlyle and Thiokol render certain management and advisory services to the
Company and receive fees for such services. Carlyle and Thiokol also received
certain fees in connection with the consummation of the Acquisition. See
"Certain Transactions," "Principal Stockholders" and "Description of Capital
Stock."
ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and changing international, federal,
state and local laws, regulations and ordinances that (i) govern activities or
operations that may have adverse environmental effects, such as discharges to
air and water, as well as handling and disposal practices for solid and
hazardous wastes, and (ii) impose liability for the costs of cleaning up, and
certain damages resulting from, sites of past spills, disposals or other
releases of hazardous substances and materials (together, "Environmental
Laws"). Management believes that the Company's current operations are in
substantial compliance with such Environmental Laws. However, due to the
nature of the Company's operations, the Company is involved from time to time
in legal proceedings involving remediation of environmental contamination from
past or present operations, as well as compliance with environmental
requirements applicable to ongoing operations. There can be no assurance that
material costs or liabilities will not be incurred in connection with any such
proceedings or claims or to meet such compliance requirements.
The amount and timing of payments the Company may be required to make with
respect to environmental matters are uncertain at this time. However, based on
management's best current estimates of potential liability, management
believes that the Company's reserves (approximately $6.1 million at December
31, 1995) are adequate to satisfy substantially all of its environmental
liabilities under current laws and regulations. In addition, in connection
with the Acquisition, Howmet Cercast S.A., Pechiney International and Pechiney
are required to indemnify Blade for environmental liabilities and obligations
stemming from events occurring or conditions
19
existing prior to the closing of the Acquisition to the extent such
liabilities exceed the Company's reserves of $6.0 million at June 30, 1995.
Blade assigned its rights to the Company with respect to any such
indemnification upon consummation of the Acquisition.
In connection with their review of environmental matters related to the
Acquisition, Thiokol and Carlyle retained independent consultants to review
the environmental liabilities associated with the European properties owned
and operated by the Company. The environmental consultants concluded in that
review that the total environmental liabilities associated with those
facilities ranged from $1.3 million to $6.5 million. Based on a preliminary
assessment of the environmental liabilities identified by the consultants, the
Company expects actual expenditures at these properties to be $1.3 million to
$3.0 million. As a result of the indemnity summarized above, the Company does
not expect any net effect on its financial condition or results of operations
from these European properties.
The Company is currently investigating possible and known contamination
(including soil and groundwater contamination) at five domestic and five
European facilities. In addition, as a result of off-site waste disposal prior
to the Acquisition, the Company may be subject to liability for, and is
currently involved in, certain matters relating to the investigation and/or
remediation of environmental contamination at certain properties not owned or
operated by the Company. In this regard, the Company has been or may be named
a potentially responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, ("CERCLA") (the federal
"Superfund" statute) and similar state statutes at nineteen on-site and off-
site locations.
The amount and timing of payments the Company may be required to make with
respect to environmental matters are uncertain at this time. See "Management's
Discussion and Analysis of Financial Condition and Result of Operations--
Environmental Matters," and "Business--Environmental Matters."
LACK OF PUBLIC MARKET
There is no existing trading market for the Notes and, although the Company
has been advised by the Initial Purchasers that they currently intend to make
a market in the Notes, and, if issued, the Exchange Notes, the Initial
Purchasers are not obligated to do so and any market making may be
discontinued at any time without notice. In addition, such market making
activity may be limited during the Exchange Offer. See "Exchange Offer and
Registration Rights."
FAILURE TO EXCHANGE ORIGINAL NOTES
The Exchange Notes will be issued in exchange for Original Notes only after
timely receipt by the Exchange Agent of such Original Notes, a properly
completed and duly executed Letter of Transmittal, and all other required
documents. Therefore, holders of Original Notes desiring to tender such
Original Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Original Notes for exchange. Original Notes that are not tendered
or are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Original Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Original Notes were acquired by such broker-
dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Original Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Original Notes
could be adversely affected. See "The Exchange Offer."
20
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on the Issue Date to the Initial
Purchasers pursuant to a Purchase Agreement dated November 22, 1995 (the
"Purchase Agreement"). As a condition to the sale of the Original Notes, the
Company and the Initial Purchasers entered into the Registration Rights
Agreement on the Issue Date. Pursuant to the Registration Rights Agreement,
the Company agreed that, unless the Exchange Offer is not permitted by
applicable law or Commission policy, it would (i) file with the Commission a
Registration Statement under the Securities Act with respect to the Exchange
Notes within 45 days after the Issue Date, (ii) use its best efforts to cause
such Registration Statement to become effective under the Securities Act
within 120 days after such filing deadline and (iii) upon effectiveness of the
Registration Statement, to commence the Exchange Offer, maintain the
effectiveness of the Registration Statement for at least 20 business days (or
a longer period if required by law) and deliver to the Exchange Agent Exchange
Notes in the same aggregate principal amount at maturity as the Original Notes
that were tendered by holders thereof pursuant to the Exchange Offer. Under
existing Commission interpretations, the Exchange Notes would in general be
freely transferable after the Exchange Offer without further registration
under the Securities Act; provided, that in the case of broker-dealers, a
prospectus meeting the requirements of the Securities Act be delivered as
required. The Company has agreed to make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any such Exchange Notes acquired as described below for
such period as such broker-dealers must comply with such requirements. A
broker-dealer that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions
under the Act, and will be bound by the Registration Rights Agreement
(including certain indemnification rights and obligations). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Registration Statement of
which this Prospectus is a part is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement and the Purchase
Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges the Original Notes for the
Exchange Notes in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement with any
person to participate, in the distribution of the Exchange Notes, will be
allowed to resell the Exchange Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Exchange Notes a prospectus that satisfies the requirements of Section
10 of the Securities Act. However, if any holder acquires the Exchange Notes
in the Exchange Offer for the purpose of distributing or participating in the
distribution of the Exchange Notes or is a broker-dealer, such holder cannot
rely on the position of the staff of the Commission enumerated in certain no-
action letters issued to third parties and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Original Notes, where such Original Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Original Notes where such Original
Notes were acquired by such broker-dealer as a result of market-making or
other trading activities. Pursuant to the Registration Rights Agreement, the
Company has agreed to make this Prospectus, as it may be amended or
supplemented from time to time, available to
21
broker-dealers for use in connection with any resale for a period of 180 days
after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Original Notes surrendered
pursuant to the Exchange Offer. Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the exchange will be registered under
the Securities Act and hence the Exchange Notes will not bear legends
restricting their transfer and (ii) holders of the Exchange Notes will not be
entitled to the certain rights of holders of Original Notes under the
Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Original Notes (which they replace) and will be issued under, and
be entitled to the benefits of, the Indenture, which also authorized the
issuance of the Original Notes, such that all outstanding Notes will be
treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $125.0 million aggregate principal amount
of the Original Notes are outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company (the "Depositary" or "DTC").
Only a registered holder of the Original Notes (or such holder's legal
representative or attorney-in-fact) as reflected on the records of the Trustee
under the Indenture may participate in the Exchange Offer. There will be no
fixed record date for determining registered holders of the Original Notes
entitled to participate in the Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Original Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "The Exchange Offer--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
August 5, 1996 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) will mail to
the registered holders of Original Notes an announcement thereof, (iii) will
issue a press release or other public announcement which shall include
disclosure of the approximate number of Original Notes deposited to date, each
prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. Without limiting the manner in which the
Company may choose to
22
make a public announcement of any delay, extension, amendment or termination
of the Exchange Offer, the Company shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement, other than
by making a timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, or (iii) if
any conditions set forth below under "The Exchange Offer--Conditions" shall
not have been satisfied, to terminate the Exchange Offer by giving oral or
written notice of such delay, extension or termination to the Exchange Agent.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered holders of Original Notes, and the Company will
extend the Exchange Offer for a period of five to 10 business days, depending
upon the significance of the amendment and the manner of disclosure to such
registered holders, if the Exchange Offer would otherwise expire during such
five to 10 business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes bear interest at a rate equal to 10% per annum. Interest
on the Exchange Notes is payable semi-annually on each June 1 and December 1,
commencing on the first such date following their date of issuance. Holders of
Exchange Notes will receive interest from June 1, 1996 (the date the initial
interest payment was made with respect to the Original Notes), and Holders of
Original Notes that are accepted for exchange will be deemed to have waived
the right to receive any interest accrued on the Original Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent at the address set forth below under "The Exchange Offer--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Notes, if such procedure is
available, into the Exchange Agent's account at DTC pursuant to the procedure
for book-entry transfer described below, must be received by the Exchange
Agent prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. All signatures on the Letter
of Transmittal must be guaranteed by an institution which is (1) a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., (2) a commercial bank or trust company having an
office or correspondent in the United States, or (3) an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934 which is a member of one of a group of Signature Guarantee
Programs (an "Eligible Institution") (as defined in the Letter of
Transmittal). However, such signatures need not be guaranteed (i) if the
Letter of Transmittal is signed by the registered holder(s) of the Original
Notes tendering the notes without requesting special issuance or special
delivery as provided for in the Letter of Transmittal or (ii) if such Original
Notes are tendered for the account of an Eligible Institution.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth in herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
23
PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Original Notes, either make
appropriate arrangements to register ownership of the Notes in such owner's
name (to the extent permitted by the Indenture) or obtain a properly completed
assignment from the registered holder. The transfer of registered ownership
may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "The Exchange Offer--Withdrawal of Tenders"), as the case may be,
must be guaranteed by an Eligible Institution (as defined below) unless the
Original Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Delivery Instructions"
on the Letter of Transmittal or (ii) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be made by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes listed therein, such Original Notes must be
endorsed or accompanied by a properly completed assignment, signed by such
registered holder as such registered holder's name appears on such Original
Notes.
If the Letter of Transmittal or any Original Notes or assignments are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Original Notes not properly tendered or any Original Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Original Notes must be cured within such time as the Company shall
determine. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Original Notes, neither the Company,
the Exchange Agent nor any other person shall incur any liability for failure
to give such notification. Tenders of Original Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
While the Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes which are not tendered
24
pursuant to the Exchange Offer, the Company reserves the right in its sole
discretion to purchase or make offers for any Original Notes that remain
outstanding subsequent to the Expiration Date or, as set forth below under "--
Conditions," to terminate the Exchange Offer and, to the extent permitted by
applicable law, purchase Original Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or
offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Original
Notes in connection with the Exchange Offer are being acquired by the holder
in the ordinary course of business of the holder, (ii) the holder has no
arrangement or understanding with any person to participate in the
distribution of Exchange Notes, (iii) the holder acknowledges and agrees that
any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) the holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Original Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission, and (v) the holder is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company. If the holder is a broker-dealer that will receive Exchange Notes for
its own account in exchange for Original Notes that were acquired as a result
of market-making activities or other trading activities, the holder is
required to acknowledge in the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, the holder will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
RETURN OF NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Original Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Original Notes by causing the Depositary to transfer such
Original Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Original Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "The Exchange Offer--Exchange Agent" on or prior to the Expiration
Date or pursuant to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available or (ii) who cannot deliver their Original Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
25
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Original Notes and
the principal amount of Original Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof) together with the certificate(s) representing the
Original Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Original Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the
Original Notes to be withdrawn (including the certificate number or numbers
and principal amount of such Original Notes), and (iii) be signed by the
holder in the same manner as the original signature on the Letter of
Transmittal by which such Original Notes were tendered (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company
in its sole discretion, whose determination shall be final and binding on all
parties. Any Original Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Original Notes so withdrawn are
validly retendered. Properly withdrawn Notes may be retendered by following
one of the procedures described above under "The Exchange Offer--Procedures
for Tendering" at any time prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes not theretofore accepted for exchange, and may terminate or
amend the Exchange Offer as provided herein before the acceptance of such
Original Notes, if any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might impair the ability
of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company or there shall have occurred any material adverse development in
any existing action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or
any of its subsidiaries which, in the reasonable judgment of the Company,
would materially impair the contemplated benefits of the Exchange Offer to
the Company; or
26
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the reasonable judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or materially impair the contemplated benefits of the Exchange Offer
to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby has not been obtained.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any
Original Notes and return all tendered Original Notes to the tendering
holders, (ii) extend the Exchange Offer and retain all Original Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to the rights
of holders to withdraw such Original Notes (see "The Exchange Offer--
Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Original Notes
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver by means of
a prospectus supplement that will be distributed to the registered holders of
the Original Notes, and the Company will extend the Exchange Offer for a
period of five to 10 business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to 10 business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the company fail to consummate the
Exchange Offer, notwithstanding a failure of the conditions stated above. Such
conditions are not intended to modify those rights or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's sole discretion. The failure by the Company
at any time to exercise the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Original Notes eligible to participate in this
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify the
holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Original Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Original Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of transfer-restricted Notes by broker-dealers for a period of 180
days from the date on which the Registration Statement is declared effective
and (iv) to provide copies of the latest version of the Prospectus to broker-
dealers upon their request for a period of 180 days from the date on which the
Registration Statement is declared effective. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted pursuant
to the foregoing provisions, the registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
LIQUIDATED DAMAGES
In the event of a failure to file, or to become effective, one or more
registration statements as provided the Registration Rights Agreement, the
Company has agreed to pay, as liquidated damages, additional interest on
Registrable Notes, as defined in the Registration Rights Agreement
("Additional Interest") under the circumstances and to the extent set forth
below (each of which is given independent effect). The following
27
description of Section 4 of the Registration Rights Agreement is qualified in
its entirety by the provisions of the Registration Rights Agreement, which has
been filed as an exhibit to the Registration Statement of which the Prospectus
is a part.
(1) If neither the Registration Statement of which this prospectus is a
part (the "Exchange Registration Statement") nor the Initial Shelf
Registration (as defined in the Registration Rights Agreement) has been
filed on or prior to January 19, 1995 (the "Filing Date"), then commencing
on the day after the Filing Date, Additional Interest shall accrue on the
Registrable Notes over and above the stated interest at a rate of 0.50% per
annum for the first 90 days immediately following the Filing Date, such
Additional Interest rate increasing by an additional 0.25% per annum at the
beginning of each subsequent 90-day period;
(2) if neither the Exchange Registration Statement nor the Initial Shelf
Registration is declared effective on or prior to the Effectiveness Date
applicable thereto (which, in the case of the Exchange Registration
Statement, is 120 days after the Filing Date), then commencing on the day
after such Effectiveness Date, Additional Interest shall accrue on the
Registrable Notes over and above the stated interest at a rate of 0.50% per
annum for the first 90 days immediately following the day after such
Effectiveness Date, such Additional Interest rate increasing by an
additional 0.25% per annum at the beginning of each subsequent 90-day
period; and
(3) if (i) the Company has not exchanged Exchange Notes for all Original
Notes validly tendered in accordance with the terms of the Exchange Offer
on or prior to 60 days after the date on which the Exchange Registration
Statement was declared effective, (ii) the Exchange Registration Statement
ceases to be effective prior to consummation of the Exchange Offer or (iii)
if applicable, a shelf registration has been declared effective and such
shelf registration ceases to be effective at any time during the Period it
is required to remain effective pursuant to the Registration Statement,
then Additional Interest shall accrue on the Registrable Notes over and
above the stated interest at a rate of 0.50% per annum for the first 90
days commencing on the (x) 61st day after such effective date in the case
of (i) above or (y) the day such Exchange Registration Statement or shelf
registration ceases to be effective in the case of (ii) and (iii) above,
such Additional Interest rate increasing by an additional 0.25% per annum
at the beginning of each such subsequent 90-day period;
provided, however, that the Additional Interest rate on the Registrable Notes
may not exceed in the aggregate 1.0% per annum; provided further that (A) upon
the filing of the Exchange Registration Statement or the Initial Shelf
Registration (in the case of (1) above), (B) upon the effectiveness of the
Exchange Registration Statement or the Initial Shelf Registration, as the case
may be (in the case of (2) above), or (C) upon the exchange of the Exchange
Notes for all Registrable Notes tendered (in the case of (3)(i) above) or upon
the effectiveness of an Exchange Registration Statement or shelf registration
which had ceased to remain effective (in the case of 3(ii) and (iii) above),
Additional Interest on any Registrable Notes then accruing Additional Interest
as a result of such clause (or the relevant subclause thereof), as the case
may be, shall cease to accrue.
The Company shall notify the Trustee within one business day after each and
every date on which an event occurs in respect of which Additional Interest is
required to be paid (an "Event Date"). Any amounts of Additional Interest due
pursuant to (1), (2), or (3) as stated above in this section will be payable
in cash semi-annually on each regular interest payment date specified in the
Indenture (the holders of Registrable Notes of record on the regular record
date therefor (specified in the Indenture) immediately preceding such dates),
commencing with the first such regular interest payment date occurring after
any such Additional Interest commences to accrue. The amount of Additional
Interest will be determined by multiplying the applicable Additional Interest
rate by the principal amount of the Notes subject thereto, multiplied by a
fraction, the numerator of which is the number of days such Additional
Interest rate was applicable during such period (determined on the basis of
360-year comprised of twelve 30-day months), and the denominator of which is
360. Additional Interest began to accrue May 21, 1996 and was paid for the
period May 21 through May 31, 1996 with the June 1, 1996 scheduled interest
payment on the Original Notes. Additional Interest from June 1, 1996 to July
4, 1996 will be paid on December 1, 1996. No Additional Interest will accrue
from the date of this Prospectus.
28
EXCHANGE AGENT
Marine Midland Bank of New York has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Registered or Certified Mail: By Hand Delivery:
Marine Midland Bank Marine Midland Bank
140 Broadway, A Level 140 Broadway, A Level
New York, NY 10005-1180 New York, NY 10005-1180
Attention: Corporate Trust Attention: Corporate Trust
Operations Operations
By Overnight Delivery: By Facsimile:
Marine Midland Bank Marine Midland Bank
140 Broadway, A Level
New York, NY 10005-1180 212/658-2292
Attention: Corporate Trust
Attention: Corporate Trust Operations
Operations Confirm by Telephone:
212/658-5931
FEES AND EXPENSES
All fees and expenses incident to compliance with the Registration Rights
Agreement regarding this Exchange Offer shall be borne by the Company whether
or not the Exchange Offer or a Shelf Registration becomes effective.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$400,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Original Notes which are not exchanged for the Exchange Notes pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such
Notes may be resold only (i) to a person whom the seller reasonably believes
is a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act or (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
29
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Original Notes in like principal amount, the terms of which are identical to
the Exchange Notes. The Original Notes surrendered in exchange for Exchange
Notes will be retired and cancelled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase in the
indebtedness of the Company.
30
THE ACQUISITION
Blade Acquisition Corp. ("Blade") was created in October 1995 by The Carlyle
Group (collectively with its affiliates (as defined in Rule 405 under the
Securities Act), "Carlyle") and Thiokol Corporation (together with its
subsidiaries, "Thiokol"; Thiokol, together with Carlyle, the "Investors") to
acquire Pechiney Corporation, the parent corporation of Howmet, from Pechiney
International, S.A. ("Pechiney International") and the Cercast group of
companies from Howmet Cercast S.A., a subsidiary of Pechiney International.
Carlyle and Thiokol Holding Company, a wholly-owned subsidiary of Thiokol
Corporation, own 51% and 49%, respectively, of Blade's common stock. The
Carlyle Group is a Washington D.C.-based private merchant bank founded in
1987. Since its inception, Carlyle has made equity investments in more than 25
companies, many of which are focused in the aerospace and defense industries.
Thiokol, a New York Stock Exchange-listed company, is a leader in the
development and production of high-technology solid rocket motors for
aerospace, defense, and commercial applications and is a major manufacturer of
precision fastening systems for aerospace and industrial markets worldwide.
Strategically, Thiokol desires to continue to expand its commercial and
industrial businesses and views its investment in Howmet as a key strategic
opportunity to achieve this goal. As part of the agreement between Carlyle and
Thiokol, Thiokol will have the option to purchase Carlyle's interest in the
Company after three years. See "Description of Capital Stock--Stockholders
Agreement." Thiokol has publicly indicated that, subject to favorable Howmet
financial and operating performance and favorable conditions in the financial
markets, it expects to exercise its option to acquire Carlyle's interest in
Blade and thereafter, to cause Howmet to redeem the Senior Subordinated Notes.
Neither Carlyle nor Thiokol has any obligation with respect to the Senior
Subordinated Notes.
The Acquisition was completed on December 13, 1995 for a total purchase
price, including transaction fees and expenses, of approximately $776.6
million (net of certain adjustments for assumed capitalized lease and other
obligations of $2.9 million). The Acquisition is being accounted for as a
purchase. The Stock Purchase Agreement provides for an adjustment to the
purchase price based on the change in net working capital from June 30, 1995
to December 13, 1995. In June 1996, this adjustment was agreed upon in the
amount of $3.6 million, payable to the Company. Financing for the Acquisition
included (i) borrowings of $300.0 million under a senior term loan facility
(the "Senior Term Facility"), (ii) the sale of $125.0 million aggregate
principal amount of the Senior Subordinated Notes, (iii) $51.4 million of
proceeds from a special purpose receivables facility (the "Receivables
Facility"), (iv) $15.2 million in borrowings under a $125.0 million (minus
standby letters of credit) revolving credit facility ("Revolving Credit
Facility" and, together with the Senior Term Facility, the "Senior Credit
Facilities"), (v) $10.0 million of Canadian borrowings (the "Canadian
Borrowings"), and (vi) a $250.0 million cash equity investment from the
proceeds of the issuance of $200.0 million of Blade common stock to the
Investors and $50.0 million of Blade pay-in-kind preferred stock to Thiokol.
The Acquisition financing also included a $25.0 million pay-in-kind junior
subordinated purchaser note ("PIK Note") issued to Pechiney International by
Howmet Holdings Acquisition Corp. ("HHAC"), a wholly owned subsidiary of
Blade, which is reflected as equity of the Company because, even though the
amount of the PIK Note is part of the purchase price paid for Howmet, it is
not a liability of Howmet and the holder of the PIK Note has no recourse to
Howmet or its assets; therefore, the PIK Note does not reduce Howmet's net
assets that resulted from the Acquisition. The Acquisition was effected
through a series of transactions, including the purchase of Pechiney
Corporation by HHAC, the purchase of the capital stock of certain Cercast
companies by Howmet Acquisition Corp. ("HAC"), a wholly owned subsidiary of
HHAC, and the mergers (the "Mergers") of HHAC with and into Pechiney
Corporation and of HAC with and into the Company (the "Acquisition
Transactions"). After the Mergers, Pechiney Corporation's name was changed to
Howmet Holdings Corporation ("Holdings"). The only subsidiary of Holdings
other than the Company is Howmet Insurance Co., Inc. The sources and uses of
funds relating to the Acquisition are set forth in the following table
(dollars in millions):
SOURCES OF FUNDS (BEFORE FEES AND
EXPENSES)
- ---------------------------------
Revolving Credit Borrowings...... $ 15.2
Senior Term Facility............. 300.0
Canadian Borrowings.............. 10.0
Receivables Facility............. 51.4
The Notes........................ 125.0
Equity Investment................ 250.0
------
Total Cash Sources............. $751.6
HHAC Purchaser Note.............. 25.0
------
Total Sources.................. $776.6
======
USES OF FUNDS
- -------------
Acquisition Purchase Price.. $746.6
Fees and Expenses........... 30.0
------
Total Uses................ $776.6
======
31
The cash portion of the purchase price paid in the Acquisition is being
adjusted as a result of changes in net working capital of the Company since
June 30, 1995, and reflects a reduction of $2.9 million for certain
capitalized leases and other obligations that remained in effect upon
consummation of the Acquisition. See Note 1 of the Notes to Financial
Statements. Except for such leases and debt incurred in connection with the
Acquisition as summarized above, there was no other debt on Howmet's balance
sheet as of the closing. Pechiney, a French corporation and the majority
stockholder of Pechiney International ("Pechiney"), Pechiney International,
and Howmet Cercast S.A. have agreed to indemnify Blade and Blade has agreed to
indemnify Pechiney, Pechiney International, and Howmet Cercast S.A. under
certain circumstances, including in the event of any loss resulting from an
untrue representation or warranty or the breach of any covenant contained in
the Stock Purchase Agreement among Pechiney, Pechiney International, Howmet
Cerast S.A. and Blade, dated as of October 12, 1996 (the "Stock Purchase
Agreement"). The indemnity from Pechiney, Pechiney International and Howmet
Cercast S.A. to Blade also includes certain pre-closing tax and environmental
matters and other contingencies.
Holdings has outstanding indebtedness to third parties of approximately
$816.0 million ("Holdings Notes"). Such indebtedness is without recourse to
Howmet and its subsidiaries and Pechiney has indemnified Blade with respect
thereto. Pursuant to the Stock Purchase Agreement, Pechiney International
issued notes to a trust for the benefit of Holdings in an amount sufficient to
make all required payments on the Holdings Notes. In addition, if Pechiney
International fails to make such payments for any reason, the repayment of
principal is also secured by letters of credit issued by Banque Nationale de
Paris for the benefit of the holders of such Holdings Notes. In the event that
any such indebtedness remains unpaid for any reason, the principal repayment
obligations of Holdings to such holders will also be secured by additional
letters of credit to be issued for the benefit of Holdings prior to the
closing of the Acquisition. If the holders of the Holdings Notes would be
unable to collect the amounts due thereunder pursuant to any of the foregoing,
a claim against Holdings could require Holdings to sell all or a portion of
its equity interest in the Company to satisfy such a claim. In the event that
a claim against Holdings was successful in forcing such a sale of the Company,
the sale could constitute a Change of Control (as defined in the Indenture
governing the Senior Subordinated Notes). If a Change of Control occurred,
each holder of the Notes would have the right to require the repurchase of
such holder's Senior Subordinated Notes pursuant to the Indenture. See
"Description of Senior Subordinated Notes--Change of Control."
32
CAPITALIZATION
The following table sets forth the capitalization (including the current
portion of long-term debt) of the Company at December 31, 1995. The
information presented below should be read in conjunction with the "Successor
Company Consolidated Financial Statements" and the notes thereto included
elsewhere in this Prospectus.
DECEMBER 31, 1995
-----------------
(DOLLARS IN
MILLIONS)
Total debt:
Revolving Credit Facility(a)............................... $ 26.0
Canadian Borrowings (including current portion of $2.5
million).................................................. 10.0
Senior Term Facility (including current portion of $16.5
million)(b)............................................... 300.0
Capital leases and other obligations....................... 2.5
Senior Subordinated Notes due 2003......................... 125.0
------
Total debt(c)............................................ 463.5
Total stockholders' equity................................... 276.3
------
Total capitalization....................................... $739.8
======
- --------
(a) The Revolving Credit Facility provides a $125.0 million line of credit
that will be available for working capital and general corporate purposes,
$15.2 million of which was borrowed in connection with the Acquisition. A
portion of the Revolving Credit Facility may be used to support commercial
and standby letters of credit in the ordinary course of business, and such
letters of credit will be issued under the Revolving Credit Facility
following the consummation of the Acquisition. Letters of credit in the
amount of $17.7 million were outstanding at December 31, 1995; the letters
of credit outstanding upon consummation of the Acquisition were replaced
by letters of credit issued under the Revolving Credit Facility. See
"Description of Senior Credit Facilities."
(b) The Company incurred $300.0 million of indebtedness pursuant to the Senior
Term Facility in connection with the Acquisition. The Senior Term Facility
is comprised of three tranches of $145.0 million, $100.0 million and $55.0
million with final maturity in 2000, 2002 and 2003, respectively, and with
principal amortization requirements prior to such maturity. See
"Description of Senior Credit Facilities."
(c) In addition to the Revolving Credit Facility, the Company entered into the
Receivables Facility, under which the Company sold certain of its accounts
receivable to a special purpose trust for aggregate cash proceeds of $51.4
million. The obligations of the trust are not obligations of the Company.
Proceeds from the sale of receivables after the closing of the Acquisition
will be used for general corporate purposes. The Company is also a
guarantor of indebtedness of two 50%-owned joint ventures aggregating
approximately $11.4 million at December 31, 1995.
33
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
The following unaudited pro forma statement of operations reflect the
Acquisition Transactions (and certain related assumptions described in the
notes hereto), the application of the proceeds therefrom, and the combination
of Howmet and Cercast as if such transactions occurred on January 1, 1995. See
"The Acquisition."
The pro forma adjustments are based upon certain assumptions that management
believes are reasonable. The Acquisition was accounted for by the Company as a
purchase. The pro forma adjustments include adjustments to inventory,
property, plant and equipment, acquisition intangible assets, goodwill,
deferred income taxes and other accounts. The pro forma adjustments have been
made based on appraisals of the fair market value of the assets acquired. The
adjustments included in the unaudited pro forma combined financial statements
represent the Company's determination of those adjustments.
The unaudited pro forma statement of operations is not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transactions had been consummated as of the
indicated date. The unaudited pro forma statement of operations should be read
in conjunction with the historical financial statements of the Company,
together with the related notes thereto, included elsewhere in this
Prospectus.
34
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
PREDECESSOR COMPANY
COMBINED SUCCESSOR COMPANY CONSOLIDATED
------------------- ----------------------------------------------------
(UNAUDITED)
YEAR ENDED
PERIOD FROM PERIOD FROM DECEMBER 31, 1995
JANUARY 1, 1995 TO DECEMBER 14, 1995 PRO FORMA PRO FORMA
DECEMBER 13, 1995 TO DECEMBER 31, 1995 ADJUSTMENTS COMBINED
------------------- -------------------- ----------- -----------------
Net sales............... $894.1 $51.4 $ -- $945.5
Operating costs and
expenses:
Cost of sales......... 681.4 38.0 -- 719.4
Selling, general and
administrative
expense.............. 105.0 4.6 1.9 (a) 111.5
Depreciation and
amortization expense. 32.6 2.8 23.1 (b) 58.5
Research and
development expense.. 25.0 1.4 -- 26.4
Restructuring expense
(credit)............. (1.6) -- -- (1.6)
------ ----- ------ ------
842.4 46.8 25.0 914.2
Earnings from
operations............. 51.7 4.6 (25.0) 31.3
Interest income--
affiliates............. 8.6 -- (8.6)(c) --
Interest income--third
parties................ 1.3 -- (1.3)(c) --
Interest expense--
affiliates............. (2.2) -- 2.2 (c) --
Interest expense--third
parties................ (3.7) (2.9) (38.6)(c) (45.2)
Other--net.............. (5.8) (1.0) (4.3)(d) (11.1)
------ ----- ------ ------
Income (loss) before
income taxes........... 49.9 0.7 (75.6) (25.0)
Provision (credit) for
income taxes........... 23.6 0.5 (30.0)(e) (5.9)
------ ----- ------ ------
Net (loss) income....... $ 26.3 $ 0.2 $(45.6) $(19.1)
====== ===== ====== ======
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(a) Management fees relating to management agreements with Carlyle and
Thiokol. See "Certain Transactions."
(b) Additional depreciation and amortization from historical amounts to
reflect purchase price adjustments to the historical value of assets
acquired as follows:
YEAR ENDED
DECEMBER 31, 1995 LIVES
----------------- -----
Depreciation of plant and equipment............... $ 5.0 14-30
Amortization of acquired intangibles.............. 11.1 10-15
Amortization of goodwill.......................... 7.0 40
-----
$23.1
=====
(c) Elimination of historical interest income and expense, increase in
interest expense and amortization of deferred financing costs relating
to the Senior Credit Facilities and the Notes.
(d) Loss on sale of accounts receivable under the Receivables Facility.
(e) Estimated effective income tax effect of pro forma adjustments applied
to pro forma income (loss) before income taxes.
35
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth selected historical combined financial data
of Howmet and Cercast as of and for the year ended December 31, 1991 and as of
December 31, 1992, which are unaudited, and selected historical combined
financial data of the Predecessor Company as of December 31, 1993 and 1994 and
for each of the three years in the period ended December 31, 1994 which have
been derived from the combined financial statements audited by Price
Waterhouse LLP, independent accountants. The selected financial data as of
December 31, 1995 and for the periods from January 1, 1995 to December 13,
1995 and December 14, 1995 to December 31, 1995 have been derived from the
Predecessor Company Combined and the Successor Company Consolidated Financial
Statements audited by Ernst & Young LLP, independent auditors. The summary
financial data as of March 31, 1996 and for the thirteen weeks ended April 2,
1995 and March 31, 1996 have been derived from unaudited interim financial
statements which, in the opinion of management, reflect all material
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the unaudited interim periods. The unaudited
pro forma financial data set forth below are not necessarily indicative of the
results that may be achieved in the future. The following financial data
should be read in conjunction with the "Unaudited Pro Forma Statement of
Operations" and the notes thereto (which include a description of the pro
forma adjustments), "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the
Company, together with the related notes thereto, included elsewhere in this
Prospectus. The combined operations of Howmet and Cercast prior to the
consummation of the Acquisition Transactions are referred to as the
"Predecessor Company Combined," and Howmet and its subsidiaries after the
consummation of the Acquisition Transactions are referred to as the "Sucessor
Company Consolidated."
PREDECESOR SUCCESSOR
SUCCESSOR COMPANY COMPANY COMPANY
PREDECESSOR COMPANY COMBINED CONSOLIDATED COMBINED CONSOLIDATED
------------------------------------------------ ---------------------------- ---------- ------------
PERIOD FROM PERIOD FROM (UNAUDITED) (UNAUDITED) THIRTEEN
YEAR ENDED DECEMBER 31, JANUARY 1, DECEMBER 14, YEAR ENDED WEEKS ENDED
---------------------------------- 1995 TO 1995 TO DECEMBER 31, -----------------------
(UNAUDITED) DECEMBER 13, DECEMBER 31, 1995 APRIL 2, MARCH 31,
1991 1992 1993 1994 1995(A) 1995(A) PRO FORMA(A)(B) 1995 1996
----------- ------ ------ ------ ------------ ------------ --------------- ---------- ------------
(DOLLARS IN MILLIONS)
STATEMENTS OF
OPERATIONS DATA:
Net sales......... $1,004.4 $920.2 $832.7 $858.3 $894.1 $ 51.4 $945.5 $235.9 $ 261.4
Gross profit...... 290.9 232.2 229.3 211.0 212.7 13.4 226.1 57.5 71.5
Selling, general
and
administrative... 105.1 116.1 104.5 90.9 105.0 4.6 111.5 26.3 29.5
Depreciation and
amortization..... 30.5 30.7 31.0 33.1 32.6 2.8 58.5 8.3 15.1
Research and
development...... 24.6 24.3 23.3 19.2 25.0 1.4 26.4 5.9 6.2
Restructuring
charges (credit). 12.9 58.9 -- 2.5 (1.6) -- (1.6) -- --
Goodwill write-
off.............. -- -- -- 47.4 -- -- -- -- --
-------- ------ ------ ------ ------ -------- ------ ------ --------
Operating income.. 117.7 2.2 70.5 17.9 51.7 4.6 31.3 17.0 20.7
Interest income--
affiliates....... 4.9 4.4 5.3 9.4 8.6 -- -- 3.5 --
Interest income--
third parties.... 0.9 2.7 0.8 0.6 1.3 -- -- -- 0.3
Interest expense--
affiliates....... -- -- (0.9) (0.8) (2.1) -- -- (0.3) --
Interest expense--
third parties.... (7.5) (4.9) (4.8) (4.0) (3.7) (2.9) (45.2) (0.8) (11.4)
Other--net........ 0.4 0.5 (0.1) (0.1) (5.8) (1.0) (11.1) (1.2) (2.0)
Provision for
income taxes..... 44.1 3.3 27.8 46.0 23.7 0.5 (5.9) 8.8 5.3
-------- ------ ------ ------ ------ -------- ------ ------ --------
Income (loss)
before cumulative
effect of change
in accounting.... $ 72.4 $ 1.6 $ 43.0 $(23.0) $ 26.3 $ 0.2 $(19.1) $ 9.4 $ 2.3
======== ====== ====== ====== ====== ======== ====== ====== ========
BALANCE SHEET DATA
(END OF
PERIOD)(C):
Total assets...... $ 660.8 $594.7 $579.6 $509.9 $ -- $1,099.5 $ -- $ -- $1,096.3
Total debt........ 69.3 66.3 44.5 42.1 -- 463.5 -- -- 446.7
Working capital... 221.2 108.8 73.3 4.5 -- 0.9 -- -- (0.7)
Stockholders'
equity........... 413.1 291.9 239.1 166.3 -- 276.3 -- -- 275.7
36
PREDECESOR SUCCESSOR
SUCCESSOR COMPANY COMPANY COMPANY
PREDECESSOR COMPANY COMBINED CONSOLIDATED COMBINED CONSOLIDATED
---------------------------------------------- ---------------------------- ---------- ------------
PERIOD FROM PERIOD FROM (UNAUDITED) (UNAUDITED) THIRTEEN
YEAR ENDED DECEMBER 31, JANUARY 1, DECEMBER 14, YEAR ENDED WEEKS ENDED
-------------------------------- 1995 TO 1995 TO DECEMBER 31, -----------------------
(UNAUDITED) DECEMBER 13, DECEMBER 31, 1995 APRIL 2, MARCH 31,
1991 1992 1993 1994 1995(A) 1995(A) PRO FORMA(A)(B) 1995 1996
----------- ------ ----- ----- ------------ ------------ --------------- ---------- ------------
(DOLLARS IN MILLIONS)
OTHER DATA:
Adjusted EBITDA(d).. 171.9 97.8 85.4 105.2 91.1 6.5 86.3 $27.7 $ 35.3
Capital
expenditures....... 37.9 28.9 33.1 38.0 41.2 1.6 -- 6.8 5.2
Number of employees
(end of period).... 11,308 10,076 8,990 8,702 -- 9,577 -- 8,897 9,821
Ratio of earnings to
fixed charges(e)... 13.2x 1.7x 10.4x 4.4x 7.7x 1.2x (e) 11.9x 1.7x
Ratio of Adjusted
EBITDA to interest
expense(d)......... -- -- -- -- 15.7x 2.2x 1.9x 23.6x 3.1x
Net cash provided by
(used in) operating
activities......... 80.6 138.8 95.4 91.4 35.2 (12.7) 22.5 (12.8) 33.3
Net cash (used in)
provided by
investing
activities(c)...... (39.3) (31.4) (31.7) (33.4) (43.8) (740.2) (784.0) (7.4) (8.3)
Net cash (used in)
provided by
financing
activities(c)...... (6.1) (4.5) (8.5) 4.5 (20.0) 762.4 742.4 0.7 (17.4)
- -------
(a) Includes the results of operations of Turbine Components Corporation
("TCC"), acquired in April 1995.
(b) The unaudited pro forma financial data for the year ended December 31,
1995 gives effect to the Acquisition Transactions and the combination of
Howmet and Cercast as if such transactions had occurred on January 1, 1995
with respect to the pro forma operating and other data. See "The
Acquisition" and "Unaudited Pro Forma Statement of Operations."
(c) Excludes the effects of advances to Pechiney Corporation, dividends to
Pechiney Corporation, and notes payable to Pechiney or its affiliates as
set forth below:
YEAR ENDED DECEMBER 31,
-------------------------------- PERIOD FROM THIRTEEN WEEKS
(UNAUDITED) JANUARY 1, 1995 TO ENDED
1991 1992 1993 1994 DECEMBER 13, 1995 APRIL 2, 1995
----------- ------ ------ ------ ------------------ --------------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA (END
OF PERIOD):
Advances to Pechiney
Corporation........... $71.5 $160.7 $203.7 $238.7 $ -- $ --
Dividends payable...... 9.3 -- 7.6 -- -- --
Notes payable.......... -- -- 12.9 20.0 -- --
CASH FLOW DATA:
Increase (decrease) in
advances to Pechiney
Corporation........... 22.9 89.1 43.0 34.9 (237.4) (18.8)
Payment of dividends... 50.6 22.7 11.5 28.6 200.0 --
(d) EBITDA is the sum of (i) income before cumulative effect of change in
accounting, (ii) provision for income taxes, (iii) depreciation and
amortization expense, (iv) a goodwill write-off of $47.4 million in 1994,
and (v) interest income (expense), net. Adjusted EBITDA is defined as the
sum of EBITDA and (x) restructuring charges of $12.9 million in 1991,
$58.9 million in 1992, $2.5 million in 1994, and a restructuring credit of
$1.6 million, actual and pro forma, in 1995, (y) LIFO inventory valuation
adjustments of $10.4, $4.5, $(15.9), $4.0, $4.4, $4.4, $0.0 and $1.2
million in 1991, 1992, 1993, 1994, 1995 actual and pro forma and the
thirteen weeks ended April 2, 1995 and March 31, 1996, respectively, and
(z) a $4.8 million accrual in 1995 for workers' compensation claims
incurred but not reported. Adjusted EBITDA is similar to Consolidated
EBITDA, as defined in the Indenture, which is used in connection with
certain covenants that limit the ability of the Company to incur
additional indebtedness, make restricted payments and effect certain
mergers and other transactions. The ratio of Adjusted EBITDA to interest
expense is calculated by dividing Adjusted EBITDA by interest expense, and
the ratio is similar to the Operating Coverage Ratio in the Indenture
which limits the Company's ability to incur debts. Neither EBITDA,
Adjusted EBITDA, nor the ratio of Adjusted EBITDA to interest expense
should be considered as alternative measures of operating results or cash
flow from operations (as determined in accordance with generally accepted
accounting principles) or ratios of earnings to fixed charges, but are
presented because management understands that some investors consider such
additional information in evaluating an issuer's ability to service debt.
See "Description of Senior Subordinated Notes."
(e) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and cumulative
effect of change in accounting plus fixed charges. "Fixed charges" consist
of interest expense, amortization of deferred financing costs and the
portion of rental expense deemed representative of the interest factor.
Pro forma for the Acquisition Transactions, earnings, as so defined, would
have been inadequate to cover fixed charges, as so defined, for the year
ended December 31, 1995 by $25.0 million.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The combined operations of Howmet and Cercast prior to the consummation of
the Acquisition Transactions are referred to as "Predecessor Company
Combined," and Howmet and its subsidiaries after the consummation of the
Acquisition Transactions are referred to as the "Successor Company
Consolidated."
The Company operates predominantly in a single industry as a manufacturer of
investment cast components for the aerospace and industrial gas turbine
industries through operating companies located in the United States, France,
the United Kingdom and Canada. See Note 13 of the Notes to Financial
Statements.
The Company's operating performance is affected by general economic trends
and by a number of other key variables, including the following:
Restructuring. During 1992, the Company reevaluated its position in the
marketplace with the goal of enhancing its competitiveness and improving the
profitability of its operations. This reevaluation culminated in the
development of a restructuring plan pursuant to which the Company planned to
rationalize certain of its business activities and to reengineer certain of
its processes. In late 1992, the plan was approved, and the Company recorded a
restructuring provision of $58,889 to provide for the estimated costs of
implementing the plan. The restructuring provision included provisions for
reengineering programs of $39,831 and for capacity rationalization of $19,058.
The following table sets forth the restructuring provision established in
1992, related activity through December 31, 1995, the remaining restructuring
reserve at December 31, 1995 and estimated future cash and non-cash costs of
implementing the restructuring plan (dollars in thousands).
