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 September 30, 1997
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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
(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 X No
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As of October 31, 1997, there were 15,477,000 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 SEPTEMBER 30, 1997
INDEX
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Page
<S> <C>
Part I. Financial Information
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of September 30, 1997 and December 31, 1996 2
Condensed Statements of Operations and Retained Earnings (Accumulated
Deficit) for the three months and nine months ended September 30, 1996 and 1997 3
Condensed Statements of Cash Flows for the nine months ended
September 30, 1996 and 1997 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative Disclosures About Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Other Information 15
Item 3. 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)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,336 $ 2,746
Accounts receivable, less allowance for doubtful accounts
of $120 for 1996 and $168 for 1997 28,628 32,514
Inventories 42,739 50,699
Prepaid expenses 382 363
Deferred taxes 2,995 3,313
------------------------------
Total current assets 78,080 89,635
Property, plant and equipment 33,232 37,800
Deferred taxes 1,743 1,295
Other assets 3,437 3,525
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Total assets $ 116,492 132,255
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 12,856 $ 12,463
Accrued liabilities 11,791 11,267
Income taxes payable 187 313
Current portion of long-term debt and capital leases 4,296 312
Subordinated notes payable to affiliates 1,500 -
------------------------------
Total current liabilities 30,630 24,355
Long-term debt and capital lease obligations 42,523 810
Other long-term liabilities 8,564 9,016
------------------------------
Total liabilities 81,717 34,181
Commitments and contingencies
Shareholders' equity:
Preferred stock - -
Common stock 124 155
Paid-in surplus 29,716 75,678
Pension adjustment (697) (697)
Retained earnings 5,632 22,938
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Total shareholders' equity 34,775 98,074
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Total liabilities and shareholders' equity $ 116,492 $ 132,255
==============================
</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)
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Net sales $ 37,174 $ 44,168 $ 120,540 $ 138,372
Cost of goods sold 30,485 33,609 99,733 105,347
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6,689 10,559 20,807 33,025
Selling, general and
administrative expenses 1,276 1,874 3,723 5,344
------------------------------- -------------------------------
Operating income 5,413 8,685 17,084 27,681
Interest expense 1,006 48 3,096 617
Abandoned acquisition costs - 11 - 553
Interest income - (84) - (265)
Other income - (92) - (296)
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Income before income taxes 4,407 8,802 13,988 27,072
Income tax expense (benefit) (4,550) 3,177 (1,901) 9,766
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Net income 8,957 5,625 15,889 17,306
Retained earnings (accumulated deficit):
Beginning of period (6,517) 17,313 (13,449) 5,632
------------------------------- -------------------------------
End of period $ 2,440 $ 22,938 $ 2,440 $ 22,938
=============================== ===============================
Net income per share $ 0.72 $ 0.36 $ 1.28 1.16
Weighted average shares outstanding 12,400 15,512 12,400 14,873
</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>
Nine months ended Sept. 30,
1996 1997
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<S> <C> <C>
Operating Activities:
Net income $ 15,889 $ 17,306
Depreciation and amortization 3,212 3,079
Other adjustments and changes in assets and liabilities (15,737) (12,035)
------------------------------
Net cash provided by operating activities 3,364 8,350
Investing Activities:
Capital expenditures (1,877) (7,508)
Financing Activities:
Proceeds from sale of common stock - 45,957
Borrowings under revolving credit facilities 5,000 -
Repayment of revolving credit facilities (5,000) (26,000)
Proceeds from (repayment of) subordinated notes
payable to affiliates 1,000 (1,500)
Repayments of term loans (3,750) (20,000)
Proceeds from equipment loans - 531
Payments on capital lease obligations (231) (228)
Other (51) (192)
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Net cash used in financing activities (3,032) (1,432)
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Net increase in cash and cash equivalents (1,545) (590)
Cash and cash equivalents at beginning of period 2,613 3,336
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Cash and cash equivalents at end of period $ 1,068 $ 2,746
==============================
</TABLE>
See accompanying notes to condensed financial statements.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 only of normal recurring accruals)
considered necessary for a fair presentation have been included. Results for the
period ended September 30, 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, September 30,
1996 1997
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Raw materials and supplies $ 11,388 $ 16,148
Work-in-process 31,351 34,551
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$ 42,739 $ 50,699
==============================
NOTE 3 - CAPITAL STOCK
On July 24, 1997, the Company awarded 4,000 shares of restricted stock to two
executive officers under the 1997 Long-Term Stock Incentive Plan. Of the 4,000
shares of restricted stock, 2,000 vested on July 24, 1997. The remaining 2,000
vest on February 25, 1998. The 2,000 vested shares have been included in the
calculation of weighted average shares outstanding since the vesting date.
