FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file No. 000-22029
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SPECIAL METALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-1445468
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4317 Middlesettlement Road
New Hartford, NY 13413
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(Address of principal executive offices)
(Zip Code)
(315) 798-2900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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As of May 1, 1997, there were 15,475,000 shares of the Issuer's common stock,
par value $.01 per share, outstanding.
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SPECIAL METALS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
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Page
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Part I. Financial Information
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of March 31, 1997 and December 31, 1996 2
Condensed Statements of Operations and Retained Earnings (Accumulated
Deficit) for the three months ended March 31, 1996 and 1997 3
Condensed Statements of Cash Flows for three months ended
March 31, 1996 and 1997 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative Disclosures About Market Risk 13
Part II.Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECIAL METALS CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited - In thousands)
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December 31, March 31,
1996 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 3,336 $ 6,334
Accounts receivable, less allowance for doubtful accounts
of $120 for 1996 and $140 for 1997 28,628 36,263
Inventories 42,739 45,830
Prepaid expenses 382 545
Deferred taxes 2,995 2,995
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Total current assets 78,080 91,967
Property, plant and equipment 33,232 33,870
Deferred taxes 1,743 1,743
Other assets 3,437 3,403
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Total assets $ 116,492 130,983
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LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 12,856 $ 20,333
Accrued liabilities 11,791 12,422
Income taxes payable 187 2,445
Current portion of long-term debt and capital leases 4,296 200
Subordinated notes payable to affiliates 1,500 --
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Total current liabilities 30,630 35,400
Long-term debt and capital lease obligations 42,523 545
Other long-term liabilities 8,564 8,705
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Total liabilities 81,717 44,650
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock 124 155
Paid-in surplus 29,716 75,646
Pension adjustment (697) (697)
Retained earnings 5,632 11,229
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Total shareholders' equity 34,775 86,333
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Total liabilities and shareholder's equity $ 116,492 $ 130,983
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</TABLE>
See accompanying notes to condensed financial statements.
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SPECIAL METALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited - In thousands, except per share amounts)
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Three months ended March 31,
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1996 1997
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Net sales $ 39,639 $ 47,424
Cost of goods sold 33,428 36,029
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6,211 11,395
Selling, general and administrative expenses 1,183 1,613
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Operating income 5,028 9,782
Interest expense 1,087 521
Other income -- (40)
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Income before income taxes 3,941 9,301
Income tax expense 1,018 3,704
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Net income 2,923 5,597
Retained earnings (accumulated deficit):
Beginning of period (13,449) 5,632
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End of period $(10,526) $ 11,229
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Net income per share $ 0.24 $ 0.41
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Weighted average shares outstanding 12,400 13,562
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</TABLE>
See accompanying notes to condensed financial statements.
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SPECIAL METALS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
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1996 1997
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Operating Activities:
Net income $ 2,923 $ 5,597
Depreciation and amortization 1,235 1,027
Other adjustments and changes in assets and liabilities (2,676) (381)
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Net cash provided by operating activities 1,482 6,243
Investing Activities:
Capital expenditures (372) (1,621)
Financing Activities:
Proceeds from sale of common stock -- 45,961
Borrowings under revolving credit facilities 1,300 --
Repayment of revolving credit facilities (2,300) (26,000)
Proceeds from (repayment of) subordinated notes
payable to affiliates 300 (1,500)
Repayments of term loans (1,250) (20,000)
Payments on capital lease obligations (41) (74)
Other 99 (11)
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Net cash used in financing activities (1,892) (1,624)
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Net increase (decrease) in cash and cash equivalents (782) 2,998
Cash and cash equivalents at beginning of period 2,613 3,336
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Cash and cash equivalents at end of period $ 1,831 $ 6,334
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</TABLE>
See accompanying notes to condensed financial statements.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
Note 1 - Accounting Policies
The accompanying unaudited condensed financial statements of Special Metals
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Results for the period
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
For further information, refer to the financial statements and footnotes thereto
for the year ended December 31, 1996 included in the Company's Registration
Statement on Form S-1 (Reg. No. 333- 18499) which was declared effective as of
February 25, 1997.
Note 2 - Inventories
Inventories consist of the following (in thousands):
December 31, March 31,
1996 1997
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Raw materials and supplies $ 11,388 $ 9,958
Work-in-process 31,351 35,872
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$ 42,739 $ 45,830
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Note 3 - Capital Stock and Stock Options
Effective February 26, 1997, the Company sold 3,075,000 shares of its common
stock at $16.50 per share in an initial public offering. Proceeds from the
offering, net of commissions and other related expenses totaling approximately
$4.8 million, were approximately $46.0 million. The proceeds were used primarily
to reduce the Company's outstanding indebtedness.
During the quarter ended March 31, 1997, the Company adopted the Special Metals
Corporation 1997 Long-Term Stock Incentive Plan (the "Stock Incentive Plan") and
granted options to key employees and certain directors for the purchase of
295,500 shares of the Company's common stock at $16.50 per share (the initial
public offering price). The options will vest 50% on the second anniversary of
the date of grant, 25% on the third anniversary of the date of grant, and 25% on
the fourth anniversary of the date of grant. The options will expire after 10
years.
In connection with the Stock Incentive Plan, the Company has reserved 800,000
shares of its common stock.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 3 - Capital Stock and Stock Options (Continued)
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation ("SFAS 123"), the Company has elected to measure
compensation for stock options based upon the intrinsic value of the award on
the measurement date. SFAS 123 requires companies that choose to measure
compensation using the intrinsic value method to disclose pro forma net income
and earnings per share information as if the fair value method prescribed in
SFAS 123 were used. The fair value method reflects compensation expense for
grants of stock, stock options, and other equity instruments to employees based
on changes in the fair value of the option or other equity instrument. The pro
forma disclosures for the Company are not material.
Note 4 - Contingencies
Environmental
The Company is subject to loss contingencies pursuant to various federal, state
and local environmental laws, and is currently involved in several actions
regarding the clean-up of disposal sites alleged to contain hazardous and/or
toxic wastes generated over a number of years including the following.
The Company, with contribution from other parties, performed remedial actions at
a site in Clayville, New York (the "Ludlow Landfill"), except for a portion of
the site known as the "North Gravel Pit." The New York State Department of
Environmental Conservation ("DEC") has advised the Company that all work
performed to date is acceptable. Notwithstanding the fact that the remediation
work has been completed (except for the North Gravel Pit) the DEC may seek a
post-excavation claim for biota monitoring, which is an environmental assessment
procedure. This claim is not anticipated to be material. The Company is also
responsible for operation and maintenance costs for a period of 30 years. The
costs for this are estimated to be approximately $150,000 per year in years one
and two, and approximately $90,000 in the remaining years. The total estimated
costs of approximately $2.8 million have been discounted at an annual rate of 4%
in the accompanying financial statements. The Company may also be required to
perform contingent post-closure activities. It is not possible to determine
which, if any, of the contingent activities the Company will need to perform.