1992 CASH CHANGES RESERVE AT
RESTRUCTURING COSTS NON-CASH IN DECEMBER 31,
PROVISION INCURRED COSTS ESTIMATES 1995
------------- -------- -------- --------- ------------
Reengineering programs.. $39,831 $(39,086) -- $ 1,434 $2,179
Capacity
rationalization........ 19,058 (14,477) $(257) (3,355) 969
------- -------- ----- ------- ------
$58,889 $(53,563) $(257) $(1,921) $3,148
======= ======== ===== ======= ======
Estimated future costs to be incurred:
Cash costs...................................................... $3,148
Non-cash costs.................................................. --
------
Total......................................................... $3,148
======
The significant cost components of the 1992 restructuring provision were as
follows:
Reengineering programs represent the estimated costs associated with
reengineering certain of the Company's business processes and related
activities and include direct expenses associated with various project teams
related to the evaluation, design and implementation of a Company-wide
synchronous manufacturing environment with cellular work stations, uniform
work instructions and business center management and reporting ($23,286),
severance and relocation for approximately 1,835 employees ($13,437), and
consulting fees ($3,108).
Capacity rationalization costs represent the estimated costs to be incurred
in streamlining operations and include expenses related to severance and
relocation for approximately 562 employees ($8,750), asset writedowns ($1,260)
and the transfer and reinstallation of equipment ($9,048).
Management periodically reevaluates the adequacy of the remaining reserve to
provide for the estimated costs of implementing the restructuring program.
Based upon this reevaluation, during 1994, the Company reversed the portion of
the reserve related to a U.S. plant shutdown ($1,800) and a French social plan
($1,430) due to improved business conditions; additionally, certain other
minor components of the restructuring reserve were adjusted on the basis of
revised estimates.
38
In 1994, the Company implemented additional restructuring programs related
to its Morristown, Tennessee wax facility, its New Jersey-based airmelt
business and certain of its administrative offices in France and recorded a
restructuring provision of $4,432. During the period from January 1, 1995 to
December 13, 1995, the Company canceled its plan for the closure of the
airmelt operation and, accordingly, reversed the related restructuring reserve
of $1,000 which had been established as of December 31, 1994. See Note 17 of
the Notes to Financial Statements.
As a result of the restructuring, total employment was reduced from 11,308
at the end of 1991 to 9,577 (including 262 employees of TCC, which was
acquired in April 1995) at December 31, 1995 and 9,821 employees at March 31,
1996. In addition, the reduced delivery times and other improvements since
1992 have reduced the Company's inventory requirements, as discussed under "--
Liquidity and Capital Resources," below. The Company is continuing to evaluate
cost reduction opportunities at certain plants and in certain programs.
Aerospace Industry Trends. Trends in the commercial and (to a lesser extent)
military aircraft markets affect demand for aircraft engines and in turn
affect demand for the Company's components. The Company's aerospace airfoil
business is approximately equally divided between parts for new engines and
airfoil replacement parts. Both of these markets are dependent, in the long
run, on the overall demand for air travel, which has risen in each of the last
25 years except 1991 (the year of the Persian Gulf war). The demand for new
engines and the demand for structural castings are dependent in substantial
part on the financial condition of the airline industry and procurement of
military aircraft, while the demand for airfoil replacement parts is primarily
dependent on the overall size and age of the airline fleet and the airlines'
airfoil replacement parts inventory levels.
In the new engine market, because order lead times for aircraft are
generally about two years, scheduled aircraft deliveries give some indication
of future engine and component requirements. Scheduled aircraft deliveries for
over 100 passengers, including both options and firm orders, for 1996 are
approximately 460 units (an increase from 1995 levels), and scheduled
deliveries, including options and firm orders, are higher (approximately 506
units) for 1997. However, scheduled deliveries are subject to deferral or
cancellation, as occurred extensively in the early 1990s. The Company's
business is affected by any such cancellations and deferrals because the
Company's customers place their component orders on a "just in time" basis and
adjust their orders to their actual engine delivery schedules. As a result,
backlog is not a significant indicator of future performance for the Company.
See "Risk Factors--Effects of Aerospace Industry Economic Conditions and
Cyclicality."
The Company's replacement parts business would ordinarily benefit during
periods in which new aircraft deliveries are delayed or canceled at the same
time air travel is increasing, because fleet age and usage are increasing.
However, because airlines were reducing inventory levels significantly during
the 1991-1994 period, when the airlines also had a much larger than normal
fleet of grounded planes from which they could cannibalize replacement parts,
the Company believes that airfoil replacement parts demand was abnormally
reduced. Management believes that trends toward larger and/or aging fleets and
increased aircraft usage, and the reduction in the number of grounded planes
from which replacement parts can be cannibalized, should benefit the Company's
airfoil replacement parts and aerospace component refurbishment businesses.
Howmet has initiated a process that may result in the sale of its
refurbishment business, although no agreement has been reached. If the
refurbishment business is sold, proceeds will be used to reduce indebtedness
or invest in available opportunities in its existing businesses. The Company
will retain its Thermatech coating operations in any disposition of its
refurbishment business. Net sales of the refurbishment business that may be
sold were $63.0 million in 1995 and $19.0 million in the first thirteen weeks
of 1996. Earnings from operations of this business were immaterial in both
periods. Apart from the benefits of proceeds if the business is sold, the
impact of the sale will not have a material effect on liquidity.
One of Howmet's largest customers, GEPS, in connection with its corporate-
level policy decision to reduce sole sourcing, has exercised its right to
terminate its 10 year long-term sole source contract with Howmet effective in
early 1997, and has placed orders for certain components with the Company's
principal competitor, PCC. The 10 year long-term contract being terminated is
unusual since the Company's contracts generally range
39
from one to three years, and the Company generally does not serve as the sole
source for all of a customer's parts, as it has for GEPS. The Company
therefore expects that its relationship with GEPS will be similar to its
arrangements with other customers after giving effect to such termination.
Based on the nature of the products presently in production and planned for
production for GEPS, the Company expects to continue producing a substantial
volume of castings for GEPS. To the extent that multiple sourcing by GEPS
reduces the Company's volume in 1997, the Company presently has other business
opportunities with other customers to make use of available capacity. As a
result of the foregoing, management does not expect that such termination will
have a material adverse effect on future operations.
New Engine Introductions. The Company's shipments of components are also
affected by the rate at which the Company's customers in the aerospace and IGT
industries change their technology to promote new engine designs. Such changes
typically require new component designs, and an increasing proportion of the
Company's revenues in the last several years has been derived from shipments
of newly designed, higher value DS and SC components for customers' latest
engines. New engines typically require approximately two years of development
before commercial production. The Company's performance has generally been
stronger during those periods when more of its customers have new model
engines entering commercial production since research and development expenses
on those engines are declining while revenues are increasing. The Company is
presently experiencing an unusually high level of new engine development by
its IGT customers, most of which will require new directionally solidified
("DS") or single crystal ("SC") airfoil designs. Management believes that new
engine introductions enhance the Company's competitive position because of the
Company's research and development and production capabilities with respect to
these higher technology components.
Electricity and IGT Demand. The demand for electric power has risen at an
average 3.4% annual rate worldwide for the 1984-1994 period (the most recent
period for which information is available), while the proportion of the
electric utility industry using IGT technology for new engines has also risen
to an estimated 25% of new engines ordered. Although management does not
expect the growth in electric power demand to continue at the same rates,
management believes that growth in electricity consumption and IGT penetration
of the power generation market, if continued, should improve demand for new
engines and for replacement sales as the installed base of IGT engines ages.
Customer Price Concessions. The Company has a relatively small number of key
customers, each of which is a major manufacturer with significant bargaining
power, and each of which seeks to minimize component costs in the engines it
manufactures. See "Risk Factors--Concentrated Customer Base; Competition,"
"Business--Major Customers," and "--Competition." Pursuant to its long-term
agreements with many of these customers, the Company shares the benefit of
certain cost savings achieved in the manufacturing process for their
components. In addition, the Company's aerospace customers have been under
severe cost constraints in recent years due to the financial difficulties
experienced by the airline industry. Due primarily to contractual price
reductions and aerospace industry weakness, the Company has agreed to material
price concessions in the period from 1993 through 1995. Such concessions have
been at more moderate levels in 1995, reflecting the improvements in the
airline industry and replacement parts demand, although management expects
customer requests and contractual requirements for concessions to continue.
The Company regularly discusses pricing with its major customers, and is
seeking to price its products with greater focus on the value added by the
Company's technology.
LIFO Accounting. The Company accounts for its inventories on a LIFO basis,
which frequently results in LIFO charges during periods when the Company's
inventory levels and/or market prices of the Company's raw materials are
increasing, and LIFO credits during periods when inventories and/or market
prices are falling. Management believes these charges and credits do not
affect the Company's ability to service debt, and therefore eliminates these
LIFO adjustments in calculating Adjusted EBITDA.
Quarterly Fluctuations. The Company's business is not generally seasonal.
However, operating performance in the fourth quarter of each year can be
somewhat difficult to predict because the Company's customers frequently
adjust their year-end component inventories downward in December, deferring
deliveries until January, to meet their own inventory management objectives.
This tendency, in addition to the timing
40
requirements of customer inventory needs in relation to engine production and
delivery schedules, can cause quarterly fluctuations in the Company's
operating performance that are not necessarily related to underlying business
conditions.
Accounting Changes. Effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits other than Pensions,"
requiring that the estimated future cost of providing postretirement benefits
such as health care be recognized as an expense when employees render services
instead of when the benefits are paid. The cumulative effect of this change in
accounting for postretirement benefits other than pensions was a charge of
$49.3 million (net of tax benefits of $31.5 million) for the year ended
December 31, 1993. See Note 3 of the Notes to Financial Statements.
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
as of January 1, 1993. SFAS No. 109 requires an asset and liability approach
to the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. The benefit of adoption was not material.
See Note 10 of the Notes to Financial Statements.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," which is required to be adopted by the Company in 1996.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of the asset. Long-lived
assets and certain identifiable intangibles to be disposed of are to be
reported at the lower of carrying amount or fair value less cost to sell.
Adoption of SFAS No. 121 is not anticipated to have a material adverse impact
on the results of operations or financial position of the Company. See Note 3
of the Notes to Financial Statements.
RESULTS OF OPERATIONS
Thirteen Weeks Ended March 31, 1996 Compared to Thirteen Weeks Ended April 2,
1995
Net sales increased by $25.5 million or 10.8% to $261.4 million for the
thirteen weeks ended March 31, 1996 from $235.9 million for the thirteen weeks
ended April 2, 1995. The increase in net sales was primarily due to increases
in shipments resulting from increased demand for aerospace and IGT airfoils,
aluminum castings, and component repairs. Approximately $4.7 million of the
increase resulted from the Company's acquisition of TCC in April 1995.
The Company's gross profit increased by $14.0 million or 24.3% to $71.5
million for the thirteen weeks ended March 31, 1996 from $57.5 million for the
thirteen weeks ended April 2, 1995, with $13.0 million of such increase due to
the effect of volume increases. Overall selling prices were essentially even
with the same period in the prior year. The Company's aggregate gross margin
improved to 27.3% for the 1996 period from 24.3% for the comparable period of
the prior year due primarily to volume increases.
Selling, general and administrative expense increased by $3.2 million or
12.2% to $29.5 million for the thirteen weeks ended March 31, 1996. The
increase was due primarily to expenses associated with the Company's promotion
of new products and applications of casting technology consistent with its
strategy, and increased consulting, employee benefit and compensation costs.
Depreciation and amortization expense increased by $6.8 million or 81.9% to
$15.1 million for the thirteen weeks ended March 31, 1996 from $8.3 million
for the thirteen weeks ended April 2, 1995. Of the increase, $6.1 million is
attributable to depreciation resulting from the step up of value of fixed
assets in the Acquisition, amortization of goodwill and other intangibles such
as patents and non-compete agreements. Other factors contributing to the
increase were the acquisition of TCC that occurred in April 1995 and higher
capital spending.
41
Research and development expense increased $0.3 million or 5.1% to $6.2
million for the thirteen week period ended March 31, 1996 from $5.9 million
for the first thirteen weeks of 1995. The amount of development work on new
products was consistent between the first quarter of 1995 and the first
quarter of 1996.
The Company incurred net interest expense of $11.1 million for the thirteen
weeks ended March 31, 1996 which represents a substantial increase over net
interest income of $2.4 million for the comparable period of the prior year.
The expense in 1996 resulted largely from new senior debt of $425.0 million
and other borrowings incurred in the Acquisition Transactions, while in 1995
the Company recorded interest income on cash balances loaned to Pechiney
Corporation.
Other expense increased $0.8 million in the 1996 period from the same period
of the prior year largely as a result of loss on sale of accounts receivable
resulting from the Receivables Facility.
The effective tax rate for the thirteen week period ended March 31, 1996 was
70%. This compares to an effective tax rate of 47.7% for the comparable period
of the prior year. The higher rate in the current period reflects certain
losses and expenses for which there were no associated tax benefits.
As a result of the foregoing, net income was $2.3 million for the thirteen
weeks ended March 31, 1996 compared to $9.4 million for the thirteen weeks
ended April 2, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Results of operations for the full year ended December 31, 1995 are
presented compared to the full year ended December 31, 1994 even though the
Acquisition was effected on December 14, 1995. Management believes a full year
comparison of 1995 and 1994 is more meaningful than comparing the full year
1994 to the period January 1, 1995 to December 13, 1995 and the period from
December 14, 1995 to December 31, 1995.
Net sales increased by $87.2 million or 10.2% to $945.5 million for the year
ended December 31, 1995 from $858.3 million for the year ended December 31,
1994. The increase in net sales was primarily due to increased demand for
aerospace airfoils, aluminum castings, and component repairs, offset in part
by selling price reductions of $4.8 million. Approximately $13.5 million of
the increase resulted from the Company's acquisition of TCC in April, 1995.
The Company's gross profit increased by $15.1 million or 7.2% to $226.1
million for the year ended December 31, 1995 from $211.0 million for the year
ended December 31, 1994, primarily due to the income effect of volume
increases aggregating $26.6 millions of which approximately $2.5 million
resulted from the acquisition of TCC. The favorable volume effect was
partially offset by price reductions aggregating $4.8 million. The year 1995
also included a $5.4 million charge for workers' compensation claims incurred
but not reported (incurred during the period due to the cessation of future
insurance underwriting by a self-insurance subsidiary of Holdings, and an
evaluation of such entity's remaining obligations). The Company's aggregate
gross margin declined slightly to 23.9% for 1995 from 24.6% for 1994 due
primarily to these charges.
Selling, general and administrative expense increased $18.7 million or 20.6%
to $109.6 million for the year ended December 31, 1995. The increase was due
primarily to expenses associated with the Company's promotion of new products
and applications of casting technology consistent with its strategy, and
increased consulting and employee benefit and compensation costs. In addition,
credits, representing adjustments of prior years' accruals (primarily for
employee benefit programs), were recorded during the year ended December 31,
1994.
Depreciation and amortization expense increased $2.3 million or 6.9% to
$35.4 million for the year ended December 31, 1995 from $33.1 million for the
year ended December 31, 1994. The increase results from the acquisition of TCC
in April 1995 which accounted for $1.3 million of depreciation expense in
1995. The balance of the increase is attributable to depreciation resulting
from the step up of value of fixed assets in the Acquisition, amortization of
goodwill and other intangibles such as patents and non-compete agreements in
the period from December 14, 1995 to December 31, 1995.
Research and development expense increased $7.2 million or 37.5% to $26.4
million for the year ended December 31, 1995 from $19.2 million for the year
ended December 31, 1994. The increase is largely attributable to additional
development work on new IGT products in response to customer development
schedules.
42
During the year ended December 31, 1995, the Company canceled its plan for
the closure of its Dover alloy airmelt operation, and accordingly, reversed
the related restructing reserve of $1.0 million previously provided. The
Company also reduced a reserve for moving administrative services to a central
location for its operations in France by $0.6 million. See Note 17 of the
Notes to Financial Statements. In 1994 the Company took a $1.0 million charge
for the Dover alloy airmelt operation and a $1.5 million charge for closure of
the Morristown, Tennessee wax manufacturing facility.
Interest expense--affiliates for the twelve months ended December 31, 1995
increased to $2.1 million, $1.3 million higher than the $0.8 million of
expense incurred for the twelve months ended December 31, 1994. The increase
was due to higher borrowings by the Company's casting operations in France
from Pechiney S.A. The borrowings were used to finance working capital
additions and capital expenditures.
Interest expense--third parties increased to $6.6 million for the twelve
months ended December 31, 1995 from $4.0 million for the twelve months ended
December 31, 1994. The increase of $2.6 million is primarily attributable to
the $425.0 million of senior debt and other borrowings incurred in the
Acquisition Transactions.
Other, net expense increased $6.7 million from the same period of the prior
year largely as a result of the Company's equity in losses of the Japanese
joint venture and realized foreign exchange losses.
The effective tax rate for the year ended December 31, 1995 was 47.7%. This
compares to an effective tax rate of 200% for 1994. The lower rate in the
current period reflects non-recurrence of certain losses from 1994 for which
there were no associated tax benefits. In 1994 the Company recorded write-
downs of goodwill totaling $47.4 million that were not tax deductible.
As a result of the foregoing, net income was $26.5 million in the year ended
December 31, 1995, compared to a $23.0 million loss for 1994.
Year Ended December 31, 1994 Compared To Year Ended December 31, 1993
Net sales increased $25.6 million or 3.1% to $858.3 million for the year
ended December 31, 1994 from $832.7 million for the year ended December 31,
1993. The increase in volume was primarily related to IGT, component repair
and aluminum casting markets which accounted for approximately $41.8 million
of the change; however, this change was partially offset by lower selling
prices aggregating $16.2 million.
Gross profit declined by $18.3 million or 8.0% to $211.0 million for the
year ended December 31, 1994 from $229.3 million for the year ended December
31, 1993 and the Company's aggregate gross profit margin declined to 24.6% in
1994 from 27.5% in 1993. The declines were primarily the result of a 1994 LIFO
charge of $4.0 million, compared to a LIFO credit of $15.9 million in the
prior year. This was due to rising alloy costs and less of a reduction in
inventory quantities in 1994. The selling price reductions of $16.2 million
also contributed to the decline; however, this was partially offset by a
favorable volume impact of $23.4 million. Reduced labor and variable overhead
costs resulting from the Company's restructuring program also had a favorable
impact.
Selling, general and administrative expenses decreased $13.5 million to
$90.9 million or 12.9% for the year ended December 31, 1994 from $104.4
million for the year ended December 31, 1993. The decrease was primarily due
to a decline in employee costs as well as continued cost reductions as a
result of the Company's restructuring program.
Research and development expense decreased $4.1 million or 17.6% to $19.2
million for the year ended December 31, 1994 from $23.3 million for the year
ended December 31, 1993. The decrease was primarily attributable to a decrease
in the level of new engine and redesign/reconfiguration development programs
in 1994 in response to customer development schedules.
During 1994, the Company recorded goodwill write-offs totaling $47.4
million, the principal component of which, $42.4 million, related to Cercast.
Cercast is a producer of aluminum investment castings for the defense
electronics and commercial aerospace industries which are primarily North
American and European based. Management estimated that the market for aluminum
investment castings in North America declined significantly due to downsizing
in the defense industry sector and a then-existing downturn in commercial
aerospace orders.
43
As a result, the industry shifted from a seller's market to a buyer's market
with pricing under severe pressure. Similarly, the European market for
aluminum castings experienced a decline due to weakness in both sectors of the
aerospace industry. These conditions at the time resulted in Cercast achieving
lower than expected sales and related profitability. The Company determined
that the defense industry sector decline was permanent in nature and that
based on its estimate of expected future operating results, the entire
remaining goodwill balance would not be recoverable. The methodology used by
management to evaluate the recoverability of goodwill was to discount ten
years of projected cash flows at 12% (the Company's estimated long term cost
of capital) together with an associated discounted earnings valuation for the
remaining amortization period. The amount of impairment was measured on this
basis as well. The forward projections made by management were based on
approved budgets and related information and represented management's belief
of the most likely future scenario.
Interest income affiliates of $9.4 million for the year ended December 31,
1994 was $4.1 million higher than the prior year, largely as a result of
additional interest earned on advances to Holdings.
The effective tax rate for the year ended December 31, 1994 was in excess of
100% as compared to an effective tax rate of 39% in 1993. The significant
increase in the 1994 effective tax rate was primarily attributable to
nondeductible goodwill write-offs and goodwill amortization, as well as
additional tax provisions. See Note 10 of the Notes to Financial Statements.
As a result of the foregoing and in particular the Cercast goodwill write-
off of $42.4 million, the Company had a net loss of $23.0 million in 1994,
compared to a $6.2 million net loss in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded working capital and capital
expenditures with cash generated from operations. During the years ended
December 31, 1995, 1994 and 1993, the Company's operating activities generated
cash flows of $22.5 million, $91.4 million and $95.4 million, respectively.
These amounts have been adjusted for significant noncash items including
depreciation and amortization of $35.6 million, $33.1 million and $31.0
million for the years ended December 31, 1995, 1994 and 1993, respectively, as
well as for goodwill write-offs of $47.4 million during the year ended
December 31, 1994. Additionally, as a result of its restructuring programs and
substantial progress in implementing Company-wide production standards, the
Company has improved its inventory turnover. Offsetting this improvement,
however, has been a recent trend of increases in the levels of accounts
receivable as a result of increased sales by the Company and the extension of
payment schedules by the Company's customers. Accounts receivable at December
31, 1995 were approximately $134.7 million, including retained receivables of
$42.7 million. In connection with the Acquisition, the Company entered into
the Receivables Facility to finance eligible accounts receivables on a
revolving basis. This program initially provided approximately $51.4 million
of financing upon consummation of the Acquisition, the proceeds of which were
used to finance the Acquisition, and offers the Company additional liquidity
through sales of receivables in the future on an ongoing basis. See
"Description of the Receivables Facility."At December 31, 1995, $55.4 million
of accounts receivable had been sold under the Receivables Facility. Such
sales are reflected as a reduction of accounts receivable in the financial
statements. Accounts receivable at December 31, 1994 amounted to $142.5
million; however, no receivables had been sold during the year ended or as of
December 31, 1994. The increase in receivables was the primary cause of the
decline in cash provided by operations in 1995, compared to 1994.
After eliminating the Company's advances to Pechiney Corporation, the
Company's primary investing activity has been for the Acquisition
Transactions, net of cash acquired of $737.5 million in 1995, and for capital
expenditures. The Company made capital expenditures totalling $42.8 million,
$38.0 million, and $33.1 million for the years ended December 31, 1995, 1994
and 1993, respectively.
After eliminating dividends to Pechiney Corporation, net cash provided by
(used in) financing activities totaled $742.4 million (of which $751.6 million
is related to the Acquisition Transactions), $4.5 million and
44
$(8.5) million during the years ended December 31, 1995, 1994 and 1993,
respectively. Funds were used for the repayment of long-term debt of $57.0
million, $4.1 million and $20.9 million during the years ended December 31,
1995, 1994 and 1993, respectively.
For the thirteen weeks ended March 31, 1996, the Company generated $33.3
million in cash from operating activities. Accounts receivable of $132.6
million including retained receivables from the Company's Receivable Facility
remained comparable to December 31, 1995 levels, despite increased sales
volume as collections performance improved. Inventories of $150.9 million were
also comparable to December 31, 1995 levels. Accounts payable of $66.5 million
increased from the December 31, 1995 year end levels of $59.0 million due to
increased purchases from suppliers associated with increased sales.
Capital expenditures through the March 1996 period were $5.2 million.
Expenditures for the first quarter are below the level expected to occur for
the remainder of the year. The Company anticipates capital expenditures levels
in 1996 to be approximately $39.8 million.
Obligations under the Revolving Credit Facility were $26.0 million at the
end of December 1995 and $13.0 million at the end of March 1996. By the end of
May 1996 the Revolving Credit Facility was paid down completely. The
availability of the Revolving Credit Facility at the end of March 1996 was
$109.0 million.
A $21.0 million restructuring reserve has been established for Howmet SA.
The cash impact of this restructuring is expected to occur predominately in
1997, and is expected to be paid out of operating cash flow and/or the
Revolving Credit Facility. The Company is in the process of establishing
revolving lines of credit in Europe, which should be in place in the third
quarter of 1996.
The Company also received approximately $7.0 million in the second quarter
of 1996 and expects to receive at least an additional $10.0 million in the
third quarter of 1996 as a result of cost recoveries under, and modifications
of, certain customer agreements.
Since the consummation of the Acquisition, the Company's principal sources
of liquidity are cash flow from operations, securitized receivables, and
borrowings under the Revolving Credit Facility. The Company's principal uses
of liquidity are to provide working capital, service debt and finance capital
expenditures.
In connection with the Acquisition, the Company entered into the Senior
Credit Facilities. The Senior Credit Facilities consist of a Senior Term
Facility and a Revolving Credit Facility. The Senior Term Facility provides
for an aggregate principal amount of $300.0 million in three tranches: (i)
Tranche A, in the amount of $145.0 million, has a five year term maturing
November 20, 2000 and quarterly amortization payments aggregating $15.0
million in the first year, $26.0 million in the second year and increasing
thereafter to $37.0 million at maturity; (ii) Tranche B, in the amount of
$100.0 million, has a seven year term maturing November 20, 2002, with nominal
annual amortizations of $1.0 million in each of the first five years, and
equal quarterly amortizations of the remaining outstanding balances in the
sixth and seventh years; and (iii) Tranche C, in the amount of $55.0 million,
has a seven and one half year term maturing May 20, 2003 with nominal annual
amortizations of $0.6 million in each of the first seven years and equal
quarterly amortizations of the remaining outstanding balances in the first
sixth months of the eighth year. The Revolving Credit Facility provides a
$125.0 million line of credit (less standby letters of credit), approximately
$15.2 million of which was borrowed upon consummation of the Acquisition, and
the balance of which is available for working capital requirements and general
corporate purposes. However, amounts in excess of $100.0 million may be
borrowed under the Revolving Credit Facility only if such amounts could
otherwise be borrowed under the limitations on indebtedness in the Indenture.
See "Description of Senior Credit Facilities." The weighted average interest
rate on the Company's borrowings under the Credit Agreement at May 31, 1996
was 7.95%. The Revolving Credit Facility is non-amortizing and has a five-year
term. The Company's obligations under the Senior Credit Facilities are
guaranteed by the Company's domestic subsidiaries and Holdings and are secured
by substantially all the assets of Holdings, the Company and its domestic
subsidiaries, including the capital stock of the Company. See "Description of
Senior Credit Facilities." A Canadian subsidiary of HAC also borrowed $10.0
million from a Canadian bank, the proceeds of which were used to finance the
acquisition of Howmet Cercast (Canada), Inc.
45
Based on 1995 operating results and operating cash flows and consistent with
1996 projections for capital expenditure levels and 1996 performance to date,
the Company believes that it will be able to satisfy all scheduled interest
and principal payments under the Senior Credit Facilities and to otherwise
meet the Company's near-term and long-term liquidity requirements, out of
operating cash flow, although no assurance can be given that it will be able
to do so.
In addition, the Company has agreed to guarantee certain indebtedness of its
two joint ventures. As of December 31, 1995 the Company's joint ventures had
outstanding indebtedness of approximately $22.8 million, of which the Company
has guaranteed approximately $11.4 million. It is anticipated that such joint
ventures may continue to incur indebtedness to fund their operations and that
the Company will guarantee its share of such indebtedness. The Indenture
limits but does not prohibit the Company from incurring additional guarantee
obligations with respect to such indebtedness.
Holdings is dependent upon dividends from the Company to fund Holdings'
routine ongoing business expenses. The Indenture permits the Company to make
such dividends to fund such expenses and to make payments in respect of the
tax liabilities of the Company and its subsidiaries to the extent such
payments are required to be made under the Tax Sharing Agreement. See "Certain
Transactions--Tax Sharing Agreement" and "Description of Senior Subordinated
Notes."
As a result of the Acquisition, the Company experienced a significant
increase in debt service requirements over historical levels due to its
borrowings under the Senior Credit Facilities, the Canadian Borrowings and the
Notes. Based upon the current level of operations, management believes that
available cash flow, together with available borrowings under the Revolving
Credit Facility and other sources of liquidity, will be adequate to meet the
Company's anticipated requirements for working capital, capital expenditures,
interest payments and scheduled principal payments under the Senior Credit
Facilities prior to final maturity.
ENVIRONMENTAL MATTERS
The Company's capital expenditures for environmental compliance have not
been material in any of the periods presented. The Company is currently
investigating possible and known environmental contamination (including soil
and groundwater contamination) at five domestic and five European facilities.
In addition, as a result of off-site waste disposal prior to the Acquisition,
the Company may be subject to liability for, and is currently involved in,
certain matters relating to the investigation and/or remediation of
environmental contamination at certain properties not owned or operated by the
Company. In this regard, the Company has been or may be named a potentially
responsible party ("PRP") under CERCLA and similar state statutes, at nineteen
on-site and off-site locations.
The amount and timing of payments the Company may be required to make with
respect to environmental matters are uncertain at this time. However, based on
management's best current estimates of potential liability, management
believes that the Company's reserves (approximately $6.1 million at December
31, 1995) are adequate under current laws and regulations. In addition, as
part of the Acquisition, Howmet Cercast S.A., Pechiney International and
Pechiney indemnified Blade, and Blade assigned such indemnification rights to
the Company, for any environmental liabilities occurring, originating, or
existing prior to December 13, 1995 (the Acquisition closing date), which
exceed the Company's reserves of $6.0 million as of June 30, 1995.
In connection with their review of environmental matters related to the
Acquisition, Thiokol and Carlyle retained independent consultants to assess
the environmental liabilities of the European properties owned and operated by
the Company. The Company has reviewed these reports and estimates actual
expenditures at these properties to be between $1.3 and $3.0 million. As a
result of the indemnification obligations of Howmet Cercast S.A., Pechiney
International and Pechiney summarized above, the Company does not expect any
net effect on its financial condition or results of operations from these
European expenditures. See "Risk Factors--Environmental Matters" and "The
Acquisition."
46
BUSINESS
Management believes that Howmet, founded in 1926, is the largest
manufacturer in the world of investment cast turbine engine components for the
jet aircraft and industrial gas power generation markets. The Company uses
investment casting techniques to produce high-performance and high-reliability
superalloy and titanium components to the exacting specifications of the major
turbine engine manufacturers. In 1995, the Company generated revenues of
$945.5 million and pro forma operating income, net loss and Adjusted EBITDA
(as defined) of $31.3 million, $(19.1) million, and $86.3 million,
respectively and cash flows from (used in) operating, investing, and financing
activities, after eliminating the effects of advances and payment of dividends
to Pechiney Corporation of $22.5 million, $(784.0) million and $742.4 million,
respectively. For the three months ended March 31, 1996, the Successor Company
generated revenues of $261.4 million, and operating income, net income and
Adjusted EBITDA (as defined) of $20.7 million, $2.3 million and $35.3 million,
respectively, and cash flows from (used in) operating, investing and financing
activities of $33.3 million, $(8.3) million and $(17.4) million, respectively.
For the three months ended April 2, 1995, revenues amounted to $235.9 million.
Operating income, net income and Adjusted EBITDA (as defined) were $17.0
million, $9.4 million and $27.7 million, respectively, and cash flows from
(used in) operating, investing and financing activities (excluding the effects
of advances and dividends to Pechiney Corporation) were $(12.8) million,
$(7.4) million and $0.7 million, respectively. EBITDA is the sum of (i) income
before cumulative effect of change in accounting, (ii) provision for income
taxes, (iii) depreciation and amortization expense, (iv) a goodwill write-off
of $47.4 million in 1994, and (v) interest income (expense), net. Adjusted
EBITDA includes EBITDA and (x) a restructuring credit of $1.6 million in 1995,
(y) LIFO inventory valuation adjustments of $4.4 million in 1995, $0.0 and
$1.2 million, respectively, for the periods ended April 2, 1995 and March 31,
1996, respectively, and (z) a $4.8 million accrual in 1995 for workers'
compensation claims incurred but not reported.
Howmet's major customers are the world's largest jet aircraft engine
manufacturers, including General Electric Aircraft Engines and Pratt & Whitney
Aircraft, and the largest IGT engine manufacturers, including General Electric
Power Systems, European Gas Turbine, Asea Brown Boveri AG, Siemens AG and
Westinghouse. The Company is a leader in technological advancement and
refinements of components for new and existing turbine engines. Management
also believes that through its Cercast subsidiary, the Company is the world's
largest producer of aluminum investment castings. The Company operates in four
major business areas described below:
Aerospace Castings. Management believes that the Company is the world's
largest manufacturer of airfoils (both moving blades and stationary vanes)
used in the hot gas path of an aircraft turbine engine, the area of the engine
with the most severe operating conditions where performance and reliability
are critical. Howmet estimates that it has an approximate 60% market share for
aerospace turbine airfoils. Management also believes that the Company
manufactures airfoils for every major jet aircraft turbine engine program
currently in production or under development by its major customers. The
aerospace castings market is strongly influenced by both the level of new
aircraft construction and demand for commercial air travel. Although the
cyclical downturn in the airline industry that began in the early 1990s
adversely impacted revenues in this business area, the commercial aerospace
market has shown signs of recovery during 1994 and 1995, favorably affecting
the Company's 1995 operating results. Approximately half of Howmet's airfoil
sales are for use in new engines and half are used in the airfoil replacement
market. In addition to airfoils, the Company also produces large structural
cast components and integral castings (multiple components in a single
circular casting) for engine and airframe manufacturers. During 1995, the
Company had aerospace castings revenues of approximately $498.5 million, or
approximately 53% of total Company revenues.
Industrial Gas Turbine Castings. Management believes that Howmet is the
largest producer in the world of airfoils for land-based gas turbine engines.
These engines are primarily used in utility power generation, as well as in
mechanical drive applications for oil and gas processing and off-shore
drilling. Growth in demand for efficient, lower cost electrical generation
facilities with shorter construction lead times has resulted in expansion of
demand for IGT engines, which management believes account for approximately
25% of new electric utility
engines ordered worldwide. Airfoil products manufactured by the Company for
the IGT market have performance and reliability requirements similar to those
produced for the aerospace market, but generally are
47
significantly larger in size. Howmet estimates that it produces approximately
70% of all IGT investment cast components sold in the world today. Management
believes that the Company is currently the only manufacturer in production of
technologically advanced DS and SC airfoils now required for the most
advanced, higher efficiency IGT engines. During 1995, the Company had IGT
casting revenues of approximately $300.6 million, or approximately 32% of
total Company revenues.
Aluminum Castings. Management believes that the Company, through Cercast, is
the largest producer of aluminum investment castings for the defense
electronics and commercial aerospace industries. Cast aluminum components,
such as doors, pump housings and gear and electronic boxes, are produced for
use in missiles, helicopters and military and commercial aircraft. During
1995, Cercast had revenues of $72.0 million, or approximately 7% of total
Company revenues.
In addition to its castings businesses, Howmet refurbishes precision turbine
engine components for a wide range of jet aircraft end-users such as airlines,
other aircraft operators and engine overhaulers. Aircraft engine overhaul and
maintenance operations are required at regular intervals and normally use a
combination of new engine components and worn or damaged components that are
refurbished. Separately, the Company provides various products and services to
third parties, including machining, component coating, and specialty alloys.
During 1995, component repair and other businesses had revenues of
approximately $74.4 million, or approximately 8% of total Company revenues.
Howmet has initiated a process that may result in the sale of its
refurbishment business, although no agreement has been reached. If the
refurbishment business is sold, proceeds will be used to reduce indebtedness
or invest in available opportunities in its existing businesses. The Company
will retain its Thermatech coating operations in any disposition of its
refurbishment business.
INVESTMENT CASTING INDUSTRY OVERVIEW
The investment casting industry has evolved over time into numerous segments
serving different customer applications and requirements, while using the same
basic casting technology. The precision casting component segment, in which
the Company competes, uses the most complex and technically demanding
investment casting processes currently available. The primary use of precision
castings has been in turbine engines, which operate most efficiently at high
temperatures and require extremely reliable performance. Most segments of the
turbine engine market are characterized by a limited number of large
manufacturers of engines. Turbine engine manufacturers generally have long-
term relationships with a small number of precision cast component suppliers
based on the suppliers' knowledge of product specifications, regulatory and
technological requirements, and involvement in new product development
initiatives. Due to the significant technology and facility investments
required, manufacturers rely on a small number of precision cast component
suppliers. In most areas of this market segment, the Company estimates that
together the Company and PCC account for more than 80% of total production. As
a result, this industry segment is greatly influenced by conditions in the
aerospace and IGT markets which are described below.
Aerospace Market. The rate of component sales for aircraft engines depends
on the rate at which new engines are being built and on the demand for
airfoils as replacement parts on aircraft engines in service. The demand for
airfoils therefore reflects the new aircraft requirements of airlines, the
utilization rates of existing airline fleets and the demand for military
aircraft engines. The industry's airfoil sales include significant volume in
both the original equipment manufacturer ("OEM") and replacement markets.
Structural components are sold almost exclusively to OEM customers, with
virtually no replacement market.
Aircraft engine component markets are substantially affected by the
financial performance of the commercial airline industry, which experienced
severe difficulties in the early 1990s. Worldwide deliveries of aircraft that
carry more than 100 passengers declined from 844 in 1991 to 442 in 1995 and
engine deliveries declined from 2,110 in 1991 to 1,323 in 1995. Widespread
deferrals and cancellations of aircraft orders by the airlines in recent years
directly affected the engine orders associated with these aircraft, which in
turn adversely affected suppliers of aircraft components, many of whom,
including Howmet, have undertaken restructuring programs while they continued
to invest in the development of new products and technologies to meet future
48
demand. Although the cyclical downturn in the airline industry that began in
the 1990s adversely impacted revenues in this business area, the commercial
aerospace market has shown signs of recovery during 1994 and 1995, favorably
affecting the Company's 1995 operating results.
One consequence of the delivery of fewer new aircraft to the airline
industry, combined with continued growth in passenger miles traveled, has been
an aging of the commercial fleet. Because maintenance requirements increase
with aircraft and engine age and flight miles, the replacement parts and
component repair businesses generally benefit from new aircraft delivery
deferrals and cancellations. However, in the early 1990s, the replacement
parts market was artificially depressed as airlines reduced their replacement
parts inventories and also cannibalized a large number of aircraft that were
taken out of service. Management believes that airlines have successfully
reduced replacement parts inventories, and that replacement parts available
from these grounded fleets have been greatly reduced, which has contributed to
a recovery in the replacement parts market.
IGT Market. Component sales for new industrial gas turbine engines are
related primarily to the growth of global electricity consumption and pumping
and transportation equipment requirements, while demand for replacement parts
depends on the size and usage rate of the installed base of IGT engines. For
the 1984-1994 period (the latest for which information is available), global
electricity consumption has grown at an average annual rate of 3.4%. Much of
this growth has been attributable to developing countries, particularly in
Asia. Within the electricity generation market, gas turbine-generated power
now represents an estimated 25% of the new engines ordered, while market share
for nuclear-based power has declined and suitable new sites for hydroelectric
power generation are less available. Although management does not expect the
growth in electric power demand to continue at the same rates, management
believes that growth in electricity consumption and IGT penetration of the
power generation market, if continued, provides opportunities for the Company
to increase new engine and replacement sales.
Gas turbine power generation has several advantages over other power-
generation methods, such as coal and nuclear-powered facilities, which
management believes have led to increased demand for gas turbine engines.
These advantages include lower average capital cost, shorter installation and
regulatory approval time, ease of adding a new industrial gas turbine engine
to an existing power plant to increase output, and the clean-burning
characteristics of natural gas. These advantages of gas turbines are somewhat
offset by the higher cost of natural gas as a fuel, which mitigates the demand
for natural gas-fueled generating equipment, especially where gas supplies are
limited, such as China.
Aluminum Casting. Unlike the precision castings described above which are
typically made of superalloys capable of withstanding extreme temperatures or
of titanium, aluminum investment castings are designed to provide a
lightweight and durable alternative to forged, fabricated or assembled
components. These components typically cost less per unit than investment
castings made of superalloys or titanium due to the lower alloy and production
costs. As investment casting technology has evolved, techniques such as
controlled solidification have augmented the mechanical properties of these
aluminum components and led to the production of increasingly complex castings
capable of a wide array of applications. The aluminum investment casting
industry has historically been focused primarily on military applications but
has recently diversified into more commercial aerospace applications. The
market for aluminum investment castings in North America and Europe declined
significantly in the early 1990s due to weak defense and commercial aerospace
markets; however, the market has stabilized somewhat in 1994 and 1995.
COMPANY STRATEGY
Enhance Worldwide Market Leadership Position. Howmet estimates that it has a
60% market share for aerospace airfoils. Management believes that the Company
manufactures airfoils for every major jet aircraft turbine engine program
currently in production or under development by its major customers. In
addition, Howmet estimates that it produces 70% of all IGT cast components
sold in the world today. Howmet seeks to enhance its position as the world
leader in the precision cast component market for jet engines and IGT engines
by capitalizing on its distinct advantages, such as its established North
American and European base of capital equipment and tooling, its experienced
research and development department with more than 70 engineers, and its
established relationships with every jet aircraft and IGT engine manufacturer
in the world.
49
Focus on Technologically Complex, Value Added Investment Castings. Howmet
has been at the forefront in the development and commercialization of numerous
technological breakthroughs in the investment casting industry. Howmet's
strategy is to continue its focus on developing higher priced and high margin
airfoils which can withstand even greater material stress and higher
temperature environments, thereby enabling OEMs to design more efficient
engines. The Company intends to pursue this strategy by continuing to develop
new applications for its critical DS and SC investment casting production
techniques, and to improve those techniques. See "--Manufacturing."
Provide Highest Possible Product Quality and Customer Service. The Company
seeks to provide the highest possible level of customer service by keeping
Howmet engineers on-site at customer locations to facilitate the integration
of Howmet's components into the OEMs' final products and to work closely with
OEMs as they develop new products. For example, Howmet has worked with GEAE
over the last four years in the development of the GE90 aircraft engine and is
under contract to supply airfoils for the GE90. In the IGT market, Howmet has
been selected by Asea Brown Boveri to develop jointly all airfoil components
for the GT24 and GT26 new generation IGT engines. In addition, the Company is
seeking to continue to reduce lead times to meet customer demands for "just in
time" delivery.
Emphasize Growth through New Applications of Investment Casting and
Technological Innovations: Howmet seeks to enter new market categories by
developing an investment casting alternative to forged, fabricated or
assembled components. In particular, the Company's strategy is to demonstrate
this alternative to customers by using a rapid prototyping method, which
produces a cast prototype for testing by the customer in a short time-frame
without a significant upfront investment in tooling. In addition, the
Company's strategy is to continue to improve and adapt new materials to
enhance the efficiency of Howmet's existing components. One example of this is
titanium aluminide, a material which is lighter than the alloys currently used
in airfoils. Several jet aircraft engine manufacturers are currently testing
airfoils made of titanium aluminide, which reduce the weight of selected
airfoil components by approximately 50% while increasing efficiency.
Continue Cost Reductions and Productivity Improvements: Since 1992 the
Company has significantly reduced costs and improved productivity, and
management believes that additional improvements can be achieved. From the
beginning of 1992 to March 31, 1996, the Company's labor force has been
reduced from approximately 11,308 to 9,821 employees worldwide. Specific
programs underway at the Company include synchronous manufacturing, kaizen (a
Japanese manufacturing management technique), standardization of manufacturing
processes across the Company's manufacturing facilities worldwide, and
specialization by Howmet's plants in production of certain families of
castings.