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.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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, if made, 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 each of 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 to a total present
value of $1.8 million. 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 fourth quarter 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.
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.
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SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 reasonably be expected to have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
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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 Section 21E of the Securities Exchange Act of
1934 (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 nine months ended September 30, 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 $138.4
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 nine months ended September 30, 1997 were
sold under conventional purchase orders or under one-year supply contracts.
Export sales represent a significant portion of the Company's business. During
the nine months ended September 30, 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, which are subject to wide price fluctuations.
The price that 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. In an 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 September 30, 1997, the
Company had commodity futures contracts covering approximately 75% of the virgin
nickel requirements of its backlog, for a total purchase price of approximately
$13.8 million. The fair value of the material covered by these contracts, based
on the September 30, 1997 price quoted on the LME, was approximately $12.4
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.
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 82.0 76.1% 82.7 76.1%
---------------------------- -----------------------------
Gross profit 18.0 23.9 17.3 23.9
Selling, general and
administrative expenses 3.4 4.2 3.1 3.9
---------------------------- -----------------------------
Operating income 14.6 19.7 14.2 20.0
Interest expense 2.7 .1 2.6 .4
Abandoned acquisition costs - .1 - .4
Interest income - (.2) - (.2)
Other income - (.2) - (.2)
---------------------------- -----------------------------
Income before income taxes 11.9 19.9 11.6 19.6
Income taxes expense (12.2) 7.2 (1.6) 7.1
---------------------------- -----------------------------
Net income 24.1% 12.7% 13.2% 12.5%
============================ =============================
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996.
NET SALES. Net sales increased $7.0 million, or 18.8% from $37.1 million in the
three months ended September 30, 1996 to $44.1 million in the three months ended
September 30, 1997. This increase was principally due to both an increase in
pounds shipped for the core business and improved pricing. A significant portion
of the pounds shipped during the three months ended September 30, 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 contracts during 1996.
COST OF GOODS SOLD. Cost of goods sold increased $ 3.1 million, or 10.2% from
$30.5 million in the three months ended September 30, 1996 to $ 33.6 million in
the three months ended September 30, 1997. As a percentage of net sales, cost of
goods sold decreased from 82.0% in the three months ended September 30, 1996 to
76.1% in the three months ended September 30, 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.
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GROSS PROFIT. Gross profit increased $3.9 million, or 57.9% from $6.7 million in
the three months ended September 30, 1996 to $10.6 million in the three months
ended September 30, 1997. This increase was due primarily to increased sales and
cost reduction programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.6 million, or 46.9% from $1.3 million in the
three months ended September 30, 1996 to $1.9 million in the three months ended
September 30, 1997. This increase was due to the increase in net sales, a
planned increase in research and development activities, and increased
expenditures related to the Board of Directors and the Managerial Assistance
Agreement between the Company and one of the Company's principal stockholders
(the "Managerial Assistance Agreement"). Selling, general and administrative
expenses as a percentage of net sales increased from 3.4% in the three months
ended September 30, 1996 to 4.2% in the three months ended September 30, 1997.
OPERATING INCOME. Operating income increased $3.3 million, or 60.4% from $5.4
million in the three months ended September 30, 1996 to $8.7 million in the
three months ended September 30, 1997. Operating income as a percentage of net
sales increased from 14.6% in the three months ended September 30, 1996 to 19.7%
in the three months ended September 30, 1997.