Contamination has been discovered at the North Gravel Pit, and a study is
currently underway to determine the extent of the contamination and to select an
appropriate remedial alternative. This study is expected to be completed in the
second half of 1997. It is not possible to provide a reasonable estimate as to
the cost of any remedial work which will be required in the North Gravel Pit
until the study is complete and a remedial alternative is determined. Based upon
preliminary information, the Company estimates the cost will be at least $1.0
million and the Company has established a reserve in this amount. The Company
has reserved a total of approximately $2.8 million with respect to the Ludlow
Landfill, including the North Gravel Pit.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 4 - Contingencies (Continued)
Environmental (Continued)
The Company is also involved in a site in Utica, New York which is alleged to be
contaminated. In the mid 1980's, the owners/operators of Universal Waste in
Utica, New York (the "Universal Waste Site") were cited by the DEC in a formal
enforcement proceeding for cleanup of the site which was allegedly contaminated.
The owner of the Universal Waste Site requested by motion that the Company be
named as an indispensable party to that proceeding. The DEC, however, took the
position that the Company should not be named as an indispensable party. The
Company believes that at least four other potentially responsible parties have
been identified with respect to the contamination at the site. A consent order
has been executed obligating the site operator to conduct a preliminary site
assessment on a portion of the property. The preliminary site assessment is
underway. The DEC is also conducting a separate preliminary site assessment. The
Company is presently not involved in investigating the alleged contamination.
Based upon the limited information available to its environmental engineers, the
Company has established a reserve of $575,000. However, because of the
preliminary nature of the investigation, it is not possible, at this time, to
provide a reasonable estimate as to the ultimate cost of any investigative or
remedial work which will be required, or the Company's share, if any, of such
costs.
The Company is on notice of, and involved in, certain other environmental
matters which have been settled or are at various stages of discussion,
negotiation or settlement which the Company does not believe to be material.
Although the Company believes that it is in substantial compliance with
applicable requirements of environmental laws, there can be no assurance that
some, or all, of the risks noted previously will not result in liabilities that
are material to the Company's business, results of operations, financial
positions, or cash flows.
Other
From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 5 - Effects of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted by the Company on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary (basic) earnings per
share, the dilutive effect of stock options will be excluded. The Company will
also be required to present diluted earnings per share, which will include the
dilutive effect of stock options. The impact on basic earnings per share for the
first quarter ended March 31, 1997 and March 31, 1996 would be immaterial. The
Company has not yet determined what the impact of Statement 128 will be on the
calculation of diluted earnings per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this item constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See Part II. Other Information, Item 5(b),
"Forward-Looking Statements."
OVERVIEW
The Company manufactures superalloys and special alloys, which are highly
engineered metal alloys designed to withstand extreme heat, stress and
corrosion. Special Metals operates three divisions. The Superalloy Billet and
Bar Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces "shape memory" alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Powder Division produces
powder metallurgy-based superalloy products for military jet engines and the
latest generation of large commercial jet engines. The Dental Division produces
amalgamable dental alloys. For the three months ended March 31, 1997, the
Superalloy Billet and Bar Division, the Powder Division and the Dental Division
accounted for 89%, 9% and 2%, respectively, of the Company's net sales of $47.4
million.
NET SALES. Net sales include sales of the Company's superalloy and special alloy
products and revenue earned from toll conversion. Sales of the Company's
products are made under conventional purchase orders, under one-year supply
contracts and under long-term firm price contracts. A substantial majority of
the Company's net sales during the three months ended March 31, 1997 were sold
under conventional purchase orders or under one-year supply contacts.
Export sales represent a significant portion of the Company's business. During
the three months ended March 31, 1997, sales to purchasers outside of the United
States totaled 30% of the Company's net sales. All of the Company's export sales
are conducted in U.S. dollars.
COSTS OF GOODS SOLD. The superalloy industry is characterized by high capital
investment and high fixed costs, and profitability is therefore significantly
affected by changes in volume. Variable costs such as raw materials, labor,
supplies and energy (primarily electricity) generally account for over
three-fourths of the Company's costs of goods sold. Fixed costs, such as
indirect overhead and depreciation, constitute the remainder of the Company's
costs of goods sold.
A substantial portion of the Company's raw material used in production consists
of commodities, such as nickel, that are subject to wide price fluctuations. The
price the Company pays for nickel is usually based upon quoted prices on the
London Metals Exchange (the "LME") plus a premium due to quality, location, and
volume purchased. To attempt to mitigate the risks associated with raw material
price fluctuations and to match raw material purchases with firm price product
orders, the Company often enters into firm price contracts for the purchase of
virgin raw materials from suppliers and for the purchase of scrap from customers
or hedges the price of nickel. At March 31, 1997, the Company had commodity swap
agreements covering approximately 51% of its virgin nickel requirements of its
backlog, for a total purchase price of approximately $8.7 million. The fair
value of the material covered by these agreements, based on the March 31, 1997
price quoted on the LME, was approximately $8.3 million. Unrealized gains and
losses on the contracts are deferred and are recognized in income during the
periods affected.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, legal services, and the office of the president.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.
Three months ended
March 31,
1996 1997
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Net sales 100.0% 100.0%
Costs of goods sold 84.3 76.0%
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Gross profit 15.7 24.0
Selling, general and administrative expenses 3.0 3.4
Operating income 12.7 20.6
Interest expenses 2.7 1.1
Other income - (.1)
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Income before income taxes 10.0 19.6
Income taxes expense 2.6 7.8
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Net income 7.4 11.8
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996.
NET SALES. Net sales increased $7.8 million, or 19.6% from $39.6 million in the
three months ended March 31, 1996 to $47.4 million in the three months ended
March 31, 1997. This increase was principally due to improved pricing and an
increase in pounds shipped. A significant portion of the pounds shipped during
the three months ended March 31, 1996 were sold under long-term contracts
negotiated in 1993, at the bottom of the aerospace cycle, which contained
unfavorable pricing provisions. The Company generally did not earn any profit on
sales under these long-term contacts during 1996.
COST OF GOODS SOLD. Cost of goods sold increased $2.6 million, or 7.8% from
$33.4 million in the three months ended March 31, 1996 to $36.0 million in the
three months ended March 31, 1997, primarily as a result of increased sales
partially offset by improved manufacturing efficiencies and cost reduction
programs. In addition, depreciation and amortization expense decreased from $1.2
million in the three months ended March 31, 1996 to $1.0 million in the three
months ended March 31, 1997 as a result of various fixed and intangible assets
becoming fully depreciated or amortized, as applicable. As a percentage of net
sales, cost of goods sold decreased from 84.3% in the three months ended March
31, 1996 to 76.0% in the three months ended March 31, 1997 primarily due to the
improved pricing in 1997 as well as to the allocation of the fixed portion of
overhead included in cost of goods sold to a larger sales base.
GROSS PROFIT. Gross profit increased $5.2 million, or 83.5% from $6.2 million in
the three months ended March 31, 1996 to $11.4 million in the three months ended
March 31, 1997. This increase was due primarily to increased sales, cost
reduction programs and improved manufacturing efficiencies.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.4 million, or 36.3% from $1.2 million in the
three months ended March 31, 1996 to $1.6 million in the three months ended
March 31, 1997. The increase was due primarily to the increase in net sales.