MANUFACTURING
In the investment casting process, an exact replica, or pattern, is produced
by injecting wax or plastic materials into a die. If the part contains
internal passages, a pre-formed ceramic core is inserted in the die cavity
around which the pattern material is injected. A ceramic shell mold is then
produced by dipping, or "investing" (hence the term "investment casting") the
pattern assembly in a ceramic slurry, draining it, and then coating it with
coarse ceramic stucco to strengthen the shell. After drying, this process is
repeated several times, using progressively coarser grades of ceramic
material, until a self-supporting shell has been formed. The coated assembly
is then placed in a high-temperature furnace where the wax or plastic is
removed from the shell through melting. Finally, the ceramic shell mold is
fired to burn out traces of pattern material and to increase its strength.
During casting, a pre-heated ceramic shell mold is filled with molten metal,
typically nickel-base, cobalt-base, titanium or aluminum alloy, which is
poured into the mold with the assistance of vacuum, pressure and/or
centrifugal force. Once the poured mold has cooled, the residual shell and
core are removed by a variety of methods and the parts are separated. The
resulting near-net-shape components require only minor cleaning and finishing
operations to become the final product.
Customers in both the aerospace and IGT markets continuously seek
improvement of turbine engine operating efficiencies through increased turbine
operating temperatures and other performance enhancement, requiring the
development of stronger, more heat resistant and more corrosion resistant
engine components. The Company has responded to these requirements with
improved metallurgical structures, and the Company's casting technologies have
progressed from "Equiax" to "DS" and to "SC".
50
Equiax is the conventional investment casting technology characterized by a
random grain structure and non-directional strength properties. Much of the
advancement in investment casting technology has involved controlling the
formation of grain boundaries which result as a metal solidifies, and
manipulating the effects of such formation on properties such as strength and
heat resistance. Aligning grains can also increase ductility and strength in
particular directions, such as along the length of a blade or vane, where
stress is greatest. This alignment process also has significant beneficial
effects on thermal fatigue properties. The DS casting process was developed to
facilitate the formation of unidirectional grain boundaries. SC castings are
composed of one crystal and represent the most advanced castings available. DS
and SC components are priced substantially higher than the Equiax parts they
replace, and a single SC airfoil may cost well in excess of $5,000 for a large
IGT application. The more advanced DS and SC technologies represented more
than 22% of the Company's 1995 total casting sales.
Because of the strict performance required of its final products, Howmet
carefully controls its manufacturing processes and materials and relies on
vertical integration to assure a consistent and reliable source for such
materials. Vertical integration also permits a greater level of protection for
the proprietary techniques, materials and processes the Company uses to
produce its castings. Vertical integration includes the production of waxes
for casting patterns and the ceramic cores and the alloys Howmet uses in its
castings.
As a manufacturer of sophisticated OEM components, Howmet has met or
surpassed all major OEM quality certifications and received all necessary FAA
approvals for jet aircraft engines. In addition, each of Howmet's major
casting facilities has been awarded ISO 9002 certification, an internationally
recognized manufacturing standard.
In aluminum castings, which are created using the basic casting procedures
described above, Cercast utilizes a unique rapid solidification technology,
which achieves static and dynamic metal properties that are superior to the
properties produced by traditional processes. Due to this technology,
Cercast's aluminum investment castings have been able to penetrate component
markets for structural airframes and engines which had previously been
reserved for other processes such as sheet assemblies, forgings and sand
castings.
PRODUCTS AND SERVICES
Aerospace Castings
Howmet manufactures titanium and superalloy castings for aircraft turbine
engines and airframe applications for customers worldwide. Aerospace products
are manufactured to precise specifications provided by customers. Howmet's
principal aerospace product group is airfoils for gas turbine engines.
Airfoils consist of blades (rotating foils) and vanes (non-rotating foils) as
well as integral castings such as turbine rotors and nozzle rings for smaller
engines where an entire set of blades and related components are cast
together. Howmet also produces structural components, or "structurals," for
both engine and airframe applications. Structurals are support components of
engines, such as engine casings, frames, bearing housings, and airframe
components. Set forth below is a summary description of Howmet's major
aerospace products:
PRODUCT SUMMARY PRODUCT
CATEGORY MAJOR PRODUCTS DESCRIPTION AND APPLICATION
-------- -------------- ---------------------------
Airfoils Blades High temperature superalloy rotating components for use in tur-
bine engines. Blades act as fans which are driven by the hot gas
flow.
Vanes High temperature superalloy non-rotating components for use in
turbine engines. Vanes are the fixed airfoils which direct the
gas flow.
Integrals Turbine rotors Integrated cast rotating wheels of blades primarily for use in
smaller engines. Turbine rotors are similar to blades in their
application but are manufactured as an integrated part and not a
build-up of separate parts.
Nozzle rings Integrated cast non-rotating ring of vanes primarily for use in
smaller engines. Nozzle rings are similar to vanes but are manu-
factured as an integral component.
Compressor Integrated cast non-rotating ring of compressor vanes for use in
stators both small and large engines. Compressor stators are similar to
vanes but are manufactured as an integral component.
51
PRODUCT SUMMARY PRODUCT
CATEGORY MAJOR PRODUCTS DESCRIPTION AND APPLICATION
-------- -------------- ---------------------------
Structurals Frames Large diameter thin-wall cases used to support their respective
sections of turbine engines such as fans, compressors and tur-
bines.
Bearing housings Large diameter, heavy structural supports for bearings.
Airframe Titanium structures for commercial and military aircraft.
components
Airfoils. Howmet was a pioneer in the airfoil casting process, including
casting intricate internal and external features in numerous sophisticated
alloys while maintaining stringent quality requirements. Investment casting
improves quality by maintaining a high degree of control over the crystal
structure of components for strength, heat resistance and durability. Airfoils
manufactured by the Company operate in the hot gas section of jet aircraft and
IGT engines, which require the Company's components to operate for prolonged
periods of time at temperatures that can exceed 2,000 degrees Fahrenheit.
Airfoils can be either cored (hollow) or non-cored (solid), depending on
customer specifications. Cores allow the flow of cooling air through the
inside of the airfoil's structure to help maintain a lower temperature on the
surface of the airfoil. Vanes are made in either single airfoils or in groups
of clustered airfoils cast simultaneously.
Howmet believes that it has become a leading supplier of airfoils for
virtually every aerospace gas turbine engine manufacturer. Airfoils are
uniquely designed for each engine model, and for each stage of that engine.
Typically, there are three to eight turbine stages, each one with between 60
and 90 identical sets of airfoils. Because of the hot gas path location of the
airfoils (as opposed to structural parts), a predictable degradation of
airfoils occurs with elapsed engine operation time. This severe environment
necessitates demanding product requirements and ultimately the need for
replacement parts and/or refurbishment. The Company's airfoil business is
approximately equally divided between sales to OEMs for new engines and sales
to engine manufacturers of airfoils that are resold as replacement parts.
Integrals. Integral castings are turbine rotors, nozzle rings and compressor
stators with circular rings of airfoils. As these are cast contiguously with
their supporting structures, integrals replace several fabricated assemblies
and provide cost efficiencies in machining, fixtures, joining and inspection,
in-house inventories and lead times. Cast integrals consistently are
dimensionally superior to many fabricated or forged products. Integrals are
found on smaller engines designed for use on helicopters, trainers, regional
aircraft, and in the business and personal aircraft market as well as stators
for larger engines.
Structurals. Structurals are support components of engines, such as engine
casings, frames, bearing housings, and airframe components. Howmet entered the
market for structural castings in the early 1980s after aircraft manufacturers
began using cast components in aircraft engines as a cost savings measure.
Howmet saw this market as an opportunity to increase its participation in
engine component sales through an extension of its casting technology. The
structurals market is separated into engine and airframe segments with a
further division between large (up to 609 in dimension) and small (249 maximum
dimension) superalloy and titanium castings in each of these categories.
Howmet is one of four principal competitors serving the large structural
casting market, which requires specialized technology and large equipment.
Structurals are usually made of lighter weight titanium (for use in colder
engine sections) and superalloys (for use in hot sections) for their strength
and temperature performance properties. Engine structurals are circular engine
components such as fan frames, compressor cases and bearing housings that
support and surround the various internal working components of a turbine
engine. Airframe structurals are of various dimensions (generally not round)
and form part of the airframe structure, and most such structural components
are made from titanium alloys for their weight and strength advantages.
Industrial Gas Turbines
Management believes that Howmet is the leading manufacturer of superalloy
components for land-based gas turbine engines worldwide. These IGT products
principally consist of airfoils (which, like airfoils for aircraft, include
moving blades and stationary vanes) for gas turbines involved in utility power
generation, and also
52
include mechanical drive applications for industrial and pipeline operations,
oil and gas processing and off-shore drilling. The Company's products can be
found in a wide range of industrial gas turbines, from small units with
capacity of as little as 1,500 kilowatts to large systems producing in excess
of 200 megawatts. In addition to IGT airfoils, Howmet also manufactures IGT
shroud blocks, which are vane holders that provide a seal to fix each vane
into its proper position.
IGT airfoils are similar in composition to those produced for aerospace
turbines except that they are often significantly larger. IGT airfoils for
large turbines can be as long as 30 inches and weigh as much as 300 pounds.
Their size makes many IGT airfoils more difficult to cast than smaller
aerospace airfoils with the same mechanical properties. Management believes
that Howmet is the only company currently capable of serial production of
large DS and SC cast components for the IGT market and that this expertise
provides the Company with significant opportunities. Management also believes
that other combustor and compressor components of IGT engines represent a
future market opportunity for the Company.
Aluminum Castings
Through its Cercast subsidiaries, the Company produces aluminum investment
castings for defense and commercial aerospace markets. Applications include
electronic packaging, electro-optical system housings, engine parts, pumps and
compressors as well as aerospace structural components. Cercast has reduced
its reliance on declining defense industry production, which has fallen from
approximately 85% of revenues in the early 1990s to approximately 50% in 1995.
Aerospace Component Repair and Other Businesses
Howmet operates component repair facilities entirely devoted to the
refurbishment of a wide range of components for jet aircraft engines. These
facilities serve airlines, overhaul shops and other refurbishment facilities,
focusing primarily on turbine hot section components such as blades, vanes,
and shrouds. Howmet can repair and return to service engine-ready turbine
hardware for both large and small engines made by most engine manufacturers.
Howmet also offers customers immediate replacement of certain parts from its
refurbished component inventory. As a cost control measure, airlines are
increasingly willing to consider refurbishment of components rather than
replacement since component repair prices are often substantially lower than
the price of new components.
An array of technically sophisticated processes are required to restore
turbine components to their original equipment specifications. These include
various machining processes such as electric discharge machining, grinding,
turning, milling, laser cutting and drilling. All repaired parts undergo
detailed quality control inspection, including evaluations involving
coordinate measurement, optical comparison, fluorescent penetration,
ultrasonic and airflow analyses, x-ray examination, and metallographic and
hardness tests. The refurbishment market is highly regulated, with FAA and OEM
certifications required for each refurbishment process used for components and
for each refurbishment facility. There is also a market for refurbishment of
IGT products, in which the Company does not actively participate.
Howmet has provided coating services to aerospace and other industries since
the early 1960s. The Company's protective metallic and ceramic coatings are
designed to prolong the life of complex turbine components by improving their
resistance to wear, oxidation and corrosion. Howmet provides four different
coating processes to customers: diffusion coating, overlay coating, recoating
and masking. Howmet also offers customers machining services, develops a
variety of alloys to meet customer needs, and provides research and
development services on specific customer projects, as discussed below.
Howmet has initiated a process that may result in the sale of its
refurbishment business, although no agreement has been reached. If the
refurbishment business is sold, proceeds will be used to reduce indebtedness
or invest in other opportunities. The Company will retain its Thermatech
coating operations in any disposition of its refurbishment business.
Joint Ventures
Howmet presently is participating in two joint ventures. In Japan, Komatsu-
Howmet Ltd. is a jointly owned investment casting business which serves IGT
and aerospace customers, primarily in Japan and other Asian
53
countries. Howmet currently holds an option to purchase Komatsu's interest in
this venture. The Company has agreed to guarantee 50% of the indebtedness of
this venture. As of December 31, 1995, Komatsu-Howmet Ltd. had approximately
$22.8 million of indebtedness outstanding. In addition, R-H Components
Technology L.C. ("RHCT") is a joint venture with Rolls-Royce plc and Rolls-
Royce Inc. organized to serve the North American refurbishment market for
aircraft engine parts (excluding PWA parts). RHCT has a line of credit for up
to $4.0 million which is guaranteed by Howmet. These joint ventures are
accounted for by the equity method.
RESEARCH AND DEVELOPMENT
Howmet has pursued technological advancement over many years to establish a
technology leadership position in the investment casting industry. Howmet has
been a leader in developing new investment casting processes such as the Mono-
Shell(TM) process for mold formation, and in putting the DS and SC casting
processes into commercial production. Howmet has also been a leader in fine
grain casting, hot isostatic pressing (a pressurizing process performed near
the melting point of metal to increase its density), and the chemical vapor
deposition coating process.
A portion of the Company's total research and development budget comes from
Howmet's customers, who regularly retain Howmet for specific projects. Howmet
also provides research and development services by contract to governmental
agencies.
At March 31, 1996 Howmet's research center staff of 182 includes 71 degreed
engineers and scientists. The center includes eight departments. Foundry
Technology develops new foundry materials, melting and casting processes, and
rapid prototyping of new products. Ceramic Technology develops new pattern,
core and shell materials essential to the production of high quality
investment castings. Advanced Technology concentrates on new materials,
processes and products, with a view toward both current customer requirements
and long term requirements. Surface Technology supports the requirements of
the Company's refurbishment and coatings businesses. Quality and Technical
Services oversees corporate quality and mechanical, physical, and chemical
property testing of materials. Manufacturing Technology designs and builds
proprietary equipment for Howmet's plants. The Environmental Engineering Group
oversees Howmet's compliance with applicable environmental laws and
regulations. The Corporate Research Center in Whitehall, Michigan also
maintains a close association with the corporate engineering staff in Hampton,
Virginia for direct interaction with all the casting plants to help develop
new and more efficient casting technologies for production. In addition to the
Research Center, each of the plants maintains a Development Center for
specific product development to meet customer needs.
Cercast also maintains a research and development staff to improve the
aluminum investment casting process. This staff develops casting processes,
specialty materials, including stable pattern waxes and hybrid ceramic shell
molds, as well as the use of pre-formed ceramic coring, which enables Cercast
to produce a diverse range of large, thinwall and complex geometries.
The Company's aggregate research and development expense for the years ended
December 31, 1993, 1994 and 1995 were $23.3 million, $19.2 million and $26.4
million, respectively.
MAJOR CUSTOMERS
Management believes that Howmet is the leading provider of precision
investment casting components to the leading producers of aircraft gas turbine
engine components. The Company's principal customers in the aerospace gas
turbine engine market are Pratt & Whitney Aircraft ("PWA") (which, together
with Pratt & Whitney-Canada, represented 15% of the Company's 1995 net sales)
and General Electric Aircraft Engines ("GEAE"). The Company's other aerospace
engine customers (none of which represented more than 4% of 1995 net sales)
are AlliedSignal, Fiat, Allison, MTU, Rolls-Royce, Walbar (a division of
Coltec) and SNECMA S.A. ("SNECMA"). Sales to the top ten aerospace customers
represented approximately 37% of the Company's net sales in 1995. See "Risk
Factors--Concentrated Customer Base."
Howmet focuses its production efforts primarily on airfoils for all the
above customers. The Company believes it is the majority airfoil supplier for
PWA, PWA-Canada, and AlliedSignal and is a principal supplier to the other
customers. Howmet estimates that it holds a nearly 50% share at GEAE. Two
engine builders (Rolls-Royce and SNECMA) produce a substantial portion of
their requirements through their own captive airfoil foundries, a strategy
management does not expect other customers to follow. See "--Competition."
54
Management also believes that Howmet is the leading provider of precision
investment casting components to the leading producers of land-based
industrial gas turbine engines. General Electric Power Systems ("GEPS") (which
represented 10% of the Company's 1995 net sales) is the Company's largest IGT
customer. The Company's other IGT customers (none of which represented more
than 5% of 1995 net sales) are European Gas Turbine ("EGT") (which
manufactures GEPS-designed engines), Asea Brown Boveri AG ("ABB"), Siemens AG
("Siemens") Westinghouse Electric Corporation ("Westinghouse"), Nuovo Pignone,
Solar, and Westinghouse-Canada. Sales to GEPS and GEAE collectively
represented approximately 21% of Howmet's 1995 net sales. Sales to the
Company's top five IGT customers accounted for approximately 28% of 1995 net
sales. See "Risk Factors--Concentrated Customer Base."
Contractual relationships with the Company's principal customers vary.
Approximately one-half of the Company's business is derived from multi-year
contracts, typically three years in length. Multi-year agreements currently
exist with PWA, PW-Canada, GEAE, GEPS, Allison, AlliedSignal and Westinghouse.
Under these contracts, the Company's customers agree to order from the
Company, and the Company agrees to supply, specified percentages of specified
parts at specified pricing over the life of the contracts. The customers are
not required to order fixed numbers of parts, although pricing may be subject
to certain threshold quantities. Historically, many customers have chosen to
single source most components due to the high cost of tooling and process
qualification, but multiple sourcing is increasing. Most of these contracts
include provisions requiring specified price reductions over the term of the
contract, based on lower production costs as programs mature, shared benefits
from other cost reductions resulting from joint production decisions, and
negotiated reductions. One of Howmet's largest customers, GEPS, in response to
a corporate policy decision to reduce sole sourcing, has exercised its right
to terminate its 10 year long-term sole source contract with Howmet effective
in early 1997, and has placed orders for certain components with PCC. The 10
year long-term contract being terminated is unusual since the Company's
contracts generally range from one to three years, and the Company generally
does not serve as the sole source for all of a customer's parts, as it has for
GEPS. The Company therefore expects that its relationship with GEPS will be
similar to its arrangements with other customers after such termination. Based
on the nature of the products presently in production and planned for
production for GEPS, the Company expects to continue producing a substantial
volume of castings for GEPS. To the extent that multiple sourcing by GEPS
reduces the Company's volume in 1997, the Company presently has other business
opportunities with other customers to make use of available capacity under
current market conditions. See "--Competition." Contractual relationships are
mainly technology driven, particularly in high efficiency, complex designs.
COMPETITION
The Company has an estimated 57% market share in the aerospace airfoil
market where competition is limited primarily to one major company, Precision
Castparts Corporation ("PCC"), due largely to high entry costs and significant
technical requirements. PCC is a public company with calendar year 1995
reported sales of $520.0 million and an estimated 35% share of the aerospace
airfoil market. Management believes PCC's capabilities have improved in recent
years, and that PCC has greater capital resources than the Company. Management
also believes that the remainder of the market is split among numerous smaller
participants, none of which has a significant share. The Company's competition
with PCC and any other competitor that enters this market is based on
providing increasing levels of quality and complexity and outstanding service
at the lowest possible cost.
Until the early 1980s, when Howmet entered the structural castings market,
PCC was also the only producer of large structural casting components. PCC
remains the industry leader, and the Company estimates its own market share at
15%.
Certain of Howmet's major aerospace customers, GEAE, PWA and AlliedSignal,
have each tried in the past to be more vertically integrated by establishing
their own airfoil casting operations, but have discontinued such efforts.
Management does not expect any of Howmet's domestic airfoil customers to begin
vertical integration projects in the foreseeable future. Apart from Howmet and
PCC, the only other significant manufacturers are the captive foundries at
Rolls-Royce and SNECMA. Management believes there are no presently foreseeable
threats of competing technologies or significant additional competitors within
the airfoil product line. While several
55
partnerships are being explored between certain of the Company's customers and
Eastern European or Far East companies that have manufacturing capabilities
for investment castings, management believes these companies cannot presently
meet strict Western standards of quality and timely delivery, and that these
partnerships might produce primarily low-technology castings for local
markets.
Competition in the IGT component market is also based on technology, price
and customer service. Howmet is the leading participant in the IGT airfoils
investment casting market with an estimated 75% market share. PCC, with an
estimated 15% market share, is the Company's primary competitor. Management
believes that the remainder of the market is split among numerous smaller
participants, none of which has a significant share. As with the aerospace
castings market, the IGT market has high entry costs and significant
qualification and technical requirements that limit competition from new
competitors. In the large IGT segment of the market, management believes that
Howmet's ability to manufacture large, complex components with SC and DS
technologies differentiate Howmet substantially from its competitors. In the
mature and lower technology small IGT business, PCC and the other competitors
are more active.
Airfoils represent a substantial cost component of aerospace and IGT
customers' engines, and customers are increasingly focused on reducing costs
and increasing competition. The companies' major customers are intensely price
competitive with each other, and this price competition increases their
incentives to reduce costs from their suppliers. The conversion of excess
aerospace component capacity to IGT capacity has further encouraged customers
to foster competition in the IGT market.
Aluminum casting manufacturers also compete on the basis of price, quality
and service. Most of Cercast's competitors are either small entrepreneurial
companies or divisions of larger industrial groups. Management believes that
Cercast's proprietary technology and innovations give Cercast a competitive
advantage.
Competition in the component repair market is primarily based on reliability
of service, pricing, quality, and turn time. Potential new entrants to the
repair market face barriers to entry based on technology, financial resources,
regulatory compliance and demonstrated experience. Since most customers desire
no more than two or three suppliers, demonstrated experience is very important
to sustaining or expanding market share. Howmet's principal competitor in the
repair market and the largest participant in the market is Chromalloy Gas
Turbine ("Chromalloy"). Chromalloy is the largest operating unit of Sequa
Corporation, a diversified industrial engineering company. SIFCO Industries,
Inc. and Indivers N.V. (Interturbine) are the Company's other significant
competitors in this market.
SALES AND MARKETING
Howmet's sales and marketing group includes a centrally managed sales force
of thirty-two salaried sales representatives and two commissioned
representatives for all of its cast products. A Senior Vice President oversees
a network of eight regional business managers and a manager of business
planning. Most regional managers have significant plant experience, and most
sales representatives have significant technical experience.
Management believes the technical nature of the turbine business has
fostered close working relationships between the Company and its customers,
which are necessary to help shorten development lead times on new components
and to insure quality and cost control over the final product, and maintaining
and expanding such relationships is one of the Company's principal strategies.
The eight regional sales offices are generally located near major customers.
For example, the eastern United States office is located in East Hartford,
Connecticut, near PWA; the mid-western office is located in Blue Ash, Ohio,
close to the GEAE plant; and the western United States office is in Phoenix,
Arizona, near the AlliedSignal aircraft engine operation. In the United
States, relationships with the large IGT product customers are coordinated by
the business manager in the Hampton, Virginia, casting plant, where most IGT
products are manufactured. This manager has four technical and support
personnel under his control specifically dedicated to the GEPS IGT account,
including two technical representatives located at the GEPS Greenville, South
Carolina manufacturing plant. In addition, several field representatives
maintain offices within customers' plants. These representatives are often
engineers with plant experience who are invited by Howmet's customers to
locate within their facilities.
Orders for components are primarily awarded through a competitive bidding
process, and drawings and specifications for each part to be bid are sent to
the appropriate manufacturing plant, which consults with engineering, quality
and business center managers in the plant as part of the formal bid process.
56
Cercast sells its products through a network of seventeen independent
representatives, plus one direct sales person, who are managed by four
regional sales managers under the direction of Cercast's Vice President,
Marketing.
Refurbishment has its own sales force, supplemented by area sales coverage
for overseas markets.
SUPPLY
The Company's raw materials include a number of metals and minerals used to
produce the alloys included in its castings, including titanium, hafnium,
aluminum, nickel, cobalt and copper, among others. The Company has multiple
sources of supply for most of these metals and has not experienced any
material supply interruption for more than twenty years. Prices of these
materials can be volatile, and the Company engages in forward purchases of
some of these materials under certain market conditions, and passes certain
price fluctuations through to customers pursuant to its long-term agreements.
The Company ordinarily does not, however, otherwise attempt to hedge the price
risk of its raw materials.
PROPERTIES
Howmet has eighteen facilities in the United States, three in France, and
two in Great Britain. Cercast has three facilities in the United States, two
in Canada, and one in France. Except as indicated, the facilities described
below are all owned by Howmet, Cercast or their subsidiaries:
AEROSPACE/INDUSTRIAL GAS TURBINES REFURBISHMENT & COATING OPERATIONS
LOCATION (NUMBER OF
FACILITIES) SIZE (SQUARE FEET)
------------------- -----------------
Cleveland, Ohio....... 100,000
Dover, New Jersey (2). 240,737
115,292
Hampton, Virginia..... 280,000
4,090 (leased)
LaPorte, Indiana...... 186,100
Morristown, Tennessee. 85,000
Whitehall, Michigan
(5).................. 253,018
43,029
56,180
65,940
23,531
Wichita Falls, Texas.. 206,300
Winsted, Connecticut.. 81,000
Dives, France (capital
lease)............... 255,858
Exeter, U.K. (2)...... 184,350
65,650
Gennevilliers, France. 47,361
Le Creusot, France.... 156,077
LOCATION SIZE (SQUARE FEET)
-------- -----------------
Branford, Connecticut............................................................................ 138,420
Claremore, Oklahoma.............................................................................. 75,000
North Haven, Connecticut......................................................................... 65,000
Wichita Falls, Texas............................................................................. 125,000
Whitehall, Michigan.............................................................................. 114,270
CERCAST
LOCATION SIZE (SQUARE FEET)
-------- -----------------
Bethlehem, Pennsylvania.......................................................................... 17,000 (leased)
City of Industry, California..................................................................... 50,000 (leased)
Hillsboro, Texas................................................................................. 51,000 (leased)
Evron, France.................................................................................... 81,000
Georgetown, Ontario.............................................................................. 37,000
Montreal, Quebec................................................................................. 97,000
ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and changing international, federal,
state and local environmental laws, including those governing discharges to
the air and water, the handling and disposal of solid and hazardous wastes,
and the remediation of contamination associated with releases of hazardous
substances or materials. Management believes that it is currently in material
compliance with such environmental laws. However, if it is determined that the
Company is not in compliance with current environmental laws, the Company
could be subject to penalties. The amount of any such penalties could be
material. In addition, the Company uses solvents, waxes, metals, caustics,
acids, oils and other hazardous substances, and as is the case with
manufacturers in general, if a release of hazardous substances occurs on or
from the Company's properties the Company may be held liable and may be
required to pay the cost of remedying the condition. The amount of any such
liability could be material.
57
The Company's facilities have made, and will continue to make, expenditures
to comply with current and future environmental laws. The Company anticipates
that it will incur additional capital and operating costs in the future to
comply with existing environmental laws and new requirements arising from new
or amended statutes and regulations. In addition, because the applicable
regulatory agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate
the cost for compliance with these additional requirements. The amount of any
such compliance cost could be material.
The Company has established reserves ($6.1 million at December 31, 1995)
that it believes are adequate to satisfy substantially all of its
environmental liabilities under present laws and regulations. In addition, in
connection with the Acquisition, Howmet Cercast S.A., Pechiney International,
and Pechiney are required to indemnify Blade with respect to certain
environmental matters, and Blade assigned these rights to the Company as part
of the Offering of the Senior Subordinated Notes. Pursuant to the Stock
Purchase Agreement, Howmet Cercast S.A., Pechiney International and Pechiney
are obligated to provide full indemnification for certain excluded liabilities
including environmental liabilities associated with (i) mining operations that
were discontinued, (ii) businesses or operations that were sold or otherwise
disposed of at the time of the Acquisition, and (iii) subsidiaries that were
transferred at the time of the Acquisition. In addition, Howmet Cercast S.A.,
Pechiney International and Pechiney are obligated to indemnify the Company for
certain environmental liabilities in existence at the time of the Acquisition,
including those associated with the handling or presence of hazardous
substances within or outside the boundaries of any Company facility, the
failure of any Company facility to be in compliance with applicable
environmental laws, and any other pre-closing act, omission or condition with
respect to the Company that gives rise to liability under any environmental
laws, to the extent such costs exceed reserves of $6.0 million on the
Company's balance sheet at June 30, 1995. The indemnification obligation is
not limited as to amount. There can be no assurances, however, that Howmet
Cercast S.A., Pechiney International and Pechiney will indemnify the Company
for all such environmental matters set forth above when requested by the
Company. If Howmet Cercast S.A., Pechiney International and Pechiney do not
honor their indemnification obligations, the Company likely would be
responsible for such matters and the cost of addressing such matters could be
material.
The Company is subject to liability for, and is currently involved in,
certain matters relating to the investigation and/or remediation of
environmental contamination at properties owned and operated by the Company.
The Company is currently investigating possible and known contamination
(including soil and groundwater contamination) at the following North American
facilities: Whitehall, Michigan; Dover, New Jersey; La Porte, Indiana;
Branford, Connecticut; and Hillsboro, Texas. The Company currently estimates
that the total investigation and remediation costs at these facilities may
range from $0.6 million to $4.8 million.
In connection with their review of environmental matters related to the
Acquisition, Thiokol and Carlyle retained independent consultants to review
the environmental liabilities associated with the European properties owned
and operated by the Company. The environmental consultants concluded in that
review that the total environmental liabilities associated with those
facilities ranged from $1.3 million to $6.5 million with actual expenditures
to range from $1.3 to $3.0 million. As set forth above, Howmet Cercast S.A.,
Pechiney International and Pechiney are obligated to indemnify the Company for
the costs associated with these environmental liabilities to the extent that
the total pre-closing environmental liabilities of the Company exceed reserves
of $6.0 million at June 30, 1995. As set forth above, however, there can be no
assurances that Howmet Cercast S.A., Pechiney International and Pechiney will
indemnify the Company for all such environmental matters set forth above when
requested by the Company. If Howmet Cercast S.A., Pechiney International and
Pechiney do not honor their indemnification obligations, the Company likely
would be responsible for such matters and the cost of addressing such matters
could be material.
The Company could also have contingent liability exposure for environmental
contamination and related costs associated with certain discontinued mining
operations owned and/or operated until the early 1960s. These liabilities
include approximately $15.5 million in remediation and natural resource damage
liabilities at the Blackbird Mine Site in Idaho and approximately $4.0 million
in investigation and remediation costs at the Holden Mine Site in Washington.
However, the Company has never owned or operated any of these facilities, the
Company has been dismissed as a defendant in the Blackbird mine proceedings,
Pechiney and Holdings are
58
primarily liable with respect to such liabilities, and Howmet Cercast S.A.,
Pechiney International and Pechiney have agreed to indemnify Blade for such
environmental liabilities as described above. Blade assigned its rights to the
Company with respect to any such indemnification to the extent the Company
incurs liability with respect to such matters. For the reasons indicated, the
Company has not established reserves with respect to any such liabilities.
The Company is subject to liability under the CERCLA and similar state
statutes for the investigation and remediation of environmental contamination
at properties owned and/or operated by it and at off-site locations where it
has arranged for the disposal of hazardous substances. Courts have determined
that liability under CERCLA is, in most cases, joint and several, meaning that
any responsible party could be held liable for all costs necessary for
investigating and remediating a release or threatened release of hazardous
substances. As a practical matter, liability at most CERCLA (and similar)
sites is shared among all the solvent PRPs. The most relevant factors in
determining the probable liability of a PRP at a CERCLA site usually are the
cost of the investigation and remediation, the relative amount of hazardous
substances contributed by the PRP to the site, and the number of solvent PRPs.
As a result of off-site waste disposal prior to the acquisition, the Company
is subject to liability for, and is currently involved in certain matters
relating to the investigation and/or remediation of environmental
contamination at properties not owned or operated by the Company. The Company
has been or may be named a PRP at the following sites: Heleva Landfill,
Pennsylvania; Novak Sanitary Landfill, Pennsylvania; Conservation Chemical
Site, Indiana; Metcoa Landfill, Pennsylvania; Barkhampstead Landfill,
Connecticut; Combe Fill South Landfill, New Jersey; PJP Landfill, New Jersey;
Thermo Chem., Inc., Michigan; Solvent Recovery Service, Connecticut; Wichita
Falls, Texas 76703 Site, Texas; Spectron Superfund Site, Maryland; PCB
Treatment Inc. Site, Missouri; and Omega Chemical Corporation Site,
California. The Company currently estimates that its total liability at those
sites may range up to $4.2 million. As set forth above, Howmet Cercast S.A.,
Pechiney International and Pechiney are obligated to indemnify the Company for
the costs associated with these liabilities to the extent that the total pre-
closing environmental liabilities of the Company exceed the above-mentioned
reserves of $6.0 million at June 30, 1995. As set forth above, however, there
can be no assurances that Howmet Cercast S.A., Pechiney International and
Pechiney will indemnify the Company for all such environmental matters set
forth above when requested by the Company. If Howmet Cercast S.A., Pechiney
International and Pechiney do not honor their indemnification obligations, the
Company likely would be responsible for such matters, and the cost of
addressing such matters could be material.
EMPLOYEES
As of March 31, 1996, the Company had 9,821 employees. Approximately 1,040
of Howmet's production and maintenance employees are represented by the United
Auto Workers Union at the Company's Whitehall, Michigan facility. The current
collective bargaining agreement expires on June 1, 1997. In addition, the
Teamsters Union has petitioned for a representation election at one of the
Company's Dover, New Jersey facilities. Management believes that the Company's
relationship with its employees is good.
Labor unions also represent most of the 781 employees at the facility in
Exeter, England, where management believes relations are good. In addition,
Howmet and Cercast have labor unions in their plants in France, where
relations are also considered good. All 1,180 employees in France are
salaried.
LEGAL MATTERS
The Company is a party to certain pending proceedings regarding
environmental matters. See "--Environmental Matters." The Company, in its
ordinary course of business, is party to various other legal actions.
Management believes these are routine in nature and incidental to its
operations. Management believes that the outcome of any proceedings to which
the Company currently is party will not have material adverse effects upon its
operations, financial condition or liquidity.
59
PATENTS
The Company has obtained numerous patents, licenses, and proprietary
information which it believes provide it with a competitive advantage,
including proprietary modifications and applications of the DS and SC
processes, for which the original patent has expired. To protect its
proprietary information, the Company requires its employees to sign
confidentiality agreements, reinforces confidentiality upon an employee's
departure from the Company, and builds much of its own equipment to prevent
competitors from learning about Howmet's newly developed processes.
Competitors in the Company's businesses also hold patents and other forms of
proprietary information, and there is active technical competition in these
businesses. No assurances can be given that one company or another will not
obtain a technological advantage from time to time, in one aspect of the
industry's technology or another.
60
MANAGEMENT
The following table sets forth certain information with respect to the
members of the Board of Directors and the executive officers of the Company,
including directorships of Holdings and Blade. Executive officers of the
Company are chosen by the Board of Directors and serve at its discretion. Each
director has held his position since consummation of the Acquisition in 1995,
except Mr. Squier who has been a director of Howmet since September 1987.
NAME TITLE AGE
---- ----- ---
William E. Conway....... Director, Chairman of Blade and Howmet 46
Frank C. Carlucci....... Director of Blade 65
Richard L. Corbin....... Director of Blade; Director, Chairman of Holdings 50
Allan M. Holt........... Director of Blade and Holdings 44
Robert K. Lund.......... Director of Blade 58
David L. Squier......... Director of Blade, Holdings and Howmet; President and Chief 50
Executive Officer of Howmet
James R. Wilson......... Director of Blade and Howmet 55
B. Dennis Albrechtsen... General Manager of Whitehall Castings 51
Henri Fine.............. President, Cercast Group 51
Jack Lambert............ Vice President, Human Resources 49
Marklin Lasker.......... Senior Vice President, Sales/Marketing and 58
International Operations
John Parkinson.......... Vice President, Howmet Refurbishment, Inc. 46
Neil Paton.............. Vice President, Technology 57
Roland Paul............. Vice President, General Counsel and Secretary 59
John C. Ritter.......... Vice President, Finance, Howmet and Holdings; Chief 48
Financial Officer
of Howmet
James R. Stanley........ Senior Vice President, United States Operations 54
Paul C. Wilson.......... Vice President, Corporate Planning 48
Ronald L. Wood.......... Vice President 54
All directors of Blade, Holdings and the Company hold office until the
election and qualification of their successors. Executive officers of the
Company are chosen by the Board of Directors and serve at its discretion.
Blade, Holdings and the Company do not pay any fees or remuneration to their
directors for service on the board or any board committee, but reimburse
directors for their ordinary out-of-pocket expenses incurred in connection
with attending meetings of the Board of Directors.
William E. Conway, Jr. was elected as a Director of Blade and Howmet upon
consummation of the Acquisition. He has been a Managing Director of The
Carlyle Group, a Washington, D.C.-based private merchant bank, since 1987. Mr.
Conway was Senior Vice President and Chief Financial Officer of MCI
Communications Corporation from 1984 until 1987, and was a Vice President and
Treasurer of MCI from 1981 to 1984. Mr. Conway presently serves on the Board
of Directors of BDM International, Inc., GTS Duratek, Inc., Highway Master,
Inc., Tracor Inc. and several privately held companies.
Frank C. Carlucci was elected as a Director of Blade upon consummation of
the Acquisition. Mr. Carlucci has been Chairman and a Managing Director of The
Carlyle Group since 1993 and served as Vice Chairman of The Carlyle Group from
1989 to 1993. Mr. Carlucci also served as U.S. Secretary of Defense from 1987
to 1989 and has held a number of other government positions, including
Ambassador to Portugal, Deputy Secretary of Defense, and Assistant to the
President for National Security Affairs. Mr. Carlucci presently serves on the
Board of Directors of the following corporations: Ashland Oil, Inc., BDM
International, Inc., Bell Atlantic Corporation, East New York Savings Bank,
General Dynamics Corporation, Kaman Corporation, Neurogen Corporation,
Northern Telecom, Ltd., The Quaker Oats Company, SunResorts, Ltd., N.V., Texas
Biotechnology Corporation, The Upjohn Company and Westinghouse Electric
Corporation. He also presently serves on the Board of Directors of several
privately held companies controlled by The Carlyle Group.
61
Richard L. Corbin was elected as a Director of Blade and Holdings upon
consummation of the Acquisition. He has been the Senior Vice President and
Chief Financial Officer of Thiokol Corporation since May of 1994. In 1986, he
joined General Dynamics Corporation; he subsequently served from 1991 to 1994
as Chief Financial Officer and Vice President of Administration Space Systems
Division of General Dynamics Corporation.
Robert K. Lund was elected as a Director of Blade upon the consummation of
the Acquisition. He has been Vice President and Technical Director of Science
and Engineering of the Thiokol Corporation since May 1992, where he is
responsible for the technical direction of the corporation's aerospace units
and corporate research and development activities. From 1989 through 1992 he
served as Vice President and Technical Director of Advanced Technology. He
joined Thiokol Chemical Corporation in 1961.
Allan M. Holt was elected as a Director of Blade and Holdings upon
consummation of the Acquisition. He has been a principal with The Carlyle
Group, a Washington, D.C.-based private merchant bank, since 1991. He was
previously with Avenir Group, a private investment and advisory group, and
from 1984 to 1987 was Director of Planning and Budgets at MCI Communications
Corporation, which he joined in 1982. Mr. Holt currently serves on the boards
of several privately held companies.
David L. Squier has been President and Chief Executive Officer of the
Company since 1992. Mr. Squier began his association with Howmet when he
joined the Corporate Planning department in December 1971. He was involved in
manufacturing management from 1976 to 1978, became General Manager of Wichita
Falls Casting in 1979, and was promoted to Vice President of Operations in
1983. He was elected as a Director of Blade, Holdings and Howmet upon
consummation of the Acquisition.
James R. Wilson was elected as a Director of Blade and the Company upon
consummation of the Acquisition. He became Chairman of the Board of Thiokol
Corporation in October 1995 and has served as a Director, President and Chief
Executive Officer of Thiokol Corporation since 1993. He was Chief Financial
Officer from 1989 through 1993, Senior Vice President from 1989 to 1992, and
Executive Vice President from 1992 to 1993. Mr. Wilson is also a director of
Rohr, Inc.
B. Dennis Albrechtsen has held the position of General Manager of Howmet
Whitehall Castings since 1994. Prior to this, he served Howmet as Vice
President, Airfoil Operations since October 1988. He has also held positions
of responsibility at the Whitehall-Michigan, Dover-New Jersey and Wichita
Falls-Texas casting plants.
Henri Fine has been President of the Cercast Group since January 1991. Mr.
Fine started his career with Pechiney in France in 1971 and has been in the
United States and Canada since 1974. During his 23 years with Pechiney, he
held positions in corporate planning, marketing, operations, general
management and corporate development. He joined the Cercast Group as President
in April 1990.
Jack Lambert has been Vice President of Human Resources for Howmet since
June 1994. Prior thereto, he served as a Vice President of Human Resources for
Rubbermaid, Inc. from March 1990 to June 1994 and Vice President for Human
Resources for operating units of United Technologies Corporation from March
1981 to March 1990.
Marklin Lasker has been Senior Vice President of Sales/Marketing and
International Operations of the Company since February 1992. Prior thereto,
Mr. Lasker was Vice President and General Manager of North American, Far East
and Latin American operations for the AlliedSignal Turbocharger Division from
April 1989 to September 1991.
John Parkinson has been Vice President of Howmet Refurbishment, Inc. since
June 1989. He began his association with Howmet as an Engineering Manager in
March 1984 and has held positions as Plant Manager and General Manager.
Neil Paton has been the Vice President of Technology for the Company since
December 1990. Previously, Mr. Paton was a Program Manager of the Rocketdyne
Division of Rockwell International Corporation.
62
Roland Paul has been Vice President, General Counsel and Secretary of the
Company since 1976. Mr. Paul was previously in private practice as an attorney
at law firms in New York and Paris and served as counsel to the United States
Senate Foreign Relations Subcommittee on United States Security Commitments
Abroad.
John C. Ritter became Vice President, Finance of both Howmet and Holdings in
April 1996 and is Chief Financial Officer of Howmet. Prior to his employment
at Howmet and Holdings, he served as Vice President, Finance and Contracts,
for AlliedSignal Government Electronics from 1994-1995, and as Vice President,
Finance and Administration of Norden Systems United Technologies, Inc. from
1991-1994. He has also held the positions of Vice President, Finance and
Administration, Chemical Systems Division, and Manager, Business Analysis,
Pratt & Whitney Aircraft--Government Products Division.
James R. Stanley has been Senior Vice President, United States Operations of
the Company since 1992. Previous to his employment at Howmet, Mr. Stanley was
the Vice President and General Manager of Customer Support and Marketing at
the Textron Turbine Engine Division of Textron, Inc. from August 1990 to
January 1992. He also held the position of Vice President of Operations for
Textron Lycoming and held numerous managerial positions for nearly 20 years at
GEAE.
Paul C. Wilson became Vice President of Corporate Planning in September
1995. Since joining the Company in 1988, Dr. Wilson has held various senior
management positions with the Company, including President of Cercast and
Business Planning Manager.
Ronald L. Wood has been a Vice President of the Company since 1993 and is
currently responsible for various duties in connection with the sale of Howmet
to Blade and the related transition period. From 1993 until April 1996, he
served as Vice President, Finance, overseeing treasury, internal auditing,
corporate accounting and plant accounting duties for Howmet and Cercast.
