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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file No. 000-22029
---------
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
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(315) 798-2900
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------------------------------------------------
(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 [ ]
As of May 1, 1998, there were 15,479,000 shares of the Issuer's common stock,
par value $.01 per share, outstanding.
<PAGE>
SPECIAL METALS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of March 31, 1998 and December 31, 1997 2
Condensed Statements of Operations and Retained Earnings
for the three months ended March 31, 1997 and 1998 3
Condensed Statements of Cash Flows for the three months ended
March 31, 1997 and 1998 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 and Qualitative Disclosures About Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
-1-
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
SPECIAL METALS CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited - In thousands)
December 31, March 31,
1997 1998
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 12,237 $ 11,252
Restricted deposits 1,161 1,360
Accounts receivable, less allowance for
doubtful accounts of $168 for 1997 and 1998 30,212 35,733
Inventories 50,580 55,999
Prepaid expenses 216 799
Deferred income taxes 2,375 2,375
---------- ----------
Total current assets 96,781 107,518
Property, plant and equipment 39,727 42,336
Deferred income taxes 1,618 1,420
Other assets 3,624 3,720
---------- ----------
Total assets $ 141,750 $ 154,994
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,688 $ 20,157
Accrued liabilities 11,459 10,689
Income taxes payable 493 3,658
Current obligation under capital leases 316 306
---------- ----------
Total current liabilities 27,956 34,810
Long-term obligation under capital leases 174 124
Other long-term liabilities 9,649 9,720
---------- ----------
Total liabilities 37,779 44,654
Commitments and contingencies
Shareholders' equity:
Preferred stock - -
Common stock 155 155
Paid-in surplus 75,678 75,712
Pension adjustment (496) (496)
Retained earnings 28,634 34,969
---------- ----------
Total shareholders' equity 103,971 110,340
---------- ----------
Total liabilities and shareholders' equity $ 141,750 $ 154,994
========== ==========
See accompanying notes to condensed financial statements.
-2-
<PAGE>
SPECIAL METALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
(Unaudited - In thousands, except per share amounts)
Three months ended March 31,
1997 1998
-----------------------------
Net sales $ 47,424 $ 49,191
Cost of goods sold 36,029 37,513
-----------------------------
11,395 11,678
Selling, general and administrative expenses 1,613 1,820
-----------------------------
Operating income 9,782 9,858
Interest expense 521 33
Other income (40) (189)
-----------------------------
Income before income taxes 9,301 10,014
Income tax expense 3,704 3,679
-----------------------------
Net income 5,597 6,335
Retained earnings
Beginning of period 5,632 28,634
-----------------------------
End of period $ 11,229 $ 34,969
=============================
Net income per share (Basic and Dilutive) $ 0.41 $ 0.41
=============================
Weighted average shares outstanding
(Basic and Dilutive) 13,562 15,478
=============================
See accompanying notes to condensed financial statements.
-3-
<PAGE>
SPECIAL METALS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
Three months ended March 31,
1997 1998
--------------------------
Operating Activities:
Net income $ 5,597 $ 6,335
Depreciation and amortization 1,027 906
Other adjustments and changes in
assets and liabilities (381) (4,355)
--------------------------
Net cash provided by operating activities 6,243 2,886
Investing Activities:
Capital expenditures (1,621) (3,462)
Net change in restricted deposits - (199)
--------------------------
Net cash used in investing activities (1,621) (3,661)
Financing Activities:
Proceeds from sale of common stock 45,961 -
Borrowings under revolving credit
facilities - -
Repayment of revolving credit facilities (26,000) -
Proceeds from (repayment of) subordinated
notes payable to affiliates (1,500) -
Repayments of term loans (20,000) -
Financing and other deferred costs - (150)
Payments on capital lease obligations (74) (60)
Other (11) -
--------------------------
Net cash used in financing activities (1,624) (210)
--------------------------
Net increase (decrease) in cash and cash
equivalents 2,998 (985)
Cash and cash equivalents at beginning of period 3,336 12,237
--------------------------
Cash and cash equivalents at end of period $ 6,334 $ 11,252
==========================
See accompanying notes to condensed financial statements.