Selling, general and administrative expenses as a percentage of net sales
increased from 3.0% in the three months ended March 31, 1996 to 3.4% in the
three months ended March 31, 1997.
OPERATING INCOME. Operating income increased $4.8 million, or 94.6% from $5.0
million in the three months ended March 31, 1996 to $9.8 million in the three
months ended March 31, 1997. Operating income as a percentage of net sales
increased from 12.7% in the three months ended March 31, 1996 to 20.6% in the
three months ended March 31, 1997.
INTEREST EXPENSE. Interest expense decreased $.6 million, or 52.1% from $1.1
million in the three months ended March 31, 1996 to $.5 million in the three
months ended March 31, 1997. This decrease was due primarily to the repayment of
debt outstanding with proceeds from the Company's initial public offering, and
to an overall decrease in interest rates.
INCOME TAXES. Income tax expense increased $2.7 million, or 264% from $1.0
million in the three months ended March 31, 1996 to $3.7 million in the three
months ended March 31, 1997. The increase was due to the increase in income
before income taxes and an increase in the overall effective tax rate from 25.8%
in the three months ended March 31, 1996 to 40% in the three months ended March
31, 1997. The effective income tax rate for the three months ended March 31,
1996 was less than that which would be expected due to utilization of net
operating loss and alternative minimum tax credit carryforwards.
NET INCOME. Net income increased 91.5% from $2.9 million in the three months
ended March 31, 1996 to $5.6 million in the three months ended March 31, 1997.
Net income as a percentage of net sales increased from 7.4% in the three months
ended March 31, 1996 to 11.8% in the three months ended March 31, 1997 primarily
as a result of stronger demand for the Company's products by the aerospace
industry, cost reduction programs and improved manufacturing efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from capital investments, working
capital requirements, and principal and interest payments on indebtedness. The
Company has historically met these liquidity requirements with funds generated
from operations and from short-term and long-term debt financing (including
borrowings from its principal stockholders). The Company's business is capital
intensive and requires substantial expenditures for, among other things, the
purchase and maintenance of equipment used in the manufacturing process and
compliance with environmental laws.
Net cash provided by operating activities was $1.5 million and $6.2 million for
the three months ended March 31, 1996 and 1997, respectively. Improvements in
cash flows from operating activities are principally the result of improved
operating results, offset by increased working capital requirements attributable
to increases in accounts receivable and inventory due to increased sales in 1996
and 1997 and a planned increase in inventory to accommodate shutting down one
VIM furnace for a major upgrade scheduled for the third quarter of 1997.
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Capital expenditures were $.4 million and $1.6 million for the three months
ended March 31, 1996 and 1997, respectively.
The Company's principal sources of funds are (i) funds generated from operations
and (ii) borrowings under the Company's Credit Agreement with Credit Lyonnais
and the financial institutions from time to time party thereto (the "Credit
Agreement"). Under the Credit Agreement, as amended, the Company may borrow,
repay, and re-borrow from time to time, the lesser of (a) $60 million, declining
$4 million per year from 1997 through 2001, at which time all remaining amounts
outstanding are due, and (b) the Company's borrowing base. The Credit Agreement
defines the Company's borrowing base as the sum of 85% of eligible accounts
receivable and 60% of eligible inventory. As of March 31, 1997, the borrowing
base was $52.3 million. The Company's ability to borrow under the Credit
Agreement is subject to the satisfaction of various conditions, including
compliance with certain financial covenants. The amount the Company may borrow
under the Credit Agreement is reduced by the aggregate amount of any letters of
credit issued for the account of the Company. All advances under the Credit
Agreement bear interest at the Company's option at (i) a base rate, which is the
higher of the bank's short-term commercial reference rate or the Federal Funds
rate plus .25%, (ii) the Eurodollar rate, which is the New York interbank
offered rate, plus 1.25% or (iii) LIBOR plus 1.25%. An annual commitment fee of
.20% on the unused available revolving credit facility commitment is due
monthly. The Company's obligations under the Credit Agreement are secured by the
Company's receivables, inventory and general intangibles. The Credit Agreement
also contains covenants, including restrictions on the ability of the Company to
make certain restricted payments, incur additional indebtedness, make certain
investments, create liens, guarantee indebtedness and enter into transactions
with affiliates. The Company is also subject to certain financial tests relating
to, among other things, its consolidated net worth, its consolidated leverage
ratio and the ratio of its senior debt to consolidated EBITDA. The Company may
prepay amounts owing under the Credit Agreement at its option at any time.
Over the next five years, the Company plans to invest over $50 million (or
approximately $10 million per year) in capital expenditures to expand and
modernize its melting, forging and finishing equipment, install a
state-of-the-art information system and make other investments to maintain its
technological leadership and reduce production costs. In addition to planned
capital expenditures, the Company expects to evaluate from time to time
potential acquisitions. Potential acquisitions may include investments in
companies, technologies or products that complement the Company's business or
products. Sources of funds for such acquisitions could include funds generated
from operations or alternative sources of debt or equity capital. Certain
covenants in the Credit Agreement may restrict or limit the Company's ability to
enter into or complete an acquisition. Under such circumstances, the Company
would need to amend, obtain a waiver of or refinance the Credit Agreement. See
Part II. Other Information, Item 5(b), "Forward-Looking Statements."
The Company does not expect the future recurring operation costs of compliance
with currently enacted environmental laws and adopted or proposed regulations to
have a material impact on its liquidity and capital resources. However, the
imposition of more strict standards or requirements under environmental laws and
the possibility of increased enforcement could result in expenditures in excess
of amounts estimated to be required for such matters. See Footnote 4 to the
Condensed Financial Statements in Part I. Item 1. "Condensed Financial
Statements (unaudited)" and Part II. Item 1, "Legal Proceedings." See also Part
II. Other information, Item 5(b), "Forward-Looking Statements."
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<PAGE>
The Company believes that its cash on hand, cash flow from operations and
borrowing capacity under the Credit Agreement will be adequate to meet its
anticipated operating requirements, and planned capital expenditures over the
next 12 months.
BACKLOG
As of March 31, 1997, the Company's backlog orders aggregated approximately
$141.7 million, compared to approximately $110.5 million at March 31, 1996. The
increase in backlog orders is primarily due to an increase in orders for jet
engines worldwide and increased demand for jet engine spare parts. The Company
defines backlog as firm purchase orders, which are generally subject to
cancellation by the customer subject to, in certain circumstances, payment of
specified charges. Substantially all orders in the backlog at March 31, 1997 are
expected to be shipped within the next 12 months. Due to the cyclical nature of
order entry experienced by the Company and its dependence on the aerospace
industry, there can be no assurance that order entry will continue at current
levels or that current firm purchase orders will not be canceled or delayed.
INFLATION
Although the Company's sales and results of operations are affected by the
prices of raw materials used to make its products and the cyclicality of the
aerospace industry, the Company does not believe that general economic inflation
has had a material effect on its results of operation for the periods presented.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted by the Company on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary (basic) earnings per
share, the dilutive effect of stock options will be excluded. The Company will
also be required to present diluted earnings per share, which will include the
dilutive effect of stock options. The impact on basic earnings per share for the
first quarter ended March 31, 1997 and March 31, 1996 would be immaterial. The
Company has not yet determined what the impact of Statement 128 will be on the
calculation of diluted earnings per share.