63
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by the Company for services rendered during the years ended December 31,
1995, December 31, 1994, and December 31, 1993, to the Chief Executive Officer
and to each of the four other most highly compensated executive officers of
the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
----------------- ---------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION PAYOUT COMPENSATION
POSITION YEAR ($) ($)(1) ($) ($)(2) ($)(3)
- ------------------ ---- ------ ------ ------------ ------ ------------
David L. Squier 1995 $325,000 $352,109 $ 7,971 $11,997 $ 21,993
Chief Executive Officer 1994 300,000 269,161 12,425 -0- 24,080
1993 280,000 123,524 10,302 29,900 27,255
James R. Stanley 1995 200,000 186,100 5,722 -0- 10,363
Senior Vice President, 1994 193,000 136,270 6,399 -0- 7,580
United States Opera-
tions 1993 185,000 59,090 6,399 -0- 12,298
Marklin Lasker 1995 190,800 150,745 5,006 -0- 8,398
Senior Vice President,
Sales 1994 184,800 129,746 4,451 -0- 8,106
and 1993 175,000 52,710 4,506 -0- 9,823
Marketing/International
Operations
B. Dennis Albrechtsen 1995 173,000 136,213 6,317 -0- 11,286
Vice President and Gen-
eral 1994 168,000 98,592 6,065 -0- 7,110
Manager, Whitehall 1993 160,000 58,190 7,950 18,594 9,924
Castings
Ronald L. Wood 1995 170,355 123,367 5,746 -0- 12,338
Vice President, Finance 1994 166,200 99,855 3,627 -0- 6,121
1993 150,621 36,101 5,394 8,724 169,779
- --------
(1) Includes payments under the Company's Annual Bonus Plan and under its
Restructuring Plan, a three year annual incentive plan which began in 1992
and ended in 1995, which allowed for payments to be made to the Named
Executive Officers in conjunction with the Company's restructuring
efforts.
(2) The Company's Long-Term Incentive Plan allowed for annual payments based
on threshold, target and maximum goals tied to the Company's performance
with respect to profits and return on net assets over rolling three-year
periods, beginning in 1991. The Long-Term Incentive Plan was terminated in
connection with the Acquisition, and the following amounts were determined
and paid in 1996 to give effect to that termination: David L. Squier,
$500,176; James R. Stanley, $226,936; Marklin Lasker, $214,006; B. Dennis
Albrechtsen, $146,749; Ronald L. Wood, $158,734.
(3) The Company makes matching contributions dollar for dollar of the first
five percent of employee compensation deferred in the Company's 401(k)
savings plan. The Company maintains an excess non-qualified plan for
contributions exceeding applicable Internal Revenue Code Section 415
compensation limits.
64
RETIREMENT PLAN
The Company maintains defined benefit pension plans for substantially all
employees. Effective December 31, 1995, the Company adopted the Howmet
Corporation Retirement Plan (the "Retirement Plan") which covers non-union
hourly employees and to which were transferred assets and benefit liabilities
for these employees from the Pechiney plan (the "Pechiney Plan") in which
these employees participated. Effective as of January 2, 1996, the Company
intends to amend the Retirement Plan to cover salaried employees. The
following table shows the estimated annual pension benefits for salaried
employees payable upon retirement (including amounts attributable to the
Excess Benefit Plan described below and including any benefit payable under
the Pechiney Plan) for the specified compensation and years of service.
PENSION PLAN TABLE
YEARS OF SERVICE
-----------------------------------------------------
REMUNERATION 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- -------- --------
$200,000.................. $ 43,164 $ 57,552 $ 71,940 $ 86,328 $100,716 $111,716
$400,000.................. $ 88,164 $117,552 $146,940 $176,328 $205,716 $227,716
$600,000.................. $133,164 $177,552 $221,940 $266,328 $310,716 $343,716
$800,000.................. $178,164 $237,552 $296,940 $356,328 $415,715 $459,716
As of December 31, 1995, the Named Executive Officers had the following
credited service for determining pension benefits: David L. Squier, 23 years;
James R. Stanley, 3 years; Marklin F. Lasker, 3 years; B. Dennis Albrechtsen,
21 years; and Ronald L. Wood, 26 years.
All employees named in the Summary Compensation Table participate in the
Retirement Plan. Pension benefits for these employees are based on the average
earnings for the highest five consecutive years of the final ten years of
service. Compensation included in the final average earnings for the pension
benefit computation includes base annual salary and annual bonuses but
excludes payments for all other compensation. Unreduced retirement pension
benefits are calculated pursuant to the Plan's benefit formula as a single
life annuity payable at age 62. Benefits may be payable as a joint and
survivor annuity, a ten year certain option, a level income option or a lump
sum. The Retirement Plan provides that the benefit otherwise payable taking
account of service and compensation earned at Pechiney will be reduced by any
benefit payable under the Pechiney Plan.
Because the Retirement Plan is subject to the benefit and compensation
limits under the Internal Revenue Code ("Code"), the Company has established
an unfunded Excess Benefit Plan that provides for payment of amounts that
would have been paid to employees under the pension formula absent the benefit
limitations of the Code.
The Company also maintains a Supplemental Executive Retirement Plan ("SERP")
designed to provide unfunded supplemental retirement benefits to certain
Executive Officers of the Company. The SERP is designed to provide the
selected employees a benefit at retirement equal to 50% of the participant's
average three highest consecutive years of compensation during the last ten
years. SERP benefits are offset by amounts the participant receives from
certain other plans and Social Security. Currently, Mr. Squier is the only
employee participating in the SERP.
TRANSACTION INCENTIVE PAYMENTS
The Company instituted an additional incentive plan in 1995 for the Named
Executive Officers granting them significant incentive bonuses upon a
successful sale of the Company. The incentives provide for a bonus equal to:
(i) a payment equal to a multiple (ranging from one-and-one-half times to
three times) of the officer's 1995 base salary plus (ii) an additional payment
equal to 0.75% of the guaranteed payment for each million dollars by which the
final sale price exceeds Pechiney's threshold price. Payments earned and paid
under the Transaction Incentive Payments are the obligations of Pechiney
pursuant to the terms of the Stock Purchase Agreement and were paid in 1996.
65
EMPLOYMENT AGREEMENTS
In October, 1995 the Company entered into employment agreements (the
"Agreements") with twelve management employees, including each Named Executive
Officer other than Mr. Albrechtsen. The Agreements set base salary levels and
provided a specified percentage (from 30-60%) of base salary as a target
annual bonus amount, and are generally effective until the Named Executive
Officer's 62nd birthday. The Agreements also generally provide each Named
Executive Officer (the "Executive") with the use of a Company-owned automobile
and participation in benefit plans and programs available to the Company
management employees generally. The Agreements generally provide that in the
event the Executive's employment is terminated by the Company other than for
"cause" or by the Executive with "good reason" (each as defined therein)
within 18 months following certain "change in control" events (as defined
therein) including the Acquisition (or prior to the Executive's 62nd birthday
in the case of Mr. Squier), the Executive will be entitled to (i) the amount
of the Executive's base pay and target bonus for a specified period ranging
from 12 to 36 months, (ii) a prorated portion of the annual bonus and any
long-term incentive awards that would have been payable in the year of
termination, (iii) Company-paid outplacement services, (iv) transfer to the
Executive of the Company-owned car, (v) accelerated vesting under certain of
the Company's retirement plans, (vi) the right to continue to participate in
the Company's medical benefits plan for up to two years at the rates in effect
for active employees, and the right to be treated as a retiree for purposes of
continued coverage thereafter. The severance benefits described above are
generally conditioned on the Executive's agreement not to compete with the
business of the Company for a period of twelve months following his or her
termination of employment. In the event of the Executive's death or
disability, the Agreements generally provide for the payment of prorated
annual bonus and long-term incentive plan awards, but not other severance
amounts. Mr. Squier's agreement provides that he is entitled to a supplemental
annual pension payment equal to the excess of 50% of his average base pay
during his final three years of employment over the amounts provided to him
under certain of the Company's retirement plans and under social security
insurance. Mr. Albrechtsen has an employment agreement that sets a base salary
and 35% of that amount as an annual bonus target, and is generally effective
until his 62nd birthday. In the event that Mr. Albrechtsen's employment is
terminated by the Company without "cause" or by Mr. Albrechtsen with "good
reason" (each as defined therein), Mr. Albrechtsen is generally entitled to
the amount of his base salary and annual bonus for a period of 24 months; and
if such termination occurs after his 55th birthday, he is entitled to such
amounts for a period of 36 months.
STOCK APPRECIATION RIGHTS
In early 1996, Blade introduced a Stock Appreciation Rights ("SARs") plan.
Under the plan, SARs representing approximately 5% of Blade's equity value
were issued to certain executive officers of the Successor Company. The SARs
are similar to phantom stock options and are valued based on appreciation in
the value of Blade's common stock, as defined, from the date of adoption of
the plan to the earlier of a sale of The Carlyle Group's controlling interest
in Blade or five years. The SARs vest over a five-year period based upon the
passage of time, the operating performance of the Successor Company and the
tenure of the executive officers, with acceleration in the event of sale of
The Carlyle Group's controlling interest in Blade.
66
PRINCIPAL STOCKHOLDERS
All of the capital stock of the Company is owned by Holdings and all of the
common stock of Holdings is owned by Blade. The following table sets forth the
ownership of common stock of Blade by each person known by Blade to be the
owner of 5% or more of Blade's outstanding common stock, by each person who is
a director or Named Executive Officer of the Company and by all directors and
executive officers of the Company as a group.
PERCENTAGE OF
NUMBER ALL OUTSTANDING
BENEFICIAL OWNER(1) OF SHARES COMMON STOCK
------------------- --------- ---------------
Carlyle-Blade Acquisition Partners, L.P., a Delaware
limited partnership ("CBAP")(2)..................... 5,100 51
c/o The Carlyle Group
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
TC Group, L.L.C.(2).................................. 5,100 51
c/o The Carlyle Group
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
TCG Holdings, L.L.C.(2).............................. 5,100 51
c/o The Carlyle Group
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Thiokol Corporation(3)............................... 4,900 49
2475 Washington Boulevard
Ogden, Utah 184401
William E. Conway, Jr................................ 0 --
Richard L. Corbin.................................... 0 --
David L. Squier...................................... 0 --
James R. Wilson...................................... 0 --
B. Dennis Albrechtsen................................ 0 --
Jack Lambert......................................... 0 --
Marklin Lasker....................................... 0 --
John C. Ritter....................................... 0 --
James R. Stanley..................................... 0 --
Ronald L. Wood....................................... 0 --
All directors and executive officers as a group (18
persons)(4)......................................... 0 --
- --------
(1) Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all shares of common stock owned by
such beneficial owner. Carlyle and Thiokol are parties to a Stockholders
Agreement governing, among other matters, voting of Blade common stock in
the election of directors. Because of their rights under the Stockholders
Agreement, Carlyle and Thiokol may be deemed beneficial owners of 100% of
the Company's Outstanding Common Stock. See "Description of Capital
Stock--Stockholders Agreement." Each of Carlyle and Thiokol disclaims
ownership of all shares it does not own of record, directly or through
partnerships.
(2) CBAP is the record owner of the shares beneficially owned by Carlyle.
Carlyle Partners II, L.P. and Carlyle Partners III, L.P. (the "General
Partners") are the general partners of CBAP. TC Group, L.L.C., a Delaware
limited liability company, is the sole general partner of each of the
General Partners, and TCG Holdings, L.L.C., a Delaware limited liability
company, is the sole managing member of TC Group, L.L.C. The General
Partners, TC Group, L.L.C. and TCG Holdings could therefore be deemed to
be beneficial owners of the shares owned by CBAP. TC Group, L.L.C is also
the general partner of certain limited partners of CBAP.
(3) Thiokol's investment in Blade is owned of record by Thiokol's wholly owned
subsidiary, Thiokol Holding Company.
(4) Certain executive officers acquired limited partnership interests in CBAP
in 1996. None of such officers have voting or investment discretion with
respect to the Company's stock.
67
CERTAIN TRANSACTIONS
MANAGEMENT AGREEMENTS
Concurrently with the closing of the Acquisition, Howmet entered into
management agreements ("Management Agreements") with TCG Holdings, L.L.C. and
Thiokol for certain management and financial advisory services to be provided
to the Company and its subsidiaries. The Management Agreements provide for the
payment to each of TCG Holdings, L.L.C. and Thiokol annual management fees in
an amount equal to $1.0 million. Also concurrently with the closing of the
Acquisition, HHAC entered into transaction fee agreements with TCG Holdings,
L.L.C. and Thiokol for the provision of advisory services relating to the
negotiation, structuring and financing of the Acquisition, for fees of $2.0
million, which were paid to each of TCG Holdings, L.L.C. and Thiokol.
TAX SHARING AGREEMENT
Blade entered into income tax sharing agreements (the "Tax Sharing
Agreements") with each of Holdings and the Company (the "Subsidiaries") on
December 13, 1995. The Tax Sharing Agreements provide that in any year in
which a Subsidiary is included in any consolidated tax return of Blade, and
the Subsidiary has taxable income, the Subsidiary will pay to Blade the amount
of the tax liability the Subsidiary would have had if it filed a separate
return (the "Separate Income Tax Liability"). In the event that the amount of
Separate Income Tax Liability for a Subsidiary in any taxable year in which it
is filing a consolidated return with Blade exceeds the amount equal to the
product of (a) the income tax liability of the group of corporations filing on
a consolidated basis for the taxable year (the "Blade Group Tax Liability")
and (b) a fraction, the numerator of which is equal to the Subsidiary's
Separate Income Tax Liability and the denominator of which is equal to the
aggregate total of the Separate Income Tax Liability of all Subsidiaries which
are included in Blade's consolidated tax return, then the Subsidiary will not
be obligated to pay Blade the amount of such excess. In the event that the
Blade Group Tax Liability exceeds the sum of all Subsidiaries' Separate Income
Tax Liability for such year, Blade may collect from the Subsidiaries the
amount of such excess, provided, however, that no Subsidiary shall be required
to pay to Blade an amount that exceeds the excess of (i) the sum of such
Subsidiary's Separate Income Tax Liability for the period beginning when such
Subsidiary was included in the Blade's Consolidated Return and ending in the
tax year at issue over (ii) the sum of amounts paid by such Subsidiary
pursuant to this sentence. Adjustments to income arising from events occurring
subsequent to the filing of the consolidated return attributable to matters
such as amended returns, carrybacks, audit adjustments and refund claims will
be given effect between Blade and the Subsidiaries as soon as practicable
after determination of such adjustments. The Tax Sharing Agreements provide
for a similar allocation between Blade and the Subsidiaries in the event that
any state and local income taxes of Blade and the Subsidiaries are determined
on a combined, consolidated or unitary basis.
DESCRIPTION OF CAPITAL STOCK
THE COMPANY
The authorized capital stock of the Company consists of 1,000 shares of
common stock, $1.00 par value per share, ten of which are outstanding and are
owned by Holdings. There is no public trading market for the common stock of
the Company. The Indenture governing the Notes and the Senior Credit
Facilities contain certain restrictions on the payment of cash dividends with
respect to the Company's common stock. Subject to the limitations contained in
such Indenture and the Senior Credit Facilities, holders of common stock of
the Company will be entitled to dividends when and as declared by the Board of
Directors of the Company from funds legally available therefor, and upon
liquidation, will be entitled to share ratably in any distribution to holders
of common stock.
BLADE
Pursuant to the terms of Blade's Certificate of Incorporation (the
"Certificate") Blade's authorized capital stock consists of (i) 10,000 shares
of common stock, par value $0.01 per share, and (ii) 15,000 shares of
preferred
68
stock, par value $0.01 per share (for which Blade's Board of Directors has
authority to fix the designation, powers, preferences and rights from time to
time). The outstanding capital stock of Blade consists of (i) 10,000 shares of
common stock, of which Thiokol owns 4,900 shares or 49% of the total
outstanding and Carlyle owns 5,100 shares or 51% of the total outstanding, and
(ii) 5,000 shares of 9% Series A Cumulative Preferred Stock ("Series A
Preferred Stock"), of which Thiokol owns 100% of the total outstanding. See
"Principal Stockholders." There is currently no public trading market for the
capital stock of Blade.
All holders of shares of common stock are entitled to receive such
dividends, if any, as may be declared from time to time by Blade's Board of
Directors in its discretion from funds legally available therefor, and upon
liquidation or dissolution are entitled to receive all assets available for
distribution to the holders of common stock. All of the outstanding shares of
common stock are fully paid and nonassessable. Holders of common stock have no
preemptive or other rights to subscribe for additional shares. No shares of
common stock are subject to redemption or a sinking fund. As a holding
company, the ability of Blade to pay cash dividends is dependent on the
receipt of dividends or other payments from Holdings, which is in turn
dependent on receipt of payments from the Company. The Senior Credit
Facilities and the Indenture contain covenants which, among other things,
restrict the payment of dividends by the Company. As a result, Blade does not
expect to pay dividends on its common stock in the foreseeable future. See
"Description of Senior Credit Facilities" and "Description of Senior
Subordinated Notes."
A holder of Series A Preferred Stock will be entitled to receive cumulative
dividends at a rate equal to 9% per annum, payable quarterly in kind in
additional shares of Series A Preferred Stock. In the event of liquidation,
dissolution or winding up of the Company, a holder of Series A Preferred Stock
will be entitled to receive $10,000 per share, plus an amount equal to any
accrued or unpaid dividends and distributions thereon, before any distribution
may be made to holders of shares of stock of Blade ranking junior to the
Series A Preferred Stock. After ten years from the date of issuance, or
immediately prior to a merger, consolidation, or sale of assets of Blade
deemed to be a liquidation, or the sale by Carlyle or its Affiliates of more
than 29% of the outstanding stock to non-Carlyle Affiliates, other than to
Thiokol, Blade is obligated to redeem all of the issued and outstanding Series
A Preferred Stock at a redemption price equal to the liquidation preference of
$10,000 per share, plus any accrued or unpaid dividends. Holders of Series A
Preferred Stock are not entitled to vote in the election of directors or
otherwise except in the case where a mandatory redemption has been made by the
Company. The Series A Preferred Stock is not convertible into any other
securities.
STOCKHOLDERS AGREEMENT
Under the terms of the Stockholders Agreement, each of Thiokol and Carlyle
nominated an equal number of directors to the Board of Directors of Blade, and
one additional director was selected from management to serve on Blade's Board
of Directors. See "Management" for the identities and backgrounds of the
directors. Blade and its subsidiaries may not take certain actions without the
approval of a supermajority of Blade's directors, including but not limited to
certain mergers, sale transactions, transactions with affiliates, issuances of
capital stock, incurrence of indebtedness and payments of dividends on or
repurchases of capital stock. Other than transfers to affiliates made in
accordance with the Stockholders Agreement, no transfer of capital stock of
Blade may be made by any stockholder without the consent of Carlyle and
Thiokol until the sixth anniversary of the Closing Date or the expiration of
the Call Option (as defined below), whichever is later. At any time after the
third anniversary and before the sixth anniversary of the Closing Date,
Thiokol will have the right to purchase all common stock then held by Carlyle
at a price equal to the greater of Carlyle's capital contributions compounded
at a fixed rate or fair market value (the "Call Option"). In addition, after
the expiration of Thiokol's Call Options, Thiokol and Carlyle will have the
right to participate, on a pro rata basis, in sales by the other of the Blade
stock they hold; at any time after the sixth anniversary of the Closing Date,
each of Thiokol and Carlyle will have the right to compel the participation of
the other in sales of all the outstanding shares of Blade's stock; and each of
Thiokol and Carlyle may, with the consent of the other, initiate a public
offering. Pursuant to a registration rights agreement entered into in
connection with the Stockholders Agreement, Thiokol and Carlyle will have
certain "demand" and "piggyback" registration rights with respect to their
Blade
69
common stock, which become effective if Thiokol's Call Option lapses. The
Stockholders Agreement also provides for an acceleration of Thiokol's Call
Option in the event there is a change in control of Carlyle's beneficial
ownership. Carlyle is entitled to control the Blade Board of Directors in the
event of a change in control of Thiokol.
DESCRIPTION OF SENIOR SUBORDINATED NOTES
GENERAL
The Senior Subordinated Notes were issued under an Indenture dated as of
December 7, 1995, by and between HAC and Marine Midland Bank, as Trustee (the
"Trustee"). Upon consummation of the Mergers, Howmet assumed the obligations
of HAC under the Indenture and the Notes pursuant to a Supplemental Indenture
dated as of December 13, 1995. References in this Description of Senior
Subordinated Notes to the "Indenture" shall be to the Indenture dated as of
December 7, 1995, as supplemented by the Supplemental Indenture dated as of
December 13, 1995 (the "Supplemental Indenture"), and references to the
"Company" are to HAC (but not any of its Subsidiaries) prior to the Mergers
and to Howmet (but not any of its Subsidiaries) subsequent to the Mergers.
The following is a summary of the material terms of the Indenture; such
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Indenture, including the
definitions of certain terms therein. A copy of the Indenture may be obtained
from the Company. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes are unsecured senior subordinated obligations of the Company, are
limited to $125.0 million aggregate principal amount and will mature on
December 1, 2003. The Notes are subordinated to Senior Indebtedness of the
Company as described below under "--Subordination."
All of the Company's existing Subsidiaries are Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to any of the restrictive covenants set forth
in the Indenture.
TERMS OF THE NOTES
The Notes will mature on December 1, 2003, and will bear interest at the
rate per annum stated on the cover page hereof from the date of issuance,
payable semiannually in arrears on each December 1 and June 1, commencing on
June 1, 1996, to the persons who are registered holders thereof at the close
of business on the November 15 or May 15 preceding the applicable interest
payment date. The Trustee authenticated and delivered the Notes for original
issue in an aggregate principal amount of $125.0 million. The Notes are
payable both as to principal and interest at the office of the agent of the
Company maintained for such purpose within the City and State of New York, or,
at the option of the Company, payment of interest may be made by check mailed
to the holders of the Notes at their respective addresses set forth in the
register of holders of the Notes. Unless otherwise designated by the Company,
the Company's agent in New York will be at the office of the Trustee
maintained for such purpose. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months. The Notes are transferable
and exchangeable at the offices of the Registrar. The Notes will be issued in
fully registered form, without coupons, in principal amounts of $1,000 and any
integral multiple thereof. See "--Book Entry; Delivery and Form."
OPTIONAL REDEMPTION
Except as provided below, the Notes may not be redeemed prior to December 1,
1999. On or after such date, the Notes may be redeemed at the option of the
Company, at any time as a whole, or from time to time in part, on not less
than 30 nor more than 60 days' notice, at the following redemption prices
(expressed as
70
percentages of principal amount), plus accrued and unpaid interest (if any) to
the date of redemption (subject to the rights of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the twelve month period commencing December 1:
REDEMPTION
PRICE
----------
1999........................................................... 105.000%
2000........................................................... 103.333%
2001........................................................... 101.667%
2002 and thereafter............................................ 100.000%
Notwithstanding the foregoing, in the event Thiokol acquires the entire
equity interest of the Company or of a corporation which owns directly or
indirectly, through one or more wholly-owned subsidiaries, the entire equity
interest of the Company (excluding up to 10% of the common stock of the
Company or such holding company, as the case may be), the Notes will be
prepayable (a "Make-Whole Payment") after December 1, 1997 and prior to
December 1, 1999, in whole or in part, at the option of Thiokol, at the Make-
Whole Price plus accrued interest to the redemption date. The "Make-Whole
Price" is defined as the greater of (i) the sum of the principal amount of the
Notes and the Make-Whole Amount, or (ii) the optional redemption price of the
Notes on December 1, 1999. Thiokol has publicly indicated that, subject to
favorable Howmet financial and operating performance and favorable conditions
in the financial markets, it expects to exercise its option to acquire
Carlyle's interest in Blade and thereafter, to cause Howmet to redeem the
Senior Subordinated Notes. In addition, at any time prior to December 1, 1998,
the Company may redeem, in part and from time to time, with the net proceeds
of one or more Public Equity Offerings, up to $45.0 million aggregate
principal amount of the Notes, so long as at least $80.0 million remain
outstanding after such redemption, at (x) 110.000% of par plus accrued
interest, if any, to the date of repayment if the date of repayment is prior
to December 1, 1996, (y) 108.571% of par plus accrued interest, if any, to the
date of repayment if such date is on or after December 1, 1996 and prior to
December 1, 1997, and (z) 107.143% of par plus accrued interest, if any, to
the date of repayment if such date is on or after December 1, 1997 and prior
to December 1, 1998.
MANDATORY REDEMPTION
There will be no mandatory sinking fund for the Notes.
NOTICES AND SELECTION
In the event of a redemption of less than all of the Notes, the Notes will
be selected for redemption by the Trustee pro rata, by lot or by any other
method that the Trustee considers fair and appropriate and, if the Notes are
listed on any securities exchange, by a method that complies with the
requirements of such exchange. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at such holder's registered address. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption (unless the Company shall default in the payment of the
redemption price or accrued interest). Notes that are redeemed by the Company
or that are purchased by the Company pursuant to a Make-Whole Payment, a Net
Proceeds Offer as described under "--Limitation on Asset Sales" or pursuant to
a Change of Control Offer as described under "--Change of Control" or that are
otherwise acquired by the Company will be surrendered to the Trustee for
cancellation.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full, in cash or Cash Equivalents, of all
Obligations on the Senior Indebtedness. Upon any payment or distribution of
assets of the Company to the creditors upon any liquidation, dissolution,
winding up, reorganization, assignment for the benefit of creditors or
marshalling of assets of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, whether voluntary or involuntary, all Obligations with respect to
all Senior Indebtedness shall first be paid in full, in cash or Cash
Equivalents, before any payment or distribution is made on account of any
Obligations on the Notes, or for the acquisition of any of the Notes for cash
or property or otherwise; and until
71
all such Obligations with respect to all Senior Indebtedness are paid in full,
in cash or Cash Equivalents, any distribution to which the holders of the
Notes would be entitled but for the subordination provisions will be made to
the holders of Senior Indebtedness as their interests may appear. If (i) any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by declaration or otherwise, of any principal of,
interest on, or other amounts due and owing on, any Senior Indebtedness or
(ii) any default occurs and is continuing with respect to any Senior
Indebtedness resulting in the acceleration of the maturity of all or any
portion of such Senior Indebtedness, no payment shall be made by or on behalf
of the Company or any of its Subsidiaries or any other person on its or their
behalf with respect to any Obligations on the Notes or to acquire any of the
Notes for cash or property or otherwise. In addition, if any other event of
default occurs and is continuing (or if such an event of default would occur
upon any payment with respect to the Notes) with respect to the Designated
Senior Indebtedness (as such event of default is defined in the instrument
creating or evidencing such Designated Senior Indebtedness) permitting the
holders of such Designated Senior Indebtedness then outstanding, or their
Representative, to accelerate the maturity thereof and if the Representative
for the Designated Senior Indebtedness gives written notice of the event of
default to the Trustee (a "Default Notice"), then, unless and until the date,
if any, on which all Designated Senior Indebtedness to which such event of
default relates is discharged or the Representative for the Designated Senior
Indebtedness gives notice that all events of default have been cured or waived
or have ceased to exist or the Trustee receives written notice from the
Representative for the Designated Senior Indebtedness terminating the Blockage
Period (as defined below), during the 179 days after the delivery of such
Default Notice (the "Blockage Period"), none of the Company or any of its
Subsidiaries or any other person on its or their behalf shall (x) make any
payment with respect to any Obligations on the Notes or (y) acquire any of the
Notes for cash or property or otherwise. Notwithstanding anything herein to
the contrary, in no event will a Blockage Period extend beyond 179 days from
the date the payment on the Notes was due. Only one such Blockage Period may
be commenced within any 360 consecutive days. No event of default which
existed or was continuing (it being acknowledged that any action of the
Company or its Subsidiaries occurring subsequent to delivery of a Default
Notice that would give rise to any event of default pursuant to any provision
under which an event of default previously existed (or was continuing at the
time of delivery of such Default Notice) shall constitute a new event of
default for this purpose) on the date of the commencement of any Blockage
Period with respect to the Designated Senior Indebtedness shall be, or be
made, the basis for the commencement of a second Blockage Period by the
Representative of the Designated Senior Indebtedness whether or not within a
period of 360 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days.
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Indebtedness,
including the holders of the Notes, may recover less, ratably, than holders of
Senior Indebtedness.
The Notes are also effectively subordinated to the indebtedness of the
Company's subsidiaries. At December 31, 1995, the amount of Senior
Indebtedness and subsidiary indebtedness outstanding was approximately $365.1
and $2.5 million, respectively.
CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes shall have the right to
require that the Company repurchase all or a portion of such holder's Notes at
a repurchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to any Repurchase Date (subject to the
rights of the holders of record on the relevant record date to receive
interest on the relevant interest payment date), in accordance with the terms
set forth below (the "Change of Control Offer").
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a Note purchased pursuant to
a Change of Control Offer will be required to surrender the Note, with the
form entitled "Option of Holder to Elect
72
Purchase" on the reverse of the Note completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the Business
Day prior to the Change of Control Payment Date.
The Company's ability to repurchase the Exchange Notes upon a Change of
Control may be limited by the terms of its then-existing contractual
obligations. The Indenture requires that if the New Bank Credit Facility is in
effect, or any amounts are owing thereunder, at the time of the occurrence of
a Change of Control, prior to the mailing of the notice to holders described
in the preceding paragraph, but in any event within 30 days following any
Change of Control, the Company covenants to (i) repay in full all Obligations
under the New Bank Credit Facility or offer to repay in full all Obligations
under the New Bank Credit Facility and repay the Obligations under the New
Bank Credit Facility of each lender who has accepted such offer or (ii) obtain
the requisite consent under the New Bank Credit Facility to permit the
repurchase of the Notes as described above. The Company must first comply with
the covenant described in the preceding sentence before it shall be required
to purchase Notes in the event of a Change of Control; provided that the
Company's failure to comply with the covenant described in the preceding
sentence constitutes an Event of Default described in clause (c) under "Events
of Default" below if not cured within 30 days after the notice required by
such clause. As a result of the foregoing, a holder of the Notes may not be
able to compel the Company to purchase the Notes unless the Company is able at
the time to refinance all of the New Bank Credit Facility or obtain requisite
consents under the New Bank Credit Facility. Other indebtedness the Company
may incur (including Senior Indebtedness) could include similar restrictions
or other provisions, such as change of control default provisions, that could
require repayment of such indebtedness prior to repayment of the Notes. The
Company will comply with all applicable securities laws in connection with any
Change of Control Offer, including Rule 14e-1 under the Exchange Act.
In addition, if the Company makes an Offer to Purchase following a Change of
Control, there can be no assurance that the Company will have adequate
financial resources to repurchase the Notes tendered. To the extent that the
Company does not have sufficient resources to effect the repurchase, or
otherwise fails to make a required repurchase, such failure to repurchase will
constitute an Event of Default under the Indenture. In the event that the
Company's failure to repurchase triggers an Event of Default that has not been
cured in accordance with the Indenture, the Trustee or the holders of at least
25% in principal amount of outstanding Notes may declare the principal of and
accrued interest on all the Notes to be due and payable.
CERTAIN COVENANTS
Limitation on Indebtedness
The Company may not create, incur, issue, assume, guarantee or otherwise
become liable for, contingently or otherwise (collectively, "issue"), directly
or indirectly, any Indebtedness, and may not permit any Restricted Subsidiary
to issue, directly or indirectly, any Indebtedness, provided that the Company
or a Restricted Subsidiary may issue Indebtedness if (x) the Operating
Coverage Ratio of the Company exceeds 2.0 to 1.0 and (y) in the case of
issuance of Indebtedness by a Restricted Subsidiary (other than guarantees of
Indebtedness of the Company under the New Bank Credit Facility, which
Indebtedness is issued in accordance with the Indenture), such Restricted
Subsidiary is a Subsidiary Guarantor or simultaneously guarantees the Notes in
accordance with the Indenture (a "Guarantee") and becomes a Subsidiary
Guarantor.
The above limitation will not apply to the issuance of the following
Indebtedness: (a) (i) Indebtedness of the Company and the Restricted
Subsidiaries pursuant to the New Bank Credit Facility in an aggregate amount
not to exceed $400.0 million (the "Initial Amount") at any time outstanding,
permanently reduced by (x) any mandatory repayments of term loans actually
made thereunder (other than any such term loans issued pursuant to clause (k)
below) and (y) repayments of term loans or revolving loans out of the Excess
Net Proceeds of Asset Sales actually made; provided that in no event shall the
Initial Amount be reduced below $250.0 million by reason of any repayment
described in clause (x) above and (ii) Indebtedness of a Receivables
Subsidiary that is not recourse to the Company or any other Restricted
Subsidiary (other then Standard Securitization Undertakings) in a Qualified
Receivables Transaction; (b) the Notes and the Guarantees; (c) Indebtedness
owed to the Company or a Restricted Subsidiary by the Company or a Restricted
Subsidiary; provided, however, that
73
any transfer of such Indebtedness (excluding a pledge or other transfer
thereof intended to create a security interest therein, but including any
enforcement thereof other than an enforcement that results in the repayment of
an obligation permitted by the terms of this covenant) to a person other than
the Company or a Restricted Subsidiary will be deemed for the purposes of this
covenant to constitute, in each case, the issuance of such Indebtedness by the
issuer thereof; (d) since consummation of the Merger of HAC with and into the
Company, Indebtedness of the Company or any Subsidiary (other than
Indebtedness described in clause (a), (b) or (c) above) outstanding as of the
Issue Date, which Indebtedness is not contemplated to be repaid by this
Prospectus; (e) Indebtedness issued in exchange for, or the proceeds of which
are used to refinance, extend, renew, substitute, replace or refund or pay at
maturity (including any mandatory sinking fund payment) any Indebtedness
issued pursuant to clauses (b) and (d) above and (j) below (the "Refinancing
Indebtedness"); provided that (1) the principal amount of such Refinancing
Indebtedness (or, if such Indebtedness is issued with original issue discount,
the amount equal to the original issue price of such Indebtedness plus
accretion, if any) shall not exceed the principal amount and accrued interest
of the Indebtedness so refinanced, (2) the Refinancing Indebtedness shall have
a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Indebtedness being refinanced, (3) if the
Indebtedness being refinanced is subordinate in right of payment to the Notes
or any Guarantee, the Refinancing Indebtedness shall be subordinated in right
of payment to the Notes or such Guarantee on terms at least as favorable to
the holders of Notes as those contained in the documentation governing the
Indebtedness being refinanced, if any; and (4) if the Indebtedness to be
refinanced is Indebtedness of the Company, such Refinancing Indebtedness will
only be permitted by this clause (e) if it is Indebtedness of the Company; (f)
Indebtedness incurred by the Company or any Restricted Subsidiary under
Hedging Obligations, provided that (x) in the case of an Interest Rate
Agreement, the notional principal amount thereof does not exceed the principal
amount of the Indebtedness to which such Interest Rate Agreement relates and
(y) in the case of a Currency Agreement, such Currency Agreement does not
increase the Indebtedness of the Company and its Subsidiaries other than as a
result of fluctuations in foreign currency exchange or by reason of fees,
indemnities and compensation payable thereunder; (g) Indebtedness incurred by
the Company or any Restricted Subsidiary under performance bonds, letter of
credit obligations to provide security for worker's compensation claims,
payment obligations in connection with self-insurance or similar requirements
and bank overdrafts incurred in the ordinary course of business, provided that
any Obligations arising in connection with such bank overdraft Indebtedness is
extinguished within five business days; (h) Indebtedness incurred by the
Company or any Restricted Subsidiary and arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
guarantees or letters of credit, surety bonds or performance bonds securing
any Obligations of the Company or any Restricted Subsidiary pursuant to such
agreements, in any case incurred in connection with the disposition of any
business, assets or Restricted Subsidiary other than guarantees of
Indebtedness incurred by any person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition, in a principal amount not to exceed the gross proceeds (with
proceeds other than cash or Cash Equivalents being valued at the fair market
value thereof as determined by the Board of Directors of the Company in good
faith) actually received by the Company or any Restricted Subsidiary in
connection with such dispositions; (i) Indebtedness of the Company in an
aggregate principal amount not to exceed $5.0 million at any time outstanding
incurred in connection with the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock of the
Company or any corporation of which the Company is a Subsidiary, options on
any such shares or related stock appreciation rights or similar securities
held by officers or employees or former officers or employees (or their
estates or beneficiaries under their estates) and which were issued pursuant
to any stock option or other equity incentive plan, upon death, disability,
retirement, termination of employment or pursuant to the terms of such stock
option or other equity incentive plan or any other agreement under which such
shares of capital stock, options, related rights or similar securities were
issued; provided that (1) such Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such Indebtedness is issued, is
expressly made subordinate in right of payment of the Notes at least to the
extent that the Notes are subordinated in right of payment to Senior
Indebtedness, (2) such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued,
provides that no payments of principal of such Indebtedness by way of sinking
fund, mandatory redemption or otherwise (including defeasance) may be made at
any time prior to one year after the stated maturity of the Notes and (3) the
scheduled maturity of all principal of such Indebtedness is
74
at least one year after the stated maturity of the Notes; (j) Acquired
Indebtedness in an aggregate principal amount not to exceed $50.0 million at
any one time outstanding (reduced by the amount of Acquired Indebtedness
repaid with Excess Net Proceeds of Asset Sales other than Asset Sales of any
Restricted Subsidiary subject to such Acquired Indebtedness) that is without
recourse to the Company or any of its Restricted Subsidiaries or any of their
respective assets (other than the Subsidiary acquired subject to such Acquired
Indebtedness and its assets), and is not guaranteed by any such person;
provided that after giving pro forma effect to the incurrence thereof, the
Company could incur at least $1.00 of Indebtedness under the first paragraph
of this "Limitation on Indebtedness;" and (k) additional Indebtedness
(including Capitalized Lease Obligations, and Purchase Money Indebtedness) of
the Company and Restricted Subsidiaries, which may, but need not be, incurred
under the New Bank Credit Facility, in an aggregate principal amount not to
exceed $40.0 million at any time outstanding. Notwithstanding any other
provision of this covenant, a guarantee by a Subsidiary Guarantor or the
Company of Indebtedness incurred in accordance with the terms of the Indenture
at the time such Indebtedness was incurred will not constitute a separate
incurrence of Indebtedness.
As of the date of this prospectus, none of the Company's subsidiaries is a
Subsidiary Guarantor guaranteeing the Notes, nor is there a plan for any
subsidiary to become a Subsidiary Guarantor guaranteeing the Notes following
this Exchange Offer.
The aggregate principal amount of the outstanding indebtedness of the
Company and its subsidiaries, as of May 31, 1996, is $431.7 million and $13.0
million ($10.0 million of which is backed by a letter of credit issued under
Howmet's credit agreement), respectively. Two of the Company's subsidiaries,
Howmet S.A. and Howmet Limited (UK) plan to enter into revolving credit
agreements of $5.0 million and $7.5 million, respectively.
Limitation on Additional Senior Subordinated Debt
Neither the Company nor any Subsidiary Guarantor will incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
expressly by its terms subordinate or junior in right of payment to any
Indebtedness of such person and senior in any respect in right of payment to
the Notes or any Guarantee of such Subsidiary Guarantor, as the case may be.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly (i) declare or pay any dividend or make any
distribution in either case on account of the Company's Capital Stock or to
the holders of the Company's Capital Stock (except dividends or distributions
payable in the Company's Capital Stock), (ii) purchase, redeem or otherwise
acquire or retire for value any Capital Stock (including any option or warrant
to purchase Capital Stock) of the Company, (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment any Subordinated
Obligations, or (iv) make any Investment other than a Permitted Investment
(any such dividend, distribution, payment, purchase, redemption, defeasance,
other acquisition or retirement or Investment being hereinafter referred to as
a "Restricted Payment") if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (a) a Default or Event of Default
has occurred and is continuing (or would result therefrom); (b) the Company's
Operating Coverage Ratio after giving effect on a pro forma basis to such
Restricted Payment shall be less than 2.0 to 1.0; or (c) the aggregate amount
of such Restricted Payment and all other Restricted Payments subsequent to the
Issue Date would exceed the sum of (A) the aggregate Net Cash Proceeds
received by the Company from any equity offering of the Qualified Capital
Stock of the Company, or of any entity of which the Company is a direct or
indirect Subsidiary, to the extent the proceeds thereof shall have been
contributed to the Company, and the amount of any other capital contributions
received by the Company in cash subsequent to the Issue Date (excluding
capital contributions received on or prior to the Closing Date in connection
with the Acquisition) and on or prior to the date the Restricted Payment
occurs (the "Reference Date"), (B) 50% of the cumulative Consolidated Net
Income of the Company subsequent to the Issue Date and on or prior to the
Reference Date or minus 100% of any cumulative deficit in Consolidated Net
Income during such period, (C) to the extent that any Investment (other than a
Permitted Investment) that was made after the Issue Date is sold for cash or
otherwise liquidated or repaid for cash, or any Unrestricted
75
Subsidiary which is designated as an Unrestricted Subsidiary subsequent to the
Issue Date is sold or liquidated for cash, the lesser of (1) the cash return
of capital with respect to such Investment (less the cost of disposition, if
any) and (2) the initial amount of such Investment, and (D) $3.5 million.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing as a consequence thereof, the provisions set forth
in the immediately preceding paragraph will not prevent (i) the declaration
and payment of any dividends paid within 60 days after the date of declaration
thereof if, at such date of declaration, such dividend would have complied
with this covenant, (ii) any purchase or redemption of Capital Stock or any
Subordinated Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Qualified Capital Stock of
the Company (other than Capital Stock issued or sold to a Restricted
Subsidiary), (iii) the repurchase, redemption or other repayment of any
Subordinated Obligations in exchange for or solely out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of
Subordinated Obligations with a Weighted Average Life to Maturity equal to or
greater than the then remaining Weighted Average Life to Maturity of the
Subordinated Obligations repurchased, redeemed or repaid, (iv) any payment by
the Company or any Subsidiary (a) in connection with repurchases of
outstanding shares of Blade common stock or equity appreciation rights
following the death, disability or termination of employment of members of
management, and (b) of amounts required to be paid by Blade, Holdings, the
Company or any of its Subsidiaries to participants in employee benefit plans
upon termination of employment by such participants, as provided in the
documents related thereto, in an aggregate amount (for both clauses (a) and
(b)) not to exceed $4.0 million in any fiscal year (provided that any unused
amounts may be carried over to any subsequent fiscal year subject to a maximum
amount of $8.0 million in any fiscal year), (v) dividends or other payments to
Blade and Holdings sufficient to enable Blade and Holdings to perform or
provide for accounting, legal, corporate reporting and administrative
functions in the ordinary course of business, pay their obligations in respect
of certain state qualification fees and charges, or to pay required fees and
expenses in connection with the Acquisition and the registration under
applicable laws and regulations of their debt or equity securities, (vi)
payments under the Tax Sharing Agreement, (vii) Investments that are not
Permitted Investments made by the Company or any Restricted Subsidiary after
the Issue Date in an aggregate amount not to exceed $15.0 million plus, to the
extent that any such Investment is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (x) the cash return of capital with respect to
such Investment (less the cost of disposition if any) and (y) the initial
amount of such Investment, and (viii) Investments in securities not
constituting cash or Cash Equivalents and received in connection with an Asset
Sale made pursuant to the provisions of the covenant described under "--
Certain Covenants--Limitation on Asset Sales" above or any other disposition
of assets not constituting an Asset Sale by reason of the $100,000 threshold
contained in the definition thereof; provided that, for purposes of
determining whether Restricted Payments can be made pursuant to the previous
paragraph, all payments made pursuant to clauses (iv), (v), (vi), (vii) and
(viii) shall be included and payments made pursuant to all other clauses
specified above shall not be so included. The Initial Distribution and any
payments made pursuant to the Management Agreements shall not constitute
Restricted Payments.