INTEREST EXPENSE. Interest expense decreased $1.0 million, or 95.2% from $1.0
million in the three months ended September 30, 1996 to zero in the three months
ended September 30, 1997. This decrease was due primarily to the repayment of
debt outstanding with proceeds from the Company's initial public offering during
the first quarter of 1997.
INCOME TAXES. Income tax expense increased $7.7 million, from a benefit of
$(4.6) million in the three months ended September 30, 1996 to an expense of
$3.2 million in the three months ended September 30, 1997. The increase was due
to the increase in income before income taxes, an increase in the overall
effective tax rate from 28.4% in the three months ended September 30, 1996 to
36.1% in the three months ended September 30, 1997, and the recognition of
previously unrecognized and non-recurring deferred tax assets of approximately
$5.8 million. The effective income tax rate for the three months ended September
30, 1996 was less than that which would be expected due to utilization of net
operating loss and alternative minimum tax credit carryforwards. The effective
income tax rate for the three months ended September 30, 1997 was less than that
which would be expected due primarily to benefits resulting from the Company's
foreign sales corporation which was established during the third quarter of
1996.
NET INCOME. Net income decreased 37.2% from $9.0 million in the three months
ended September 30, 1996 to $5.6 million in the three months ended September 30,
1997. Net income as a percentage of net sales decreased from 24.1% in the three
months ended September 30, 1996 to 12.7% in the three months ended September 30,
1997. Net income for the three months ended September 1996 was positively
impacted by the recognition of previously unrecognized and non-recurring
deferred tax assets of approximately $5.8 million.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996.
NET SALES. Net sales increased $17.9 million, or 14.8% from $120.5 million in
the nine months ended September 30, 1996 to $138.4 million in the nine months
ended September 30, 1997. This increase was principally due to both an increase
in pounds shipped for the core business and improved pricing. A significant
portion of the pounds shipped during the nine months ended September 30, 1996
were sold under long-term contracts negotiated in 1993, at the bottom of the
aerospace cycle, which contained
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unfavorable pricing provisions. The Company generally did not earn any profit on
sales under these long-term contracts during 1996.
COST OF GOODS SOLD. Cost of goods sold increased $5.6 million, or 5.6% from
$99.7 million in the nine months ended September 30, 1996 to $105.3 million in
the nine months ended September 30, 1997, primarily as a result of increased
sales offset in part by cost reduction programs. As a percentage of net sales,
cost of goods sold decreased from 82.7% in the nine months ended September 30,
1996 to 76.1% in the nine months ended September 30, 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 and cost
reduction programs.
GROSS PROFIT. Gross profit increased $12.2 million, or 58.7% from $20.8 million
in the nine months ended September 30, 1996 to $33.0 million in the nine months
ended September 30, 1997. This increase was due primarily to increased sales and
cost reduction programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.6 million, or 43.5% from $3.7 million in
the nine months ended September 30, 1996 to $5.3 million in the nine months
ended September 30, 1997. This increase was due to the increase in net sales, a
planned increase in research and development activities, and increased
expenditures related to the Board of Directors and Managerial Assistance
Agreement. Selling, general and administrative expenses as a percentage of net
sales increased from 3.1% in the nine months ended September 30, 1996 to 3.9% in
the nine months ended September 30, 1997.
OPERATING INCOME. Operating income increased $10.6 million, or 62.0% from $17.1
million in the nine months ended September 30, 1996 to $27.7 million in the nine
months ended September 30, 1997. Operating income as a percentage of net sales
increased from 14.2% in the nine months ended September 30, 1996 to 20.0% in the
nine months ended September 30, 1997.
INTEREST EXPENSE. Interest expense decreased $2.5 million, or 80.1% from $3.1
million in the nine months ended September 30, 1996 to $.6 million in the nine
months ended September 30, 1997. This decrease was due primarily to the
repayment of debt outstanding with proceeds from the Company's initial public
offering during the first quarter of 1997.