-4-
<PAGE>
SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(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 March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
December 31, March 31,
1997 1998
-------------------------------
Raw materials and supplies $ 13,007 $ 14,756
Work-in-process 37,573 41,243
-------------------------------
$ 50,580 $ 55,999
===============================
NOTE 3 - 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 adjoining
property 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. The Company is also responsible for operation
and maintenance
-5-
<PAGE>
SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
costs for a period of 30 years, which began in 1997. 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 also been discovered at the North Gravel Pit site. A study was
completed in 1997 to determine the extent of the contamination and to select an
appropriate remedial alternative. A report detailing the work and a recommended
remedial alternative was prepared by the Company's engineers and submitted to
the DEC on or around the end of January 1998. The recommended remedial
alternative has a total estimated capital cost for the remedy of approximately
$910,000 with a total estimated annual operation and maintenance cost of
approximately $39,000. The estimated 30 year present value for operation and
maintenance costs is approximately $600,000. The engineers' cost estimates are,
however, preliminary and, accordingly, may be subject to material adjustment
during the period of remedial design. It is not known at this time whether the
DEC will accept the recommended remedial alternative.
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.
-6-
<PAGE>
SPECIAL METALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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.
-7-
<PAGE>
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 three months ended March 31, 1998, the
Superalloy Billet and Bar Division, the Powder Division and the Dental Division
accounted for 88%, 8% and 4%, respectively, of the Company's net sales of $49.2
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, one-year supply contracts,
long-term firm price contracts, and indexed price contracts. A substantial
majority of the Company's net sales during the three months ended March 31, 1998
were sold under conventional purchase orders, one-year supply contracts, and
indexed price contracts.
Export sales represent a significant portion of the Company's business. During
the three months ended March 31, 1998, sales to purchasers outside of the United
States totaled 29% of the Company's net sales. Substantially 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. Although the Company's long-term agreements
provide for certain price adjustments to reflect changes in the price of raw
materials, once a customer places an order, the price is fixed and is not
subject to further adjustment. 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 forward contracts to
manage its exposure to changes in nickel prices and also enters into contracts
for the purchase of scrap with customers. Nickel forward contracts obligate the
Company to make or receive payment equal to the net change in value of the
contract at its maturity. Substantially all contracts are designed as hedges of
the Company's firm sales commitments, are timed to correspond to the commitment
period, and are effective in hedging the
-8-
<PAGE>
Company's exposure to changes in nickel prices during that cycle.
At March 31, 1998, the Company had open purchase contracts with a notional
principal value of approximately $8.7 million. The fair value of the material
covered by these contracts based on the March 31, 1998 price quoted on the LME,
was approximately $6.4 million. Unrealized gains and losses on the contracts
which have been designated, and are effective, as hedges for firm sales
commitments, totaling approximately $2.0 million, have been deferred. Unrealized
losses on forward contracts not designated or effective as hedges, totaling
approximately $.3 million, have been recognized in income currently.
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,
1997 1998
------ ------
Net sales 100.0% 100.0%
Costs of goods sold 76.0 76.3
------ ------
Gross profit 24.0 23.7
Selling, general and administrative expenses 3.4 3.7
------ ------
Operating income 20.6 20.0
Interest expenses 1.1 .0
Other income (.1) (.4)
------ ------
Income before income taxes 19.6 20.4
Income taxes expense 7.8 7.5
------ ------
Net income 11.8 12.9
====== ======
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997.
NET SALES. Net sales increased $1.8 million, or 3.7% from $47.4 million in the
three months ended March 31, 1997 to $49.2 million in the three months ended
March 31, 1998. This increase was principally due to a shift in the Company's
product mix toward higher value-added products and improved pricing, offset
somewhat by a slight decrease in pounds shipped.
COST OF GOODS SOLD. Cost of goods sold increased $1.5 million, or 4.1% from
$36.0 million in the three months ended March 31, 1997 to $ 37.5 million in the
three months ended March 31, 1998, primarily as a result of increased sales and
increased costs associated with implementing the new management information
-9-
<PAGE>
systems, offset, in part, by cost reduction programs. In addition, depreciation
and amortization expense decreased from $1.0 million in three months ended March
31, 1997 to $.9 million in three months ended March 31, 1998. As a percentage of
net sales, cost of goods sold increased from 76.0% in the three months ended
March 31, 1997 to 76.3% in the three months ended March 31, 1998.
GROSS PROFIT. Gross profit increased $.3 million, or 2.5% from $11.4 million in
the three months ended March 31, 1997 to $11.7 million in the three months ended
March 31, 1998. This increase was due primarily to increased sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.2 million, or 12.8% from $1.6 million in the
three months ended March 31, 1997 to $1.8 million in the three months ended
March 31, 1998. This increase was due to the increase in net sales and an
increase in the Company's research and development activities. Selling, general
and administrative expenses as a percentage of net sales increased from 3.4% in
the three months ended March 31, 1997 to 3.7% in the three months ended March
31, 1998.