Limitation on Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to: (i) pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness or other obligation owed to the
Company or a Restricted Subsidiary, (ii) make any loans or advances to the
Company or a Restricted Subsidiary or (iii) transfer any of its property or
assets to the Company, except any such encumbrance or restriction under or by
reason of (a) applicable law, (b) the Indenture, (c) the New Bank Credit
Facility, (d) secured Indebtedness otherwise permitted to be incurred pursuant
to the provisions of the covenants described under "--Limitation on Liens"
that limit the right of the debtor to dispose of the assets securing such
Indebtedness, (e) customary net worth provisions contained in leases and other
agreements entered into in the ordinary course of business, (f) customary
restrictions with respect to a Restricted Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Restricted Subsidiary, (g)
provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements, (h) any
Purchase Money Note, or
76
other Indebtedness or contractual requirements incurred with respect to a
Qualified Receivables Transaction relating to Receivables Subsidiaries, (i)
any other instrument governing Indebtedness incurred on or after the Closing
Date or any refinancing thereof that is incurred in accordance with the
Indenture, provided that the encumbrance or restriction contained in any such
Indebtedness or any such refinancing thereof is no more restrictive and no
more unfavorable to the holders of the Notes than that contained in the New
Bank Credit Facility as in effect on the Closing Date, (j) customary
provisions restricting subletting or assignment of any lease governing a
leasehold interest of a Subsidiary, and (k) Acquired Indebtedness, provided
that (x) such restriction is not applicable to any person, or the properties
or assets of any person, other than the person acquired and (y) such
Indebtedness is otherwise permitted to be incurred pursuant to the "Limitation
on Indebtedness" covenant.
Limitation on Asset Sales
The Company may not, and may not permit any Restricted Subsidiary to,
consummate any Asset Sale unless (i) the Company (or the Restricted
Subsidiary, as the case may be) receives consideration at the time of each
such Asset Sale at least equal to the fair market value (as determined by the
Board of Directors of the Company in good faith) of the assets sold; (ii) not
less than 80% (100% in the case of lease payments) of the consideration
received by the Company (or such Restricted Subsidiary, as the case may be) is
in the form of cash, provided that any note or other obligation received by
the Company (or such Restricted Subsidiary, as the case may be) that is
converted into cash within 30 days after receipt shall be deemed to be cash
for purposes of this clause (ii); and (iii) the Company within 365 days of
such Asset Sale (x) reinvests or causes a Restricted Subsidiary to reinvest
(including by way of acquisitions) the Net Cash Proceeds of any Asset Sale
into one or more of the then existing businesses of the Company and its
Subsidiaries; or (y) applies or causes to be applied such Net Cash Proceeds to
the permanent reduction of outstanding Senior Indebtedness; or (z) after such
time as the accumulated Excess Net Proceeds equal or exceed $10.0 million,
applies or causes to be applied such Excess Net Proceeds to the purchase of
Notes tendered to the Company for purchase at a price equal to 100% of the
principal amount thereof plus accrued interest thereon to the date of purchase
pursuant to an offer to purchase by the Company (a "Net Proceeds Offer") as
set forth below; provided, however, that the Company shall have the right to
exclude Asset Sales the net proceeds of which in the aggregate do not exceed
$2.0 million annually from the calculation of accumulated Net Cash Proceeds;
provided, further, to the extent Net Cash Proceeds have not been applied
pursuant to clause (x), (y) or (z) above within 270 days of an Asset Sale,
such Net Cash Proceeds shall be held in a segregated account pending such
application.
The Company will be required under the New Bank Credit Facility to apply
certain net proceeds of asset sales to the repayment of Obligations
thereunder.
Each Net Proceeds Offer will be mailed to record holders of Notes as shown
on the register of holders not less than 325 nor more than 365 days after the
relevant Asset Sale, with a copy to the Trustee, shall specify the purchase
date (which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed) and shall otherwise comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent holders properly
tender Notes in an amount exceeding the Net Proceeds Offer, Notes of tendering
holders will be repurchased on a pro rata basis (based on amounts tendered).
If the aggregate purchase price of Notes tendered pursuant to the Net Proceeds
Offer is less than the Net Cash Proceeds allotted to the purchase of the
Notes, the Company may apply the remaining Net Cash Proceeds for general
corporate purposes.
The Company will comply with all applicable securities laws in connection
with any Net Proceeds Offer, including Rule 14e-1 under the Exchange Act.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur or otherwise cause or suffer to exist or become effective
any Liens of any kind (other than Permitted Liens) upon any property
77
or asset of the Company or any Restricted Subsidiary or any shares of stock or
debt of any Restricted Subsidiary which owns property or assets, now owned or
hereafter acquired, unless (i) if such Lien secures Indebtedness which is pari
passu with the Notes or a Guarantee, then the Notes or such Guarantee, as the
case may be, are secured on an equal and ratable basis with the obligations so
secured until such time as such obligation is no longer secured by a Lien or
(ii) if such Lien secures Indebtedness which is subordinated to the Notes or a
Guarantee, any such Lien shall be subordinated to the Lien granted to the
holders of the Notes or such Guarantee, as the case may be, to the same extent
as such Subordinated Obligations are subordinated to the Notes.
Limitation on Transfer of Assets to Certain Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries
to, sell, convey, transfer, lease or otherwise dispose of any of its assets or
property to any Subsidiary that is not a wholly owned Restricted Subsidiary of
the Company, except in connection with a Qualified Receivables Transaction or
as otherwise permitted pursuant to the "--Limitation on Asset Sales" and the
"--Limitation on Restricted Payments" covenants.
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary (other than Liens on
such Capital Stock securing Obligations under Senior Indebtedness or Guarantor
Senior Indebtedness) or (ii) permit any of its Restricted Subsidiaries to
issue any Capital Stock, other than to the Company or a wholly owned
Restricted Subsidiary of the Company. The foregoing restrictions shall not
apply to an Asset Sale made in compliance with "--Limitation on Certain Asset
Sales" or the issuance of Preferred Stock in compliance with the covenant
described under "--Limitation on Indebtedness."
Limitation on Transactions With Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, following the Issue Date, enter into or permit to
exist any transaction with any Affiliate of the Company or any Significant
Stockholder of the Company, including any payments pursuant to the Management
Agreement in excess of the amounts specified in clause (vi) below (an
"Affiliate Transaction") unless such transaction is on terms that are fair and
reasonable to the Company or such Subsidiary and no less favorable to the
Company or such Subsidiary than those that could be obtained in a comparable
arm's length transaction with an entity that is not an Affiliate or a
Significant Stockholder of the Company; provided that in the event such
transaction or series of related transactions involves aggregate consideration
in excess of $2.0 million, the foregoing determination as to fairness shall be
made by a majority of the Independent members of the Board of Directors of the
Company as evidenced by a Board Resolution (and if there are no Independent
directors (x) directors shall be deemed to be Independent if they are
Independent with respect to the Affiliate Transaction under consideration and
(y) each of the Company's officers who are also directors shall be considered
Independent with respect to transactions to which the Company or a Restricted
Subsidiary, on the one hand, and a Significant Stockholder or its Affiliate,
on the other hand, are parties, unless such officer is an officer, director,
employee, partner or stockholder of such Significant Stockholder or Affiliate,
as the case may be); provided, further, that in the event such transaction or
series of related transactions involves aggregate consideration in excess of
$10.0 million, the Company shall, in addition to obtaining the approval of the
Independent members of its Board of Directors, obtain a written opinion of an
Independent Financial Advisor stating that the terms of such transaction are
fair and reasonable to the Company or such Subsidiary from a financial point
of view; provided, however, that the (i) reasonable and customary directors'
fees, indemnification and similar arrangements and payments thereunder, (ii)
transactions between or among or for the benefit of the Company and its
Subsidiaries, which are not otherwise prohibited by the Indenture, (iii) any
employment agreement entered into by the Company or any of its Subsidiaries in
the ordinary course of business, (iv) Restricted Payments (other than
Investments) permitted by the provisions of the Indenture described above
under "--Limitation on Restricted Payments," (v) provision of administrative
or management services by the Company or its Subsidiaries or any of their
officers to any of their respective
78
Subsidiaries in the ordinary course of business, (vi) payments made pursuant
to each of the Management Agreements (x) upon consummation of the Acquisition
not in excess of $2.0 million plus fees and expenses, and, in addition, (y)
payments in an aggregate amount not exceeding $1.0 million in any twelve-month
period, (vii) transactions contemplated by any agreement as in effect as of
the Closing Date or any amendment thereto so long as any such amendment is not
disadvantageous to the Holders of the Notes in any material respect and so
long as the amounts paid by the Company and the Restricted Subsidiaries under
any such amended agreement do not exceed the amounts payable by the Company
and the Restricted Subsidiaries on the Closing Date, in each case, shall not
be deemed Affiliate Transactions.
Limitation on Mergers and Certain Other Transactions
The Company, in a single transaction or through a series of related
transactions, shall not consolidate with or merge with or into any other
person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets unless (i) either the Company
shall be the continuing person, or the person (if other than the Company)
formed by such consolidation or into which the Company is merged or to which
all or substantially all of the properties and assets of the Company are
transferred (the Company or such other person hereinafter referred to as the
"Surviving Person") shall be a corporation organized and validly existing
under the laws of the United States, any state thereof or the District of
Columbia, and if other than the Company shall expressly assume, by an
indenture supplement, all of the obligations of the Company under the Notes
and the Indenture; (ii) immediately after and giving effect to such
transaction and the assumption contemplated by clause (i) above and the
incurrence or anticipated incurrence of any Indebtedness to be incurred in
connection therewith, the Surviving Person could incur at least $1.00 of
Indebtedness pursuant to the first paragraph under the "Limitation on
Indebtedness" covenant; and (iii) immediately before and immediately after and
giving effect to such transaction and the assumption of the obligations as set
forth in clause (i) above and the incurrence or anticipated incurrence of any
Indebtedness to be incurred in connection therewith, no Default or Event of
Default shall have occurred and be continuing.
Mergers consummated on the Closing Date to effect the Acquisition were
exempt from the foregoing limitations.
GUARANTEES
The Notes are jointly and severally guaranteed by Restricted Subsidiaries of
the Company if such Subsidiaries seek to incur Indebtedness that may only be
incurred by Subsidiaries that are Subsidiary Guarantors.
Each Subsidiary Guarantor unconditionally guarantees, jointly and severally,
to each holder and the Trustee, subject to subordination provisions
substantially the same as those described above, the full and prompt
performance of the Company's obligations under the Indenture and the Notes,
including the payment of principal of and interest on the Notes.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor (or all or substantially all of its
assets) to an entity which is not a Restricted Subsidiary, which is otherwise
in compliance with the Indenture, such Subsidiary Guarantor shall be deemed
released from all its obligations under the Indenture and its Guarantee;
provided, however, that any such termination shall occur only to the extent
that all obligations of such Subsidiary Guarantor under the New Bank Credit
Facility and all of its guarantees of, and under all of its pledges of assets
or other security interests which secure, Indebtedness of the Company or any
Restricted Subsidiary shall also terminate upon such release, sale or
transfer.
The Indebtedness evidenced by each Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) will be subordinated
on the same basis to Guarantor Senior Indebtedness (defined with respect to
the Indebtedness of a Guarantor in the same manner as Senior Indebtedness is
defined with respect to the Company) as the Notes are subordinated to Senior
Indebtedness. See "--Subordination" above.
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The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
guarantees under the New Bank Credit Facility) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor
under its Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer
under federal or state law. Each Subsidiary Guarantor that makes a payment or
distribution under a Guarantee shall be entitled to a contribution from each
other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net
Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation. Each
Subsidiary Guarantor may consolidate with or merge into or sell all or
substantially all of its assets to a corporation other than the Company or
another Subsidiary Guarantor (whether or not affiliated with the Subsidiary
Guarantor), provided that (i) the transaction is an Asset Sale consummated in
accordance with the "Limitation on Asset Sales" covenant, (ii) if the
surviving corporation is not the Subsidiary Guarantor, the surviving
corporation agrees to assume such Subsidiary Guarantor's Guarantee and all its
obligations pursuant to the Indenture and (iii) such transaction does not (x)
violate any covenants set forth in the Indenture or (y) result in a Default or
Event of Default immediately thereafter that is continuing.
As of the date of this prospectus, none of the Company's subsidiaries is a
Subsidiary Guarantor guaranteeing the Notes, nor is there a plan for any
subsidiary to become a Subsidiary Guarantor guaranteeing the Notes following
this Exchange Offer.
EVENTS OF DEFAULT
An "Event of Default" is defined in the Indenture to mean
(a) default in the payment of any installment of interest upon any of the
Notes as and when the same shall become due and payable, and continuance of
such default for a period of 30 days; (b) default in the payment of all or any
part of the principal on any of the Notes when the same shall become due and
payable, either at maturity, upon any redemption, by declaration or otherwise;
(c) failure on the part of the Company or any Subsidiary Guarantor duly to
observe or perform any other of the covenants or agreements on the part of the
Company or any Subsidiary Guarantor in the Notes or in the Indenture for a
period of 30 days after receipt of written notice specifying such failure,
stating that such notice is a "Notice of Default" under the Indenture and
demanding that the Company or such Subsidiary Guarantor, as the case may be,
remedy the same, shall have been given by registered or certified mail, return
receipt requested, to the Company by the Trustee, or to the Company and the
Trustee by the holders of at least 25% in aggregate principal amount of the
Notes at the time outstanding; (d) a default under any Indebtedness of the
Company or its Restricted Subsidiaries, whether such Indebtedness now exists
or shall hereinafter be created, if both (A) such default either (i) results
from the failure to pay principal on Indebtedness at its final stated maturity
and such failure continues for a period longer than the grace period provided
in such Indebtedness, or (ii) results in the holder or holders of such
Indebtedness causing such Indebtedness to become due prior to its stated
maturity and such acceleration has not been rescinded, canceled or otherwise
cured within 10 days after receipt of notice of acceleration by the Company
and (B) the principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay principal
or interest at final maturity or the maturity of which has been so
accelerated, in each case with respect to which the time period described
above has passed, aggregates in excess of $7.5 million at any one time; (e)
any final judgment or order for the payment of money shall be rendered against
the Company or any Significant Subsidiary of the Company by a court of
competent jurisdiction in excess of $7.5 million individually or in the
aggregate for all such judgments or orders against all such persons that are
not stayed, bonded or discharged and there is a period of 60 consecutive days,
after written notice has been given by the Trustee or the holders of at least
25% in aggregate principal amount of the Notes then outstanding, during which
a stay of enforcement of such judgment or order, by reason of pending appeal
or
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otherwise, shall not be in effect; (f) certain events of bankruptcy with
respect to the Company and its Significant Subsidiaries; or (g) failure of the
Company to consummate the Acquisition substantially concurrently with the
issuance of the Notes.
If an Event of Default (other than an Event of Default specified in clause
(f) above with respect to the Company) occurs and is continuing, either the
Trustee or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice in writing to the Company and the Trustee
specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), may declare the entire principal
amount of and accrued interest on the Notes to be due and payable immediately,
and the same (i) shall become immediately due and payable or (ii) if there are
any amounts outstanding under the New Bank Credit Facility, shall become due
and payable upon the first to occur of an acceleration under the New Bank
Credit Facility, or 5 business days after receipt by the Company and the
Representative under the New Bank Credit Facility of such Acceleration Notice,
unless all Events of Default specified in such Acceleration Notice (other than
any Event of Default in respect of non-payment of principal) shall have been
cured. In the event of a declaration because an Event of Default set forth in
clause (d) of the preceding paragraph has occurred and is continuing, such
declaration of acceleration shall be automatically annulled if the missed
payments in respect of such Indebtedness have been paid or if the holders of
the Indebtedness that is subject to acceleration have rescinded their
declaration of acceleration and the Trustee has received written notice of
such Indebtedness having been repaid in full, in each case within 60 days
thereof and if (i) the annulment of such acceleration would not conflict with
any judgment or decree of a court of competent jurisdiction, (ii) all existing
Events of Default, except non-payment of principal or interest which have
become due solely because of the acceleration, have been cured or waived and
(iii) the Company has delivered an Officer's Certificate to the Trustee to the
effect of clauses (i) and (ii) above. If an Event of Default specified in
clause (f) above occurs with respect to the Company, the principal amount of
and accrued interest on the Notes shall become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder.
The declaration of acceleration is subject to the condition that if, at any
time after the principal of the Notes shall have been so declared due and
payable, and before any judgment or decree for the payment of the moneys shall
have been obtained or entered as hereinafter provided, the Company shall pay
or shall deposit with the Trustee a sum sufficient to pay all matured
installments of interest upon all the Notes and the principal of any and all
Notes which shall have become due otherwise than by acceleration (with
interest upon such principal and, to the extent that payment of such interest
is unenforceable under applicable law, on overdue installments of interest, at
the same rate as the rate of interest specified in the Notes, to the date of
such payment or deposit) and such amount as shall be sufficient to cover
reasonable compensation to the Trustee and each predecessor Trustee, their
respective agents, attorneys and counsel, and all other expenses and
liabilities incurred, and all advances made, by the Trustee and each
predecessor Trustee except as a result of negligence or bad faith, and if any
and all Events of Default under the Indenture, other than the non-payment of
the principal of Notes which shall have become due by acceleration, shall have
been cured, waived or otherwise remedied as provided in the Indenture, then
and in every such case the holders of a majority in aggregate principal amount
of the Notes then outstanding, by written notice to the Company and to the
Trustee, may waive all defaults and rescind and annul such declaration and its
consequences, but no such waiver or rescission and annulment shall extend to
or shall affect any subsequent default or shall impair any right consequent
thereon.
The holders of a majority in outstanding aggregate principal amount of the
Notes by notice to the Trustee may on behalf of the holders of the Notes waive
any existing Default or Event of Default under the Indenture and its
consequences, except a continuing Default or Event of Default in the payment
of interest on, or the principal of, the Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered indemnity, to the Trustee to institute such proceeding as
Trustee, the Trustee has failed to institute such proceeding within 30 days
after receipt of such notice and the Trustee has not within such
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30-day period received directions inconsistent with such written request by
holders of a majority in principal amount of the outstanding Notes. Such
limitations do not apply, however, to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or
accrued interest on, such Note on or after the respective due dates expressed
in such Note.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal, premium (if any) or interest on any Note, the
trustee may withhold notice if and so long as a committee of its trust
officers determines that withholding notice is in the interest of the holders
of the Notes. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred under the
Indenture during the previous year. The Company is also required to deliver to
the Trustee, within 30 days after the occurrence thereof, written notice of
events which would constitute certain Defaults under the Indenture, their
status and what action the Company is taking or proposes to take in respect
thereof.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Company may require payment of a sum sufficient to pay all
taxes, assessments or other governmental charges. The Notes will be issued in
a transaction exempt from registration under the Act and will be subject to
the restrictions on transfer described in "Transfer Restrictions." The
registered holder of a Note may be treated as the owner of it for all
purposes. See "Book Entry, Delivery Form."
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder, as such, of the Company or
any Subsidiary shall have any liability for any obligations of the Company or
any Subsidiary under the Notes, any Subsidiary Guarantee or the Indenture.
Each holder of the Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Notes. This provision does not affect any possible claims under the
federal securities laws.
SATISFACTION AND DISCHARGE OF THE INDENTURE; COVENANT DEFEASANCE
The Indenture will cease to be of further effect as to all outstanding Notes
(except as to (a) rights of registration of transfer, substitution, exchange
and the Company's right of optional redemption and prepayment), (b) rights of
holders to receive payments of principal of and interest on the Notes and any
other rights of the holders thereof with respect to the amounts deposited with
the Trustee under the provisions referred to in this paragraph, (c) the
rights, obligations and immunities of the Trustee under the Indenture and (d)
certain other specified provisions in the Indenture) when (x) all outstanding
Notes (except lost, stolen or destroyed Notes which have been replaced or
paid) have been delivered to the Trustee for cancellation or (y) the Company
shall have paid or caused to be paid the principal of and interest on the
Notes as and when the same shall have become due and payable or (z)(i) the
Notes not previously delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption upon delivery of notice and (ii)
the Company shall have deposited with the Trustee, as trust funds, the entire
amount in cash sufficient to pay the principal of and interest on the
outstanding Notes to maturity or redemption, as the case may be.
The Indenture will also cease to be in effect (except as aforesaid) on the
91st day after the deposit by the Company with the Trustee, in trust for the
benefit of the holders of Notes, of (a) money in an amount or (b) U.S.
government obligations which through the payment of interest and principal in
accordance with their terms will provide, not later than one business day
before the due date of payments in respect of the Notes, money in an amount,
or (c) a combination thereof, sufficient in the opinion of a nationally
recognized independent public
82
accounting firm to pay and discharge without consideration of reinvestment of
such interest each installment of principal and interest on the Notes then
outstanding at the maturity date of such principal or installment of principal
and interest. Such a trust may only be established if the Company has
delivered to the Trustee an opinion of counsel acceptable to the Trustee (who
may be counsel to the Company) to the effect that (i) the defeasance and
discharge will not be deemed, or result in, a taxable event, with respect to
holders of the Notes, (ii) the creation of the trust will not violate the
Investment Company Act of 1940 and (iii) after the passage of 90 days
following the deposit of the trust funds, such funds will not be subject to
any bankruptcy, insolvency, reorganization or other similar law affecting
creditors' rights generally. The Indenture will not be discharged if, among
other things, an Event of Default, or an event which with notice or lapse of
time would have become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 91st
day after such date. In the event of any such defeasance and discharge, Note
holders will thereafter be able to look only to such trust fund for payment of
principal and interest on the Notes.
The Indenture provides that the Company may cease to comply with certain
covenants imposing restrictions on the incurrence of Indebtedness by the
Company and its Subsidiaries, and limitations on certain Restricted Payments,
disposition of assets of the Company and its Subsidiaries, limitations on
payment of dividends and other distributions or payments by Subsidiaries,
transactions with Affiliates, mergers and consolidations, and Change in
Control transactions if the Company deposits with the Trustee money and/or
U.S. government obligations, which, through the payment of interest and
principal thereof in accordance with their terms, will provide, not later than
one business day before the date payments in respect of the Notes are payable,
money in an amount sufficient in the opinion of a nationally recognized
independent public accounting firm to pay principal of and interest on the
outstanding Notes (without consideration of the reinvestment of such interest)
or installments of principal or interest. The obligations of the Company under
the Indenture other than with respect to the covenants referred to above shall
remain in full force and effect. Such a trust may only be established if the
Company has delivered to the Trustee an opinion of counsel acceptable to the
Trustee (who may be counsel to the Company) to the effect that (i) the deposit
and related covenant defeasance will not be deemed, or result in, a taxable
event with respect to holders of Notes; and (ii) the creation of the trust
will not violate the Investment Company Act of 1940.
MODIFICATION OF THE INDENTURE
The Indenture and the Notes may be amended or supplemented (and compliance
with any provision thereof may be waived) by the Company, the Trustee and the
holders of not less than a majority in aggregate principal amount of the Notes
then outstanding, except that without the consent of each holder affected, no
such amendment, supplement or waiver may (1) change the principal amount of
Notes whose holders must consent to an amendment, supplement or waiver of any
provision of the Indenture or the Notes; (2) reduce the rate or extend the
time for payment of interest on any Note; (3) reduce the principal amount of
any Note; (4) change the Maturity Date of any Note or alter the redemption
provisions in a manner adverse to any holder; (5) make any changes in the
provisions concerning waivers of Defaults or Events of Default by holders or
the rights of holders to recover the principal of, premium (if any) or
interest on or redemption payment with respect to any Note; (6) make the
principal of, or interest on, any Note payable with anything other than as
provided for in the Indenture and the Notes; (7) waive the Event of Default
specified in clause (g) of the first paragraph under "Events of Default" and
(8) make any change to the subordination provisions of the Indenture and the
Notes in a manner that adversely affects the holders.
In addition, the Company and the Trustee may amend the Indenture and the
Notes for certain specified purposes, including, among other things, (a) to
cure any ambiguity, defect or inconsistency therein; provided that such
amendment or supplement does not adversely affect the rights of any holder,
(b) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act of
1939 or (c) to make any other change that does not adversely affect the rights
of any holder. Notwithstanding the foregoing, no amendment shall modify any
provision of the Indenture so as to adversely affect the rights of any holder
of Senior Indebtedness without the consent of such holder.
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THE TRUSTEE
The holders of a majority in principal amount of the outstanding Notes may
remove the Trustee and appoint a successor trustee with the Company's consent,
by so notifying the trustee to be so removed and the Company. In addition, the
holders of a majority in principal amount of the outstanding Notes have the
right, subject to certain limitations, to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on such Trustee.
The Indenture provides that, in case a Default or an Event of Default has
occurred and is continuing, the Trustee thereunder shall exercise such of the
rights and powers vested in it by the Indenture, and use the same degree of
care and skill in the exercise thereof, as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs. Subject to the
latter provision, the Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the holders, unless they shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred thereby. Subject to certain provisions concerning the rights of the
Trustee, the holders of a majority in principal amount of the outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any laws or
power conferred on the Trustee.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to be realized on certain property received by it in respect of any such
claims, securities or otherwise. The Trustee is permitted to engage in other
transactions; however, if the Trustee acquires any "conflicting interest," it
must eliminate such conflict or resign.
REPORTS
So long as the Notes are outstanding, the Company will furnish to the
Trustee and holders of the Notes all quarterly and annual financial reports
that the Company is required to file with the Commission under the Exchange
Act (or similar reports in the event that the Company is not at the time
required to file such reports with the Commission). The Indenture provides
that even if the Company is entitled under the Exchange Act not to furnish
such information to the Commission or the holders of the Notes, it will
nonetheless continue to furnish such information to the Commission (to the
extent the Commission is accepting such reports) and holders of the Notes.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes (and the related
guarantees, if any) initially will be represented by a single, permanent
global certificate in definitive, fully registered form (the "Global Note").
The Global Note will be deposited on the Issue Date with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") and registered in the
name of a nominee of DTC.
Notes (i) held by or transferred to "foreign purchasers" or (ii) held by
qualified institutional buyers (as defined in Rule 144A under the Securities
Act) ("QIBs") or Accredited Investors who are not QIBs who elect to take
physical delivery of their certificates instead of holding their interests
through the Global Note (and which are thus ineligible to trade through DTC)
(collectively referred to herein as the "Non-Global Purchasers") will be
issued in registered form (a "Certificated Security"). Upon the transfer to a
QIB of any Certificated Security initially issued to a Non-Global Purchaser,
such Certificated Security will, unless the transferee requests otherwise or
the Global Note has previously been exchanged in whole for Certificated
Securities, be exchanged for an interest in the Global Note.
The Global Note. Pursuant to Procedures established by DTC (i) DTC or its
custodian will credit, on its internal system, the principal amount of Notes
of the individual beneficial interests represented by the Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global. Note will be shown on, and
the transfer of such ownership will be effected
84
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Ownership of beneficial
interest in the Global Note will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants. QIBs
may hold their interests in the Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
Payments of the principal of, premium (if any) and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interest in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in federal funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more participants
to whose account the DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount Notes as to which
such participant or participants has or have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Note for Certificated Securities, which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
85
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depository for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Notes.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means (i) with respect to any person that becomes a
Restricted Subsidiary, Indebtedness of such person at the time such person
becomes a Restricted Subsidiary and not incurred in connection with, or in
contemplation of, such person becoming a Restricted Subsidiary, treating for
purposes of this definition as Indebtedness the unused portion of any
revolving loan commitments provided in agreements to which such person is a
party as borrower or guarantor and (ii) with respect to the Company or any of
its Restricted Subsidiaries, any Indebtedness assumed by the Company or any of
its Restricted Subsidiaries in connection with the acquisition of any assets
from another person (other than the Company or any of its Restricted
Subsidiaries), and which was not incurred by such other person in connection
with or, in contemplation of, such acquisition.
"Acquisition" means the acquisition of Holdings and certain affiliates of
Holdings pursuant to that certain Stock Purchase Agreement dated as of October
12, 1995 among Pechiney, Pechiney International, Howmet Cercast S.A. and
Blade.
"Act" means the Securities Act of 1933, as amended.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (i) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including,
without limitation, contingent liabilities (after giving effect to all other
fixed and contingent liabilities incurred or assumed on such date), but
excluding liabilities under the Guarantee of such Subsidiary Guarantor at such
date and (ii) the present fair salable value of the assets of such Subsidiary
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Subsidiary Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on
such date and after giving effect to any collection from any Subsidiary of
such Subsidiary Guarantor in respect of the obligations of such Subsidiary
under the Guarantee), excluding debt in respect of the Guarantee, as they
become absolute and matured.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer for value (including any sale
and leaseback transaction) by the Company or any of its Restricted
Subsidiaries to any person other than the Company, any Receivables Subsidiary
or any other wholly owned Restricted Subsidiary of (i) any Capital Stock of
any Restricted Subsidiary; or (ii) any other property or assets of the Company
or any Restricted Subsidiary other than in the ordinary course of business, in
each case, resulting in Net Cash Proceeds to the Company and its Restricted
Subsidiaries of $100,000 or more (other than sales of accounts receivable by a
Receivables Subsidiary pursuant to a Qualified Receivables Transaction),
provided that the sale, conveyance, transfer, assignment or other transfer of
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the terms of the Indenture described
above under the caption "--Limits on Mergers and Certain Other Transactions."
"Blade" means Blade Acquisition Corp., a Delaware corporation.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such person.
86
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or
obligations issued by any agency or instrumentality thereof and backed by the
full faith and credit of the United States of America maturing not more than
one year from the date of the issuance thereof, (ii) commercial paper rated
among the two highest grades by Moody's Investors Service, Inc. and Standard &
Poor's Corporation and maturing not more than one year from the date of
creation thereof, (iii) demand and time deposits with, and certificates of
deposit, eurodollar time deposits and banker's acceptances issued by, any bank
having capital surplus and undivided profits aggregating at least $500.0
million and maturing not more than one year from the date of creation thereof,
(iv) repurchase agreements that are secured by a perfected security interest
in an obligation described in clause (i) and are with any bank described in
clause (iii), and (v) readily marketable direct obligations issued by any
state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
Investors Service, Inc. or Standard & Poor's Corporation maturing not more
than one year from the date of the issuance thereof.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any person or group of related persons for purposes of Section
13(d) of the Exchange Act (a "Group") together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the Indenture);
(ii) the approval by the holders of Capital Stock of the Company of any plan
or proposal for the liquidation or dissolution of the Company (whether or not
otherwise in compliance with the provisions of the Indenture); or (iii) the
acquisition in one or more transactions, of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) by (x) any person or entity
(other than any Permitted Holder) or (y) any group of persons or entities
(excluding any Permitted Holders) who constitute a Group, in either case, of
any securities of the Company such that, as a result of such acquisition, such
person, entity or Group either (A) beneficially owns (within the meaning of
Rule 13d-3 under the Exchange Act), directly or indirectly, at least 35% of
the Company's then outstanding voting securities entitled to vote on a regular
basis for the Board of Directors of the Company (but only to the extent that
(x) such beneficial ownership is not shared with any Permitted Holder who has
the power to direct the vote thereof and (y) Permitted Holders beneficially
own less than a majority of such voting securities), or (B) otherwise has the
ability to elect, directly or indirectly, a majority of the members of the
Company's Board of Directors, including without limitation by the acquisition
of revocable proxies for the election of directors. Clause (i) of the
definition of "Change of Control" includes a sale, lease, exchange or other
transfer of "all or substantially all" of the assets of the Company to a
Group. There is little case law interpreting the phrase "all or substantially
all" in the context of an indenture. Because there is no precise established
definition of this phrase, the ability of a holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, exchange or
other transfer of all or substantially all of the Company's assets to person
or a Group may be uncertain.
"Consolidated EBITDA" of the Company means, for any period, the sum (without
duplication) of (i) Consolidated Net Income, (ii) to the extent Consolidated
Net Income has been reduced thereby, all income taxes of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such
period, Consolidated Interest Expense, amortization expense (including write-
off of intangible assets and deferred financing costs), depreciation expense,
and any restructuring reserve or charge recorded during such period in
accordance with GAAP (including any such reserve or charge related to the
Acquisition), (iii) LIFO charges (credit) of the Company and its Restricted
Subsidiaries for such period and (iv) other non-cash items reducing
Consolidated Net Income (excluding any such charge which requires an accrual
of or a cash reserve for cash charges for any future period) less (x) other
non-cash items increasing Consolidated Net Income and (y) the amount of all
cash payments made by such person or its subsidiaries during such period to
the extent that such cash payment has been provided for in a reserve or charge
referred to (and previously added back to such Consolidated Net Income) in
clause (ii) or (iv) above (and were not otherwise deducted in the computation
of
87
Consolidated Net Income of such person for such period), all as determined on
a consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP.
"Consolidated Interest Expense" of the Company means, the aggregate of (i)
all cash and non-cash interest expense (minus amortization or write-off of
deferred financing costs included in cash or non-cash interest expense and
minus interest income and capitalized interest) with respect to all
outstanding Indebtedness of the Company and its Restricted Subsidiaries for
such period plus (ii) the product of (x) the amount of all dividend payments
on any series of Preferred Stock of the Company and the Restricted
Subsidiaries (other than dividends paid in Qualified Capital Stock) paid,
accrued (other than to or for the benefit of the Company or a Restricted
Subsidiary) or scheduled to be paid or accrued during such period times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective consolidated federal, state and local tax
rate of the Company expressed as a decimal.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (i) gains and losses from
Asset Sales or abandonments or reserves relating thereto and the related tax
effects, (ii) items classified as extraordinary, nonrecurring or unusual gains
and losses, and the related tax effects, each determined in accordance with
GAAP, (iii) the net income of any person acquired in a pooling of interests
transaction accrued prior to the date it becomes a Restricted Subsidiary of
the Company or is merged or consolidated with the Company or any Restricted
Subsidiary, (iv) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income was actually prevented by contract, operation of law
or otherwise and (v) the net income of any person, other than a Restricted
Subsidiary, except to the extent of the lesser of (x) cash dividends or
distributions paid to the Company or a Restricted Subsidiary of the Company by
such person and (y) the net income of such person (but in no event less than
zero).
"Consolidated Net Worth" of any person means the Net Worth of such person
and its consolidated subsidiaries, determined on a consolidated basis in
accordance with GAAP.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness under or in
respect of the New Bank Credit Facility and (ii) if no Indebtedness under the
New Bank Credit Facility is outstanding, any other Senior Indebtedness which,
at the date of determination, has an aggregate principal amount of, or under
which, at the date of determination, the holders thereof are committed to lend
up to, at least $25.0 million and is specifically designated by the Company in
the instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of this Prospectus. For purposes of this
definition the term "New Bank Credit Facility" shall not include any agreement
governing Indebtedness incurred to refund, replace or refinance borrowings or
commitments under the New Bank Credit Facility other than any such agreements
incurred to refund, replace or refinance the entirety of the borrowings and
commitments then outstanding or permitted to be outstanding thereunder.
"Disqualified Capital Stock" means, with respect to any person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes.
88
"Excess Net Proceeds" shall mean Net Cash Proceeds of any Asset Sale not
applied in accordance with clause (iii)(x) or (y) of the "Limitation on Asset
Sales" covenant.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" or "generally accepted accounting principles" means generally
accepted accounting principles in the United States as in effect from time to
time, including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as approved by a significant segment of the accounting profession.
"Guarantor Senior Indebtedness" means (i) indebtedness of a Subsidiary
Guarantor for money borrowed and all obligations, whether direct or indirect,
under guarantees, letters of credit, foreign currency or interest rate swaps,
foreign exchange contracts, caps, collars, options, hedges or other agreements
or arrangements designed to protect against fluctuations in currency values or
interest rates, other extensions of credit, expenses, fees, reimbursements,
indemnities and all other amounts owed by such Subsidiary Guarantor under, or
with respect to, the New Bank Credit Facility (including any interest accruing
subsequent to the filing of a petition in bankruptcy at the rate provided for
in the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law), (ii) the principal of and premium, if
any, and accrued and unpaid interest, whether existing on the date hereof or
hereafter incurred, in respect of (A) indebtedness of such Subsidiary
Guarantor for money borrowed, (B) express written guarantees by such
Subsidiary Guarantor of indebtedness for money borrowed by any other person,
(C) indebtedness evidenced by notes, debentures, bonds, or other instruments
of indebtedness for the payment of which such Subsidiary Guarantor is
responsible or liable, by guarantees or otherwise, (D) obligations of such
Subsidiary Guarantor for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction, (E) obligations of
such Subsidiary Guarantor under any agreement to lease, or any lease of, any
real or personal property which, in accordance with GAAP, is classified upon
such Subsidiary Guarantor's consolidated balance sheet as a liability, and (F)
obligations of such Subsidiary Guarantor under or guaranteeing interest rate
swaps, caps, collars, options and similar arrangements and foreign currency
hedges and (iii) modifications, renewals, extensions, replacements,
refinancings, and refundings of any such indebtedness, obligations or
guarantees, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is expressly provided that such
indebtedness, obligations or guarantees, or such modifications, renewals,
extensions, replacements, refinancings, or refundings thereof, are not
superior in right of payment to the Guarantee of such Subsidiary Guarantor,
provided, that Guarantor Senior Indebtedness will not be deemed to include (a)
any liability for Federal, state, local or other taxes owed or owing by a
Subsidiary Guarantor, (b) any accounts payable or other liability to trade
creditors arising in the ordinary course of business, (c) any Indebtedness,
guarantee or obligation of a Subsidiary Guarantor which is subordinate or
junior by its terms in any respect to any other Indebtedness, guarantee or
obligations of such Subsidiary Guarantor or (d) Indebtedness incurred in
violation of the "Limitation on Indebtedness" covenant (but as to any such
Indebtedness under the New Bank Credit Facility, no such violation shall be
deemed to exist for purposes of this clause (d) if the Representative of the
Lenders thereunder shall have received an Officers' Certificate of the Company
to the effect that the issuance of such Indebtedness does not violate such
covenant and setting forth in reasonable detail the reasons therefor.)
"Hedging Obligations" means, with respect to the Company or a Restricted
Subsidiary, (i) the obligations of such person under Interest Rate Agreements,
(ii) the obligations of such person under Currency Agreements and (iii)
obligations under agreements or arrangements designed to protect such person
against fluctuations in the value of commodities entered into in such person's
business.
"Holdings" means Pechiney Corporation, a Delaware corporation.
"Howmet Cercast S.A." means Howmet Cercast S.A., a societe anonyme organized
under the laws of the Republic of France.
89
"Indebtedness" of any person means, at any time, without duplication: (i)
the principal of and, if any is due and payable at such time, premium in
respect of (A) indebtedness of such person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds, or other similar
instruments for the payment of which such person is responsible or liable;
(ii) all Capitalized Lease Obligations of such person; (iii) all obligations
of such person issued or assumed as the deferred purchase price of property,
all conditional sale obligations of such person and all obligations of such
person under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business); (iv) all obligations of
such person for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in (i) through (iii) above) entered into in the ordinary course of
business of such person; provided that, for the purpose of determining Events
of Default referred to in clause (d) under the caption "--Events of Default",
obligations with respect to letters of credit securing obligations entered
into in the ordinary course of business shall be excluded only to the extent
such letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed no later than the third Business Day following
receipt by such person of a demand for reimbursement following payment on the
letter of credit); (v) the principal amount of all obligations of such person
with respect to the redemption, repayment or other purchase of any
Disqualified Capital Stock; (vi) in the case of the Company, any Preferred
Stock of a Restricted Subsidiary, valued at the aggregate liquidation
preference thereof plus accrued and unpaid dividends thereon; (vii) all
obligations of the type referred to in clauses (i) through (vi) above of other
persons and all dividends of other persons for the payment of which, in either
case, such person is responsible or liable as obligor, guarantor or otherwise;
and (viii) all obligations of the type referred to in clauses (i) through
(vii) of other persons secured by a lien, mortgage, pledge or encumbrance of
any kind on any property or asset of such person (whether or not such
obligation is assumed by such person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount
of the obligation so secured; provided, however, that Indebtedness shall not
include any interest, commitment or other fees.
"Independent" means, with respect to the Company and its subsidiaries, any
person who (i) is in fact independent, (ii) does not have any direct financial
interest or any material indirect financial interest in the Company or any of
its Subsidiaries, or in any Affiliate of the Company or any of its
Subsidiaries (other than as a result of holding securities of the Company in
trading accounts) and (iii) is not an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions
for the Company or any of its Subsidiaries or any Affiliate of the Company or
any of its Subsidiaries.
"Independent Financial Advisor" means a reputable accounting, appraisal or
investment banking firm that is, in the reasonable judgment of the Board of
Directors of the Company, qualified to perform the task for which such firm
has been engaged hereunder and disinterested and independent with respect to
the Company and its Affiliates.
"Initial Distribution" means the distribution, or the advance pursuant to
the Pechiney Intercompany Note, to Holdings by the Company on the date the
Acquisition is consummated of funds not greater than an amount sufficient to
effect the Acquisition.
"Interest Rate Agreements" means, with respect to the Company and the
Restricted Subsidiaries, any arrangements with any other person, whereby,
directly or indirectly, such person is entitled to receive from time to time
periodic payments calculated by applying either a floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made by
such other person calculated by applying a fixed or a floating rate of
interest on the same notional amount and shall include, without limitation,
interest rate swaps, caps, floors, collars and similar agreements.
"Investment" means, with respect to any person, all investments by such
person in other persons (including Affiliates of such person) in the form of
loans, guarantees, advances of assets or capital contributions (excluding
commission, travel and similar advances to, and compensation and benefits of,
officers and employees of such person made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Capital Stock or other securities and all other items that are or would be
classified as investments
90
on a balance sheet prepared in accordance with GAAP. In addition, the fair
market value (as determined by the Board of Directors of the Company in good
faith) of the assets of any Subsidiary of the Company at the time that such
Subsidiary is designated as an Unrestricted Subsidiary shall be deemed to be
an Investment made by the Company in such Unrestricted Subsidiary at such
time. "Investment" shall exclude (i) extensions of trade credit by the Company
and the Restricted Subsidiaries on commercially reasonable terms in accordance
with such person's normal trade practices and (ii) sales, assignments,
transfers, contributions, licenses or other dispositions of patents,
copyrights, applications with respect thereto, and other trademarks,
intellectual property and other technological "know-how" (collectively,
"Intellectual Property") to joint ventures in which the Company or a wholly-
owned Restricted Subsidiary owns at least 50% of the equity interests
(provided, that if the equity interest of the Company or such Restricted
Subsidiary, as the case may be, in such joint venture is reduced below 50%,
the Company shall have been deemed to make an Investment in such joint venture
in an amount equal to the fair market value (as determined by the Board of
Directors of the Company in good faith) of such Intellectual Property).
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means with respect to any property or assets of any person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance,
preference, priority, or other security agreement or preferential arrangement
of any kind or nature whatsoever on or with respect to such property or assets
(including, without limitation, any Capitalized Lease Obligation, conditional
sales, or other title retention agreement having substantially the same
economic effect as any of the foregoing).
