SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(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, 1999
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 April 30, 1999, 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, 1999
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations
and Retained Earnings for the three months ended
March 31, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and
1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Special Metals Corporation
Condensed Consolidated Balance Sheets
(Unaudited - In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,622 $ 42,499
Restricted deposits 352 -
Accounts receivable - trade, less allowance for doubtful accounts
of $3,179 in 1998 and $3,122 in 1999 137,634 134,233
Inventories 271,812 250,373
Prepaid expenses and other current assets 16,991 22,731
------------------------------
Total current assets 466,411 449,836
Property, plant and equipment 309,025 304,622
Non-competition agreement, net of accumulated amortization
of $617 in 1998 and $1,542 in 1999 36,383 35,458
Other assets 28,335 29,977
------------------------------
Total assets $ 840,154 $ 819,893
==============================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 46,753 $ 51,318
Accrued liabilities 79,576 68,146
Notes payable 3,163 2,360
Current portion of long-term debt and capital leases 13,155 14,347
------------------------------
Total current liabilities 142,647 136,171
Long-term debt and capital leases 282,792 279,835
Postretirement benefits obligation 188,748 190,134
Other long-term liabilities 16,537 15,032
Commitments and contingencies
Redeemable, convertible preferred stock, Series A, nonvoting,
$0.01 par value, 10,000,000 shares authorized, 1,940,000
shares issued and outstanding 98,071 99,678
Shareholders' equity:
Common stock, $0.01 par value, 35,000,000 shares authorized, 155 155
15,479,000 shares issued and outstanding
Paid-in surplus 75,712 75,712
Accumulated other comprehensive loss (1,911) (5,928)
Retained earnings 37,403 29,104
------------------------------
Total shareholders' equity 111,359 99,043
------------------------------
Total liabilities and shareholders' equity $ 840,154 $ 819,893
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
Special Metals Corporation
Condensed Consolidated Statements of Operations and Retained Earnings
(Unaudited - In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
-------------------------------------
<S> <C> <C>
Net sales $ 49,191 $ 151,708
Cost of goods sold 37,513 142,937
-------------------------------------
11,678 8,771
Selling, general and administrative expenses 1,820 15,157
-------------------------------------
Operating income (loss) 9,858 (6,386)
Interest income - (570)
Interest expense 33 5,669
Other income (189) (405)
-------------------------------------
Income (loss) before income taxes 10,014 (11,080)
Income tax expense (benefit) 3,679 (4,387)
-------------------------------------
Net income (loss) 6,335 (6,693)
Accumulated preferred stock dividends - 1,606
-------------------------------------
Net income (loss) attributable to common shareholders 6,335 (8,299)
Retained earnings
Beginning of period 28,634 37,403
-------------------------------------
End of period $ 34,969 $ 29,104
=====================================
Net income (loss) per share (Basic and Dilutive) $ 0.41 $ (0.54)
=====================================
Weighted average shares outstanding (Basic and Dilutive) 15,478 15,479
=====================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
Special Metals Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited - In thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 6,335 $ (6,693)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 906 8,218
Other adjustments and changes in assets and liabilities (4,355) 9,087
------------------------------
Net cash provided by operating activities 2,886 10,612
INVESTING ACTIVITIES:
Capital expenditures (3,462) (2,726)
Net change in restricted deposits (199) 352
------------------------------
Net cash used in investing activities (3,661) (2,374)
FINANCING ACTIVITIES:
Repayment of term loans and other long-term debt - (4,178)
Financing and other deferred costs (150) (37)
Payments on capital lease obligations (60) (152)
-------------------------------
Net cash used in financing activities (210) (4,367)
Net effect of exchange rate changes on cash - (994)
-------------------------------
Net increase (decrease) in cash and cash equivalents (985) 2,877
Cash and cash equivalents at beginning of period 12,237 39,622
------------------------------
Cash and cash equivalents at end of period $ 11,252 $ 42,499
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
Note 1 - Accounting Policies
The accompanying unaudited condensed consolidated 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, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
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, 1998.
Note 2 - Inventories
Inventories consist of the following (in thousands):
December 31, March 31,
1998 1999
Raw materials and supplies $ 67,198 $ 46,268
Work-in-process 151,136 163,291
Finished goods 57,478 47,830
------------------------------
275,812 257,389
Adjustment to LIFO cost (4,000) (7,016)
-------------------------------
$ 271,812 $ 250,373
==============================
Note 3 - Inco Alloys Acquisition
On October 28, 1998, the Company acquired the stock of the companies which
comprised the Inco Alloys International high performance nickel alloys business
unit ("IAI") of Inco Limited ("Inco") and entered into a non-competition
agreement with Inco (the "Acquisition").