INCOME TAXES. Income tax expense increased $11.7 million, from a benefit of
$(1.9) million in the nine months ended September 30, 1996 to $9.8 million in
the nine months ended September 30, 1997. The increase was due to the increase
in income before income taxes, an increase in the overall effective tax rate
from 27.9% in the nine months ended September 30, 1996 to 36.1% in the nine
months ended September 30, 1997, and the recognition of previously unrecognized
and non-recurring deferred tax assets of approximately $5.8 million. The
effective income tax rate for the nine months ended September 30, 1996 was less
than that which would be expected due to utilization of net operating loss and
alternative minimum tax credit carryforwards. The effective income tax rate for
the nine months ended September 30, 1997 was less than that which would be
expected due primarily to benefits resulting from the Company's foreign sales
corporation which was established during the third quarter of 1996.
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<PAGE>
NET INCOME. Net income increased 8.9% from $15.9 million in the nine months
ended September 30, 1996 to $17.3 million in the nine months ended September 30,
1997. Net income as a percentage of net sales decreased from 13.2% in the nine
months ended September 30, 1996 to 12.5% in the nine months ended September 30,
1997. Net income for the nine months ended September 1996 was positively
impacted by the recognition of previously unrecognized and non-recurring
deferred tax assets of approximately $5.8 million.
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 $3.4 million and $8.3 million for
the nine months ended September 30, 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, as well as significant purchases of raw materials in September 1997.
The Company anticipates that it will consume a substantial portion of this
material during the fourth quarter of 1997.
Capital expenditures were $1.9 million and $7.5 million for the nine months
ended September 30, 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 September 30, 1997, the
borrowing base was $52.4 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%. A commitment fee of .20% per
annum 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.
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<PAGE>
During the current year and the succeeding four 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."
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. See Part II. Other information, Item 5(b), "Forward-Looking
Statements.
BACKLOG
As of September 30, 1997, the Company's backlog orders aggregated approximately
$150.7 million, compared to approximately $135.7 million at September 30, 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 September 30, 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.
-13-
<PAGE>
LABOR AGREEMENTS
During September 1997 the Company and the hourly workers in its New Hartford,
New York site reached agreement on a new five-year collective bargaining
agreement. The agreement covers 320 production and maintenance employees
represented by Local 2310 of the International Association of Machinists.
During August 1997 the Company and the hourly workers in its Princeton,
Kentucky site reached agreement on a new three-year collective bargaining
agreement. The agreement covers 57 production and maintenance employees
represented by Local 2507 of the International Association of Machinists.
ITEM 3. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NEW HARTFORD, NEW YORK FACILITY
Reference is made to the Company's Quarterly Report on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997 and to Note 4 of the Notes to
Condensed Financial Statements included in Part I of this Report for
descriptions of certain environmental matters. As previously reported, during
the course of excavation within the plant at New Hartford, New York to install
new equipment, the Company discovered an area of soils contaminated with PCBs.
The area of contamination was defined in accordance with instruction from
regulatory officials. The Company has incurred $150,000 to date relating to the
disposal of soil and other related clean-up activities. The Company anticipates
that it will incur an additional $110,000 relating to clean-up activities. It is
likely that regulatory authorities will require additional soil and ground water
monitoring relating to PCBs at the New Hartford Facility. It is not possible now
to predict whether additional PCB contamination will be discovered or whether
additional remedial action will be required.
-14-
<PAGE>
ITEM 2. OTHER INFORMATION
(A) PRESS RELEASE
The Company issued a press release dated October 16, 1997 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter ended September 30, 1997 and nine months ended September 30, 1997.
The Company issued a press release dated September 19, 1997 which announced that
the hourly workers at its New Hartford site have voted to ratify a new five-year
collective bargaining agreement. The contract covers 320 production and
maintenance employees represented by Local 2310 of the International Association
of Machinists.
(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 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 3. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
10.1 Second Amendment to Credit Agreement dated as of October 3, 1997 by and
among the Company, Credit Lyonnais and other financial institutions
party thereto.