"Make-Whole Amount" with respect to a Note means an amount equal to the
excess, if any, of (i) the present value of the remaining interest, premium
and principal payments due on such Note as if such Note were redeemed on
December 1, 1999, computed using a discount rate equal to the Treasury Rate
plus 150 basis points, over (ii) the outstanding principal amount of such
Note. "Treasury Rate" is defined as the yield to maturity at the time of the
computation of United States Treasury securities with a constant maturity (as
compiled by and published in the most recent Federal Reserve Statistical
Release H.15(519), which has become publicly available at least two business
days prior to the date fixed for prepayment or, if such Statistical Release is
no longer published, any publicly available source of similar market data)
most nearly equal to the then remaining maturity of the Notes assuming
redemption of the Notes on December 1, 1999, provided, however, that if the
Average Life of such Note is not equal to the constant maturity of the United
States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the
Average Life of such Notes is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used. "Average Life" means the number of years
(calculated to the nearest one-twelfth) between the date of such purchase and
December 1, 1999.
"Management Agreements" means those certain Management Agreements between
the Company and TCG Holdings, L.L.C. or another Affiliate of Carlyle, and
between the Company and Thiokol Corporation or an Affiliate thereof, in effect
on the Closing Date as the same may thereafter be amended on terms no more
favorable to such Carlyle or Thiokol entity, as the case may be, than the
terms in effect on the Closing Date.
"Net Cash Proceeds" means cash payments received (including any cash
payments received by way of deferred payment of principal pursuant to a note
or installment receivable or otherwise, but only as and when received) from
any sale, lease, transfer or other disposition of Capital Stock of the Company
or a Restricted Subsidiary or property or other assets of the Company or a
Restricted Subsidiary, in each case net of (i) any reserve for adjustment in
respect of the sale price of such asset or assets as required by GAAP
(provided, that upon the payment of such adjustment amount the excess, if any,
of the amount so reserved over the amount so paid shall be deemed "Net Cash
Proceeds"), (ii) repayment of any Purchase Money Indebtedness secured by a
Lien on the sold asset or assets and (iii) all legal, title and recording tax
expenses, commissions and other fees
91
and expenses incurred, and any taxes payable and reasonably estimated income
taxes, as a consequence of such sale, lease, transfer or other disposition.
"Net Worth" of any person means the total of the amounts shown on the
balance sheet of such person, as of the end of the most recent fiscal quarter
of such person ending at least 45 days prior to the taking of any action for
the purpose of which the determination is being made, as the sum of (i) par or
stated value for all outstanding Capital Stock of such person plus (ii) paid-
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (x) any accumulated deficit and (y)
any amounts attributable to Disqualified Capital Stock.
"New Bank Credit Facility" means the Credit Agreement, entered into by and
among Blade, Holdings, the Company, certain of its Subsidiaries, the lenders
referred to therein, Bankers Trust Company, Citicorp USA, Inc. and The First
National Bank of Chicago, as Managing Agents, together with the related
documents thereto (including, without limitation, the term loans and revolving
loans thereunder, any guarantees and security documents), as amended,
extended, renewed, restated, supplemented or otherwise modified (in whole or
in part, and without limitation as to amount, terms, conditions, covenants and
other provisions) from time to time, and any agreement (and related documents)
governing Indebtedness incurred to refund or refinance the entirety of the
borrowings and commitments then outstanding or permitted to be outstanding
under such Credit Agreement or a successor New Bank Credit Facility, whether
by the same or any other lender or group of lenders.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under, or with respect to, the documentation governing any
Indebtedness.
"Operating Coverage Ratio" means the ratio of Consolidated EBITDA of the
Company and the Restricted Subsidiaries during the four most recent full
fiscal quarters for which financial information is available (the "Four
Quarter Period") ending not more than 135 days prior to the date of the
transaction giving rise to the need to calculate the Operating Coverage Ratio
(the "Transaction Date") of the Company and the Restricted Subsidiaries for
the Four Quarter Period to Consolidated Interest Expense of the Company and
the Restricted Subsidiaries for the Four Quarter Period. In addition to and
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Interest Expense" shall be calculated
after giving effect on a pro forma basis for the Four Quarter Period to (i)
the incurrence or repayment of any Indebtedness (excluding the incurrence of
Indebtedness under any revolving credit facility and including repayments of
Indebtedness under any revolving credit facility only to the extent that such
repayment effects, or is accompanied by, a permanent reduction in the
availability thereunder) of the Company and the Restricted Subsidiaries at any
time subsequent to the last day of the Four Quarter Period and on or prior to
the Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period and (ii) any Asset Sales (and the application of
proceeds thereof) or asset acquisitions outside the ordinary course of
business in excess of $100,000 occurring during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or prior
to the Transaction Date, as if such Asset Sale (and the application of
proceeds thereof) or asset acquisition occurred on the first day of the Four
Quarter Period. If the Company or any of its Restricted Subsidiaries directly
or indirectly guarantees Indebtedness of a third person (other than the
Company or any of its Restricted Subsidiaries), the preceding sentence shall
give effect to the incurrence of such guaranteed Indebtedness as if such
person or any subsidiary (other than an Unrestricted Subsidiary) of such
person had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Interest Expense," (A)
interest on Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall
be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date, (B) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period, (C) notwithstanding clause (A) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by Interest Rate
92
Agreements, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such Interest Rate Agreements and (D) the
permanent retirement of any Indebtedness during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or prior
to the Transaction Date shall be given effect as if it occurred at the
beginning of such Four Quarter Period.
"Pechiney Intercompany Note" means the promissory note of Howmet Holdings
Acquisition Corp. issued to the Company on the Closing Date in an amount not
to exceed the amount sufficient to effect the Acquisition and to pay related
fees and expenses.
"Pechiney International" means Pechiney International, S.A., a societe
anonyme organized under the laws of the Republic of France.
"Pechiney" means Pechiney, a societe anonyme organized under the laws of the
Republic of France.
"Permitted Holder" means TC Group, L.L.C. and Thiokol Corporation or any of
their respective Affiliates including managing members on the Issue Date of TC
Group, L.L.C. and its affiliates that are limited liability companies.
"Permitted Investment" means (i) cash and Cash Equivalents, (ii) any
Investment in the Company or in a wholly owned Restricted Subsidiary of the
Company and (iii) any Investment by the Company or any Subsidiary existing on
the Closing Date (including an investment in the Pechiney Intercompany Note
and joint ventures existing on the Closing Date), (iv) any Investment by the
Company or any Subsidiary of the Company in a person, if as a result of such
Investment (A) such person becomes a wholly owned Restricted Subsidiary of the
Company or (B) such person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a wholly owned Restricted Subsidiary of the
Company (subject in each case to the restrictions described under "--
Limitations and Indebtedness" and "--Limitations on Mergers and Certain Other
Transactions") and (v) any Investment by the Company or a wholly owned
Restricted Subsidiary of the Company in a Receivables Subsidiary or any
Investment by a Receivables Subsidiary in any other person or assets in
connection with a Qualified Receivables Transaction; provided that any
Investment in any such person is in the form of a Purchase Money Note, an
equity interest or interests in accounts receivable generated by the Company
or a Restricted Subsidiary and transferred to any person in connection with a
Qualified Receivables Transaction or any such person owning such accounts
receivable.
"Permitted Liens" means (i) Liens on property or assets of, or any shares of
stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or at the time such
corporation is merged into the Company or any of its Restricted Subsidiaries,
provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Restricted Subsidiary of the
Company or merging into the Company or any of its Restricted Subsidiaries,
(ii) Liens securing Refinancing Indebtedness, provided that any such Lien does
not extend to or cover any Property, shares or debt other than the Property,
shares or debt securing the Indebtedness so refunded, refinanced or extended,
(iii) Liens in favor of the Company or any of its Restricted Subsidiaries,
(iv) Liens securing industrial revenue bonds, (v) Liens to secure Purchase
Money Indebtedness that is otherwise permitted under the Indenture, provided
that (A) any such Lien is created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the
cost (including sales and excise taxes, installation and delivery charges and
other direct costs of, and other direct expenses paid or charged in connection
with, such purchase or construction) of such Property, (B) the principal
amount of the Indebtedness secured by such Lien does not exceed 100% of such
costs, and (C) such Lien does not extend to or cover any Property other than
such item of Property and any improvements on such item, (vi) statutory Liens
or landlords', carriers', warehousemen's, mechanics', suppliers',
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business which do not secure any Indebtedness and with respect to amounts
not yet delinquent or being contested in good faith by appropriate
proceedings, if a reserve or other appropriate provisions, if any, as shall be
required in conformity with GAAP shall have been made therefor, (vii) Liens in
favor of the Trustee under the Indenture and any substantially
93
equivalent Lien granted to any trustee or similar institution under any
indenture for Indebtedness permitted by the terms of the Indenture, (viii)
Liens incurred or pledges or deposits made in the ordinary course of business
to secure obligations under workers' compensation, unemployment insurance or
other types of social security or similar legislation, (ix) Liens incurred or
deposits made to secure the performance of tenders, bids, leases, statutory
obligations, surety and appeal bonds, government contracts, performance and
return of money bonds and other obligations of a like nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money), (x) Liens upon specific items of inventory or other goods and
proceeds of any person securing such person's obligations in respect of
bankers' acceptances issued or created for the account of such person to
facilitate the purchase, shipment or storage of such inventory or other goods
in the ordinary course of business, (xi) Liens securing reimbursement
obligations with respect to letters of credit which encumber documents and
other property relating to such letters of credit and the products and
proceeds thereof, (xii) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of nondelinquent customs duties
in connection with the importation of goods, (xiii) judgment and attachment
Liens not giving rise to a Default or Event of Default, (xiv) leases or
subleases granted to others not interfering in any material respect with the
business of the Company or any Subsidiary, (xv) Liens encumbering customary
initial deposits and margin deposits, and other Liens incurred in the ordinary
course of business that are within the general parameters customary in the
industry, in each case securing Indebtedness under Hedging Obligations, (xvi)
Liens encumbering deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company or its Subsidiaries for which a reserve
or other appropriate provision, if any, as shall be required by GAAP shall
have been made, (xvii) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or any
Subsidiary in the ordinary course of business in accordance with past
practices; (xviii) any interest or title of a lessor in the property subject
to any lease, whether characterized as capitalized or operating other than any
such interest or title resulting from or arising out of a default by the
Company or any Subsidiary of its obligations under such lease, (xix) Liens
arising from filing UCC financing statements for precautionary purposes in
connection with true leases of personal property that are otherwise permitted
under the applicable indenture and under which the Company or any Subsidiary
is lessee, (xx) other Liens securing obligations incurred in the ordinary
course of business which obligations or judgments do not exceed $5.0 million
in the aggregate at any one time outstanding, (xxi) Liens securing Capitalized
Lease Obligations permitted to be incurred; provided that such Lien does not
extend to any property other than that subject to the underlying lease, (xxii)
Liens on assets or capital stock of Unrestricted Subsidiaries, (xxiii) Liens
securing Indebtedness under the New Bank Credit Facility, (xxiv) Liens
existing on the date of the Indenture, (xxv) Liens on accounts receivable
owned by Howmet and its Subsidiaries (including, but not limited to, any
Receivables Subsidiary) securing Indebtedness incurred in connection with a
Qualified Receivables Transaction, (xxvi) Liens on assets of the Company
securing Senior Indebtedness and Liens on assets of a Subsidiary Guarantor
securing Guarantor Senior Indebtedness, (xxvii) Liens on assets of Howmet
Cercast (Canada), Inc. and Canada Acquisition Co. securing Indebtedness of up
to $10.0 million from time to time outstanding permitted to be incurred under
clause (k) of the covenant described above under Certain Covenants "--
Limitation or Indebtedness," (xxviii) any extensions, substitutions,
replacements or renewals of the foregoing, (xxix) Liens for taxes, assessments
or governmental charges that are not delinquent or are being contested in good
faith by appropriate proceedings and (xxx) easements or minor defects or
irregularities in title and other similar charges or encumbrances on property
not interfering in any material respect with the Company's use of such
property.
"person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.
"Preferred Stock" means any Capital Stock of a person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such person over the holders of other
Capital Stock issued by such person.
"Property" of any person means all types of real, personal, tangible,
intangible or mixed property owned by such person whether or not included in
the most recent consolidated balance sheet of such person and its Subsidiaries
under GAAP.
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"Public Equity Offering" means an underwritten equity offering of the
Qualified Capital Stock of the Company, or of any entity of which the Company
is a direct or indirect subsidiary, to the extent the proceeds thereof shall
have been contributed to the Company, pursuant to an effective registration
statement under the Act, the net proceeds of which to the Company (after
deducting any underwriting discounts and commissions) exceed $25.0 million.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a person to finance the cost (including the
cost of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such person incurred in connection therewith.
"Purchase Money Note" means a promissory note evidencing a line of credit,
which may be irrevocable, from, or evidencing other Indebtedness owed to, the
Company or any Restricted Subsidiary in connection with a Qualified
Receivables Transaction, which note shall be repaid from cash available to the
maker of such note, other than amounts required to be established as reserves
pursuant to agreements, amounts paid to investors in respect of interest,
principal and other amounts owing to such investors and amounts paid in
connection with the purchase of newly generated receivables.
"Qualified Capital Stock" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any Restricted
Subsidiary pursuant to which the Company or any Restricted Subsidiary may
sell, convey or otherwise transfer to (a) a Receivables Subsidiary (in the
case of a transfer by the Company or any Restricted Subsidiary) and (b) any
other person (in the case of a transfer by a Receivables Subsidiary), or may
grant a security interest in, any accounts receivable (whether now existing or
arising in the future) of the Company or any Restricted Subsidiary, and any
assets related thereto including, without limitation, all collateral securing
such accounts receivable, all contracts and all guarantees or other
obligations in respect of such accounts receivable, proceeds of such accounts
receivable and other assets which are customarily transferred or in respect of
which security interests are customarily granted in connection with asset
securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a wholly owned Restricted Subsidiary (other
than a Subsidiary Guarantor), which engages in no activities other than in
connection with the financing of accounts receivable and which is designated
by the Board of Directors of the Company (as provided below) as a Receivables
Subsidiary (a) no portion of the Indebtedness or any other Obligations
(contingent or otherwise) of which (i) is guaranteed by the Company or any
Restricted Subsidiary (excluding guarantees of Obligations (other than the
principal of, and interest on, Indebtedness)) pursuant to Standard
Securitization Undertakings, (ii) is recourse to or obligates the Company or
any Restricted Subsidiary in any way other than pursuant to Standard
Securitization Undertakings or (iii) subjects any property or asset of the
Company or any Restricted Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings, (b) with which neither the Company nor any
Restricted Subsidiary has any material contract, agreement, arrangement or
understanding (except in connection with a Purchase Money Note or Qualified
Receivables Transaction) other than on terms no less favorable to the Company
or such Restricted Subsidiary than those that might be obtained at the time
from persons that are not Affiliates of the Company, other than fees payable
in the ordinary course of business in connection with servicing accounts
receivable, and (c) to which neither the Company nor any Restricted Subsidiary
has any obligation to maintain or preserve such entity's financial condition
or cause such entity to achieve certain levels of operating results. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the resolution of the
Board of Directors of the Company giving effect to such designation and an
Officers' Certificate certifying, to the best of such officer's knowledge and
belief after consulting with counsel, that such designation complied with the
foregoing conditions.
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"Representative" means the agent or representative in respect of any
Designated Senior Indebtedness; provided that if, and for so long as, any
Designated Senior Indebtedness lacks such a representative, then the
Representative for such Designated Senior Indebtedness shall at all times
constitute the holders of a majority in outstanding principal amount of such
Designated Senior Indebtedness in respect of any Designated Senior
Indebtedness.
"Restricted Subsidiary" means any Subsidiary that is not an Unrestricted
Subsidiary.
"Senior Indebtedness" means (i) indebtedness of the Company for money
borrowed and all obligations, whether direct or indirect, under guarantees,
letters of credit, foreign currency or interest rate swaps, foreign exchange
contracts, caps, collars, options, hedges or other agreements or arrangements
designed to protect against fluctuations in currency values or interest rates,
other extensions of credit, expenses, fees, reimbursements, indemnities and
all other amounts owed by the Company under, or with respect to, the New Bank
Credit Facility (including any interest accruing subsequent to the filing of a
petition in bankruptcy at the rate provided for in the documentation with
respect thereto whether or not such interest is an allowed claim under
applicable law), (ii) the principal of and premium, if any, and accrued and
unpaid interest, whether existing on the date hereof or hereafter incurred, in
respect of (A) indebtedness of the Company for money borrowed, (B) express
written guarantees by the Company of indebtedness for money borrowed by any
other person, (C) indebtedness evidenced by notes, debentures, bonds, or other
instruments of indebtedness for the payment of which the Company is
responsible or liable, by guarantees or otherwise, (D) obligations of the
Company for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction, (E) obligations of the Company under
any agreement to lease, or any lease of, any real or personal property which,
in accordance with GAAP, is classified upon the Company's consolidated balance
sheet as a liability, and (F) obligations of the Company under Hedging
Obligations and (iii) modifications, renewals, extensions, replacements,
refinancings, and refundings of any such indebtedness, obligations or
guarantees, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is expressly provided that such
indebtedness, obligations or guarantees, or such modifications, renewals,
extensions, replacements, refinancings, or refundings thereof, are not
superior in right of payment to the Notes; provided, that Senior Indebtedness
will not be deemed to include (a) any obligation of the Company to any
Subsidiary (other than obligations pledged pursuant to the New Bank Credit
Facility, as security for the obligations of the Company thereunder), (b) any
liability for Federal, state, local or other taxes owed or owing by the
Company, (c) any accounts payable or other liability to trade creditors
arising in the ordinary course of business, (d) any Indebtedness, guarantee or
obligation of the Company which is subordinate or junior by its terms in any
respect to any other Indebtedness, guarantee or obligations of the Company or
(e) that portion of any Indebtedness incurred in violation of the "Limitation
on Indebtedness" covenant (but as to any such Indebtedness under the New Bank
Credit Facility, no such violation shall be deemed to exist for purposes of
this clause (e) if the Representative of the lenders thereunder shall have
received an officers' certificate of the Company to the effect that the
issuance of such Indebtedness does not violate such covenant and setting forth
in reasonable detail the reasons therefor).
"Significant Stockholder" means, with respect to any person, any other
person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 5% of any class of equity securities of such person
that are entitled to vote on a regular basis for the election of directors of
such person.
"Significant Subsidiary" means each Restricted Subsidiary of the Company
that is a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-
X under the Securities Act and the Exchange Act (as such regulation is in
effect on the date hereof).
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Restricted
Subsidiary which are reasonably customary in an accounts receivable
transaction.
"Subordinated Obligations" means any Indebtedness of the Company which is
expressly subordinated or junior in right of payment to the Notes.
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"subsidiary" of any person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such person, by one or more subsidiaries of such person or by such person and
one or more subsidiaries of such person, or (ii) a partnership in which such
person or a subsidiary of such person is, at the date of determination, a
general partner of such partnership, but only if such person or its subsidiary
is entitled to receive more than fifty percent of the assets of such
partnership upon its dissolution, or (iii) any other person (other than a
corporation or a partnership) in which such person, a subsidiary of such
person or such person and one or more subsidiaries of such person, directly or
indirectly, at the date of determination, has (x) at least a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the directors or other governing body of such person.
"Subsidiary" means any subsidiary of the Company.
"Subsidiary Guarantor" means (i) each of the Company's Subsidiaries which
becomes a guarantor of the Notes pursuant to the "Guarantees of Certain
Indebtedness" covenant and (ii) each of the Company's Subsidiaries executing a
supplemental indenture in which such Subsidiary agrees to be bound by the
terms of the Indenture; provided that any person constituting a Subsidiary
Guarantor as described above shall cease to constitute a Subsidiary Guarantor
when its respective Subsidiary Guaranty is released in accordance with the
terms thereof.
"Tax Sharing Agreement" means each of those certain agreements by and
between Blade and each of Holdings and the Company under which the tax
liability of the consolidated group consisting of Blade, Holdings and the
Company is allocated between each of Blade, Holdings and the Company, and each
of Holdings and the Company agrees to pay to Blade its allocable share of such
tax liability, as amended from time to time so long as the basis for
determining the amounts to be paid by the Company and the Restricted
Subsidiaries under any such amended agreement is no less favorable to the
Company and the Restricted Subsidiaries than the basis for determining the
amounts payable by the Company and the Restricted Subsidiaries on the Closing
Date.
"Unrestricted Subsidiary" means any Subsidiary (other than a Subsidiary
Guarantor) designated as an Unrestricted Subsidiary by the Board of Directors
of the Company, provided that (i) such Subsidiary does not own any Capital
Stock of the Company or any Restricted Subsidiary, (ii) if such Subsidiary is
acquired by the Company, such Subsidiary is designated as an Unrestricted
Subsidiary prior to the consummation of such acquisition, (iii) no portion of
any Indebtedness or any other obligation (contingent or otherwise) of such
Subsidiary (a) is guaranteed by, or is otherwise the subject of credit support
provided by, the Company or any Restricted Subsidiary, (b) is recourse to or
obligates the Company or any Restricted Subsidiary in any way, or (c) subjects
any property or asset of the Company or any Restricted Subsidiary, directly or
indirectly, contingently or otherwise, to the satisfaction of such
Indebtedness or other obligation, (iv) neither the Company nor any of the
Restricted Subsidiaries has any contract, agreement, arrangement or
understanding with such Subsidiary other than on terms as favorable to the
Company or such Restricted Subsidiary, as the case may be, as those that might
be obtained at the time from persons that are not Affiliates of the Company,
(v) after giving effect to such designation, no Default or Event of Default
shall be continuing, and (vi) neither the Company nor any Restricted
Subsidiary has any obligation (a) to subscribe for additional shares of
Capital Stock of such Subsidiary, or (b) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing a Board
Resolution with the Trustee giving effect to such designation and a
certificate stating that such designation complies with the foregoing
conditions. Notwithstanding the foregoing or any other provision of the
Indenture to the contrary, no assets of the Company or the Restricted
Subsidiaries existing on the Closing Date may be held at any time by any
Unrestricted Subsidiary.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (x) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (y)
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the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payments.
DESCRIPTION OF SENIOR CREDIT FACILITIES
In connection with the Acquisition, the Company entered into the Senior
Credit Facilities with a syndicate of financial institutions for whom Bankers
Trust Company, The First National Bank of Chicago ("FNBC") and Citicorp USA,
Inc. are acting as managing agents (the "Managing Agents"). The Senior Credit
Facilities provide for up to $425.0 million of financing. The following is a
summary of the material terms and conditions of the Senior Credit Facilities
and is qualified in its entirety by reference to the provisions of the credit
agreement (the "Credit Agreement"), a copy which has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
General. The Senior Credit Facilities consist of (i) the Senior Term
Facility in an aggregate principal amount of $300.0 million, comprised of
three tranches: $145.0 million of Tranche A Term Loans ("A Term Loans"),
$100.0 million of Tranche B Term Loans ("B Term Loans"), and $55.0 million of
Tranche C Term Loans ("C Term Loans"); and (ii) the $125.0 million Revolving
Credit Facility including a swingline subfacility of loans provided solely by
the administrative agent.
All proceeds of the Senior Term Facility and approximately $15.7 million of
proceeds of the Revolving Credit Facility were used to finance the Acquisition
and to pay related transaction costs. Additional amounts available under the
Revolving Credit Facility may be used for the Company's general corporate and
working capital requirements. The Revolving Credit Facility also may be used
in part for the issuance of standby and trade letters of credit ("Letters of
Credit") to support the obligations of the Company and its subsidiaries, and
approximately $17.0 million of the amount available under the Revolving
Borrowings had been used for such purpose as of December 13, 1995 (including a
$10.0 million letter of credit issued to back up the Canadian Borrowings).
However, the New Bank Credit Facility permits amounts in excess of $100.0
million to be borrowed under the Revolving Credit Facility only if such
amounts could otherwise be borrowed under the limitations on indebtedness in
the Indenture. See "Description of Senior Subordinated Notes--Certain
Covenants--Limitation on Indebtedness."
Interest Rates; Fees. The Senior Credit Facilities may be maintained from
time to time, at the Company's option, as (i) Base Rate Loans which bear
interest at the Base Rate (defined in the Loan Agreement as the higher of (x)
1/2 of 1% in excess of the Federal Reserve reported certificate of deposit
rate and (y) FNBC's announced corporate base rate, each as in effect from time
to time) plus the "Applicable Margin" (as defined below), or (ii) Eurodollar
Loans bearing interest at the Eurodollar Rate (adjusted for maximum reserves)
as determined by FNBC for the applicable interest period plus the Applicable
Margin. "Applicable Margin" means a per annum rate equal to (x) in the case of
A Term Loans and the Revolving Credit Facility (A) maintained as Base Rate
Loans, 1 1/2% and (B) maintained as Eurodollar Loans, 2 1/2%, (y) in the case
of B Term Loans (A) maintained as Base Rate Loans, 2% and (B) maintained as
Eurodollar Loans, 3% and (z) in the case of C Term Loans (A) maintained as
Base Rate Loans, 2 1/4% and (B) maintained as Eurodollar Loans, 3 1/4%.
Eurodollar Loans may have 1, 2, 3 and 6 month interest periods. Interest
periods of 9 and 12 months may also be available for Eurodollar Loans if
agreed upon by the Managing Agents and Dollar deposits for the applicable term
are available to Lenders of the respective tranche. Interest on Eurodollar
Loans is payable in arrears at the end of the applicable interest period and
every three months where the applicable period exceeds three months. Interest
is payable on Base Rate Loans on the last business day of each calendar
quarter.
Overdue amounts bear interest at a rate per annum equal to the greater of
(i) the rate which is 2% in excess of the rate otherwise applicable to Base
Rate Loans, and (ii) the rate which is 2% in excess of the rate then borne by
the applicable borrowings. Default interest is payable on demand.
The Company is required to pay a commitment fee calculated at a rate of 1/2
of 1% per annum of the unutilized commitments of each Lender under the
Revolving Credit Facility. This fee will accrue from the
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Closing Date to and including the date of termination of the Senior Credit
Facilities, and is payable quarterly in arrears.
The Company is required to pay a letter of credit fee of 1/2 of 1% per
annum, and a facing fee of 1/4 of 1% per annum, in each case calculated based
on the aggregate stated amount of each Letter of Credit for its stated
duration. Such fees are payable in arrears at the end of each quarter. In
addition, the Company is required to pay customary administrative charges in
connection with the issuance and amendment of, and draws under, Letters of
Credit.
Amortization; Prepayments. The A Term Loans are scheduled to mature on
November 20, 2000 and will be subject to quarterly amortization payments. The
first such payment is due three months after the Closing Date. The B Term
Loans are scheduled to mature on November 20, 2002. Amortization payments
equal to 1% of the initial aggregate principal amount of B Term Loans are
required for each of the five successive one-year periods following the
Closing Date, payable quarterly in arrears. The remaining aggregate principal
amount of B Term Loans are subject to eight equal quarterly amortization
payments, with the first such payment to be made five years and three months
after the Closing Date. The C Term Loans are scheduled to mature on May 20,
2003. Annual amortization of the C Term Loans, for the seven years following
the Closing Date, are required in an amount for each annual period equal to 1%
of the initial aggregate principal amount of C Term Loans, payable quarterly
in arrears. The remaining aggregate principal amount of C Term Loans are
subject to two equal amortization payments, with the first such payment to be
made seven years and three months after the Closing Date and the second to be
made three months after the first such scheduled amortization date. The
Revolving Credit Facility is scheduled to mature on November 20, 2000.
Voluntary prepayments may be made at any time on one day's notice for Base
Rate Loans and five business days' notice for Eurodollar Loans without premium
or penalty (other than the payment of breakage costs for Eurodollar Loans
prepaid on a day other than the last day of an interest period). Such payments
on the Senior Term Facility will be applied pro rata to outstanding A, B, and
C Term Loans, and payments on each tranche of Loans will be applied to reduce
the amortization payments of the respective tranche coming due in the next 12
months, and then, to reduce the remaining scheduled amortization payments of
the respective tranche on a pro rata basis.
The Company is required to make mandatory repayments of the Senior Term
Facility from (i) 100% of the net proceeds from assets sales by Blade or any
of its subsidiaries (subject, however, to certain exceptions and reinvestment
rights), (ii) 100% of the net proceeds from the issuance of certain debt by
Blade or any of its subsidiaries (including, under certain circumstances,
certain proceeds of the Receivables Facility), (iii) 100% of the net proceeds
from certain equity issuances, (iv) 75% of annual excess cash flow of the
Company and its subsidiaries, provided that once 50% of the initial aggregate
amount of the Senior Term Facility has been repaid, only 50% of such excess
cash flow shall be required to be so used, and (v) 100% of the net proceeds
from insurance or condemnation recovery events by Blade or any of its
subsidiaries (subject, however, to certain reinvestment rights). Mandatory
repayments pursuant to clauses (i)-(v) shall be applied pro rata to the
outstanding A, B, and C Term Loans. Repayments of each tranche of the Senior
Term Facility made under clauses (iii) and (iv) shall be applied to reduce the
scheduled amortization payments of the respective tranche falling due in the
next 12-month period, then to reduce future amortization payments of the
respective tranche on a pro rata basis based upon the principal amounts of
such scheduled payments. Repayments of each tranche of the Senior Term
Facility made under clauses (i), (ii) or (v) shall reduce future scheduled
amortization payments of the tranche on a pro rata basis based upon the
principal amounts of such scheduled payments. If the mandatory repayments
otherwise required under clauses (i), (ii) or (v) would exceed the aggregate
principal amount of the Senior Term Facility then outstanding, the excess will
be applied to reduce the lenders' commitments (and, if applicable, loans)
under the Revolving Credit Facility.
Guarantees and Collateral. Blade, Holdings and each domestic direct and
indirect subsidiary of Holdings (excluding the Company, the Insurance
Subsidiary and each Receivables Subsidiary) (collectively, the "Guarantors")
guaranteed all of the amounts owing under the Senior Credit Facilities. All
amounts owing under
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the Senior Credit Facilities (including amounts owed under the guarantees) are
secured by a first priority (subject to certain permitted liens and
encumbrances) perfected security interest in all stock and promissory notes
owned by the Company and the Guarantors (with certain exceptions relating to
stock or promissory notes issued by foreign subsidiaries), and in all or
substantially all other tangible and intangible assets (other than receivables
sold pursuant to the Receivables Program) owned by the Company and each
Guarantor.
Covenants. The obligations of the lenders under the Senior Credit Facilities
are subject to the satisfaction of certain conditions precedent customary in
acquisition credit facilities or otherwise appropriate under the
circumstances. The Company and each of its subsidiaries are subject to certain
affirmative and negative covenants contained in the Senior Credit Facilities,
including without limitation covenants that restrict, subject to specified
exceptions, (i) the incurrence of additional indebtedness and other
obligations and the granting of additional liens, (ii) mergers, acquisitions,
investments, and acquisitions and dispositions of assets, (iii) the incurrence
of capitalized lease obligations, (iv) dividends, (v) prepayment or repurchase
of other indebtedness and amendments to certain agreements governing
indebtedness, including the Indenture and the Notes, (vi) engaging in
transactions with affiliates, (vii) capital expenditures, (viii) the use of
proceeds, and (ix) changes of lines of business. There are also covenants
relating to compliance with ERISA and environmental and other laws, payment of
taxes, maintenance of corporate existence and rights, maintenance of insurance
and interest rate protection, and financial reporting. Certain of these
covenants are more restrictive than those set forth in the Indenture. In
addition, the Senior Credit Facilities require the Company to maintain
compliance with certain specified financial covenants, including covenants
relating to minimum interest coverage, minimum EBITDA, minimum fixed charge
coverage, and maximum leverage.
Events of Default. The Senior Credit Facilities also include events of
default that are customary in acquisition credit facilities, including,
without limitation, cross defaults and other defaults in connection with the
Receivables Program, and a change of control of Blade, Holdings or the Company
(with the exception of certain changes in control between Thiokol and Carlyle
investors). The occurrence of any of such events of default could result in
acceleration of the Company's and the Guarantors' obligations under the Senior
Credit Facilities and foreclosure on the collateral securing such obligations,
which could have material adverse results to holders of the Notes.
DESCRIPTION OF RECEIVABLES FACILITY
In connection with the Acquisition, Blade Receivables Corporation (the
"Receivables Subsidiary"), a wholly owned subsidiary of Howmet Acquisition
Corp. ("HAC"), borrowed approximately $51.4 million (the "Receivables Loan")
from Bankers Trust Company ("BTCo") and The First National Bank of Chicago
("FNBC" and, together with BTCo, the "Receivables Lenders"). The proceeds from
the Receivables Loan were used to fund part of the purchase price of the
Acquisition. Upon the merger of HAC with and into the Company, the Receivables
Subsidiary became a wholly owned subsidiary of the Company. In connection with
the Receivables Loan, the Company, its U.S. Subsidiaries (the Company and its
U.S. Subsidiaries are collectively referred to as the "Receivables Sellers")
and the Receivables Subsidiary entered into a receivables program (the
"Receivables Facility") financed by the Receivables Lenders. The following is
a summary of certain of the material terms and conditions of the Receivables
Facility, which should be read in conjunction with the detailed provisions of
the following agreements (collectively, the "Receivables Agreements"), each of
which was entered into as of December 13, 1995 (the "Receivables Closing
Date"): (i) the Blade Receivables Master Trust Pooling and Servicing Agreement
among the Company, Manufacturers and Traders Trust Company (the "Receivables
Trustee") and the Receivables Subsidiary (the "Trust Agreement"), (ii) the
Series 1995-1 Supplement to the Pooling and Servicing Agreement among the
Company, the Receivables Subsidiary, and the Receivables Trustee (the
"Supplement"), (iii) the Revolving Certificate Purchase Agreement among the
Company, the Receivables Subsidiary, and the Receivables Lenders (the
"Certificate Purchase Agreement"), and (iv) the Receivables Purchase Agreement
among the Receivables Sellers and the Receivables Subsidiary (the "Receivables
Purchase Agreement").
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General. Pursuant to the terms of the Receivables Agreements, until the
termination of the Receivables Facility, on each day that Receivables are
created, such Receivables are (i) either sold or contributed to the
Receivables Subsidiary, and then (ii) sold by the Receivables Subsidiary to a
trust (the "Trust") that was created pursuant to the Trust Agreement. In
connection with the creation of the Trust, certificates (the "Certificates")
evidencing the entire beneficial interest in the Trust were issued to the
Receivables Subsidiary. The Receivables Subsidiary sold certain of the
Certificates (the "Purchaser Certificates") to the Receivables Lenders and the
proceeds from such sale were used to repay the Receivables Loan in full.
Each holder of a Purchaser Certificate is entitled to receive from the
collections on the Receivables, (i) on a monthly basis, interest and all other
amounts, if any, due on its certificate, and (ii) upon the termination of the
Receivables Facility, the purchase price paid to the Receivables Subsidiary
for such certificate (the "Invested Amount"). The outstanding Purchaser
Certificates represented an aggregate Invested Amount of approximately $51.4
million upon consummation of the Acquisition (the amount of the Receivables
Loan). The Receivables Lenders are currently committed to increase their
Invested Amount up to $60.0 million (the "Commitment Amount") if and to the
extent requested by the Receivables Subsidiary; provided, however, that the
Receivables Lenders will have no obligation to advance any additional amounts
to the Receivables Subsidiary unless, and then only to the extent that, the
Receivables held by the Trust satisfy certain criteria. Pursuant to the terms
of the Certificate Purchase Agreement, the Receivables Subsidiary may, at its
option and without any penalty or fee, (i) permanently reduce the Commitment
Amount, and/or (ii) reduce the Invested Amount (however, a reduction in the
Invested Amount may result in an increase in the Non-Usage Fee (defined below)
and breakage costs).
The transfers of Receivables from the Receivables Sellers to the Receivables
Subsidiary pursuant to the Receivables Purchase Agreement have been structured
as sales. As a result, the Receivables Subsidiary does not have recourse
against the Receivables Sellers for credit-related defaults by the obligors on
the Receivables. However, pursuant to the Receivables Purchase Agreement, each
Receivables Seller has made certain representations and warranties with
respect to the Receivables sold or contributed by such Receivables Seller and
any breach of such representations and warranties may require such Receivables
Seller to pay the Receivables Subsidiary for any damages it suffers as result
of such breach. The Company has guaranteed the obligations of the other
Receivables Sellers under the Receivables Purchase Agreement.
Pursuant to the Trust Agreement, all of the Receivables Subsidiaries' rights
in, to and under the Receivables Purchase Agreement has been assigned to the
Trust. However, pursuant to the Trust Agreement, the Company has been
appointed as the servicer of the Receivables and, in consideration for
servicing the Receivables, the Company is entitled to receive a monthly fee
(the "Servicing Fee") equal to one-twelfth of 2% of the outstanding balance of
the Receivables at the beginning of each month. The Trustee may replace the
Company as the servicer if the Company defaults in its duties as the servicer.
Prior to the termination of the Receivables Facility, collections on the
Receivables will be used to (i) pay interest and other amounts, if any, due
each month on the Purchaser Certificates, (ii) pay the Servicing Fee, (iii)
establish reserves to the extent required by the Supplement in order to insure
that adequate amounts are available to pay the Servicing Fee, interest and
other amounts, if any, due on the Purchaser Certificates and the aggregate
Invested Amount, and (iv) purchase Receivables from the Receivables
Subsidiary. Although the Receivables Facility is currently scheduled to
terminate on June 15, 2000, the Receivables Facility can be terminated earlier
upon the occurrence of certain events that may have a material adverse effect
on the validity, enforceability or collectibility of the Receivables. Upon the
termination of the Receivables Facility, collections on the Receivables will
be set aside and applied to pay in full the aggregate Invested Amount and all
interest and other amounts due on the Purchaser Certificates, after which any
remaining collections will be paid to the Receivables Subsidiary.
Interest Rates; Fees. At the option of the Receivables Subsidiary, the
Purchaser Certificates will bear interest at a per annum rate equal to either
(A) the reserve adjusted Eurodollar rate plus (i) 0.5% during the first three
months, (ii) 1.0% during the next three months and (iii) 1.5% thereafter,
and/or (B) the applicable prime rate during the first three months, the
applicable prime rate plus 0.25% during the next three months, and the
applicable prime rate plus 0.75% thereafter. A non-usage fee (the "Non-Usage
Fee") will be payable monthly
101
on the unused part of the Commitment Amount at a rate per annum of (i) 0.375%
prior to the six month anniversary of the Receivables Closing Date, and (ii)
0.5% thereafter.
Takeout Financing. Pursuant to the Certificate Purchase Agreement, if the
Receivables Lenders have not been repaid in full and their Commitment Amount
reduced to zero within five months of the Receivables Closing Date, the
Company and the Receivables Subsidiary have agreed to cooperate in good faith
with the Receivables Lenders to either refinance the Purchaser Certificates or
facilitate the complete assignment of the Receivable Lenders' Purchaser
Certificates to other purchasers, which may include restructuring the
transactions contemplated by the Receivables Agreements and designing
securities to be issued by the Trust. Such restructuring and design may
include, among other things, (i) the creation of senior and subordinated
classes of instruments, (ii) the creation of fixed principal and/or variable
principal instruments with varying maturities and interest rates, (iii)
changes to the number and type of investors required to take or omit to take a
particular action, (iv) the imposition of make-whole payments or other
prepayment premiums if the securities are repaid prior to maturity, (v) any
changes or modifications necessary to enable an investor to qualify for the
portfolio interest exemption, and (vi) any changes or modifications necessary
to satisfy the then current requirements of Standard & Poor's Corporation (or,
if the Receivables Lenders request, any other rating agency) for trade
receivables securitizations rated "A." The Company and the Receivables
Subsidiary have also agreed to enter into amendments to the Receivables
Agreements that are requested by the Receivables Lenders to effect such
restructuring and design of the securities; provided, however, that
notwithstanding the foregoing, (a) neither the Company nor the Receivables
Subsidiary shall be required to consent to any amendment to any Receivables
Agreement that it believes in its reasonable discretion to be materially
adverse to its own interests, and (b) the ability of the Company and the
Receivables Subsidiary to consent to any amendment to the Receivables
Agreements may be subject to the consent from the lenders that are parties to
the Company's credit agreement and, if such consent cannot be obtained from
such lenders, neither the Company nor the Receivables Subsidiary shall have
any obligation to consent to such amendment.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
It is the opinion of Latham & Watkins, counsel to the Company, that the
material federal income tax considerations to holders whose Original Notes are
exchanged for Exchange Notes in the Exchange Offer are as described herein,
subject to the limitations and qualifications set forth below. Because the
Exchange Notes should not be considered to differ materially either in kind or
in extent from the Original Notes, the exchange of the Exchange Notes for the
Original Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes. As a result, no material federal
income tax considerations should result to holders exchanging Original Notes
for Exchange Notes. If, however, the exchange of Original Notes for Exchange
Notes were treated as a taxable event, such transaction should constitute a
recapitalization for federal income tax purposes and holders would not
recognize any gain or loss upon such exchange.
The foregoing opinion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended, applicable existing and proposed Treasury
Regulations promulgated thereunder, judicial authority and current
administrative rulings and practice. There can be no assurance that final
Treasury Regulations will not differ materially from those which are presently
proposed nor that the Internal Revenue Service (the "IRS") will not take a
contrary view. No ruling from the IRS has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements or conclusions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and individuals who are not citizens or residents of the United
States) may be subject to special rules not discussed herein. AS A RESULT,
EACH HOLDER OF ORIGINAL NOTES SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING HIS OR HER ORIGINAL
NOTES FOR EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
102
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Notes where such Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that for a period of 180
days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders (including any broker-dealers) and certain parties
related to the holders against certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby will be
passed upon for the Company by Latham & Watkins, Chicago, Illinois.
EXPERTS
The combined financial statements of Howmet and Cercast as of December 31,
1994 and for each of the two years in the period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements (including Schedule II) of Howmet Corporation at
December 31, 1995 and for the period from January 1, 1995 to December 13, 1995
and the period from December 14, 1995 to December 31, 1995 appearing in this
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein
which, as to the financial statements of Howmet SA, CIRAL SNC and Howmet
Limited (UK), wholly-owned subsidiaries, at December 31, 1995 and for the year
ended December 31, 1995 (not separately presented in this Prospectus), are
based in part on the reports of Price Waterhouse, independent accountants. The
financial statements (including Schedule II) of Howmet Corporation
103
referred to above are included in reliance upon such reports of Ernst & Young
LLP given upon the authority of such firm as experts in accounting and
auditing.
Effective upon consummation of the Acquisition on December 13, 1995, Ernst &
Young LLP, independent auditors, replaced Price Waterhouse LLP as the
Company's independent auditors. The change resulted from the changes in the
Company's ownership; Ernst & Young LLP also serves as independent auditors for
Thiokol. The Company's Board of Directors participated in and approved the
decision to change independent auditors.
The reports of Price Waterhouse LLP on the combined financial statements as
of and for the years ended December 31, 1993 and December 31, 1994 contained
no adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principle.
In connection with its audits for the years ended December 31, 1993 and
December 31, 1994 and through December 13, 1995, there have been no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of Price Waterhouse
LLP would have caused them to make reference thereto in their report on the
combined financial statements for such years.
The Company has requested that Price Waterhouse LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated March 29, 1996, is filed as Exhibit
16.1 to the Registration Statement of which this Prospectus is a part.