The Acquisition has been accounted for under the purchase method of accounting,
and the results of operations of IAI have been included in the consolidated
statements of operations since the date of acquisition. The initial $328 million
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their estimated fair values. This allocation, however, is subject to
adjustment based upon the final purchase price adjustment, which is pending.
The following unaudited pro forma information presents the results of operations
of the Company as if the Acquisition had taken place at January 1, 1998. These
pro forma results of operations have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which actually
would have resulted had the Acquisition occurred on the date indicated, or which
may result in the future.
-5-
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 1999
(Unaudited)
Three months ended
March 31, 1998
(In thousands, except per share amounts)
----------------------------------------
Net sales $ 211,182
Net income 9,055
Net income available to common shareholders 7,448
Net income per share:
Basic 0.48
Diluted 0.42
Note 4 - Business Segment Information
Segment information for the three months ended March 31, 1999 is as follows. For
the three months ended March 31, 1998, the Company consisted solely of the SMC
Premium Alloys segment.
<TABLE>
<CAPTION>
INCO
SMC ALLOYS INCO
PREMIUM NORTH ALLOYS
ALLOYS AMERICA EUROPE CORPORATE TOTAL
----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 37,731 $ 68,641 $ 45,336 $ - $ 151,708
Intersegment sales 1,934 8,286 4,244 - 14,464
Operating income (loss) 6,497 (12,965) 1,418 (1,336) (6,386)
Interest expense (5,669)
Interest income 570
Other income 405
--------------
Loss before income taxes (11,080)
</TABLE>
Note 5 - Contingencies
Environmental Matters
The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater
discharges, the handling and disposal of solid and hazardous wastes and the
release of hazardous substances (collectively, "Environmental Laws"). In the
United States, for example, such laws include the Federal Clean Air Act, Clean
Water Act, Resource Conservation and Recovery Act ("RCRA"), Comprehensive
-6-
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 1999
(Unaudited)
Environmental Response, Compensation and Liability Act ("CERCLA"), and analogous
state laws. The Company uses substantial quantities of substances that are
considered hazardous or toxic under Environmental Laws. The Company's operations
pose a continuing risk of accidental releases of, and worker exposure to,
hazardous or toxic substances. There is also a risk that Environmental Laws, or
the enforcement thereof, may become more stringent in the future and that the
Company may be subject to legal proceedings brought by private parties or
government agencies with respect to environmental matters. Although the Company
believes that it is in substantial compliance with applicable requirements of
Environmental Laws, there can be no assurance that some, or all, of the risks
discussed under this heading will not result in liabilities that are material to
the Company's business, results of operations, financial condition or cash
flows.
The Company's facilities have been used for industrial purposes for a
substantial period and, over such time, these facilities have used substances or
generated and disposed of wastes which are hazardous. The Company currently
faces potential material environmental remediation liabilities in connection
with certain sites at which the Company's wastes have been allegedly released or
otherwise come to be located. At March 31, 1999, the Company had total reserves
of approximately $10.1 million to cover future costs arising from known
environmental liabilities for investigation, remediation and operation and
maintenance of remediation systems, including costs relating to its own
properties and to certain sites at which the Company's wastes have allegedly
been identified. However, the Company's actual future expenditures for
remediation of environmental conditions existing at its properties and at
offsite waste-disposal locations cannot be conclusively determined at this time.
Furthermore, additional locations at which wastes generated by the Company may
have been released or disposed, and of which the Company is currently unaware,
may in the future become the subject of remediation for which the Company may be
liable, in whole or in part. Accordingly, it is possible that the Company could
become subject to environmental liabilities in the future that could result in a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows.
The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to regulatory
enforcement under various Environmental Laws, resolution of which typically
involves the establishment of compliance programs and may involve the payment of
penalties. To date, the Company has incurred no material penalties pursuant to
Environmental Laws. The Company's 1999 capital budget provides $3.6 million for
environmental protection and compliance matters. The Company incurred capital
expenditures for environmental matters of $.8 million during the three months
ended March 31, 1999. The Company does not expect future costs of compliance
with currently enacted and proposed Environmental Laws to have a material impact
on its liquidity and capital resources. However, changes in Environmental Laws
which result in the imposition of stricter standards or requirements or more
rigorous enforcement of existing Environmental Laws could result in expenditures
in excess of amounts estimated to be required for such matters.