ITEM 3. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in the Company's Prospectus, dated February 25, 1997,
under the caption "Business--Environmental Matters" is incorporated herein by
reference. This portion of the Prospectus is included as Exhibit 99.1 to this
Report. There were no material developments relating to the matters discussed
therein during the fiscal quarter ended March 31, 1997.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On January 29, 1997, Special Metals and Technologies Corporation ("SMTC"),
the Company's sole stockholder at the time, by unanimous written consent
approved (i) the adoption of the Company's Amended and Restated Certificate of
Incorporation, (ii) the adoption of the Company's Amended and Restated By-laws,
(iii) the election of (a) Robert F. Dropkin, Raymond F. Decker and Donald C.
Darling as Class I directors with terms expiring in 1998, (b) Robert D.
Halverstadt and Antoine Treuille as Class II directors with terms expiring in
1999 and (c) Donald R. Muzyka and Edouard Duval as Class III directors with
terms expiring in 2000.
(b) On February 14, 1997, SMTC, the Company's sole stockholder at the time, by
unanimous written consent approved the adoption of the Special Metals
Corporation 1997 Long-Term Stock Incentive Plan.
ITEM 5. OTHER INFORMATION
(a) Press Release
The Company issued a press release dated April 28, 1997 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter ended March 31, 1997.
(b) Forward-Looking Statements
Certain statements in this Report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made by or with the approval of an authorized executive officer of
the Company constitute "forward-looking statements" within the meaning of the
Reform Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company to be materially different from those expressed
or implied by such forward-looking statements. Such factors include economic
slowdowns and recessions (especially in the aerospace industry, in which most of
the Company's customers are concentrated); the
-14-
<PAGE>
availability and pricing of raw materials used in the manufacture of the
Company's products; the reliable operation of the Company's manufacturing
facilities and equipment; the Company's ability to evaluate, finance and
integrate acquired businesses, products and companies into the Company's
existing business and operations; the Company's ability to effectively compete
in the industries in which it does business; the Company's ability to
successfully negotiate new labor agreements and otherwise maintain favorable
relations with its employees, a majority of whom are unionized; the Company's
ability to comply with existing and future environmental laws and regulations,
the accuracy of its current estimates of existing environmental liabilities and
the possibility that currently unknown environmental liabilities may be
discovered.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
10.1 First Amendment to Credit Agreement dated as of April 15, 1997 by
and amount the Company, Credit Lyonnais and the other financial
institutions party thereto.
27.1 Financial Data Schedule.
99.1 Section captioned "Business--Environmental Matters" from the
Company's Prospectus, dated February 25, 1997.
The Company did not file any reports on Form 8-K during the fiscal quarter ended
March 31, 1997.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPECIAL METALS CORPORATION
Date: May 9, 1997 By: /s/ Donald R. Muzyka
---------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: May 9, 1997 By: /s/ Donald C. Darling
----------------------
Donald C. Darling
Chief Financial Officer and Chief
Accounting Officer
-16-
Exhibit 10.1
FIRST AMENDMENT
to
CREDIT AGREEMENT
AMENDMENT, dated as of April 15, 1997 by and among SPECIAL METALS
CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions
listed on the signature pages hereto (collectively, the "Lenders") and CREDIT
LYONNAIS NEW YORK BRANCH, as Issuing Bank and as Agent for the Lenders (in such
capacity, the "Agent").
RECITALS
A. The Borrower, the Lenders, the Issuing Bank and the Agent are party to
the Credit Agreement dated as of October 18, 1996 (the "Credit Agreement"),
pursuant to which the Lenders severally agreed to make Term Loans and Revolving
Loans to the Borrower, and the Issuing Bank agreed to issue Letters of Credit
for account of the Borrower, all upon the terms and subject to the conditions
set forth in the Credit Agreement.
B. The Borrower has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (the "SEC") on December 20, 1996 (said
Registration Statement, as subsequently amended, herein called the "Registration
Statement"), registering a portion of its shares of common stock for offering to
the public (the "Offering").
C. The Borrower paid the Term Loans in full upon the consummation of the
Offering and the receipt of the proceeds therefrom and has requested that the
Credit Agreement be modified in certain respects, including (i) to increase the
Aggregate Revolving Commitments by $20,000,000 to $60,000,000 (subject to the
scheduled reductions specified below), (ii) to reduce the Commitment Fee to
0.20% per annum, (iii) to eliminate the prohibition against the termination of
the Cash Flow Support Agreement, (iv) to permit the use of Loan proceeds for
capital improvements and acquisitions, and (v) to permit the Borrower to
repurchase or redeem its capital stock.
D. The Lenders, the Issuing Bank and the Agent are willing to effect such
modifications, subject to the terms and conditions specified below.
ACCORDINGLY, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment, unless
otherwise defined, shall have the meanings given to them in the Credit
Agreement. In addition, the following terms shall have the following meanings:
1
<PAGE>
"AGENT" shall have the meaning specified in the preamble hereto.
"BORROWER" shall have the meaning specified in the preamble hereto.
"CREDIT AGREEMENT" shall have the meaning specified in Recital A hereto.
"FIRST AMENDMENT DATE" shall have the meaning specified in Section 5
hereto.
"LENDERS" shall have the meaning specified in the preamble hereto.
"OFFERING" shall have the meaning specified in Recital B hereto.
"REGISTRATION STATEMENT" shall have the meaning specified in Recital B
hereto.
"SEC" shall have the meaning specified in Recital B hereto.
2. AMENDMENTS TO CREDIT AGREEMENT.
(a) The parties have agreed that the Aggregate Revolving Commitments will
be increased to $60,000,000 on the First Amendment Date and will be apportioned
among the Lenders as specified in Exhibit A hereto. In order to reflect that
understanding, the parties hereby agree that, effective on the First Amendment
Date, Schedule I to the Credit Agreement shall be deleted and the schedule
attached to this Amendment as Exhibit A shall be substituted therefor.
(b) The parties have agreed that the Aggregate Revolving Commitments will
be reduced by $4,000,000 a year, such reductions to be made on October 17 of
each year, commencing with October 17, 1997. To reflect that understanding, the
parties hereby agree that, effective on the First Amendment Date, Section 2.6(b)
of the Credit Agreement will be redesignated as Section 2.6(c) and the following
new Section 2.6(b) will be added to the Credit Agreement:
"The Aggregate Revolving Commitments shall be reduced on
each date set forth below to the amount set forth below
opposite such date:
DATE OF REDUCTION AGGREGATE REVOLVING COMMITMENTS
October 17, 1997 $56,000,000
October 17, 1998 52,000,000
October 17, 1999 48,000,000
October 17, 2000 44,000,000
October 17, 2001 40,000,000
2
<PAGE>
Each such reduction shall be permanent and shall occur
irrespective of any prior optional reduction of the
Aggregate Revolving Commitments pursuant to Section
2.6(a,) unless the prior optional reduction has reduced
the Aggregate Revolving Commitments below the amounts
set forth above, in which event no further reductions in
the Aggregate Revolving Commitments shall occur on the
date specified. If the aggregate principal amount of the
Revolving Loans outstanding on the effective date of any
such reduction exceeds the amount of the Aggregate
Revolving Commitments after giving effect to such
reduction, the Borrower shall prepay the Revolving Loans
on the date on which such reduction becomes effective by
an amount equal to the amount of such excess."