27.1 Financial Data Schedule.
The Company did not file any reports on Form 8-K during the fiscal quarter ended
September 30, 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: November 7, 1997 By: /s/ Donald R. Muzyka
----------------------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: November 7, 1997 By: /s/ Donald C. Darling
----------------------------------
Donald C. Darling
Chief Financial Officer and Chief
Accounting Officer
-16-
Exhibit 10.1
SECOND AMENDMENT
to
CREDIT AGREEMENT
AMENDMENT, dated as of October 3, 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 (as amended, 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 requested that the Credit Agreement be modified as
provided in this Amendment, and the Lenders, the Issuing Bank and the Agent are
willing to effect such modifications, subject to the terms and conditions
specified herein.
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, as amended hereby. In addition, the following terms shall have the
following meanings:
"CREDIT AGREEMENT" shall have the meaning specified in Recital A hereto.
"SECOND AMENDMENT DATE" shall have the meaning specified in Section 5
hereof.
2. AMENDMENTS TO CREDIT AGREEMENT.
(a) Section 1.1 of the Credit Agreement (Defined Terms) is hereby amended
by adding the following new definition in appropriate alphabetical order:
"'AMI': ADVANCED MATERIALS INVESTMENTS HOLDING S.A., A LUXEMBOURG
CORPORATION."
"'REPORTING ENTITY': ANY ENTITY WHICH IS REQUIRED TO FILE PERIODIC AND
OTHER REPORTS WITH THE SEC UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED."
1
<PAGE>
(b) The parties have agreed that so long as the Borrower is a Reporting
Entity, it may satisfy its reporting requirements under paragraphs (a) and (b)
of Section 6.3 of the Agreement (Financial Statements, Reports, Etc.) by
delivering to the Lenders its quarterly and annual reports on Forms 10-Q and
10-K, respectively. In order to reflect that understanding, the parties hereby
amend said Section 6.3 by adding the following new paragraph at the end thereof:
"NOTWITHSTANDING THE FOREGOING, SO LONG AS THE BORROWER IS A REPORTING
ENTITY, (X) IT MAY SATISFY THE REQUIREMENTS OF SECTION 6.3(A) BY
DELIVERING TO THE LENDERS WITHIN TWO BUSINESS DAYS AFTER THE FILING
THEREOF WITH THE SEC BUT IN ANY EVENT NO LATER THAN 45 DAYS AFTER THE END
OF EACH OF THE FIRST THREE FISCAL QUARTERS OF EACH FISCAL YEAR OF THE
BORROWER, THE BORROWER'S QUARTERLY REPORT ON FORM 10-Q FOR SUCH QUARTER
AND (Y) IT MAY SATISFY THE REQUIREMENTS OF SECTION 6.3(B) BY DELIVERING
TO THE LENDERS WITHIN TWO BUSINESS DAYS AFTER THE FILING THEREOF WITH THE
SEC BUT IN ANY EVENT NO LATER THAN 90 DAYS AFTER THE END OF EACH FISCAL
YEAR OF THE BORROWER, THE BORROWER'S ANNUAL REPORT ON FORM 10-K FOR SUCH
QUARTER, ACCOMPANIED BY A CERTIFICATE OF THE BORROWER'S AUDITORS SHOWING
WHETHER THE BORROWER IS IN COMPLIANCE WITH THE FINANCIAL COVENANTS
CONTAINED IN SECTIONS 6.18, 6.19 AND 6.20, 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."