During the years ended December 31, 1993 and December 31, 1994 and through
December 13, 1995, the Company has not consulted with Ernst & Young LLP on
items which (1) were or should have been subject to SAS 50 or (2) concerned
the subject matter of a disagreement or reportable event with the former
auditor (as described in Regulation S-K Item 304(a)(2)).
104
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
NO.
----
Report of Independent Auditors........................................... F-2
Auditors' Report to the Members of Howmet Limited........................ F-3
Auditors' Report on the Annual Accounts of Howmet SA..................... F-4
Auditors' Report on the Annual Accounts of Ciral SNC..................... F-5
Report of Independent Accountants........................................ F-6
Successor Company Consolidated Balance Sheet at December 31, 1995 and
Predecessor Company Combined Balance Sheet at December 31, 1994......... F-7
Statements of Operations and Retained Earnings for the Period from
December 14, 1995 to December 31, 1995 (Successor Company Consolidated),
the Period from January 1, 1995 to December 13, 1995 (Predecessor
Company Combined), and the Years Ended December 31, 1994 and 1993
(Predecessor Company Combined).......................................... F-8
Statements of Cash Flows for the Period from December 14, 1995 to
December 31, 1995 (Successor Company Consolidated), the Period from
January 1, 1995 to December 13, 1995 (Predecessor Company Combined), and
the Years Ended December 31, 1994 and 1993 (Predecessor Company
Combined)............................................................... F-9
Notes to Financial Statements............................................ F-10
Consolidated Condensed Balance Sheet at March 31, 1996 (unaudited)....... F-29
Condensed Statements of Operations and Retained Earnings for the Thirteen
Weeks ended March 31, 1996 (Successor Company Consolidated) and April 2,
1995 (Predecessor Company Combined) (unaudited)......................... F-30
Condensed Statements of Cash Flows for the Thirteen Weeks ended March 31,
1996 (Successor Company Consolidated) and April 2, 1995 (Predecessor
Company Combined) (unaudited)........................................... F-31
Notes to Condensed Financial Statements (unaudited)...................... F-32
Report of Independent Auditors........................................... II-6
Schedule II--Valuation and Qualifying Accounts and Reserves.............. II-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Howmet Corporation
We have audited the consolidated balance sheet of Howmet Corporation and
subsidiaries as of December 31, 1995, and the related consolidated statements
of operations and retained earnings, and cash flows for the period from
January 1, 1995 to December 13, 1995 (Predecessor Company) and for the period
from December 14, 1995 to December 31, 1995 (Successor Company). 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 audit. We did not audit the financial statements of Howmet SA, CIRAL SNC
and Howmet Limited (UK), wholly-owned subsidiaries, which statements reflect
total assets of $201 million as of December 31, 1995, and total revenues of
$221 million for the year ended December 31, 1995. Those statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for Howmet SA, CIRAL SNC and
Howmet Limited (UK), is based solely on the reports of the other auditors. The
combined financial statements of Howmet Corporation and Howmet Cercast Group
as of December 31, 1994 and for each of the two years in the period ended
December 31, 1994, were audited by other auditors whose report dated October
27, 1995 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts (including the allocation of the results of operations
of Howmet SA, CIRAL SNC and Howmet Limited (UK) between the period from
December 14, 1995 to December 31, 1995) and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit and the
reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
1995 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Howmet Corporation and
subsidiaries as of December 31, 1995 and the consolidated results of their
operations and their cash flows for the periods from January 1, 1995 to
December 13, 1995 and December 14, 1995 to December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
May 2, 1996, except for Note 1, as to which the date is June 24, 1996
F-2
AUDITORS' REPORT TO THE MEMBERS OF HOWMET LIMITED
We have audited the financial statements (not separately presented herein)
on pages 7 to 20 which have been prepared under the historical cost convention
and the accounting policies set out on pages 7 and 8.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 4 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial statements, and of
whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the
state of the company's affairs as at 31 December 1995 and of its profit and
cash flows for the year then ended and have been properly prepared in
accordance with the Companies Act of 1985.
/s/ Price Waterhouse
Price Waterhouse
Chartered Accountants
and Registered Auditors
Bristol, United Kingdom
7 June 1996
F-3
AUDITOR'S REPORT ON THE ANNUAL ACCOUNTS
(YEAR ENDED DECEMBER 31, 1995)
To the Stockholders
Howmet SA
68 Rue du Moulin du Cage
92230 Gennevilliers
In accordance with the terms of our appointment by the General Meeting, we
hereby present our report for the year ended December 31, 1995 on:
--the audit of the annual accounts of Howmet SA (not separately presented
herein);
--the specific procedures and disclosures required by law.
The Board of Directors is responsible for the preparation of the annual
accounts. Our responsibility is to express an opinion on these accounts based
on our audit.
1. OPINION ON THE ANNUAL ACCOUNTS
We conducted our audit in accordance with auditing standards. These standards
require the auditor to perform such tests and procedures as give reasonable
assurance that the annual accounts are free from material misstatement. An
audit includes examination, on a test basis, of evidence relevant to the
information contained in these accounts. It also includes an assessment of the
accounting policies used and of significant estimates made by the Board of
Directors in the preparation of the annual accounts, and an evaluation of the
overall adequacy of the presentation of these accounts. We believe that our
audit provides a reasonable basis for the opinion expressed below.
In our opinion, the annual accounts have been properly prepared and present
fairly the company's results for the year ended December 31, 1995, and its
assets, liabilities and financial position as at that date.
2. SPECIFIC PROCEDURES AND DISCLOSURES
We have also performed the specific procedures required by the law, in
accordance with auditing standards.
We have no comments to make on the fair presentation or on the consistency
with the annual accounts of the information given in the Management Report of
the Board of Directors or in documents sent to the stockholders on the
company's financial position and annual accounts.
In accordance with the law, we have ensured that the necessary disclosures on
acquisitions of participating and controlling interests and on the identity of
stockholders have been provided in the Management Report.
Signed in Paris on May 23, 1996
The Auditor
/s/ Befec--Price Waterhouse
F-4
AUDITOR'S REPORT ON THE ANNUAL ACCOUNTS
(YEAR ENDED DECEMBER 31, 1995)
To the Stockholders
CIRAL SNC
ZAC de la Presale
53600 Evron
In accordance with the terms of our appointment by the General Meeting, we
hereby present our report for the year ended December 31, 1995 on:
--the audit of the annual accounts of Ciral SNC (not separately presented
herein);
--the specific procedures and disclosures required by law.
The manager is responsible for the preparation of the annual accounts. Our
responsibility is to express an opinion on these accounts based on our audit.
1. OPINION ON THE ANNUAL ACCOUNTS
We conducted our audit in accordance with auditing standards. These
standards require the auditor to perform such tests and procedures as give
reasonable assurance that the annual accounts are free from material
misstatement. An audit includes examination, on a test basis, of evidence
relevant to the information contained in these accounts. It also includes an
assessment of the accounting policies used and of significant estimates made
by the manager in the preparation of the annual accounts, and an evaluation of
the overall adequacy of the presentation of these accounts. We believe that
our audit provides a reasonable basis for the opinion expressed below.
In our opinion, the annual accounts have been properly prepared and present
fairly the company's results for the year ended December 31, 1995, and its
assets, liabilities and financial position as at that date.
2. SPECIFIC PROCEDURES AND DISCLOSURES
We have also performed the specific procedures required by the law, in
accordance with auditing standards.
We have no comments to make on the fair presentation or on the consistency
with the annual accounts of the information given in the Management Report of
the manager or in documents sent to the stockholders on the company's
financial position and annual accounts.
Signed in Paris on May 15, 1996
The Auditor
/s/ Befec--Price Waterhouse
F-5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors of
Howmet Corporation and Howmet Cercast Group
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and retained earnings and of cash flows as
of and for each of the two years in the period ended December 31, 1994 present
fairly, in all material respects, the financial position, results of
operations and cash flows of Howmet Corporation and Howmet Cercast Group
(collectively, the "Predecessor Company") and each of their consolidated
subsidiaries, affiliated by common ownership and management, as of and for
each of the two years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Predecessor Company's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 3 and 12 to the Notes to Financial Statements, the
Predecessor Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
in 1993.
We have not audited the combined financial statements of the Predecessor
Company for any period subsequent to December 31, 1994.
Price Waterhouse LLP /s/ Price Waterhouse LLP
Stamford, Connecticut
October 27, 1995
F-6
HOWMET CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 9,606 $ 4,962
Advances to Pechiney............................... -- 238,571
Accounts receivable (less allowance of $8,258 in
1995; $6,107 in 1994)............................. 92,014 142,481
Inventories........................................ 150,288 71,311
Deferred income taxes.............................. -- 29,152
Retained receivables............................... 42,690 --
---------- --------
Total current assets............................. 294,598 486,477
Property, plant and equipment, net................... 301,563 190,295
Deferred income taxes................................ -- 28,617
Goodwill, net........................................ 311,092 22,505
Acquisition intangibles and other assets, net........ 192,250 20,542
---------- --------
Total assets..................................... $1,099,503 $748,436
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 58,987 $ 70,850
Notes payable to affiliates........................ -- 20,007
Notes payable...................................... -- 1,593
Accrued liabilities................................ 154,957 119,725
Income taxes payable............................... 6,064 24,679
Long-term debt due within one year................. 45,303 26,541
Deferred income taxes.............................. 28,382 --
---------- --------
Total current liabilities........................ 293,693 263,395
Accumulated postretirement benefit obligation........ 82,259 79,766
Other liabilities.................................... 22,419 4,918
Deferred income taxes................................ 6,663 --
Long-term debt....................................... 418,186 15,522
---------- --------
Total liabilities................................ 823,220 363,601
Commitments and contingencies........................
Stockholders' equity:
Howmet Corporation common stock, $1 par value;
authorized--1,000 shares; issued and outstanding--
10 shares......................................... -- --
Capital surplus.................................... 275,000 85,610
Retained earnings.................................. 160 297,914
Cumulative translation adjustment.................. 1,123 1,311
---------- --------
Total stockholders' equity....................... 276,283 384,835
---------- --------
Total liabilities and stockholders' equity....... $1,099,503 $748,436
========== ========
See notes to the financial statements.
F-7
HOWMET CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
SUCCESSOR COMPANY
CONSOLIDATED PREDECESSOR COMPANY COMBINED
----------------- ----------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 14, 1995 JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO TO DECEMBER 13, ------------------------
DECEMBER 31, 1995 1995 1994 1993
----------------- --------------- ----------- -----------
Net sales............... $51,366 $ 894,132 $ 858,251 $ 832,668
Operating costs and
expenses:
Cost of sales......... 38,021 681,427 647,272 603,393
Selling, general and
administrative
expense.............. 4,591 104,990 90,894 104,418
Depreciation and
amortization expense. 2,780 32,654 33,089 31,004
Research and
development expense.. 1,425 25,004 19,169 23,335
Restructuring expense
(credit)............. -- (1,624) 2,546 --
Goodwill writeoff..... -- -- 47,400 --
------- --------- ----------- -----------
46,817 842,451 840,370 762,150
------- --------- ----------- -----------
Earnings from
operations............. 4,549 51,681 17,881 70,518
Interest income,
affiliates............. -- 8,628 9,462 5,298
Interest income, third
parties................ 23 1,297 552 776
Interest expense,
affiliates............. -- (2,155) (843) (927)
Interest expense, third
parties................ (2,925) (3,713) (3,948) (4,659)
Equity in loss of
unconsolidated
affiliates............. (159) (4,315) (1,434) (672)
Other, net.............. (847) (1,477) 1,324 535
------- --------- ----------- -----------
Income before income
taxes.................. 641 49,946 22,994 70,869
Provision for income
taxes.................. 481 23,662 45,984 27,822
------- --------- ----------- -----------
Income (loss) before
cumulative effect of
change in accounting... 160 26,284 (22,990) 43,047
Cumulative effect of
change in accounting
for postretirement
benefit costs (net of
taxes of $31,490 in
1993).................. -- -- -- (49,253)
------- --------- ----------- -----------
Net income (loss)....... 160 26,284 (22,990) (6,206)
Retained earnings at
beginning of period.... -- 297,914 340,665 366,037
Dividends declared on
common stock........... -- (200,000) (19,761) (19,166)
------- --------- ----------- -----------
Retained earnings at end
of period.............. $ 160 $ 124,198 $ 297,914 $ 340,665
======= ========= =========== ===========
See notes to the financial statements.
F-8
HOWMET CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SUCCESSOR COMPANY
CONSOLIDATED PREDECESSOR COMPANY COMBINED
-------------------- ---------------------------------------
YEAR ENDED
PERIOD FROM PERIOD FROM DECEMBER 31,
DECEMBER 14, 1995 JANUARY 1, 1995 ------------------
TO DECEMBER 31, 1995 TO DECEMBER 13, 1995 1994 1993
-------------------- -------------------- -------- --------
OPERATING ACTIVITIES
Net income (loss)..... $ 160 $ 26,284 $(22,990) $ (6,206)
Adjustment to
reconcile net income
(loss) to net cash
(used in) provided
by operating
activities:
Depreciation and
amortization....... 2,965 32,654 33,089 31,004
Gain on sale of
fixed assets....... -- 227 (2,857) (228)
Equity in loss of
unconsolidated
affiliates......... 159 4,315 1,434 672
Goodwill writeoff... -- -- 47,400 --
Changes in assets and
liabilities:
Accounts receivable. (19,793) (11,431) 7,847 (9,144)
Inventory........... 12,382 (1,655) 15,608 40,453
Deferred taxes...... 167 (2,650) 9,770 (27,335)
Accounts payable.... (5,452) (23,111) 9,992 6,191
Accrued liabilities
and other
liabilities........ (2,723) 17,246 (6,714) 62,769
Income taxes
payable............ (594) (18,738) (519) 4,618
Other--net.......... -- 12,098 (668) (7,430)
--------- --------- -------- --------
Net cash (used in)
provided by
operating
activities....... (12,729) 35,239 91,392 95,364
INVESTING ACTIVITIES
Proceeds from
disposal of fixed
assets............... 13 3,217 5,027 1,570
Payments made for
capital
expenditures......... (1,613) (41,203) (37,991) (33,086)
Decrease (increase)
in advances to
Pechiney............. -- 237,368 (34,914) (42,993)
Payments made for
investments and
other assets......... (1,076) (5,790) (454) (173)
Acquisition of
business, net of
cash acquired........ (737,546) -- -- --
--------- --------- -------- --------
Net cash (used in)
provided by
investing
activities....... (740,222) 193,592 (68,332) (74,682)
FINANCING ACTIVITIES
Issuance of short-
term debt............ 50,842 -- -- --
Repayment of short-
term debt............ (40,000) -- -- --
Issuance of long-term
debt................. -- 37,013 305 299
Repayment of long-
term debt............ -- (56,986) (4,021) (20,896)
Increase in notes
payable.............. -- -- 8,229 12,115
Payment of dividends.. -- (200,000) (28,613) (11,528)
Proceeds from the
sale of accounts
receivable to
finance acquisition.. 51,400 -- -- --
Proceeds from the
issuance of debt to
finance acquisition.. 450,200 -- -- --
Proceeds from the
issuance of equity
to finance
acquisition.......... 250,000 -- -- --
--------- --------- -------- --------
Net cash provided
by (used in)
financing
activities....... 762,442 (219,973) (24,100) (20,010)
Effect of exchange rate
changes on cash....... 115 234 (439) (1,989)
--------- --------- -------- --------
Net increase
(decrease) in
cash............. 9,606 9,092 (1,479) (1,317)
Cash and cash
equivalents at
beginning of period... -- 4,962 6,441 7,758
--------- --------- -------- --------
Cash and cash
equivalents at end of
period................ $ 9,606 $ 14,054 $ 4,962 $ 6,441
========= ========= ======== ========
Supplemental
disclosures of cash
flow information:
Cash paid during the
period for:
Income taxes........ $ 876 $ 42,646 $ 34,643 $ 18,441
Interest............ $ 37 $ 5,265 $ 4,425 $ 4,073
See notes to the financial statements.
F-9
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
Successor Company
Blade Acquisition Corp. ("Blade") was formed in October 1995 to acquire
Pechiney Corporation ("Pechiney") from Pechiney International, S.A. ("Pechiney
International") and the Cercast group of companies from Howmet Cercast S.A., a
subsidiary of Pechiney International. The Carlyle Group and certain of its
affiliates ("The Carlyle Group") and Thiokol Holding Company, a wholly-owned
subsidiary of Thiokol Corporation ("Thiokol"), own 51% and 49%, respectively,
of Blade's common stock. The acquisition was effected through a series of
transactions, including the purchase of Pechiney by Howmet Holdings
Acquisition Corp. ("HHAC"), a wholly-owned subsidiary of Blade; the purchase
of the capital stock of certain Cercast companies by Howmet Acquisition Corp.
("HAC"), a wholly-owned subsidiary of HHAC; and the mergers of HHAC with and
into Pechiney and of HAC with and into Howmet Corporation ("Successor Company"
or "Howmet"). After the mergers, Pechiney's name was changed to Howmet
Holdings Corporation ("Holdings"). Howmet is a wholly-owned subsidiary of
Holdings. The acquisition was completed on December 13, 1995 for a total
purchase price, (subject to adjustment as discussed below) including
transaction fees and expenses, of approximately $776.6 million. Financing for
the acquisition included (i) borrowing of $300.0 million under a senior term
loan facility, (ii) the sale of $125.0 million aggregate principal amount of
senior subordinated notes, (iii) $51.4 million of proceeds from a special
purpose receivables facility, (iv) $15.2 million in borrowings under a $125.0
million (excluding standby letters of credit) revolving credit facility, (v)
$10.0 million of borrowings through a Canadian facility, and (vi) a $250.0
million cash equity investment from the proceeds of the issuance of $200.0
million of Blade common stock and $50.0 million of Blade pay-in-kind preferred
stock. The acquisition financing also included a $25.0 million pay-in-kind
junior subordinated purchaser note ("PIK Note") issued to Pechiney
International by HHAC, which amount was contributed to the Company's capital.
The Stock Purchase Agreement ("SPA") provides Blade with indemnities for
certain pre-closing tax, environmental and product liability matters.
An agreement between The Carlyle Group and Thiokol Holding Company provides
that Thiokol Holding Company may purchase all of The Carlyle Group's interest
in Blade, beginning from the third anniversary and ending on the sixth
anniversary of the December 13, 1995 acquisition date. In addition, at any
time after December 13, 2001, each of Thiokol Holding Company and The Carlyle
Group will have the right to compel the participation of the other in sales of
all the outstanding shares of Blade's common stock. Each of Thiokol Holding
Company and The Carlyle Group may, with the consent of the other, initiate a
public offering.
The acquisition was accounted for in accordance with the purchase method of
accounting, and accordingly, the Successor Company Consolidated Financial
Statements reflect the allocation of the purchase price and related
acquisition costs to the assets acquired and liabilities assumed based on
their fair values and the results of operations from the date of acquisition.
The following unaudited condensed financial information gives effect, on a pro
forma basis, to the acquisition as if it had occurred at the beginning of the
years ended December 31, 1995 and 1994, respectively. The pro forma
information does not necessarily represent what the actual consolidated
results would have been for these periods and is not intended to be indicative
of future results.
PRO FORMA
(UNAUDITED)
YEAR ENDED
DECEMBER 31,
------------------
1995 1994
-------- --------
Net sales............. $945,498 $858,251
Net loss.............. (19,150) (58,560)
The pro forma net loss in 1994 includes a $47,400 write off of goodwill as
discussed in Note 6.
F-10
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The allocation of the total purchase price to the assets and liabilities
acquired is as follows:
Total current assets, less $87.7 million of accounts receivable sold
under the Receivables Facility offset by a $36.3 million retained
interest in pooled accounts receivable.............................. $ 341.4
Property, plant and equipment........................................ 301.0
Investments and other assets, including $19.9 million of deferred
financing costs..................................................... 49.8
Acquisition intangibles.............................................. 142.4
Goodwill............................................................. 311.4
Current liabilities assumed.......................................... (228.3)
Other liabilities assumed............................................ (141.1)
-------
Total purchase price................................................. $ 776.6
=======
The SPA provides for an adjustment to the purchase price based on the change
in net working capital from June 30, 1995 to December 13, 1995. On June 24,
1996, this adjustment was agreed upon in the amount of $3,634, including
interest payable to Howmet. The effect on the annual goodwill amortization is
a reduction of approximately $90.
Predecessor Company
The combined financial statements have been prepared to present the combined
operations of Howmet Corporation and Howmet Cercast Group ("Cercast")
(collectively, the "Predecessor Company"), affiliated entities with common
ownership and management, on a historical cost basis prior to their
acquisition by Blade. All transactions between Howmet Corporation and Cercast
have been eliminated.
Howmet Corporation is a vertically-integrated manufacturer of investment
cast and machined component parts for sale to the gas turbine engine industry.
Cercast is a manufacturer of aluminum investment castings for the aerospace
and electronic packaging industries.
The stockholders' equity of the Predecessor Company at December 31, 1994 was
comprised as follows:
HOWMET
CORPORATION CERCAST TOTAL
----------- -------- --------
Capital.................................... $ 35,570 $ 50,040 $ 85,610
Retained earnings (accumulated deficit).... 342,263 (44,349) 297,914
Cumulative translation adjustment.......... 323 988 1,311
-------- -------- --------
Stockholders' equity................... $378,156 $ 6,679 $384,835
======== ======== ========
The Predecessor Company had significant transactions with Pechiney and
Pechiney S.A., a French Corporation and majority owner of Pechiney
International.
F-11
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References to the "Company" relate to both the Predecessor Company and the
Successor Company.
The accompanying financial statements include all majority-owned subsidiary
companies and reflect the use of the equity method of accounting for entities
that are 50% owned. Equity in income or in loss of such 50% owned entities is
included in Other, net in the Statements of Operations and Retained Earnings.
All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue from the sale of its products upon shipment.
Provision for estimated losses on contracts are recorded when identified.
Financial Instruments
Financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables. The Company does not require
collateral and maintains reserves for potential credit losses for trade
accounts receivable. The Company's accounts receivable are principally due
from companies in the gas turbine engine industry.
Inventories
Inventories are stated at cost, which is less than replacement value. The
Company values a substantial portion of its inventories on the last-in, first-
out ("LIFO") method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is computed
principally on the straight-line method over the estimated useful lives of the
respective assets, ranging from 4 to 8 years for machinery and equipment and
from 19 to 30 years for buildings.
Other Intangible Assets
Other intangible assets consist of the fair value, on the date of
acquisition, of patents, technology and a noncompete agreement and are being
amortized on a straight-line basis over 10 to 15 years.
Goodwill
Goodwill is the excess of the purchase price over the fair value of tangible
and identifiable intangible net assets acquired and is amortized on a
straight-line basis over 40 years. Periodically the Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected future discounted cash flows and earnings. The amount of
goodwill impairment considered to be permanent is measured based upon these
projected future results at appropriate discount rates.
Translation of Foreign Currencies
All assets and liabilities of the Company's subsidiaries outside of the
U.S., except for Canada, are translated into U.S. dollars at year end exchange
rates. Revenues and expenses are translated into U.S. dollars at average rates
of exchange prevailing during the period. Unrealized currency translation
adjustments are deferred in the balance sheet, whereas transaction gains and
losses are recognized currently in the statement of operations and retained
earnings. The Canadian operation's functional currency is the U.S. dollar.
Therefore, Canadian monetary
F-12
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
assets and liabilities are translated at period end exchange rates and
inventories and other nonmonetary assets and liabilities are translated at
historical rates. Adjustments resulting from translation of Canadian monetary
assets and liabilities at year end exchange rates are included in the
statements of operations and retained earnings.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
investment instruments with a maturity of three months or less when acquired
to be cash equivalents.
Income Taxes
Income taxes are provided on all revenue and expense items included in the
statements of operations and retained earnings, regardless of the period in
which such items are recognized for income tax purposes, except for items
representing permanent differences between pretax accounting income and
taxable income. Deferred income taxes result from the future tax consequences
associated with temporary differences between the carrying amounts of assets
and liabilities for tax and financial reporting purposes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities, including
allowances for doubtful accounts and reserves for contract losses and other
accruals, at the date of the financial statements and the reported amounts of
revenues and expenses during the respective period. Actual results could
differ from those estimates.
3. ACCOUNTING CHANGES
Effective January 1, 1993, the Predecessor Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which requires that the estimated
future cost of providing postretirement benefits such as health care be
recognized as an expense when employees render services instead of when the
benefits are paid. The cumulative effect of this change in accounting for
postretirement benefits other than pensions was a charge of $49.3 million (net
of tax benefits of $31.5 million) for the year ended December 31, 1993.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," which is required to be adopted by the Company in 1996.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of the asset. Long-lived
assets and certain identifiable intangibles to be disposed of are to be
reported at the lower of carrying amount or fair value less cost to sell.
Adoption of SFAS No. 121 is not anticipated to have a material adverse impact
on the results of operations or financial position of the Successor Company.
F-13
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. INVENTORIES
Inventories are summarized as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Raw material and supplies....................... $ 63,281 $64,775
Work in progress and finished goods............. 87,078 93,470
-------- -------
FIFO inventory.................................. 150,359 158,245
LIFO valuation adjustment....................... (71) (86,934)
-------- -------
$150,288 $71,311
======== =======
Inventories include approximately $39,728 and $22,889 that are valued using
average cost at December 31, 1995 and 1994, respectively.
During 1994 and 1993, inventory was reduced which resulted in liquidation of
LIFO inventory carried at lower costs prevailing in prior years as compared
with costs of current purchases, the effect of which decreased cost of sales
by approximately $8,986 and $9,314 in 1994 and 1993, respectively and
increased net income by approximately $5,481 in 1994 and $6,054 in 1993.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Land............................................ $ 14,502 $ 6,456
Buildings....................................... 67,603 91,874
Machinery and equipment......................... 221,305 383,104
-------- --------
303,410 481,434
Accumulated depreciation........................ (1,847) (291,139)
-------- --------
$301,563 $190,295
======== ========
Depreciation expense amounted to $1,847, $31,922, $31,022 and $28,940 for
the period from December 14, 1995 to December 31, 1995, the period from
January 1, 1995 to December 13, 1995 and the years ended December 31, 1994 and
1993, respectively.
6. GOODWILL
Goodwill balances are summarized as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Goodwill........................................ $311,446 $35,688
Accumulated amortization........................ (354) (13,183)
-------- -------
$311,092 $22,505
======== =======
F-14
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The goodwill at December 31, 1995 relates to the acquisition by Blade (see
Note 1).
As a result of the acquisition of Cercast in 1989, goodwill of approximately
$67,000 was recorded with annual amortization expense since that time
approximating $1,673. During 1994, the Predecessor Company recorded goodwill
write-offs totaling $47.4 million, the principal component of which, $42.4
million, related to Cercast. Cercast is a producer of aluminum investment
castings for the defense electronics and commercial aerospace industries which
are primarily North American and European based. Management estimated that the
market for aluminum investment castings in North America had declined
significantly due to downsizing in the defense industry sector and a then
existing downturn in commercial aerospace orders. As a result, the industry
had shifted from a seller's market to a buyer's market with pricing under
severe pressure. Similarly, the European market for aluminum casting had
experienced a decline due to weakness in both sectors of the aerospace
industry. These conditions resulted in Cercast achieving lower than expected
sales and related profitability. The Predecessor Company determined that the
defense industry sector decline was permanent in nature and that based on its
estimate of expected future operating results, the entire remaining goodwill
balance would not be recoverable. The methodology used by management to
evaluate the recoverability of goodwill was to discount 10 years of projected
cash flows at 12% (the Predecessor Company's estimated long term cost of
capital) together with an associated discounted earnings valuation for the
remaining amortization period. The amount of impairment was measured on this
basis as well. The forward projections made by management were based on
approved budgets and related information and represented management's belief
of the most likely future scenario.
Also during 1994, $5,000 of goodwill pertaining to the acquisition of Howmet
Corporation's wholly-owned tooling subsidiary, Tempcraft, was written off. The
evaluation and measurement criteria used in making this determination were
similar to that described above for Cercast.
7. ACQUISITION INTANGIBLES AND OTHER ASSETS, NET
Acquisition intangibles and other assets, net include the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Patents and technology.......................... $ 67,400 $ --
Non-compete agreement........................... 75,000 --
Deferred financing costs........................ 19,909 --
Accumulated amortization........................ (579) --
Acquisition intangibles......................... 161,730 --
Other assets, net............................... 30,520 20,542
-------- ------
$192,250 20,542
======== ======
Patents and technology and the non-compete agreement are being amortized
over their estimated useful lives of 10 years and 15 years, respectively. The
deferred financing costs are being amortized over the life of the financings.
F-15
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. FINANCING ARRANGEMENTS
Long-term debt is summarized as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Senior term facility, aggregate principal amount of
$300.0 million comprised of:
Tranche A term loan due in 2000, at base rate +
1.5% or Euro$ rate + 2.5%, payments due quarterly
beginning February 1996, maturing November 2000.. $145,000 $ --
Tranche B term loan due in 2002, at base rate +
2.0% or Euro$ rate + 3.0%, payments due quarterly
in arrears, maturing November 2002............... 100,000 --
Tranche C term loan due in 2003, at base rate +
2.25% or Euro$ rate + 3.25%, payments due
quarterly in arrears, maturing May 2003.......... 55,000 --
Senior revolving credit facility at base rate + 1.5%
or Euro$ rate + 2.5%............................... 26,000 --
Senior subordinated notes due in 2003 at 10%........ 125,000 --
Revolving bank lines of credit payable in 1995 and
1996 at variable rates based on LIBOR + 3/16% to
3/8%............................................... -- 22,500
Revolving bank line of credit denominated in French
Francs, payable in 1995 at variable rates based on
LIBOR + 3/16% to 3/8%.............................. -- 10,662
Industrial Revenue Bond due 1995 at a rate of 8.0%.. -- 5,000
Bank loans denominated in French Francs, due in
varying annual amounts from 1995 to 2004 at rates
ranging from 5.0% to 13.5%......................... -- 2,928
Mortgage notes payable monthly to November 1998 at a
rate of 6.0%....................................... -- 579
Government loan due in 1997 at 7.5%................. -- 394
Other............................................... 12,489 --
-------- -------
463,489 42,063
Less current portion................................ 45,303 26,541
-------- -------
$418,186 $15,522
======== =======
Principal maturities for the succeeding five years ending December 31 and
thereafter are as follows:
1996............................ $ 45,303
1997............................ 29,304
1998............................ 35,055
1999............................ 40,055
2000............................ 40,305
Thereafter...................... 273,467
--------
$463,489
========
The senior revolving credit facility provides for $125.0 million of
revolving credit, subject to certain limitations as defined in the agreement
for borrowings in excess of $100.0 million, and matures on November 20, 2000.
The senior term facility and the senior revolving credit facility
(collectively, the "Senior Credit Facilities") are guaranteed by Blade, are
secured by a security interest in all stock and promissory notes owned
F-16
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
by Blade (with certain exceptions) and in all or substantially all other
tangible and intangible assets (other than receivables sold pursuant to the
receivables facility) owned by the Successor Company. The Senior Credit
Facilities contain certain affirmative and negative covenants, including
without limitation covenants that restrict, subject to specified exceptions,
(i) the incurrence of additional indebtedness and other obligations and the
granting of additional liens, (ii) mergers, acquisitions, investments, and
acquisitions and dispositions of assets, (iii) the incurrence of capitalized
lease obligations, (iv) dividends, (v) prepayment or repurchase of other
indebtedness and amendments to certain agreements governing indebtedness,
including the Indenture and the Notes, as defined below, (vi) engaging in
transactions with affiliates, (vii) capital expenditures, (viii) the use of
proceeds, and (ix) changes of lines of business. There are also covenants
relating to compliance with ERISA and environmental and other laws, payments
of taxes, maintenance of corporate existence and rights, maintenance of
insurance and interest rate protection, and financial reporting. The Senior
Credit Facilities also contain events of default including, without
limitation, cross defaults and other defaults in connection with the
receivables facility and a change of control of Blade, Holdings or the
Successor Company (with the exception of certain changes in control between
Thiokol Holding Company and The Carlyle Group). As the Senior Credit
Facilities are comprised of loans with variable interest rates, the carrying
value approximates fair value at December 31, 1995.
As of December 31, 1995, $81,275 was available under the senior revolving
credit facility which requires an availability fee on the unused portion of
.50%. The senior term facility requires mandatory prepayments if certain
events occur.
The senior subordinated notes ("Notes") are unsecured obligations of the
Successor Company and may be redeemed at the option of the Successor Company
in whole or in part, on or after December 1, 1999 at a redemption price of
105%, declining to 100% on December 1, 2002. The Successor Company may also
redeem up to $45,000 aggregate principal amount of the Notes with the net
proceeds of one or more public equity offerings, at anytime prior to December
1, 1998. The Notes limit the Company's ability to incur additional
indebtedness, sell assets and enter into mergers and certain other
transactions. The Notes also give the holders the right to require the
Successor Company to repurchase their Notes at 101% in the event there is a
change in control. In addition, the Notes may be redeemed after December 1,
1997 in the event Thiokol Holding Company acquires the entire equity interest
of Blade.
As required by the senior term facility, during February 1996, the Successor
Company entered into two interest rate swap agreements with notional principal
amounts of $100,000 each. These agreements have fixed the base rate on
$200,000 of the $300,000 senior term loans at approximately 5% through
February 1998. As of March 31, 1996, the fair value of these swap agreements
is approximately $3,000 as a result of interest rate increases. The
counterparties to these transactions are major financial institutions. The
Successor Company does not anticipate nonperformance by the counterparties.
Certain obligations of the Predecessor Company, primarily the revolving bank
lines of credit and the Industrial Revenue Bond, were guaranteed by Pechiney.
The counterparties to these transactions are major financial institutions.
In December 1995, the Successor Company entered into an agreement to sell,
on a revolving basis, an undivided interest in a defined pool of accounts
receivable. At December 31, 1995 the defined pool of outstanding accounts
receivable amounted to $98,090. During the period from December 14, 1995 to
December 31, 1995, the Successor Company had net cash receipts of $55,400 from
the sale of such eligible receivables toa master trust. The remaining $42,690
represents retainage on the sale in the event the receivables are notfully
collected. If the amount of uncollected receivables is more or less than the
December 31, 1995 allowance for such uncollectibility, the Successor Company
will incur a loss or gain. The sales are reflected as a reduction of accounts
receivable in the accompanying consolidated balance sheet and as operating
cash flows subsequent to the sale of $51,400 of accounts receivable to finance
the acquisition. The loss on the sale amounted
F-17
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
to $657 for the period from December 14, 1995 to December 31, 1995 and is
included in Other, net in the accompanying consolidated statements of
operations and retained earnings.
At December 31, 1995 letters of credit amounting to $17,725 were
outstanding.
9. COMMITMENTS
The Successor Company and its subsidiaries have noncancellable leases
relating principally to manufacturing and office facilities and certain
equipment. Future minimum payments under noncancellable leases as of December
31, 1995 are as follows:
1996............................. $ 5,754
1997............................. 3,687
1998............................. 2,250
1999............................. 1,430
2000............................. 1,278
Thereafter....................... 4,040
-------
$18,439
=======
Total rental expense for all operating leases was $364 and $6,668 for the
period from December 14, 1995 to December 31, 1995 and the period from January
1, 1995 to December 13, 1995, respectively, and $6,110 and $5,797 for the
years ended December 31, 1994 and 1993, respectively.
10. INCOME TAXES
On December 13, 1995, the Successor Company and its subsidiaries
("Subsidiary") and Blade entered into a tax sharing agreement (the "Tax
Sharing Agreement"). The Tax Sharing Agreement provides that in any year in
which a Subsidiary is included in any consolidated tax return of Blade, and
the Subsidiary has taxable income, the Subsidiary will pay to Blade the amount
of the tax liability the Subsidiary would have had if it filed a separate tax
return (the "Separate Income Tax Liability"). In the event that the amount of
Separate Income Tax Liability for a Subsidiary in any taxable year in which it
is filing a consolidated return with Blade exceeds the amount equal to the
product of (a) the income tax liability of the group of corporations filing on
a consolidated basis for the taxable year (the "Blade Group Tax Liability")
and (b) a fraction, the numerator of which is equal to the Subsidiary's
Separate Income Tax Liability and the denominator of which is equal to the
aggregate total of the Separate Income Tax Liability of all Subsidiaries which
are included in Blade's consolidated tax return, then the Subsidiary will not
be obligated to pay Blade the amount of such excess. In the event that the
Blade Group Tax Liability exceeds the sum of all Subsidiaries' Separate Income
Tax Liability for such year, Blade may collect from the Subsidiaries the
amount of such excess, provided, however, that no Subsidiary shall be required
to pay Blade an amount that exceeds the excess of (i) the sum of such
Subsidiary's Separate Income Tax Liability for the period beginning when such
Subsidiary was included in Blade's Consolidated Return and ending in the tax
years at issue over (ii) the sum of amounts paid by such Subsidiary pursuant
to this sentence. Adjustments to income arising from events occurring
subsequent to the filing of the consolidated return attributable to matters
such as amended returns, carrybacks, audit adjustments and refund claims will
be given effect between Blade and the Subsidiaries as soon as practicable
after determination of such adjustments. The Tax Sharing Agreement provides
for a similar allocation between Blade and the Subsidiaries in the event that
any state and local income taxes of Blade and the Subsidiaries are determined
on a combined, consolidated or unitary basis.
Prior to the acquisition, the Predecessor Company and Pechiney were parties
to a tax-sharing agreement requiring the Predecessor Company to pay to
Pechiney an amount equal to U.S. income taxes that would be payable if the
Predecessor Company was a stand alone taxpayer. The Predecessor Company is
included in a U.S. consolidated tax return with Pechiney and other related
entities. Accordingly, the tax strategies reflected in Pechiney's U.S.
consolidated tax return are not necessarily consistent with the basis of
preparation for the Predecessor Company's tax provision in the accompanying
financial statements.
F-18
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Income taxes were provided in the following amounts:
PREDECESSOR COMPANY COMBINED
SUCCESSOR COMPANY ------------------------------------
CONSOLIDATED YEAR ENDED
PERIOD FROM PERIOD FROM DECEMBER 31,
DECEMBER 14, 1995 JANUARY 1, 1995 ---------------
TO DECEMBER 31, 1995 TO DECEMBER 13, 1995 1994 1993
-------------------- -------------------- ------- -------
Current income taxes:
U.S. Federal.......... $166 $22,900 $24,352 $18,010
State................. 43 3,976 3,474 5,053
Foreign............... 313 2,809 4,039 4,220
---- ------- ------- -------
522 29,685 31,865 27,283
Deferred income taxes... (41) (6,023) 14,119 539
---- ------- ------- -------
$481 $23,662 $45,984 $27,822
==== ======= ======= =======
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal tax rate (35%) to pretax
income as follows:
PREDECESSOR COMPANY COMBINED
SUCCESSOR COMPANY ------------------------------------
CONSOLIDATED YEAR ENDED
PERIOD FROM PERIOD FROM DECEMBER 31,
DECEMBER 14, 1995 JANUARY 1, 1995 ---------------
TO DECEMBER 31, 1995 TO DECEMBER 13, 1995 1994 1993
-------------------- -------------------- ------- -------
U.S. Federal income tax
at statutory rate...... $224 $17,481 $ 8,048 $24,804
State income taxes, net
of federal benefit..... 52 2,009 3,001 3,281
Net foreign taxes in
excess of statutory
rate................... 88 2,483 16,166 2,202
Goodwill................ 237 598 4,669 259
Additional tax reserves. -- -- 6,092 --
Deferred tax
adjustments............ -- 983 6,712 --
FSC benefit............. -- (391) -- --
Adjustment to prior
years' provision....... -- 1,144 -- --
Other capital
transactions........... -- (553) -- --
Other................... (120) (92) 1,296 (2,724)
---- ------- ------- -------
$481 $23,662 $45,984 $27,822
==== ======= ======= =======
In 1994 a provision for potential tax exposures was provided due to
developments related to examinations by federal and state taxing authorities
of the Predecessor Company's prior years' income tax returns.
Deferred tax adjustments in 1994 represent a change in the Predecessor
Company's overall estimated state income tax rate and other adjustments
relating to permanent differences.
F-19
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Domestic and foreign components of pre-tax income are as follows:
SUCCESSOR
COMPANY PREDECESSOR COMPANY COMBINED
CONSOLIDATED ------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 14, JANUARY 1, YEAR ENDED
1995 TO 1995 TO DECEMBER 31,
DECEMBER 31, DECEMBER 13, -----------------
1995 1995 1994 1993
------------ ------------ -------- -------
United States................. $(1,879) $37,877 $ 57,629 $70,578
Foreign....................... 2,520 12,069 (34,635) 291
------- ------- -------- -------
$ 641 $49,946 $ 22,994 $70,869
======= ======= ======== =======
The components of the deferred income tax asset (liability) are as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Other post retirement benefits reserve.......... $ 35,504 $33,643
Restructuring accrual........................... 9,263 6,769
Other liability reserves........................ 11,058 4,479
Pension liability............................... 3,470 --
Loss carryforward............................... 17,652 10,090
State taxes..................................... 1,558 1,107
Inventory....................................... -- 1,164
Other assets.................................... 10,948 10,906
--------- -------
Gross deferred tax asset.................... 89,453 68,158
Valuation allowance............................. (8,105) (2,957)
--------- -------
Total deferred tax asset.................... 81,348 65,201
Inventory....................................... (34,375) --
Property, plant and equipment................... (74,713) (7,039)
Other liabilities............................... (7,305) (393)
--------- -------
Total deferred tax liability................ (116,393) (7,432)
--------- -------
Net deferred tax asset/liability............ $ (35,045) $57,769
========= =======
Management believes that it is more likely than not that the net deferred
tax asset at December 31, 1994 will be realized.
During 1994 and 1993, the Predecessor Company's deferred tax valuation
allowance increased by $1,542 and $1,415, respectively. During the period from
December 14, 1995 to December 31, 1995 and the period from January 1, 1995 to
December 13, 1995 the Successor Company's and the Predecessor Company's
deferred tax valuation allowances increased by $100 and $4,148, respectively.
At December 31, 1995 the Successor Company has available approximately $23,000
of foreign net operating loss carryforwards which can only be used to offset
foreign taxable income. A majority of the carryforwards expire over the next
five years. At December 31, 1995 the Successor Company had a valuation
allowance equal to the deferred tax asset associated with these foreign net
operating loss carryforwards.
The Predecessor Company adopted SFAS No. 109 "Accounting for Income Taxes"
as of January 1, 1993. The effect of adoption was not material.
F-20
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. PENSIONS
The Predecessor Company had trusteed noncontributory defined benefit
retirement plans covering substantially all of its employees in the U.S. and
Canada. All plans, except the Howmet Combined Pension Plan, became plans of
the Successor Company as part of the acquisition (see Note 1). In accordance
with the SPA, an affiliate of Pechiney International assumed sponsorship of
the Howmet Combined Pension Plan and transferred assets related to the active
nonunion hourly employees to the Successor Company's new defined benefit plan,
which has substantially the same provisions and benefits as the Howmet
Combined Pension Plan with respect to those employees. That Pechiney
International affiliate has no liability to pay benefits to the active hourly
group. In addition, in accordance with the SPA, the Howmet Combined Pension
Plan benefits related to salaried employees were frozen as of January 6, 1996.