The following is a summary of the more significant environmental
matters or proceedings in which the Company is currently involved:
-7-
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 1999
(Unaudited)
Asbestos Exposure Actions. The Company's domestic IAI subsidiary (Inco
Alloys International, Inc., "IAII") is a co-defendant in various consolidated
and unconsolidated actions by plaintiffs, including former employees of IAII and
former employees of contractors to IAII, alleging exposure to asbestos at IAII's
Huntington, West Virginia facility. Plaintiffs' counsel have also informed IAII
that they intend to add similar claims by additional plaintiffs. Insurance
coverage is available for some of these proceedings. The Company is not able to
reasonably estimate what the ultimate loss, if any, will be with respect to
these matters. However, the damages sought by plaintiffs in these actions, if
IAII were required to pay them, could have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
Manganese Exposure Actions. IAII is a defendant in nine actions (one
not served) by plaintiffs seeking damages for alleged health problems resulting
from exposure to manganese in welding products and one action in which the
plaintiff alleges exposure, to manganese originating in wastewater from IAII's
Huntington, West Virginia facility, while an employee of the Huntington Sanitary
Board. One case is scheduled for trial in May 1999; the other cases are at
various stages of pleading and discovery. The Company does not believe that
these proceedings are likely to have a material adverse effect on the business,
financial condition, results of operations or cash flows of the Company, but
there can be no assurance that this will be the case.
Ludlow Landfill. The Company has been identified as a potentially
responsible party ("PRP") under CERCLA at the Ludlow Landfill, Clayville, New
York, due to the Company's alleged generation of certain industrial wastes,
including wastes contaminated by polychlorinated biphenyls ("PCBs"), which were
disposed at the landfill (the "Ludlow Site"). CERCLA imposes strict, joint and
several liability upon, inter alia, generators of wastes disposed at a
contaminated site, for investigation and remedial costs.
The Company assumed responsibility for remediation of the Ludlow Site
and has completed remediation except for that of an adjoining property known as
the "North Gravel Pit." The discovery of PCB contamination in the North Gravel
Pit has required further investigation and remediation. The Company's engineers
have submitted to the DEC a report detailing their investigation pursuant to the
work plan and recommending a remedial alternative. The Company has established a
reserve based on the recommended remedial alternative. However, the DEC has
notified the Company that it did not find the recommended remedial alternative
acceptable. The Company hopes to reach agreement with the DEC on the final
remedial alternative, which may include removal of additional PCB-impacted
soils, in 1999. The additional costs, if any, associated with the modified final
remedial alternative can not be determined until the areas of dispute with the
DEC are resolved. Furthermore, if the EPA, which also has jurisdiction over the
Ludlow Site, disagrees with the final remedial alternative, it may seek to
require implementation of a different remedial alternative.
The Company is also responsible for post-closure operations and
maintenance at the remainder of the Ludlow Site, including groundwater
monitoring, through 2027. These operations and maintenance costs are estimated
at approximately $90,000 per year for a total of approximately $2.6 million. At
March 31, 1999, the Company's reserve in respect of these expenses, based on a
present value calculation using a discount rate of 4%, was $1.3 million. In
addition, the Company may be required to conduct certain post-closure
activities.
-8-
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 1999
(Unaudited)
The Company and the DEC also disagree concerning the DEC's outstanding
natural resources damage claim. The DEC has requested additional annual biota
sampling for a period in excess of the post-closure operations and maintenance
period, to be incorporated in a revised post-closure operations and maintenance
plan. The Company has disputed this request. The Company cannot determine at
this time whether it will have to undertake this long-term biota sampling.
Though the Company does not believe it likely that liabilities at the
Ludlow Site will have a material adverse effect on the Company's business,
results of operations, financial condition or cash flow, this possibility cannot
be excluded.
Universal Waste Site. The owners and operators of the Universal Waste
Site, Utica, New York, conducted a preliminary site assessment pursuant to a
consent order with the DEC, which also conducted a separate preliminary site
assessment. The Company believes that at least four other potentially
responsible parties have been identified with respect to the contamination at
the site. The Company has not been obligated to become involved in the
investigation. Based upon the limited information available to it, 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 of the ultimate cost of any investigative or remedial work
which will be required, or the Company's share, if any, of such costs.
Therefore, it is possible that liabilities could arise in respect of this site
that could have a material adverse effect on the business, results of
operations, financial condition or cash flows of the Company.