(c) The parties have agreed that from and after the First Amendment Date
the Commitment Fee shall be reduced from 0.25% to 0.20%. To reflect that
understanding, the parties hereby agree that, effective on the First Amendment
Date, Section 2.12(a) of the Credit Agreement (Fees) will be amended by deleting
the figure "one-quarter of one percent (0.25%)" from the first sentence thereof
and substituting the figure "one-fifth of one percent (0.20%)" in its place.
(d) The parties have agreed that from and after the First Amendment Date
the Borrower may use the proceeds of the Loans not only to repay certain
existing indebtedness and to finance working capital needs, but also to fund
capital improvements and finance acquisitions which are otherwise permitted
under the Credit Agreement. To reflect that understanding, the parties hereby
agree that, effective on the First Amendment Date, clause (a) of Section 4.16 of
the Credit Agreement (Use of Proceeds) shall be amended in its entirety to read
as follows:
"(a) The Borrower shall use the proceeds of the Loans solely (i) to
refinance the principal of, and to pay all interest, fees and other
amounts payable in respect of, all loans outstanding under the Existing
Agreement, (ii) to pay the transaction costs relating to this Agreement,
(iii) to finance the working capital needs of the Borrower and its
Subsidiaries, (iv) to repay outstanding Indebtedness of the Borrower to
its Affiliates, (v) to finance capital expenditures, and (vi) to finance
acquisitions and Investments that are permitted under this Agreement. The
Borrower shall use the Letters of Credit solely to support payment
obligations incurred by it in the ordinary course of its business."
(e) The parties have agreed that the Borrower shall furnish to the Agent
and the Lenders, prior to the closing of any acquisition or Investment in a
joint venture that is otherwise permitted under the Credit Agreement certain
information regarding the impact of the proposed acquisition or Investment on
the Borrower's financial statements and calculations showing that after giving
effect to such acquisition or Investment the Borrower will be in compliance with
the financial covenants contained in the Credit Agreement. To reflect that
understanding, the parties hereby agree that, effective on the First Amendment
Date, Section 6.3 of the Credit Agreement
3
<PAGE>
(Financial Statements, Reports, Etc.) will be amended by deleting the word "and"
from the end of clause (f) thereof, redesignating clause (g) thereof as clause
(h) and adding the following new clause (g) thereto:
"(g) as soon as available and in any event no later than 10 Business Days
prior to the closing of any merger or consolidation of the Borrower or
any of its Subsidiaries with any other Person (other than a merger of a
Subsidiary into the Borrower or a merger among two or more Subsidiaries),
any acquisition by the Borrower or any of its Subsidiaries of all or
substantially all of the assets of any other Person or any division or
business unit of any other Person, or any Investment (other than an
Investment described in Section 6.14 (a), (b), (c), (d), or (e)) by the
Borrower or any of its Subsidiaries in any other Person (each of the
foregoing herein called a "Corporate Event" and any such other Person
herein called a "Target"), (x) a copy of the most recent available
balance sheets and statements of income and cash flows of such Target,
(y) if such Target will become a consolidated Subsidiary of the Borrower
after the consummation of the Corporate Event, a pro forma consolidated
balance sheet and pro forma consolidated statements of income and cash
flows of the Borrower and its consolidated Subsidiaries (including the
Target) after giving effect to such Corporate Event and (z) a certificate
of a Responsible Officer of the Borrower to the effect that, to the best
of his knowledge, after due inquiry, the Borrower shall be in compliance
with the financial covenants contained in Sections 6.18, 6.19 and 6.20 of
the Credit Agreement after giving effect to such Corporate Event, which
certificate shall set forth in detail reasonably satisfactory to the
Agent the calculations made to determine such compliance and the
information required to make such calculations."
(f) The parties have agreed that the Borrower shall not permit its
Consolidated Net Worth to be less than $40,000,000 at any time after the First
Amendment Date. To reflect that understanding, the parties hereby agree that,
effective on the First Amendment Date, Section 6.18 of the Credit Agreement
(Consolidated Net Worth) will be amended by deleting the figure "$24,000,000"
therefrom and substituting the figure "$40,000,000" in its place.
(g) The parties have agreed that from and after the First Amendment Date
the Borrower shall be permitted to redeem or repurchase shares of its Capital
Stock, subject to the same restrictions as those currently applicable to
payments of dividends or other distributions on shares of its Capital Stock. To
reflect that understanding, the parties hereby agree that, effective on the
First Amendment Date, clause (a) of the proviso in Section 6.17 of the Credit
Agreement (Restricted Payments) shall be amended in its entirety to read as
follows:
"(a) so long as no Default or Event of Default has occurred and is
continuing or would occur after giving effect thereto, the Borrower may
declare and pay dividends or other distributions on shares of its Capital
Stock, and may purchase or redeem shares of its Capital Stock, provided
that the aggregate amount of all such dividends, distributions, purchases
or redemptions does not exceed in any fiscal year of the Borrower an
amount equal to fifty percent (50%) of the Consolidated Net Income of the
Borrower for the
4
<PAGE>
immediately preceding fiscal year"
(h) The parties have agreed that the Borrower may terminate, or permit
SIMA to terminate, the Cash Flow Support Agreement at any time after the First
Amendment Date. To reflect that understanding, the parties hereby agree that,
effective on the First Amendment Date,
(A) The Cash Flow Support Agreement, and the promissory note
issued by the Borrower to the order of SIMA thereunder, shall
be terminated and shall be of no further force and effect;
(B) Section 6.23 of the Credit Agreement (Cash Flow Support
Agreement) shall be amended in its entirety to read as
follows:
"6.23. INTENTIONALLY DELETED."
(C) clause (j) of Section 7.1 of the Credit Agreement (Events of
Default) (which makes the termination of the Cash Flow
Support Agreement an Event of Default) shall be deleted and
the following new clause (j) shall be substituted therefor:
"(j) Intentionally deleted; or"
(i) The following new paragraph is hereby added at the end of Section 9.3
of the Credit Agreement (Amendments and Waivers):
"In the event that any Lender fails to consent to a waiver, amendment,
supplement or modification which requires the unanimous written consent
of all the Lenders and which has been approved in writing by the Majority
Lenders, the Borrower shall have the right, at its own expense, upon
notice to such Lender and the Agent, so long as no Default or Event of
Default shall have occurred and be continuing, to require such Lender to
transfer and assign without recourse (in accordance with and subject to
the restrictions contained in Section 9.6) all, but not less than all, of
its interests, rights and obligations under this Agreement and the other
Loan Documents to one or more existing Lenders that are willing, in their
sole discretion, to acquire and assume such interests, rights and
obligations (it being understood and agreed that no Lender shall have any
obligation to do so) or to one or more other banks or financial
institutions that are chosen by the Borrower and are acceptable to the
Agent and the Issuing Bank; provided that (x) no such assignment shall
conflict with any law, rule, regulation or order of any Governmental
Authority and (y) the Borrower or the acquiring Lender, bank or financial
institution, as the case may be, shall pay to the assigning Lender in
immediately available funds on the date of such assignment the principal
of and interest accrued to the date of payment on the Loans made by it
hereunder and all fees and other amounts accrued for its account or owed
to it hereunder or under any other Loan Document (including any amounts
owed to it pursuant to Section 3.5)."