The liabilities with respect to the salaried group for service prior to the
acquisition and related assets continue to be administered by that Pechiney
International affiliate. The Successor Company intends to install a
replacement defined benefit retirement plan for its salaried employees. This
plan will mirror the previous plan and as such will continue from the date the
former plan was frozen. The Successor Company intends to make and the
Predecessor Company made annual contributions to the retirement plans in
amounts up to the maximum allowable for tax purposes.
The following items are the components of the net periodic pension cost for
the U.S. and Canadian plans:
SUCCESSOR
COMPANY PREDECESSOR COMPANY COMBINED
CONSOLIDATED -------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 14, JANUARY 1, YEAR ENDED
1995 TO 1995 TO DECEMBER 31,
DECEMBER 31, DECEMBER 13, ------------------
1995 1995 1994 1993
------------ ------------ -------- --------
Service cost--benefits earned
during the period............... $ 397 $ 7,779 $ 7,889 $ 8,820
Interest cost on the projected
benefit obligation.............. 474 8,003 13,786 13,772
Actual return on plan assets..... (437) (12,780) 548 (25,296)
Net amortization of unrecognized
net assets and prior service
cost............................ -- -- 177 887
Deferral of actual vs. expected
return on plan assets........... -- 4,703 (18,091) 8,348
----- -------- -------- --------
Net periodic pension cost........ $ 434 $ 7,705 $ 4,309 $ 6,531
===== ======== ======== ========
The following table sets forth the U.S. and Canadian plans' funded status
and amounts recognized in the balance sheets:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Actuarial present value of benefit obligations:
Vested benefit obligation.................... $(80,216) $(141,765)
Nonvested benefit obligation................. (6,219) (6,871)
-------- ---------
Accumulated benefit obligation............... (86,435) (148,636)
Additional benefits based on estimated future
salaries.................................... (41,820) (36,689)
-------- ---------
Projected benefit obligation................. (128,255) (185,325)
Fair value of plan assets.................... 107,256 181,546
-------- ---------
Projected benefit obligation in excess of
plan assets................................. (20,999) (3,779)
Unrecognized net (gain) or loss.............. 5,651 (22,608)
Unrecognized prior service cost.............. -- 32,114
Unrecognized net asset from adoption of SFAS
#87......................................... -- (20,167)
-------- ---------
Accrued pension liability.................... $(15,348) $ (14,440)
======== =========
F-21
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The discount rate used to determine the actuarial present value of the
projected benefit obligation was 7.5% at December 31, 1995 and 8.0% at
December 31, 1994. The expected rate of return was 9.5% for U.S. plan assets
and 8% for Canadian plan assets at December 31, 1995 and 1994. The expected
increase in future salaries for those plans using future compensation
assumptions was 5.0% at December 31, 1995 and 5.5% at December 31, 1994 for
the U.S. plans and 6% for the Canadian plans in 1995 and 1994. The
unrecognized net asset and the unrecognized prior service cost are being
amortized based on the projected future service lives of employees, which
range from 15-25 years. Plan assets are primarily invested in equity
securities, debt securities, guaranteed insurance contracts, real estate and
temporary cash investments. The accrued pension liability is included within
"Accrued Liabilities" in the balance sheets.
The Company has unfunded supplemental retirement plans for certain employees
whose benefits under the salaried retirement plans are reduced because of
compensation deferral elections or limitations under federal tax laws. Pension
expense for these plans was $14, $333, $268 and $105 for the period from
December 14, 1995 to December 31, 1995, the period from January 1, 1995 to
December 13, 1995 and the years ended December 31, 1994 and 1993,
respectively. The projected benefit obligation for these plans was $1,700 and
$339 at December 31, 1995 and 1994, respectively. The corresponding
accumulated benefit obligation of $335 and $297 at December 31, 1995 and 1994,
respectively, has been recognized as a liability in the balance sheets and is
equal to the amount of vested benefits.
The net pension expense for the Company's United Kingdom operations was $25,
$654, $700 and $447 for the period from December 14, 1995 to December 31,
1995, the period from January 1, 1995 to December 13, 1995 and the years ended
December 31, 1994 and 1993, respectively.
12. POSTRETIREMENT BENEFITS
The Company provides postretirement health care and life insurance benefits
to its eligible active and retired employees, including certain union, non-
union and salaried employees. Effective January 1, 1993, the Predecessor
Company adopted SFAS No. 106 "Employer's Accounting for Postretirement
Benefits Other Than Pensions," and began recording its obligation for its
unfunded postretirement health care and life insurance programs, which
effectively records the cost of postretirement benefits over the service lives
of employees. Previously, the Predecessor Company's practice was to record
such amounts on a pay-as-you-go basis.
Components of the net periodic postretirement benefit cost were as follows:
SUCCESSOR PREDECESSOR COMPANY
COMPANY COMBINED
CONSOLIDATED --------------------------
PERIOD FROM PERIOD FROM
DECEMBER 14, JANUARY 1, YEAR ENDED
1995 TO 1995 TO DECEMBER 31,
DECEMBER 31, DECEMBER 13, -------------
1995 1995 1994 1993
------------ ------------ ------ ------
Service cost--benefits attributable to
service during the period.............. $135 $2,454 $2,397 $2,219
Interest cost on accumulated
postretirement benefit obligation...... 345 6,281 6,442 6,237
---- ------ ------ ------
Net periodic postretirement benefit
cost............................... $480 $8,735 $8,839 $8,456
==== ====== ====== ======
F-22
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The amounts recognized as a liability in the Company's balance sheets are as
follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Retirees........................................ $55,961 $54,124
Fully eligible active plan participants......... 12,774 10,810
Other plan participants......................... 29,580 21,332
Unrealized net loss............................. (9,705) --
------- -------
Total....................................... 88,610 86,266
Less current portion............................ 6,351 6,500
------- -------
$82,259 $79,766
======= =======
The accumulated postretirement benefit obligation was determined using 7%
and 8% weighted average discount rates for 1995 and 1994, respectively. The
health care cost trend rate assumption for pre-age 65 benefits was 12% and 13%
for 1995 and 1994, respectively, and was assumed to decline 1% annually to 6%
in the year 2001 and remain constant thereafter. The health care cost trend
rate for post-age 65 benefits was 9.8% and 10.6% for 1995 and 1994,
respectively, and was assumed to decline gradually to 5% in the year 2001 and
remain constant thereafter. A 1% increase in the health care cost trend rate
would have increased the accumulated postretirement benefit obligation by
$5,971 and $5,008 at December 31, 1995 and 1994, respectively, and the net
periodic cost by $668 and $621 for the years ended December 31, 1995 and 1994,
respectively.
13. SEGMENT RELATED INFORMATION
The Company operates predominantly in a single industry as a manufacturer of
investment cast components for the aerospace and industrial gas turbine
industries. The Company is a multinational entity with operating subsidiaries
in two geographic regions, North America (including the United States and
Canada) and Europe (including France and the United Kingdom). Intercompany
transfers between geographic areas are not significant. In computing earnings
from operations for subsidiaries outside of the United States, no allocations
of general corporate expenses have been made.
F-23
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Identifiable assets of subsidiaries outside of the United States are those
assets related to the operations of those subsidiaries. United States assets
consist of all other assets of the Company.
NORTH
AMERICA EUROPE TOTAL
-------- -------- ----------
Successor Company Consolidated:
Period from December 14, 1995 to December 31,
1995
Sales to unaffiliated customers.............. $ 34,894 $ 16,472 $ 51,366
Earnings from operations..................... 2,118 2,431 4,549
Identifiable assets.......................... 898,384 201,119 1,099,503
Predecessor Company Combined:
Period from January 1, 1995 to December 13,
1995
Sales to unaffiliated customers.............. 703,657 190,475 894,132
Earnings from operations..................... 31,831 19,850 51,681
1994
Sales to unaffiliated customers.............. 678,481 179,770 858,251
Earnings (loss) from operations.............. 30,135 (12,254) 17,881
Identifiable assets.......................... 609,050 139,386 748,436
1993
Sales to unaffiliated customers.............. 655,221 177,447 832,668
Earnings from operations..................... 68,336 2,182 70,518
Identifiable assets.......................... 630,593 152,637 783,230
Sales to unaffiliated customers include export sales of $19,308, $278,108,
$176,859, and $180,449 for the period from December 14, 1995 to December 31,
1995, for the period from January 1, 1995 to December 13, 1995, and for the
years ended December 31, 1994 and 1993, respectively.
The Company's sales to its two largest customers were $10,501 and $7,881 for
the period from December 14, 1995 to December 31, 1995, $183,955 and $138,063
for the period from January 1, 1995 to December 13, 1995, $229,175 and
$123,671 for the year ended December 31, 1994 and $206,533 and $136,441 for
the year ended December 31, 1993. Receivables from these customers were
$17,135 and $12,180 at December 31, 1995 and $20,128 and $10,084 at December
31, 1994.
An analysis of the changes in the cumulative translation adjustment is as
follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Balance at beginning of period................. $ -- $(4,046)
Aggregate translation adjustments, net of
income taxes.................................. 1,123 5,357
------ -------
Balance at December 31......................... $1,123 $ 1,311
====== =======
In 1993, the Company sold its 51% interest in an operating facility in Spain
and recorded a $945 loss.
14. TRANSACTIONS WITH AFFILIATES
The Predecessor Company had financing and other transactions with Pechiney.
Interest income earned from advances to Pechiney was based on short-term
borrowing rates obtained by Pechiney. The average advance balance
F-24
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
was $148,653 and $217,919 for the period from January 1, 1995 to December 13,
1995 and the year ended December 31, 1994, respectively. The carrying amount
at December 31, 1994 approximated fair value as the interest rate was
determined by Pechiney's short-term borrowing rates obtained by Pechiney and
its affiliates.
The Successor Company has management agreements with an affiliate of The
Carlyle Group and with Thiokol Holding Company for certain management and
financial advisory services. Each agreement provides for the payment of an
annual management fee of $1,000. In addition, The Carlyle Group and Thiokol
Holding Company each received a fee of $2,000 for services provided in
connection with the acquisition of the Predecessor Company.
In November 1995, certain executives of the Predecessor Company were offered
the opportunity to defer all or a portion of a bonus to be earned in
connection with the expected sale of the Predecessor Company in December 1995.
As a result, deferred amounts totaling $2.45 million were invested in a trust,
which in turn made investments in The Carlyle Group partnership controlling
Blade. The partnership interests are subordinated to the claims of creditors
of the Successor Company. It is expected that the partnership interests will
receive a cash distribution upon a sale of The Carlyle Group's interest in
Blade and the executives will receive appropriate shares of such distribution,
pro rata to their capital contributions in the partnership.
In early 1996, Blade introduced a Stock Appreciation Rights ("SARs") plan.
Under the plan, SARs representing approximately 5% of Blade's equity value
were issued to certain executive officers of the Successor Company. The SARs
are similar to phantom stock options and are valued based on appreciation on
the value of Blade's common stock, as defined, from the date of adoption of
the plan to the earlier of a sale of The Carlyle Group's controlling interest
in Blade or five years. The SARs vest over a five-year period based upon the
passage of time, the operating performance of the Successor Company and the
tenure of the executive officers, with acceleration in the event of sale of
The Carlyle Group's controlling interest in Blade.
In early 1996, 230,000 stock options for Thiokol common stock were granted
to certain executives of the Successor Company. The options are contingent on
Thiokol's purchase of The Carlyle Group's total interest in Blade and 50% of
such options would vest and become exercisable on the date of such purchase.
Of the remaining 50% of the options, 25% will vest and become exercisable on
each of the subsequent two anniversaries following the first vesting date. If
Thiokol does not obtain 100% of the equity ownership of the Successor Company
prior to December 13, 2001, the options become void. The options expire not
later than ten years after the date of grant. The exercise price of the
options is the price of Thiokol common stock on the first trading date after
the dates of grant (range of $35-41).
15. FINANCIAL INSTRUMENTS
The Predecessor Company entered into forward exchange contracts as a hedge
against currency fluctuations of certain foreign currency transactions. At
December 31, 1994, the Predecessor Company had contracts with maturity dates
from January 1995 through August 1995 to purchase 5,018 Canadian Dollars for
$3,605. The fair value of these foreign currency contracts at December 31,
1994 was approximately $3,576. The fair value of foreign currency contracts
was estimated by obtaining quotes from brokers. The market value gains or
losses arising from foreign exchange contracts offset foreign exchange gains
or losses on the underlying hedged assets. The Predecessor Company's exposure
to currency risk was limited to currency rate movement and was considered to
be negligible.
During 1994, the Predecessor Company also entered into an option contract to
purchase up to $1,300 of Canadian dollars as a hedge against currency
fluctuations of certain foreign currency transactions. These options are
exercisable from June 1995 through December 1996. The fair value of these
foreign currency option contracts at December 31, 1995 is not significantly
different as compared to the original contract value. The fair value was
F-25
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
estimated by obtaining quotes from brokers. The market value gains or losses
arising from currency exchange options offset foreign exchange gains or losses
on the underlying hedged assets. The Successor Company's exposure to currency
risk in these options is limited to currency rate movements and is considered
to be negligible.
The counterparties to these transactions are major financial institutions.
16. CONTINGENCIES
The Company and its subsidiaries are involved in litigation, administrative
proceedings and investigations of various types in several jurisdictions.
Additionally, liabilities arising for cleanup costs associated with hazardous
types of materials in several waste disposal facilities exist. In particular,
the Company has been or may be named a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act or
similar state laws at nineteen on-site and off-site locations. Estimated
environmental costs are not expected to materially impact the financial
position or the results of the Successor Company's operations in future
periods. However, environmental clean-up periods are protracted in length and
environmental costs in future periods are subject to changes in environmental
remediation regulations. Accordingly, should any losses not indemnified be
sustained in excess of provided reserves, they will be charged to income in
the future. Under the terms of the SPA, Pechiney International has agreed to
indemnify the Successor Company for environmental liabilities existing at the
closing date that exceed reserves recorded at June 30, 1995 of $6,000.
At December 31, 1995, the Successor Company guaranteed certain indebtedness
aggregating $11,400 of its 50% owned entities.
17. RESTRUCTURING
The following is a summary of the Company's restructuring activities:
In late 1992, the Predecessor Company approved a restructuring program
pursuant to which it planned to rationalize certain of its business activities
and to reengineer certain of its processes in an effort to streamline
operations and reduce costs.
The 1992 restructuring provision of $58,889 included $39,831 for the
estimated cost of reengineering programs and $19,058 in estimated costs for
capacity rationalization.
The following tables set forth the related activity for the restructuring
provision established in 1992 for the years ended December 31, 1995, 1994 and
1993.
1995 ACTIVITY
--------------------------
RESERVE AT CASH NON- CHANGES RESERVE AT
DECEMBER 31, COSTS CASH IN DECEMBER 31,
1994 INCURRED COSTS ESTIMATES 1995
------------ -------- ----- --------- ------------
Reengineering programs....... $ 8,547 $(6,368) $ -- $-- $2,179
Capacity rationalization..... 3,876 (2,815) (92) -- 969
------- ------- ---- --- ------
$12,423 $(9,183) $(92) $-- $3,148
======= ======= ==== === ======
F-26
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1994 ACTIVITY
--------------------------
RESERVE AT CASH NON- CHANGES RESERVE AT
DECEMBER 31, COSTS CASH IN DECEMBER 31,
1993 INCURRED COSTS ESTIMATES 1994
------------ -------- ----- --------- ------------
Reengineering programs..... $18,770 $(11,657) $ -- $ 1,434 $ 8,547
Capacity rationalization... 10,673 (3,312) (165) (3,320) 3,876
------- -------- ----- ------- -------
$29,443 $(14,969) $(165) $(1,886) $12,423
======= ======== ===== ======= =======
1993 ACTIVITY
--------------------------
RESERVE AT CASH NON- CHANGES RESERVE AT
DECEMBER 31, COSTS CASH IN DECEMBER 31,
1992 INCURRED COSTS ESTIMATES 1993
------------ -------- ----- --------- ------------
Reengineering programs..... $37,649 $(18,879) $ -- $ -- $18,770
Capacity rationalization... 18,628 (7,920) -- (35) 10,673
------- -------- ----- ------- -------
$56,277 $(26,799) $ -- $ (35) $29,443
======= ======== ===== ======= =======
Costs related to the Successor Company period from December 14, 1995 to
December 31, 1995 are not significant and are included in the 1995 activity
table above.
The significant cost components of the 1992 restructuring provisions were as
follows:
Reengineering programs represent the estimated costs associated with
reengineering certain of the Predecessor Company's business processes and
related activities and include expenses associated with various project teams
related to the evaluation, design and implementation of a Predecessor Company-
wide synchronous manufacturing environment with cellular work stations,
uniform work instructions and business center management and reporting
($23,286), severance and relocation for approximately 1,835 employees
($13,437) and consulting fees ($3,108).
Capacity rationalization costs represent the estimated costs to be incurred
in streamlining operations and include expenses related to severance and
relocation for approximately 562 employees ($8,750), asset writedowns ($1,260)
and the transfer and reinstallation of equipment ($9,048).
Management periodically reevaluates the adequacy of the remaining
restructuring reserve to provide for the estimated costs of implementing the
restructuring program. Based upon this reevaluation, during 1994, the
Predecessor Company reversed the portion of the reserve related to a U.S.
plant shutdown ($1,800) and a French social plan ($1,430) due to improved
business conditions; additionally, certain other minor components of the
restructuring reserve were adjusted on the basis of revised estimates.
During 1994 the Predecessor Company implemented the following restructuring
programs:
Morristown Wax Closure
The Predecessor Company recorded a $1,450 restructuring charge in connection
with its plan to close its Morristown, Tennessee wax facility. The closure is
to be effected in order to reduce excess capacity and enhance coordination and
lead time at Howmet Corporation's casting plants. The restructuring provision
is primarily comprised of exit costs ($945), termination benefits ($180) and
other items ($325).
F-27
HOWMET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Dover Airmelt Closure
The Predecessor Company recorded a $1,000 restructuring provision in
connection with its plan to exit its airmelt business at its Dover Alloy plant
in New Jersey. The exit from the airmelt business is primarily due to the
unprofitability of the airmelt product line which is not considered an
essential part of Howmet Corporation's alloy operations. The restructuring
charge is entirely comprised of exit costs. This decision was reversed in 1995
because a buyer could not be found. The Company has increased airmelt business
in 1995 and generated improved returns.
Howmet S.A. Administrative Office Closure
The Predecessor Company recorded a $1,982 restructuring charge related to
the closure of its administrative office in Asnieres, France and the opening
of an administrative office in Dives, France. The restructuring charge is
comprised of termination benefits ($595), exit costs ($1,182) and other items
($205). A portion of the reserve deemed to be in excess of remaining amounts
to be paid was reversed in 1995.
The following is an analysis related to the restructuring reserve activities
for the 1994 restructuring programs:
1995 ACTIVITY
--------------------------
RESERVE AT CASH NON- CHANGES RESERVE AT
DECEMBER 31, COSTS CASH IN DECEMBER 31,
1994 INCURRED COSTS ESTIMATES 1995
------------ -------- ----- --------- ------------
Morristown.................. $1,035 $ (706) $(132) $ -- $197
Dover Airmelt............... 1,000 -- -- (1,000) --
Howmet S.A.................. 1,982 (1,279) 262 (624) 341
------ ------- ----- ------- ----
$4,017 $(1,985) $ 130 $(1,624) $538
====== ======= ===== ======= ====
1994 ACTIVITY
1994 ------------------- RESERVE AT
RESTRUCTURING CASH COSTS NON-CASH DECEMBER 31,
PROVISION INCURRED COSTS 1994
------------- ---------- -------- ------------
Morristown....................... $1,450 $(176) $(239) $1,035
Dover Airmelt.................... 1,000 -- -- 1,000
Howmet S.A....................... 1,982 -- -- 1,982
------ ----- ----- ------
$4,432 $(176) $(239) $4,017
====== ===== ===== ======
At December 31, 1994, $570 of the Predecessor Company's restructuring
reserves were considered long-term and included in "Other Liabilities" while
the remaining amounts were considered short-term and included in "Accrued
Liabilities". At December 31, 1995, all restructuring reserves relating to the
1992 and 1994 restructuring programs are considered short-term and included in
"Accrued Liabilities."
Amounts related to the Successor Company period from December 14, 1995 to
December 31, 1995 are not significant and are included in the 1995 activity
table above.
In connection with the acquisition, management determined that certain
manufacturing capabilities would be eliminated and the related facilities
would be utilized for purposes other than for manufacturing. Accordingly, a
reserve of $21,000 (including $6,300 in "Accrued Liabilities"), principally
for severance costs, was recorded in connection with the acquisition.
F-28
HOWMET CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 17,110
Accounts receivable (less allowance of $8,345)................... 96,217
Inventories...................................................... 150,940
Retained receivables............................................. 36,365
----------
Total current assets........................................... 300,632
Property, plant and equipment, net................................. 295,544
Goodwill, net...................................................... 309,351
Acquisition intangibles and other assets, net...................... 190,770
----------
Total assets................................................... $1,096,297
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 66,541
Accrued liabilities.............................................. 160,027
Income taxes payable............................................. 11,139
Long-term debt due within one year............................... 35,047
Deferred income taxes............................................ 28,583
----------
Total current liabilities...................................... 301,337
Accumulated postretirement benefit obligation...................... 81,716
Other liabilities.................................................. 21,725
Deferred income taxes.............................................. 4,184
Long-term debt..................................................... 411,682
----------
Total liabilities.............................................. 820,644
Commitments and contingencies......................................
Stockholders' equity:
Howmet Corporation common stock, $1 par value; authorized--1,000
shares; issued and outstanding--10 shares....................... --
Capital surplus.................................................. 275,000
Retained earnings................................................ 2,425
Cumulative translation adjustment................................ (1,772)
----------
Total stockholders' equity..................................... 275,653
----------
Total liabilities and stockholders' equity..................... $1,096,297
==========
See notes to the condensed financial statements.
F-29
HOWMET CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
-------------- --------------
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED ENDED
MARCH 31, 1996 APRIL 2, 1995
-------------- --------------
Net sales......................................... $261,448 $235,907
Operating costs and expenses:
Cost of sales................................... 189,978 178,429
Selling, general and administrative expenses.... 29,546 26,279
Depreciation and amortization expense........... 15,119 8,247
Research and development expense................ 6,159 5,893
-------- --------
240,802 218,848
-------- --------
Earnings from operations.......................... 20,646 17,059
Interest income, affiliates....................... -- 3,485
Interest income, third parties.................... 269 8
Interest expense, affiliates...................... -- (335)
Interest expense, third parties................... (11,384) (828)
Equity in loss of unconsolidated affiliates....... (895) (940)
Other, net........................................ (1,085) (215)
-------- --------
Income before income taxes........................ 7,551 18,234
Provisions for income taxes....................... 5,286 8,832
-------- --------
Net income........................................ 2,265 9,402
Retained earnings at beginning of period.......... 160 297,914
-------- --------
Retained earnings at end of period................ $ 2,425 $307,316
======== ========
See notes to the condensed financial statements.
F-30
HOWMET CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
CONSOLIDATED COMBINED
-------------- --------------
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED ENDED
MARCH 31, 1996 APRIL 2, 1995
-------------- --------------
OPERATING ACTIVITIES
Net income...................................... $ 2,265 $ 9,402
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 15,939 8,247
Equity in loss of unconsolidated affiliates... 895 940
Changes in assets and liabilities:
Accounts receivable......................... 2,792 (9,404)
Inventory................................... (1,308) (11,833)
Deferred taxes.............................. (2,714) 152
Accounts payable............................ 5,318 (12,994)
Accrued liabilities and other liabilities... 5,637 3,341
Income taxes payable........................ 4,805 (1,222)
Other--net.................................. (375) 600
--------- -------
Net cash provided by (used in) operating
activities............................... 33,254 (12,771)
INVESTING ACTIVITIES
Payments made for capital expenditures........ (5,167) (6,806)
Decrease in advances to Pechiney.............. -- 18,804
Payments made for investments and other
assets....................................... (3,158) (616)
--------- -------
Net cash (used in) provided by investing
activities............................... (8,325) 11,382
FINANCING ACTIVITIES
Issuance of short-term debt................... 126,500 1,284
Repayment of short-term debt.................. (139,744) (590)
Repayment of long-term debt................... (4,138) --
--------- -------
Net cash (used in) provided by financing
activities............................... (17,382) 694
Effect of exchange rate changes on cash......... (43) 26
--------- -------
Net increase (decrease) in cash........... 7,504 (669)
Cash and cash equivalents at beginning of
period......................................... 9,606 4,962
--------- -------
Cash and cash equivalents at end of period...... $ 17,110 $ 4,293
========= =======
Supplemental disclosures of cash flow
information:
Cash paid during period for
Income taxes................................ $ 2,829 $10,025
Interest.................................... $ 6,726 $ 1,581
See notes to the condensed financial statements.
F-31
HOWMET CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
A. BASIS OF PRESENTATION
For a description of Predecessor Company and Successor Company and the
transactions which resulted in the Successor Company, see Note 1 of the notes
to the financial statements of Howmet Corporation for the periods ended
December 13, 1995 and December 31, 1995, 1994 and 1993.
The condensed financial statements have been prepared in conformity with the
standards of accounting set forth in Accounting Principles Board Opinion No.
28 and any amendments thereto adopted by the Financial Accounting Standards
Board. Also, the condensed financial statements have been prepared in
accordance with the accounting policies stated in the Howmet Corporation
financial statements for the periods ended December 13, 1995 and December 31,
1995, 1994 and 1993 and should be read in conjunction with the notes to the
financial statements appearing in such financial statements.
In the opinion of management, the unaudited condensed financial statements
reflect all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods.
B. INVENTORIES
Inventories at March 31, 1996 are as follows:
Raw materials and supplies......................................... $ 59,559
Work in process and finished goods................................. 92,631
--------
FIFO inventory..................................................... 152,190
LIFO valuation adjustment.......................................... (1,250)
--------
$150,940
========
Inventories include approximately $40,000 that are valued using average
cost.
In the 13 weeks ended March 31, 1996, the Company increased the LIFO
valuation adjustment and thereby increased cost of sales by $1,179. There was
no comparable adjustment in the comparable 1995 period.
C. ACQUISITION
Effective April 30, 1995, the Company acquired Turbine Components
Corporation ("TCC"), a refurbishment operation, in exchange for approximately
$9,000 and the assumption of certain liabilities. TCC contributed an
immaterial loss in the first thirteen weeks of 1996.
D. CONTINGENCIES
The Company and its subsidiaries are involved in litigation, administrative
proceedings and investigations of various types in several jurisdictions.
Additionally, liabilities arising for cleanup costs associated with hazardous
types of materials in several waste disposal facilities exist. In particular,
the Company has been or may be named a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act or
similar state laws at nineteen on-site and off-site locations. Estimated
environmental costs are not expected to materially impact the financial
position or the results of the Successor Company's operations in future
periods. However, environmental clean-up periods are protracted in length and
environmental costs in future periods are subject to changes in environmental
remediation regulations. Accordingly, should any losses not indemnified be
sustained in excess of provided reserves, they will be charged to income in
the future. Under the terms of the SPA, Pechiney International has agreed to
indemnify the Successor Company for environmental liabilities existing as of
June 30, 1995 that exceed recorded reserves of $6,000.
At March 31, 1996, the Successor Company guaranteed certain indebtedness
aggregating $11,500 of its 50% owned entities.
F-32
PART II:
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company is a Delaware corporation, and Section 102(b)(7) of the Delaware
General Corporation Law (the "DGCL") permits a corporation in its certificate
of incorporation to eliminate the liability of a corporation's directors to a
corporation or its stockholders, except for liabilities related to breach duty
of loyalty, actions not in good faith and certain other liabilities.
Section 145 of the DGCL provides for indemnification by a Delaware
corporation of its directors, officers, employees, and agents in connection
with actions, suits, or proceedings brought against them by a third party or
in right of the corporation, by reason of the fact that they were directors,
officers, employees, or agents, against liabilities and expenses incurred in
such action, suit, or proceeding.
The Articles of Incorporation of Howmet, provide that no director of the
Corporation shall be liable to the Corporation or its stockholders for
monetary damages for the breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involved intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Articles also provide that the Corporation shall indemnify every person who is
or was a party or is or was threatened to be made a party to any action, suit,
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
Corporation or, while a director or officer or employee of the Corporation, is
or was serving at the request of the Corporation as a director, officer,
employee, agent or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
counsel fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
to the full extent permitted by applicable law.
The Company maintains an insurance policy with Federal Insurance Company, a
member of the Chubb Group of Insurance Companies, in the name of Blade, the
parent of Holdings, which is the parent of the Company. The policy provides
insurance coverage for, and indemnification of, the directors and officers of
Blade and its subsidiaries (including the Company) for liability which they
may incur in their capacities as officers and directors.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
EXHIBIT
NUMBER EXHIBIT
------- -------
3.1 Articles of Incorporation of Howmet Corporation, with amendments thereto**
3.2 By-laws of Howmet Corporation**
4.1 Registration Rights Agreement dated as of December 7, 1995, among the
Company, BT Securities Corporation, and Lehman Brothers Inc.**
4.2(a) Indenture dated as of December 7, 1995 between the Company and Marine
Midland Bank, as Trustee**
4.2(b) Supplemental Indenture dated as of December 13, 1995 between the Company
and Marine Midland Bank as Trustee**
4.3 Credit Agreement dated as of December 13, 1995 among Blade Acquisition
Corp., Howmet Holdings Acquisition Corp., Howmet Acquisition Corp.,
Bankers Trust Company, various banks, Citicorp USA, Inc., and The First
National Bank of Chicago as Managing Agents, Bankers Trust Company as
Syndication Agent, Citicorp USA, Inc. as Documentation Agent and The First
National Bank of Chicago, as Administrative Agent, together with certain
collateral documents attached thereto as exhibits, including the
Subsidiary Guaranty, Pledge Agreement and Security Agreement among Blade
Acquisition Corp., Pechiney Corporation, Howmet Corporation, certain
subsidiaries and affiliates of Howmet Corporation and The First National
Bank of Chicago.** (The Company has requested Confidential Treatment of
Schedule VI and Schedule X of this Credit Agreement.)
4.4 Copies of the executed Original Notes, authenticated and delivered by the
Trustee on December 7, 1995**
4.5 Form of Exchange Notes (included in Exhibit 4.2)**
-- Agreement with respect to Canadian borrowings will be made available to
the Commission upon request.
5.1 Opinion of Latham & Watkins**
8.1 Opinion of Latham & Watkins regarding tax matters**
10.1 Howmet Corporation Annual Bonus Plan+**
10.2 Howmet Restructuring Cash Incentive Plan+**
10.3 Howmet Corporation Special 1995 Executive Deferred Compensation Plan+**
10.4 Howmet Corporation Excess Benefit Plan+**
10.5 Transaction Incentive Payments Plan+**
10.6 Howmet Enhanced Bonus Program for Employees Grade 22 and Above+**
10.7 1986 Deferred Compensation Plan+**
10.8 Howmet Corporation 1995 Executive Deferred Compensation Plan+**
10.9 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Henri Fine+**
10.10 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Jack Lambert+**
10.11 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Marklin Lasker+**
10.12 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Neil Paton+**
10.13 Employment Agreement dated October 4, 1995, between Howmet Corporation and
James Stanley+**
10.14 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Paul Wilson+**
10.15 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Ronald Wood+**
II-2
10.16 Employment Agreement dated October 4, 1995, between Howmet Corporation and
Roland Paul+**
10.17 Employment Agreement dated October 4, 1995, between Howmet Corporation and
David Squier+**
10.18 Employment Agreement between Howmet Turbine Components Corporation and B.
Dennis Albrechtsen+**
10.19 Letter Agreement regarding payment of life insurance between Howmet
Corporation and David L. Squier+**
10.20(a) Tax Sharing Agreement among Howmet Corporation, Howmet Management
Services, Inc., Howmet-Tempcraft, Inc., Howmet Thermatech Canada, Inc.,
Howmet Transport Services, Inc., Howmet Sales, Inc., Howmet Refurbishment,
Inc., Turbine Components Corporation, Blade Receivables Corporation, a
Nevada corporation, and Howmet Cercast (USA), Inc., dated as of December
13, 1995**
10.20(b) Tax Sharing Agreement among Blade Acquisition Corp., Pechiney Corporation,
Howmet Insurance Co. Inc., Howmet Corporation and all of its directly and
indirectly owned subsidiaries, dated as of December 13, 1995**
10.21 Management Agreement between Howmet Corporation and Thiokol Holding
Company, dated as of December 13, 1995**
10.22 Management Agreement between Howmet Corporation and TCG Holdings, L.L.C.,
dated as of December 13, 1995**
10.23 Assignment and Assumption Agreement between Howmet Holdings Acquisition
Corp. and Howmet Acquisition Corp., dated as of December 6, 1995 and
Indemnification Provisions of the Stock Purchase Agreement among Pechiney,
Pechiney International S.A., Howmet Cercast S.A. and Blade Acquisition
Corp., dated as of October 12, 1995**
10.24 Revised Employment Letter dated February 13, 1996, between Howmet
Corporation and John C. Ritter+**
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges**
12.2 Statement Regarding Computation of Pro Forma Ratio of Earnings to Fixed
Charges**
16.1 Letter Regarding Change in Certifying Accountant**
21.1 Subsidiaries of the Registrant**
23.1 Consent of Latham & Watkins (included in Exhibits 5.1 and 8.1)**
23.2 Consent of Price Waterhouse LLP (updated)*
23.3 Consent of Ernst & Young LLP (updated)*
23.4 Consent of Price Waterhouse*
23.5 Consent of Price Waterhouse*
24.1 Power of Attorney (included in signature page)**
25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of Marine Midland Bank (trustee)**
99.1 Form of Letter of Transmittal**
99.2 Form of Notice of Guaranteed Delivery**
- --------
**Previously filed.
*Filed herewith.
+Executive Compensation Plan or Arrangement
(b) FINANCIAL STATEMENT SCHEDULE:
The following financial statement schedule of the Company is filed as part
of this Registration Statement and should be read in conjunction with the
Financial Statements of Howmet Corporation:
Schedule II--Valuation and Qualifying Accounts and Reserves
Schedules other than that listed above have been omitted because they are
not required or are not applicable, or the required information is shown in
the financial statements or notes thereto.
II-3
ITEM 22. UNDERTAKINGS.
(a) 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, 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
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 Act
and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Howmet Corporation
We have audited the consolidated financial statements of Howmet Corporation
as of December 31, 1995, and for the period from January 1, 1995 to December
13, 1995 (Predecessor Company) and for the period from December 14, 1995 to
December 31, 1995 (Successor Company), and have issued our report thereon
dated May 2, 1996, except for Note 1 as to which the date is June 24, 1996
(included elsewhere in this Registration Statement). Our audit also included
the financial statement schedule listed in Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
May 2, 1996, except for
Note 1 as to which the
date is June 24, 1996
II-5
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
HOWMET CORPORATION
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO COSTS CHARGED TO DEDUCTIONS BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS FROM RESERVES END OF PERIOD
----------- ------------------- ---------------- -------------- ------------- -------------
PERIOD FROM DECEMBER 14, 1995 TO DECEMBER 31, 1995 (SUCCESSOR COMPANY)
Reserves:
Accounts Receivable... $ 8,375 $ -- (a) $ (96) $ (21) $ 8,258
------- ------- ------- -------- -------
Inventories........... $20,872 $ 4,850 $ 1,792 $ (3,163) $24,351
------- ------- ------- -------- -------
Deferred income tax
valuation allowance.. $ 7,995 $ 110 $ -- $ -- $ 8,105
------- ------- ------- -------- -------
PERIOD FROM JANUARY 1, 1995 TO DECEMBER 13, 1995 (PREDECESSOR COMPANY)
Reserves:
Accounts Receivable... $ 6,107 $ 1,288(a) $ 1,931 $ (951) $ 8,375
------- ------- ------- -------- -------
Inventories........... $13,501 $14,922 $(1,342) $ (6,209) $20,872
------- ------- ------- -------- -------
Deferred income tax
valuation allowance.. $ 2,957 $ 5,038 $ -- $ -- $ 7,995
------- ------- ------- -------- -------
FOR THE YEAR ENDED DECEMBER 31, 1994 (PREDECESSOR COMPANY)
Reserves:
Accounts receivable... $ 6,737 $ 300(a) $ 1,641 $ (2,571) $ 6,107
------- ------- ------- -------- -------
Inventories........... $16,294 $13,744 $ 1,520 $(18,057) $13,501
------- ------- ------- -------- -------
Deferred income tax
valuation allowance.. $ 1,415 $ 2,241 $ -- $ (699) $ 2,957
------- ------- ------- -------- -------
FOR THE YEAR ENDED DECEMBER 31, 1993 (PREDECESSOR COMPANY)
Reserves:
Accounts receivable... $ 4,460 $ 3,396(a) $ (308) $ (811) $ 6,737
------- ------- ------- -------- -------
Inventories........... $23,322 $17,846 $ (419) $(24,455) $16,294
------- ------- ------- -------- -------
Deferred income tax
valuation allowance.. $ -- $ 1,415 $ -- $ -- $ 1,415
------- ------- ------- -------- -------
- --------
(a) Includes bad debt expense of $0 for the period from December 14, 1995 to
December 31, 1995 (Successor Company), $524 for the period from January 1,
1995 to December 13, 1995 (Predecessor Company) and ($579) and $1,839 for
the years ended December 31, 1994 and 1993 (Predecessor Company),
respectively.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenwich,
State of Connecticut, on July 3, 1996.
Howmet Corporation
/s/ David L. Squier*
By: _________________________________
David L. Squier
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ William E. Conway, Jr.* Chairman of the Board of Directors July 3, 1996
____________________________________
William E. Conway, Jr.
/s/ James R. Wilson* Director July 3, 1996
____________________________________
James R. Wilson
/s/ David L. Squier* President and Chief Executive July 3, 1996
____________________________________ Officer, Director
David L. Squier (Principal Executive Officer)
/s/ John C. Ritter Vice President Finance July 3, 1996
____________________________________ (Principal Financial
John C. Ritter and Accounting Officer)
/s/ Ronald L. Wood
*By____________________________
Ronald L. Wood, as
attorney-in-fact July ,
1996
II-7
EXHIBIT INDEX
EXHIBIT
NUMBER PAGE
------- ----
3.1 Articles of Incorporation of Howmet Corporation, with
amendments thereto**
3.2 By-laws of Howmet Corporation**
4.1 Registration Rights Agreement dated as of December 7, 1995,
among the Company, BT Securities Corporation, and Lehman
Brothers Inc.**
4.2(a) Indenture dated as of December 7, 1995 between the Company and
Marine Midland Bank, as Trustee**
4.2(b) Supplemental Indenture dated as of December 13, 1995 between
the Company and Marine Midland Bank as Trustee**
4.3 Credit Agreement dated as of December 13, 1995 among Blade
Acquisition Corp., Howmet Holdings Acquisition Corp., Howmet
Acquisition Corp., Bankers Trust Company, various banks,
Citicorp USA, Inc., and The First National Bank of Chicago as
Managing Agents, Bankers Trust Company as Syndication Agent,
Citicorp USA, Inc. as Documentation Agent and The First
National Bank of Chicago, as Administrative Agent, together
with certain collateral documents attached thereto as exhibits,
including the Subsidiary Guaranty, Pledge Agreement and
Security Agreement among Blade Acquisition Corp., Pechiney
Corporation, Howmet Corporation, certain subsidiaries and
affiliates of Howmet Corporation and The First National Bank of
Chicago.** (The Company has requested Confidential Treatment of
Schedule VI and Schedule X of this Credit Agreement.)
4.4 Copies of the executed Original Notes, authenticated and
delivered by the Trustee on December 7, 1995**
4.5 Form of Exchange Notes (included in Exhibit 4.2)**
-- Agreement with respect to Canadian borrowings will be made
available to the Commission upon request.
5.1 Opinion of Latham & Watkins**
8.1 Opinion of Latham & Watkins regarding tax matters**
10.1 Howmet Corporation Annual Bonus Plan+**
10.2 Howmet Restructuring Cash Incentive Plan+**
10.3 Howmet Corporation Special 1995 Executive Deferred Compensation
Plan+**
10.4 Howmet Corporation Excess Benefit Plan+**
10.5 Transaction Incentive Payments Plan+**
10.6 Howmet Enhanced Bonus Program for Employees Grade 22 and
Above+**
10.7 1986 Deferred Compensation Plan+**
10.8 Howmet Corporation 1995 Executive Deferred Compensation Plan+**
10.9 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Henri Fine+**
10.10 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Jack Lambert+**
10.11 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Marklin Lasker+**
10.12 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Neil Paton+**
10.13 Employment Agreement dated October 4, 1995, between Howmet
Corporation and James Stanley+**
10.14 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Paul Wilson+**
10.15 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Ronald Wood+**
EXHIBIT
NUMBER PAGE
-------- ----
10.16 Employment Agreement dated October 4, 1995, between Howmet
Corporation and Roland Paul+**
10.17 Employment Agreement dated October 4, 1995, between Howmet
Corporation and David Squier+**
10.18 Employment Agreement between Howmet Turbine Components
Corporation and B. Dennis Albrechtsen+**
10.19 Letter Agreement regarding payment of life insurance between
Howmet Corporation and David L. Squier+**
10.20(a) Tax Sharing Agreement among Howmet Corporation, Howmet
Management Services, Inc., Howmet-Tempcraft, Inc., Howmet
Thermatech Canada, Inc., Howmet Transport Services, Inc.,
Howmet Sales, Inc., Howmet Refurbishment, Inc., Turbine
Components Corporation, Blade Receivables Corporation, a
Nevada corporation, and Howmet Cercast (USA), Inc., dated as
of December 13, 1995**
10.20(b) Tax Sharing Agreement among Blade Acquisition Corp., Pechiney
Corporation, Howmet Insurance Co. Inc., Howmet Corporation and
all of its directly and indirectly owned subsidiaries, dated
as of December 13, 1995**
10.21 Management Agreement between Howmet Corporation and Thiokol
Holding Company, dated as of December 13, 1995**
10.22 Management Agreement between Howmet Corporation and TCG
Holdings, L.L.C., dated as of December 13, 1995**
10.23 Assignment and Assumption Agreement between Howmet Holdings
Acquisition Corp. and Howmet Acquisition Corp., dated as of
December 6, 1995 and Indemnification Provisions of the Stock
Purchase Agreement among Pechiney, Pechiney International
S.A., Howmet Cercast S.A. and Blade Acquisition Corp., dated
as of October 12, 1995**
10.24 Revised Employment Letter dated February 13, 1996, between
Howmet Corporation and John C. Ritter+**
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges**
12.2 Statement Regarding Computation of Pro Forma Ratio of Earnings
to Fixed Charges**
16.1 Letter Regarding Change in Certifying Accountant**
21.1 Subsidiaries of the Registrant**
23.1 Consent of Latham & Watkins (included in Exhibits 5.1 and
8.1)**
23.2 Consent of Price Waterhouse LLP (updated)*
23.3 Consent of Ernst & Young LLP (updated)*
23.4 Consent of Price Waterhouse*
23.5 Consent of Price Waterhouse*
24.1 Power of Attorney (included in signature page)**
25.1 Form T-1 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of Marine Midland Bank (trustee)**
99.1 Form of Letter of Transmittal**
99.2 Form of Notice of Guaranteed Delivery**
- --------
**Previously filed.
*Filed herewith
+Executive Compensation Plan or Arrangement