(c) The parties have agreed that the Borrower may provide one-year
forecasts instead of the three-year forecasts currently required under the
Credit Agreement. In order to reflect that understanding, the parties hereby
amend paragraph (f) of Section 6.3 of the Credit Agreement (Financial
Statements, Reports, Etc.) in its entirety to read as follows:
"(F) AS SOON AS AVAILABLE AND IN ANY EVENT WITHIN 90 DAYS AFTER THE
BEGINNING OF EACH FISCAL YEAR OF THE BORROWER, ONE- YEAR FORECASTS
COVERING SUCH FISCAL YEAR, PREPARED BY A RESPONSIBLE OFFICER OF THE
BORROWER AND CERTIFIED BY SUCH OFFICER TO HAVE BEEN PREPARED IN GOOD
FAITH AND BASED UPON REASONABLE ASSUMPTIONS; AND"
(d) The parties have agreed that, before the Borrower consummates any
merger, consolidation, asset acquisition or other Investment, one of its
Responsible Officers will certify that no Default or Event of Default exists or
would result therefrom. In order to reflect that understanding, the parties
hereby amend clause (z) of Section 6.3(g) of the Credit Agreement (which was
added by the First Amendment dated as of April 15, 1997) in its entirety to read
as follows:
"(Z) A CERTIFICATE OF A RESPONSIBLE OFFICER OF THE BORROWER TO THE EFFECT
THAT, TO THE BEST OF HIS KNOWLEDGE, AFTER DUE INQUIRY, NO DEFAULT OR
EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING OR WOULD OCCUR AS A
RESULT OF SUCH CORPORATE EVENT, AND 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
2
<PAGE>
TO THE AGENT THE CALCULATIONS MADE TO DETERMINE SUCH COMPLIANCE AND THE
INFORMATION REQUIRED TO MAKE SUCH CALCULATIONS;"
(e) The parties have agreed that the Borrower shall provide to the Banks
copies of any reports, statements or other documents filed by it with the SEC
within two Business Days after such filing. In order to reflect that
understanding, the parties hereby amend Section 6.3 of the Credit Agreement
(Financial Statements, Reports, Etc.) by redesignating clause (h) thereof as
clause (j) and adding the following new clause (h) thereto:
"(H) AS SOON AS AVAILABLE AND IN ANY EVENT WITHIN TWO BUSINESS DAYS AFTER
THE FILING THEREOF, COPIES OF ANY REPORTS, STATEMENTS OR OTHER DOCUMENTS
FILED BY THE BORROWER WITH THE SEC;"
(f) The parties have agreed that Section 4.2 of the Disclosure Schedule
will be updated by the Borrower only once a year. In order to reflect that
understanding, the parties hereby amend Section 6.3 of the Credit Agreement
(Financial Statements, Reports, Etc.) by adding the following new clause (i)
thereto:
"(I) TOGETHER WITH EACH SET OF FINANCIAL STATEMENTS DELIVERED TO THE
LENDERS PURSUANT TO PARAGRAPH (B) ABOVE, AN UPDATE OF SECTION 4.2 OF THE
DISCLOSURE SCHEDULE, REFLECTING THE BORROWER'S CAPITAL STRUCTURE AND
SUBSIDIARIES ON THE DATE OF DELIVERY OF SUCH FINANCIAL STATEMENTS AND
CERTIFIED BY A RESPONSIBLE OFFICER OF THE BORROWER (A "SECTION 4.2
UPDATE"); FOR PURPOSES OF SECTION 5.2(A), ALL REPRESENTATIONS AND
WARRANTIES SET FORTH IN SECTION 4.2 WHICH REFER TO THE DISCLOSURE
SCHEDULE SHALL BE DEEMED TO RELATE EXPRESSLY TO THE DATE OF THE THEN MOST
RECENT SECTION 4.2 UPDATE; AND"
(g) The parties have agreed that so long as the Borrower is a Reporting
Entity, its notification requirements under Section 6.4 of the Credit Agreement
(Notice of Adverse Events and Significant Changes) will be modified in certain
respects. In order to reflect that understanding, the parties hereby amend said
Section 6.4 by adding the following new paragraph at the end thereof:
"SO LONG AS THE BORROWER IS A REPORTING ENTITY, IT SHALL DELIVER TO THE
LENDERS COPIES OF ALL REPORTS ON FORM 8-K FILED BY IT FROM TIME TO TIME
WITH THE SEC, PROMPTLY AFTER SUCH FILING. IF THE BORROWER HAS FILED A
REPORT ON FORM 8-K WITH RESPECT TO AN EVENT DESCRIBED IN THIS SECTION 6.4
OR ANY SUCH EVENT HAS BEEN DISCLOSED BY THE BORROWER ON ANY REPORT ON
FORM 10-Q OR 10-K, IT MAY SATISFY THE NOTICE REQUIREMENTS OF THIS SECTION
BY DELIVERING A COPY OF SUCH FORM 8-K, 10-Q OR 10-K TO THE AGENT, THE
ISSUING BANK AND EACH LENDER. NOTHING HEREIN CONTAINED SHALL BE DEEMED TO
WAIVE THE OBLIGATION OF THE BORROWER TO FURNISH IN ACCORDANCE WITH THIS
SECTION 6.4 PROMPT WRITTEN NOTICES OF ALL EVENTS SPECIFIED HEREIN,
IRRESPECTIVE OF WHETHER SUCH EVENTS WOULD REQUIRE THE FILING OF A REPORT
ON FORM 8-K WITH THE SEC OR DISCLOSURE ON A REPORT ON FORM 10-Q OR 10-K."