OPERATING INCOME. Operating income increased $.1 million, or .77% from $9.8
million in the three months ended March 31, 1997 to $9.9 million in the three
months ended March 31, 1998. Operating income as a percentage of net sales
decreased from 20.6% in the three months ended March 31, 1997 to 20.0% in the
three months ended March 31, 1998.
INTEREST EXPENSE. Interest expense decreased $.5 million, or 93.7% from $.5
million in the three months ended March 31, 1997 to zero in the three months
ended March 31, 1998. 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 was $3.7 million in the three months ended
March 31, 1997 and three months ended March 31, 1998. The effective income tax
rate decreased from 39.8% in three months ended March 31, 1997 to 36.7% in the
three months ended March 31, 1998.
NET INCOME. Net income increased 13.2% from $5.6 million in the three months
ended March 31, 1997 to $6.3 million in the three months ended March 31, 1998.
Net income as a percentage of net sales increased from 11.8% in the three months
ended March 31, 1997 to 12.9% in the three months ended March 31, 1998.
-10-
<PAGE>
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 $6.2 million and $2.9 million for
the three months ended March 31, 1997 and 1998, respectively. The difference in
cash flows from operating activities is principally the result of increased
working capital requirements attributable to increases in accounts receivable
and inventory due to increased sales in 1998 partially offset by an increase in
accounts payable.
Capital expenditures were $1.6 million and $3.5 million for the three months
ended March 31, 1997 and 1998, 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 other 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) $56 million, declining
$4 million per year from 1998 through 2001, at which time all remaining
outstanding amounts are due, or (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, 1998, the
borrowing base was $58.6 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 working capital commitment is due monthly. At
March 31, 1998, there were no amounts outstanding under the Credit Agreement.
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 restricting the ability of the Company to make certain
restricted payments, create liens, guarantee indebtedness or 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
earnings before interest, taxes, depreciation and amortization ("EBITDA"). The
Company may prepay amounts owing under the Credit Agreement at its option at any
time.
-11-
<PAGE>
Over the next four years, the Company plans to invest up to $54 million 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 position as a technical leader. 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 3 to the
Condensed Financial Statements in Part I. Item 1. "Condensed Financial
Statements (unaudited)". See also Part II. Other information, Item 5(b),
"Forward-Looking Statements."
The Company expects that its cash and cash equivalents 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 March 31, 1998, the Company's backlog orders aggregated approximately
$126.9 million, compared to approximately $141.7 million at March 31, 1997. The
decrease in backlog orders is primarily due to changes in customer order
patterns. The Company defines backlog as firm purchase orders, which are
generally subject to cancellation by the customer.
Substantially all orders in the backlog at March 31, 1998 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.
-12-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(A) PRESS RELEASE
The Company issued a press release dated April 16, 1998 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter ended March 31, 1998.
(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
Section 21E of the Securities Exchange 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.
-13-
<PAGE>
(C) RETIREMENT OF CHAIRMAN OF THE BOARD
During the quarter of 1998, Robert D. Halverstadt, Chairman of the Board,
informed the Company that he will retire from that position later this year. Mr.
Halverstadt will remain a Director of the Company. The Company plans to make a
determination regarding his successor prior to such retirement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to Stockholders Agreement dated as of March 1, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
March 31, 1998.
-14-
<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 11, 1998 By: /s/ Donald R. Muzyka
------------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: May 11, 1998 By: /s/ Donald C. Darling
-------------------------
Donald C. Darling
Chief Financial Officer and Chief
Accounting Officer
-15-
EXHIBIT 10.1
Amendment No. 1 to Stockholders Agreement
Amendment No. 1, dated as of March 1, 1998 (this "Amendment") to the
Amended and Restated Stockholders' Agreement, dated as of February 25, 1997 (the
"Stockholders Agreement"), among Special Metals Corporation, a Delaware
corporation (the "Corporation"), Societe Industrielle de Materiaux Avances, a
societe anonyme organized under the laws of the Republic of France ("SIMA"),
Advanced Materials Investments Holding S.A., a Luxembourg corporation ("AMI"),
and LWH Holding S.A., a Luxembourg corporation ("LWH" and together SIMA and AMI,
the "Stockholders"). Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings ascribed thereto in the Stockholders
Agreement.