5
<PAGE>
(j) Clause (A) of Section 9.9 of the Credit Agreement (Judicial
Proceedings) is hereby amended by deleting the reference to "Schedule I"
therefrom and substituting a reference to "Schedule II" in its place.
(k) All references in the Credit Agreement or any other Loan Document to
one or more Notes shall be deemed to include any promissory note or notes issued
in replacement or substitution therefor, including any Note or Notes issued
pursuant to this Amendment.
3. REAFFIRMATION OF OBLIGATIONS. The Borrower hereby acknowledges and
confirms to Agent, the Issuing Bank and each Lender (a) that the amendments and
modifications to the Credit Agreement made pursuant hereto shall not affect or
impair in any way the validity, binding effect or enforceability of any Loan
Document to which it is a party or of any liens or security interests granted to
the Agent, the Issuing Bank or any Lender thereunder, or its obligations or the
respective rights and remedies of the Agent, the Issuing Bank and the Lenders
thereunder and (b) that the Loan Documents to which the Borrower is a party, any
liens and security interests granted to the Bank thereunder, and the Borrower's
obligations and the respective rights and remedies of the Agent, the Issuing
Bank and the Lenders thereunder shall continue in full force and effect,
notwithstanding such amendments and modifications.
4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Agent, the Issuing Bank and the Lenders that (a) it has full
power and authority to execute and deliver this Amendment and the replacement
Notes being issued pursuant hereto, (b) this Amendment, the Credit Agreement as
amended hereby, and such replacement Notes constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, (c) the Borrower's execution, delivery
and performance of this Amendment, the Credit Agreement as amended hereby and
such replacement Notes have been duly authorized by all requisite action of the
Borrower and do not require the approval of its shareholders, (d) the execution
and delivery by the Borrower of this Amendment and such replacement Notes and
the performance by the Borrower of the Credit Agreement as amended hereby do not
and will not (i) violate the Borrower's Certificate of Incorporation or By-Laws
or any law or regulation applicable to the Borrower, (ii) violate or constitute
(with due notice or lapse of time or both) a default under any indenture,
agreement, license or other instrument to which the Borrower is a party or by
which the Borrower or any of its properties may be bound or affected, (iii)
violate any order of any court, tribunal or governmental agency binding upon the
Borrower or its properties, (iv) result in the creation or imposition of any
Lien of any nature whatsoever upon any properties or assets of the Borrower, or
(v) require any license, consent or approval of any governmental agency or
regulatory authority or any other third party, and (e) (i) the Borrower has
complied and is currently in compliance with all the terms, covenants and
conditions of the Credit Agreement and the other Loan Documents, (ii) there
exists no Default under the Credit Agreement, and (iii) the representations and
warranties of the Borrower contained in Article 4 of the Credit Agreement are
true with the same effect as though such representations and warranties had been
made on the date hereof, except for such representations and warranties which
specifically relate to an earlier date.
6
<PAGE>
5. CONDITIONS PRECEDENT. This Amendment shall become effective on the
date (the "First Amendment Date") on which each of the following conditions
precedent shall have been satisfied or waived:
(a) The Borrower, SIMA and each Lender shall have executed and delivered
to the Agent counterpart originals or facsimiles hereof;
(b) The Borrower shall have executed and delivered to the Agent such
replacement Notes as may be necessary to reflect the Lenders' respective
Revolving Commitments after giving effect to this Amendment;
(c) The Agent shall have received payment in full of (i) all fees
separately agreed upon between the Borrower and the Agent and (ii) all costs and
expenses (including, without limitation, all fees and disbursements of outside
counsel to the Agent) incurred by the Agent in connection with the preparation
of this Amendment and all related instruments and agreements; and
(d) All legal, documentary and other matters in connection with this
Amendment and the transactions contemplated hereby shall be satisfactory to the
Agent and its counsel.
The amendments to the Credit Agreement set forth in Section 2 of this
Amendment shall become effective automatically on the First Amendment Date,
without the need for any further action by any party hereto.
6. MISCELLANEOUS.
(a) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(b) Except as expressly amended hereby, all terms and conditions of the
Credit Agreement and the other Loan Documents, and all rights of the Agent and
each Bank and obligations of the Borrower thereunder and under all related
documents, shall remain in full force and effect.
(c) The Borrower hereby agrees to pay on demand all costs and expenses
(including without limitation the reasonable fees and expenses of outside
counsel to the Agent) incurred by the Agent in connection with the negotiation,
preparation, execution and delivery of this Amendment and all related documents,
whether or not the transactions contemplated hereby are consummated.
(d) This Amendment may be executed by one or more of the parties hereto
on any number of separate counterparts, and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. Delivery of
an executed signature page to this Amendment by facsimile transmission shall be
as effective as delivery of a manually signed
7
<PAGE>
counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their duly authorized officers as of the day and year first
above written.
SPECIAL METALS CORPORATION
By: /s/ Donald C. Darling
-------------------------
Donald C. Darling
Vice President - Administration
CREDIT LYONNAIS NEW YORK BRANCH, as
Agent, Issuing Bank and Lender
By: /s/ Xavier Roux
-------------------------
Xavier Roux
First Vice President
MELLON BANK, N.A.
By: /s/ Stephen B. Derby
-------------------------
Name: Stephen B. Derby
Title: Vice President
8
<PAGE>
BANQUE NATIONALE DE PARIS
NEW YORK BRANCH
By: /s/ Patrick Pages /s/ Phil Truesdale
-------------------------------------------
Name: Patrick Pages Phil Truesdale
Title: Vice President Vice President
BANQUE NATIONALE DE PARIS
GEORGETOWN BRANCH
By: /s/ Patrick Pages /s/ Phil Truesdale
-------------------------------------------
Name: Patrick Pages Phil Truesdale
Title: Vice President Vice President
SOCIETE GENERALE NEW YORK BRANCH
By: /s/ Betsy Burg
--------------------------
Name: Betsy Burg
Title: Vice President
9
<PAGE>
The undersigned, Societe Industrielle de Materiaux Avances ("SIMA"),
consents to the termination of the Cash Flow Support Agreement and the
Promissory Note delivered thereunder, and acknowledges and confirms to, and
agrees with, the Agent, the Issuing Bank and the Lenders party to the foregoing
Amendment (i) that the amendments and modifications to the Credit Agreement made
pursuant to the foregoing Amendment shall not affect or impair in any way the
validity, binding effect or enforceability of the Subordination Agreement dated
as of October 18, 1996 among Special Metals Corporation, SIMA, and the Agent
(the "Subordination Agreement") or SIMA's obligations or the respective rights
and remedies of the Agent, the Issuing Bank and the Lenders under the
Subordination Agreement and (ii) that the Subordination Agreement, and the
undersigned's obligations and the respective rights and remedies of the Agent,
the Issuing Bank and the Lenders thereunder, shall continue in full force and
effect, notwithstanding such amendments and modifications.