3
<PAGE>
(h) The parties have agreed that the Borrower shall be permitted to make
asset acquisitions without the prior consent of the Lenders, so long as no
Default or Event of Default shall have occurred and be continuing or would occur
as a result of such acquisition. In order to reflect that understanding, the
parties hereby amend Section 6.14 of the Credit Agreement (Investments) by
deleting the word "and" which precedes clause (h) thereof and inserting the
following new clause at the end thereof:
", AND (I) SO LONG AS (X) NO DEFAULT OR EVENT OF DEFAULT SHALL HAVE
OCCURRED AND BE CONTINUING OR WOULD OCCUR AS A RESULT THEREOF, (Y) THE
BORROWER SHALL HAVE DELIVERED THE FINANCIAL STATEMENTS AND CERTIFICATES
REQUIRED TO BE DELIVERED BY IT IN CONNECTION WITH SUCH INVESTMENT UNDER
SECTION 6.3(G), AND (Z) IF SUCH INVESTMENT IS MADE IN AN AFFILIATE OF THE
BORROWER OR ANY OF ITS SUBSIDIARIES, IT COMPLIES WITH SECTION 6.16,
INVESTMENTS OF THE TYPE DESCRIBED IN CLAUSE (IV) OF THE DEFINITION OF
SAID TERM."
(i) The parties have agreed to define with greater precision the business
in which the Borrower and its Subsidiaries may engage hereafter. In order to
reflect that understanding, the parties hereby amend Section 6.15 of the Credit
Agreement (Change in Nature of Business) in its entirety to read as follows:
"6.15 CHANGE IN NATURE OF BUSINESS.
THE BORROWER SHALL, AND SHALL CAUSE ITS SUBSIDIARIES TO, BE PRIMARILY
ENGAGED AT ALL TIMES IN BUSINESSES RELATED TO SPECIALTY ALLOYS,
ENGINEERED CERAMIC MATERIALS, AND COMPOSITES CONSISTING OF ENGINEERED
MATERIALS HAVING UNIQUE PROPERTIES, FORMED FROM TWO OR MORE MATERIALS
THAT ARE MECHANICALLY AND/OR PHYSICALLY BONDED."
(j) The parties have agreed that the occurrence of an event specified in
paragraph (f) of Section 7.1 of the Credit Agreement (Events of Default) with
respect to SIMA will not constitute an Event of Default under the Credit
Agreement. In order to reflect that understanding, the parties hereby amend said
paragraph (f) by deleting the words "or SIMA" therefrom.