Huntington and Burnaugh RCRA Facility Assessments. The Huntington, West
Virginia, and Burnaugh, Kentucky facilities of IAII have been subject to site
inspections pursuant to RCRA. Draft reports issued by the respective inspecting
agencies recommended environmental investigation at Huntington and Burnaugh.
However, neither report was ever issued in final form, and no action
has been taken by the inspecting agency since January 1996 in the case of
Huntington and April 1992 in the case of Burnaugh. If such investigation is
ultimately required, the Company could also be required to undertake significant
remediation, the cost of which could have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
Department Of Justice Investigation
In March 1999, the Company received a subpoena from a federal grand
jury investigating possible violations of the federal antitrust laws in the
nickel industry. The Company is responding to the subpoena but cannot at this
time determine what further action may be taken by the grand jury or the United
States Justice Department's Antitrust Division, which is submitting evidence to
the grand jury.
Other Matters
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. Except as
discussed above, the Company does not believe that it is presently a party to
any proceedings that are likely to have a material adverse effect on the
Company's business, financial condition, results of operation or cash flows.
-9-
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 1999
(Unaudited)
Note 6 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three month periods ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Numerator:
Net income (loss) $ 6,335 $ (6,693)
Preferred stock dividends - 1,606
-------------------------------------
Numerator for basic earnings per share -
income available to common shareholders 6,335 (8,299)
Effect of dilutive securities - preferred stock
dividends - -
-------------------------------------
Numerator for diluted earnings per share -
income available to common shareholders
after assumed conversions $ 6,335 $ (8,299)
=====================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 15,478 15,479
Effect of dilutive securities:
Employee stock options - -
Preferred stock - -
-------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average shares 15,478 15,479
=====================================
Basic earnings per share $ 0.41 $ (0.54)
=====================================
Diluted earnings per share $ 0.41 $ (0.54)
=====================================
</TABLE>
Potential common shares resulting from stock options and convertible preferred
stock were excluded from the calculation of diluted earnings per share because
their inclusion would have had an antidilutive effect on earnings per share.
-10-
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 1999
(Unaudited)
Note 7 - Comprehensive Income
Comprehensive income (loss) for the three month periods ended March 31, 1998 and
1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
----------------------------------
(In thousands)
<S> <C> <C>
Net income (loss) $ 6,335 $ (6,693)
Change in foreign currency translation adjustment - (4,017)
----------------------------------
Comprehensive income (loss) $ 6,335 $ (10,710)
Accumulated other comprehensive income (loss) consists of the following at
December 31, 1998 and March 31, 1999:
<CAPTION>
1998 1999
------------------------------------
(In thousands)
<S> <C> <C>
Pension adjustment $ (1,571) $ (1,571)
Foreign currency translation adjustment (340) (4,357)
----------------------------------
Accumulated other comprehensive income (loss) $ (1,911) $ (5,928)
==================================
</TABLE>
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<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Statements included in this Management Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report that do not
relate to present or historical conditions are "forward looking statements"
within the meaning of that term in Section 21F of the Securities Exchange Act of
1934, as amended. Additional oral or written statements may be made from time to
time, and such statements may be included in documents filed with the Securities
and Exchange Commission. 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 a substantial portion 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.
Overview
The Company manufactures high-performance nickel-based alloys and
superalloys, which are highly engineered metal alloys designed to withstand
extremes of heat, stress, and corrosion. The Company conducts its business
through three principal operating segments. The SMC Premium Alloys Division
manufactures a comprehensive range of premium grade, nickel-based and
cobalt-based wrought superalloy and special alloy long products in billet and
bar forms, which are used primarily in jet engines. This division also produces
shape memory alloys, known as Nitinol, which is used primarily in medical and
dental applications; powder metallurgy superalloy products used principally in
military and the latest generation of large commercial jet engines; and
silver-based amalgamable dental alloys. The Inco Alloys North American Division
manufactures nickel-based alloys in a broad range of product forms, including
billet, bar, rod, sheet, strip, plate, tubing, and rod-in-coil. The division
also manufactures and sells nickel-based welding consumables and
high-performance nickel-based alloy and stainless steel wire products. The Inco
Alloys European Division manufactures nickel-based alloys in billet, bar, rod,
extruded section, narrow strip, rod-in-coil, and tubular product forms. The
organization also includes a network of distribution facilities and service
centers throughout Europe. For the three months ended March 31, 1999, the SMC
Premium Alloys Division, the Inco Alloys North American Division, and the Inco
Alloys European Division accounted for 25%, 45%, and 30% respectively, of the
Company's net sales of $151.7 million.