SOCIETE INDUSTRIELLE DE MATERIAUX AVANCES
By /s/ Edouard Duval
----------------------------
Name: Edouard Duval
Title: Directuer General
10
<PAGE>
EXHIBIT A to Amendment
SCHEDULE I to Credit Agreement
SCHEDULE OF COMMITMENTS AND PERCENTAGES
NAME OF LENDER REVOLVING COMMITMENT PERCENTAGE
- -------------------- --------------------- ------------
Credit Lyonnais $18,000,000 30.00%
New York
Branch
Mellon Bank, N.A 17,000,000 28.33%
Banque Nationale 15,000,000 25.00%
de Paris,
New York Branch
and Georgetown
Branch
Societe Generale
New York Branch 10,000,000 16.67%
- -------------------- --------------------- ------------
TOTAL $60,000,000 100.00%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Financial Statements contained in the Quarterly Report to which this
schedules relates and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001028965
<NAME> SPECIAL METALS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,334
<SECURITIES> 0
<RECEIVABLES> 36,403
<ALLOWANCES> (140)
<INVENTORY> 45,830
<CURRENT-ASSETS> 91,967
<PP&E> 71,992
<DEPRECIATION> (38,122)
<TOTAL-ASSETS> 130,983
<CURRENT-LIABILITIES> 35,400
<BONDS> 10
0
0
<COMMON> 155
<OTHER-SE> 86,178
<TOTAL-LIABILITY-AND-EQUITY> 130,983
<SALES> 47,424
<TOTAL-REVENUES> 47,424
<CGS> 36,029
<TOTAL-COSTS> 37,642
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 521
<INCOME-PRETAX> 9,301
<INCOME-TAX> 3,704
<INCOME-CONTINUING> 5,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,597
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
Exhibit 99.1
"BUSINESS-ENVIRONMENTAL MATTERS" extracted from pages 42-46 of the Company's
Prospectus, dated February 25, 1997.
The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater
discharges, the handling and disposal of solid and hazardous wastes and the
remediation of contamination caused by the release of hazardous substances in
the past. In the U.S., such laws include the Federal Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and analogous state laws. The Company uses substantial quantities or substances
that are considered hazardous or toxic under federal, state and/or local
environmental, worker safety and health laws and regulations. The Company's
operations pose a continuing risk of accidental releases of, and worker exposure
to, hazardous or toxic substances. There is also a risk that government
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Company may be subject to legal proceedings brought by
private parties or governmental agencies with respect to environmental matters.
Although the Company believes that it is in substantial compliance with
applicable requirements of environmental laws, there can be no assurance that
some, or all, of the risks discussed under this heading will not result in
liabilities that are material to the Company's business, results of operations,
financial condition or cash flows.
The Company's facilities have been used for industrial purposes for a
substantial period and, over such time, these facilities have used substances or
generated and disposed of wastes which are hazardous. For example, the Company
used substantial quantities of polychlorinated biphenyls ("PCBs") at its New
Hartford facility through the 1970s. Sites at which the Company's wastes have
been allegedly released or otherwise come to be located, and for which the
Company currently faces potentially material environmental remediation
liabilities, are described below. At December 31, 1996, the Company had total
reserves of approximately $3.5 million to cover future costs arising from known
environmental liabilities for remediation and operation and maintenance of
remediation systems, including costs relating to its own properties and certain
sites at which the Company's wastes have allegedly been identified. The
Company's actual future expenditures, however, for remediation of environmental
conditions existing at its properties and at these other locations cannot be
conclusively determined at this time. Furthermore, additional locations at which
wastes generated by the Company may have been released or disposed, and of which
the Company is currently unaware, may in the future become the subject of
remediation for which the Company may be liable, in whole or in part.
Accordingly, it is possible that the Company could become subject to
environmental liabilities in the future that could result in a material adverse
effect on the Company's business, results of operations, financial condition or
cash flows.
<PAGE>
2
The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs and may involve the payment of
penalties, but to date no material penalties have been incurred. The Company
incurred average annual capital expenditures for environmental protection and
compliance of less than $220,000 for 1994, 1995 and 1996 and its capital budget
provides for less than $150,000 for such expenditures in 1997. The Company does
not expect the future recurring operation costs of compliance with currently
enacted environmental laws and adopted or proposed regulations to have a
material impact on its liquidity and capital resources. However, the imposition
of more strict standards or requirements under environmental laws and the
possibility of increased enforcement could result in expenditures in excess of
amounts estimated to be required for such matters.
The Company is currently involved in the following potentially material
environmental matters or proceedings:
CLAYVILLE, NEW YORK. The State of New York identified the Company as a
potentially responsible party ("PRP") under CERCLA for the release or threatened
release of hazardous substances at Ludlow Landfill, Clayville, New York, due to
the Company's generation of certain industrial wastes, including PCB wastes,
believed to have been disposed at the landfill (the "Site"). CERCLA imposes
strict, joint and several liability for investigatory and clean-up costs. The
State of New York brought a federal action against Ludlow Sand and Gravel
Company, Ludlow Sanitary Landfill, Inc., James Ludlow and Kevin Ludlow
(collectively, "Ludlow") under CERCLA, common law nuisance and state statutory
law, seeking the recovery of its response costs, damages to natural resources,
closure of the landfill and penalties. Ludlow, in turn, brought a third-party
action for indemnification and/or contribution against the Company and four
other generators of wastes allegedly sent to the Site.
A consent judgment was entered, resolving the litigation with respect to
the Company. Under the terms of the consent judgment, claims against Ludlow, the
Company and Chesebrough Pond's (the "Settling Defendants") are settled and the
Site is required to be closed and remediated pursuant to an approved remedial
plan (the "ARP") as defined in the consent judgment. The Company is obligated
under the consent judgment to pay all remediation costs required to implement
the ARP in excess of the funds in a trust account established by the Consent
Judgment. The trust account has received monies paid by the Settling Defendants
as well as a specified percentage of the settlement funds obtained to date from
a contribution action brought by the Company and Chesebrough-Pond's against
non-settling users of the landfill. The trust account currently has
approximately $100,000. Further recovery in the contribution action against the
non-settling users is not anticipated to be more than $75,000.
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The Company has completed the ARP with respect to the main body of the
Site. However, completion of the remedy in one area (the "North Gravel Pit") was
delayed because of PCB contamination discovered in the course of excavation in
that area. A work plan designed to determine the extent of contamination in the
North Gravel Pit and select an appropriate remedial alternative has been
approved by the New York State Department of Environmental Conservation ("DEC")
but not yet completed by the Company's environmental engineers. In the interim,
the Company has assumed its responsibility for onsite treatment of the leachate
generated at the project site and subsurface discharge of the treated leachate.
The cost of the investigative and remedial work which will ultimately be
required in the North Gravel Pit cannot be estimated until the investigation
specified in the work plan is complete and a remedial alternative is determined.