(k) The parties have agreed to modify the change in control provisions
set forth in paragraph (i) of Section 7.1 of the Credit Agreement (Events of
Default). In order to reflect that understanding, the parties hereby amend said
paragraph (i) in its entirety to read as follows:
"(I) (X) SIMA, LWH AND AMI SHALL CEASE TO OWN BENEFICIALLY IN THE
AGGREGATE, DIRECTLY OR INDIRECTLY, WITH FULL CONTROL THEREOF AND FREE AND
CLEAR OF ANY LIENS, AT LEAST 35% OF ALL OUTSTANDING SHARES OF CAPITAL
STOCK OF THE BORROWER HAVING ORDINARY VOTING POWER FOR THE ELECTION OF
DIRECTORS OF THE BORROWER, OR (Y) SIMA AND LWH SHALL CEASE TO HAVE VOTING
CONTROL OVER CAPITAL STOCK OF THE BORROWER SUFFICIENT TO ELECT A MAJORITY
OF ITS BOARD OF DIRECTORS, OR (Z) DIRECTORS NOMINATED OR APPROVED BY SIMA
SHALL CONSTITUTE AT ANY TIME LESS THAN A MAJORITY OF THE BOARD OF
4
<PAGE>
DIRECTORS OF THE BORROWER; FOR PURPOSES OF THIS SECTION, VOTING CONTROL
OVER SHARES OF CAPITAL STOCK OF THE BORROWER MEANS THE RIGHT TO VOTE SUCH
SHARES WITH COMPLETE DISCRETION, WHETHER SUCH RIGHT IS DERIVED FROM
OWNERSHIP OF SUCH SHARES, FROM PROXIES SUBMITTED BY THE BENEFICIAL
HOLDERS THEREOF (OTHER THAN PROXIES WHICH INCLUDE VOTING DIRECTIONS
CONTRARY TO DIRECTIONS SOLICITED BY SIMA OR LWH, AS THE CASE MAY BE) OR
FROM AN AGREEMENT WITH SUCH BENEFICIAL HOLDERS; OR"
(l) All references in the Credit Agreement to "this Agreement" or such
words as "hereof", "herein", "hereto" or "hereunder" shall be deemed to be
references to the Credit Agreement as amended by 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 Agent for the benefit of the Lenders
and the Issuing 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, (b) this Amendment,
and the Credit Agreement as amended hereby, 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 and
delivery of this Amendment, and its performance of this Amendment and of the
Credit Agreement as amended hereby, 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 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
5
<PAGE>
representations and warranties had been made on the date hereof, except for such
representations and warranties which specifically relate to an earlier date.
5. CONDITIONS PRECEDENT. This Amendment shall become effective on the
date (the "Second 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; and
(b) 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 Second 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, the
Issuing Bank and each Lender 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
6
<PAGE>
Amendment by facsimile transmission shall be as effective as delivery of a
manually signed 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/ Oliver Perrain
------------------------------------
Name: Oliver Perrain
Title: First Vice President
SOCIETE GENERALE NEW YORK BRANCH
By: /s/ Cynthia Colucci
------------------------------------
Name: Cynthia Colucci
Title: Vice President
7
<PAGE>
BANQUE NATIONALE DE PARIS
NEW YORK BRANCH
By: /s/ Patrick Pages /s/ Nathalie Herrington
-----------------------------------------------------
Name: Patrick Pages Name: Nathalie Herrington
Title: Vice President Title: Vice President
BANQUE NATIONALE DE PARIS
GEORGETOWN BRANCH
By:/s/ Patrick Pages /s/ Nathalie Herrington
-----------------------------------------------------
Name: Patrick Pages Name: Nathalie Herrington
Title: Vice President Title: Vice President
MELLON BANK, N.A.
By:/s/ Stephen B. Derby
-----------------------------------------------------
Name: Stephen B. Derby
Title: Assistant Vice President
8
<PAGE>
The undersigned, Societe Industrielle de Materiaux Avances ("SIMA"),
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: Directeur General
9
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,746
<SECURITIES> 0
<RECEIVABLES> 32,682
<ALLOWANCES> (168)
<INVENTORY> 50,699
<CURRENT-ASSETS> 89,635
<PP&E> 77,879
<DEPRECIATION> (40,079)
<TOTAL-ASSETS> 132,255
<CURRENT-LIABILITIES> 24,355
<BONDS> 810
0
0
<COMMON> 155
<OTHER-SE> 97,919
<TOTAL-LIABILITY-AND-EQUITY> 132,255
<SALES> 138,372
<TOTAL-REVENUES> 138,372
<CGS> 105,347
<TOTAL-COSTS> 105,347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48
<INTEREST-EXPENSE> 617
<INCOME-PRETAX> 27,072
<INCOME-TAX> 9,766
<INCOME-CONTINUING> 17,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,306
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