WHEREAS the Corporation and the Stockholders desire to amend the
Stockholders Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Section 5 of the Stockholders Agreement is hereby amended and
restated to read in its entirety as follows:
(a) Section 5. Voting. The Stockholders agree that all Shares of stock
beneficially owned at such time by the Stockholders ("Relevant Shares") shall be
voted as follows:
(i) if such vote relates to any matter submitted to a vote of the
stockholders of the Corporation other than the election of directors,
all Relevant Shares shall be voted in accordance with the instructions
of the Majority Stockholders;
<PAGE>
2
(ii) if such vote relates to the election of directors:
(A) as to that number of directors that equal the maximum
number of directors that is less than the 50% of directors then in
office (including directors that will be in office following such
election), all Relevant Shares shall be voted in accordance with the
instructions of the Majority Stockholders; and
(B) as to all other directors, all Relevant Shares shall be
voted in accordance of the instructions of the SuperMajority
Stockholders (as defined below). If the SuperMajority Stockholders
are unable to agree as to any such vote, each Stockholder shall be
entitled to vote its shares with respect to such vote in its
discretion.
(b) In furtherance of the foregoing, so long as the total number of
directors and the number of directors in each of Class I, II and III
remain unchanged, the Majority Stockholders shall, pursuant to clause
(a)(ii)(A) of this Section 5 have the right to determine the vote of all
Shares with respect to one director in each of the three Classes and the
SuperMajority Stockholders shall, pursuant to clause (a)(ii)(B) of this
Section 5 have the right to determine the vote of all Shares with
respect to the other directors. If the total number of directors or the
number of directors in any Class is changed, the parties shall negotiate
appropriate changes to this clause (b) to effectuate the provisions of
clause (a)(ii) of Section 5.
(c) The Majority Stockholder or the SuperMajority Stockholders as
applicable, shall deliver a written notice to all Stockholders at least
five days prior to any election setting forth the Majority Stockholder's
or SuperMajority Stockholders' voting instructions.
(d) For purposes of this Section 5, SuperMajority Stockholders shall
mean the Stockholders who hold at least a number of shares of common
stock equal to one plus the number of shares of common stock
beneficially owned by SIMA; provided that if such Shares do not equal
50% of the voting shares of the Corporation's capital stock entitled to
vote for directors ("Voting Shares"), SuperMajority Stockholders shall
mean Majority Stockholders.
(e) At such time as the Stockholders no longer hold 50% of the
outstanding Voting Shares, all Shares shall be voted as a unit,
including with respect to the election of directors, in accordance with
Section 5.1(a)(i) above.
<PAGE>
3
2. The parties hereby ratify and confirm that they continue to be bound
by the terms and provisions of the Stockholders Agreement. Except as expressly
modified hereby, all other terms and provisions of the Stockholders Agreement
shall continue in full force and effect, and the parties shall be entitled to
all of the applicable benefits thereof.
3. This Amendment shall be governed, by and construed in accordance
with, the laws of the State of New York regardless of the laws that might
otherwise govern under applicable principles of conflict laws thereof.
4. This Amendment may be executed in counterparts, each of which shall
be deemed an original, but all of which taken together shall constitute one and
the same instrument. This Amendment shall become effective and binding upon each
party hereto upon execution and delivery of the counterpart hereof by such
party.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
SPECIAL METALS CORPORATION
By: /s/ Donald R. Muzyka
------------------------
Name: Donald R. Muzyka
Title: President and Chief Executive Officer
<PAGE>
4
SOCIETE INDUSTRIELLE DE
MATERIAUX AVANCES
By: /s/ Edouard Duval
---------------------
Name: Edouard Duval
Title: Directeur General
ADVANCED MATERIALS
INVESTMENTS HOLDING S.A.
By: /s/ Claude Kremer
---------------------
Name: Claude Kremer
Title: Director
By: /s/ Paul Mousel
-------------------
Name: Paul Mousel
Title: Director
By: /s/ Guy Harles
------------------
Name: Guy Harles
Title: Director
LWH HOLDING S.A.
By: /s/ Marie-Therese Gorges
----------------------------
Name: Marie-Therese Gorges
Title: Director
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,612
<SECURITIES> 0
<RECEIVABLES> 35,901
<ALLOWANCES> (168)
<INVENTORY> 55,999
<CURRENT-ASSETS> 107,518
<PP&E> 83,704
<DEPRECIATION> (41,368)
<TOTAL-ASSETS> 154,994
<CURRENT-LIABILITIES> 34,810
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 110,185
<TOTAL-LIABILITY-AND-EQUITY> 154,994
<SALES> 49,191
<TOTAL-REVENUES> 49,191
<CGS> 37,513
<TOTAL-COSTS> 37,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 10,014
<INCOME-TAX> 3,679
<INCOME-CONTINUING> 6,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,335
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>