Therefore, it is possible that liabilities in respect of this site could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flow. Based upon preliminary information, the
Company estimates that the cost will be at least $1.0 million and the Company
has provided for this amount in its financial statements.
The Company will be responsible for the cost of post-closure operation and
maintenance ("O&M") at the Site for a period of thirty (30) years, and part of
the required O&M activities will include groundwater monitoring. These costs are
estimated for the main body of the site to be approximately $150,000 per year in
years one and two and approximately $90,000 per year in years three through 30
for a total of $2.8 million. The Company has established a reserve of $1.8
million in respect of these expenses based upon the present value of these
expenses using a discount rate of 4%. In addition, there are contingent
post-closure activities. It cannot be determined which, if any, of the
contingent activities the Company will need to perform.
UNIVERSAL WASTE SITE. In the mid-1980's, the owners/operators of Universal
Waste in Utica, New York (the "Universal Waste Site") were cited by the DEC in a
formal enforcement proceeding for cleanup of the site which was allegedly
contaminated with PCBs and trichloroethylene. The owner of the Universal Wastes
Site requested by motion that the Company be named as an indispensable party to
that proceeding. The DEC, however, took the position that the Company should not
be named as an indispensable party. The Company believes that at least four
other potentially responsible parties have been identified with respect to the
contamination at the site. A consent order has been executed obligating the site
operator to conduct a preliminary site assessment on a portion of the property.
The preliminary site assessment is underway. The DEC is also conducting a
separate preliminary site assessment. The Company is presently not involved in
investigating the alleged contamination.
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Based upon the limited information available to its environmental
engineers, the Company has established a reserve of $575,000. However, because
of the preliminary nature of the investigation, it is not possible, at this
time, to provide a reasonable estimate as to the ultimate costs of any
investigative or remedial work which will be required, or the Company's share,
if any, of such costs. Therefore, it is possible that liabilities could arise in
respect of this site that could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flows.
QUANTA RESOURCES SITE. In August 1990, the Company received notification
from the United States Environmental Protection Agency (the "EPA") that it is
considered a potentially responsible party under CERCLA at a site in Syracuse,
New York (the "Quanta Resources Site"). The Company, together with approximately
20 other potentially responsible parties, formalized an agreement by which it
paid the sum of $27,500 towards contribution for removal costs of the EPA
associated with waste material at the site. The total sum collected
(approximately $1 million) was paid directly to the EPA. In September 1996, the
Company received notification from the EPA asking the Company to attend another
meeting with respect to the site. The EPA requested approximately $200,000 to
investigate further removal and cleanup actions. The Company, together with
approximately 60 other potentially responsible parties, formalized an agreement
by which it paid the sum of $5,000 towards the investigation. The investigation
is to be managed by the potentially responsible parties. The extent of
additional regulatory action which may be required at the site is unclear. It is
not possible, at this time, to provide a reasonable estimate as to the cost of
any further investigative or remedial work which will be required or the
Company's share, if any, of such costs. Therefore, it is possible that
liabilities could arise in respect of this site that could have a material
effect on the Company's business, results of operations, financial condition and
cash flows.
AL-TECH SITE. Al-Tech Specialty Steel Corporation ("Al-Tech") occupies a
parcel of realty adjacent to the Company's Dunkirk, New York, facility. In 1988,
Al-Tech advised the Company that a cooling pond located on its property was
contaminated with PCBs. At the time, the Company utilized the pond as a source
of non-contact cooling water. The Company conducted a PCB investigation
(including sampling) of its facilities. The Company's investigation did not
indicate any connection between contamination in the pond and the Company's
operations. A recent edition of an Al-Tech newsletter indicated that Al-Tech has
retained a consultant to conduct an RCRA Facility Investigation ("RFI") at its
facility in Dunkirk, New York to determine whether or not chemical constituents,
from past and present activities at the site, have impacted the environment. The
Company has no other information on which to estimate reasonably the cost of
further investigative or remedial work at the Al-Tech site, or the Company's
share, if any, of such costs. Depending on the development of any information
connecting the Company to this site, it is possible that liabilities could arise
in respect of this site that could have a
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material adverse effect on the Company's business, results of operations,
financial condition and cash flows.
NEW HARTFORD SITE. In 1986, the DEC approved the Company's plan for the
closure of a waste impoundment containing spent acid waste at its New Hartford
facility. The impoundment is now maintained pursuant to the RCRA Corrective
Action Program. In September 1993 the Company submitted a Voluntary RCRA
Facility Investigation Report to the DEC to monitor ground water for metals in
the area of the Company's waste impoundment. Based on test results from the
spring of 1994 to the spring of 1996, it appears that further remediation may
not be necessary, and the Company does not believe that it will incur any
material liability in connection with this matter. The Company will continue to
perform groundwater monitoring at the site pursuant to the RCRA Corrective
Action Program. Depending on the results, it is possible that further
investigative or remedial activity could be required in respect of this matter
and that the liabilities in respect thereof could have a material effect on the
Company's business, results of operations, financial condition and cash flows.
NEW HARTFORD SPDES PERMIT ISSUE. One outfall out of five permitted under
the Company's State Pollution Discharge Elimination System permit at its New
Hartford facility has been out of compliance from time to time with respect to
PCB limits. The current limit for PCBs in the Company's permit is .5 parts per
billion. The Company had certain sections of its sewers jet-cleaned during the
summer of 1996 to reduce or eliminate further incidences of noncompliance. The
DEC has notified the Company that sampling in aquatic organisms downstream from
the Company's outfall revealed higher than acceptable levels of PCBs. The DEC
has notified the Company that it plans to modify the Company's permit which may
require the Company to install end-of-pipe treatment for PCBs. The DEC has
indicated that the limit for PCBs could be .3 parts per billion, or possibly a
lower level depending upon the capabilities of new pollution control equipment
to be installed. The Company met the .3 parts per billion limit six out of
twelve months in 1995 and nine out of twelve months in 1996. The Company has
obtained a preliminary estimate of $120,000 to install additional storm water
treatment equipment designed to consistently meet the proposed DEC limits.
Although the Company cannot at this time provide a reasonable estimate of any
additional costs that may be required, the Company does not believe it will
incur any material liability in connection with this matter.
ANN ARBOR EPCRA VIOLATION COMPLAINT. In early December, 1996, the Company
received a Notice of Intent to File Civil Administrative Complaint from the EPA.
In the notice, EPA stated its intent to commence an administrative proceeding
against the Company under the Emergency Planning and Community Right to Know Act
based upon the alleged failure of the Company's Ann Arbor, Michigan facility to
timely file with EPA certain forms disclosing the amount and type of silver used
at the facility for the years 1991 and 1992. EPA invited the Company to provide
EPA
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with information relating to the alleged offense. The Company intends to avail
itself of this opportunity. The Company has not yet been informed of the amount
of the civil penalty or the nature of the corrective work which EPA intends to
seek in this matter but the Company does not expect the penalty or the costs of
the corrective work to be a material amount.
OTHER MATTERS. The Company is on notice of, and involved in, certain other
environmental matters which have been settled or are at various stages of
discussion, negotiation or settlement which the Company does not believe to be
material.