Net Sales. Net sales include sales of the Company's high-performance
nickel-based alloy, superalloy, and special alloy products, as well as 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. Long-term firm price and indexed price
contracts have become more prevalent in the superalloy industry because jet
engine manufacturers are required to provide firm price quotations to airlines
for jet engines to be delivered several years into the future. To the extent
that it has entered into long-term agreements, the Company has sought pricing
terms which are either indexed or otherwise accommodate changes in product and
raw material markets.
-12-
<PAGE>
Export sales represent a significant portion of the Company's business.
During the three months ended March 31, 1999, sales to purchasers outside of the
United States totaled 13% of the Company's net sales.
Cost of Goods Sold. The high-performance nickel-based alloy and
superalloy industry is characterized by high capital investment and high fixed
costs, and therefore profitability is significantly affected by changes in
volume. Variable costs such as raw materials, labor, supplies and energy
(primarily electricity) generally account for more than 70 percent of the
Company's cost of goods sold. Fixed costs, such as indirect overhead and
depreciation, constitute the remainder of the Company's cost of goods sold. The
Company has undertaken various initiatives to maintain and improve its
efficiency and cost position over the last few years.
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 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 generally fixed and 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. A substantial majority of the nickel
forward contracts result in the Company taking possession of the inventory;
however, certain of these contracts are settled in cash. For the nickel forward
contracts settled in cash, the Company makes or receives payment equal to the
net change in value of the contract at its maturity. Substantially all contracts
are designated as hedges of the Company's firm sales commitments, are timed to
correspond to the commitment period, and are effective in hedging the Company's
exposure to changes in nickel prices during that cycle. At March 31, 1999, the
Company had open purchase contracts with a notional principal value of
approximately $21.9 million. The fair value of the material covered by these
contracts, based on the March 31, 1999 price quoted on the LME, was
approximately $23.0 million. Unrealized gains and losses on the contracts which
have been designated, and are effective, as hedges for firm sales commitments
have been deferred.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, legal expenses, certain accounting and information
systems expenses, and the office of the president.
-13-
<PAGE>
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,
1998 1999
---- ----
Net sales 100.0% 100.0%
Costs of goods sold 76.3 94.2
------- ------
Gross profit 23.7 5.8
Selling, general and administrative expenses 3.7 10.0
------- ------
Operating income (loss) 20.0 (4.2)
Interest income - (.4)
Interest expense - 3.8
Other income (.4) (.3)
------- -------
Income (loss) before income taxes 20.4 (7.3)
Income tax expense (benefit) 7.5 (2.9)
------- -------
Net income (loss) 12.9 (4.4)
======= =======
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
Net Sales. Net sales increased $102.5 million, or 208.4% from $49.2 million in
the three months ended March 31, 1998 to $151.7 million in the three months
ended March 31, 1999. This increase is the result of including sales of IAI,
offset in part by reduced sales of the SMC Premium Alloys Division as a
consequence of global economic pressures which have resulted in reduced volumes
and increased pressure on prices, and customer inventory adjustments in response
to earlier order patterns which led to overstocking in customer plants.
Cost Of Goods Sold. Cost of goods sold increased $105.4 million, or 281.0% from
$37.5 million in the three months ended March 31, 1998 to $142.9 million in the
three months ended March 31, 1999. This increase is the consequence of including
results of operations for IAI. As a percentage of net sales, cost of goods sold
increased from 76.3% in the three months ended March 31, 1998 to 94.2% in the
three months ended March 31, 1999.
Gross Profit. Gross profit decreased $2.9 million, or 24.9% from $11.7 million
in the three months ended March 31, 1998 to $8.8 million in the three months
ended March 31, 1999. This decrease was a consequence of global economic
pressures, customer inventory adjustments, and a strike at the Company's IAI
West Virginia facility which ended March 1, 1999, offset in part by increased
sales.
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased $13.3 million, or 732.8% from $1.8 million in
the three months ended March 31, 1998 to $15.1 million in the three months ended
March 31, 1999. This increase is the consequence of including results of
operations for IAI. Selling, general and administrative expenses as a percentage
of net sales increased from 3.7% in the three months ended March 31, 1998 to
10.0% in the three months ended March 31, 1999.
Operating Income (loss). Operating income (loss) decreased $16.3 million, or
164.8% from $9.9 million in the three months ended March 31, 1998 to $(6.4)
million in the three months ended March 31, 1999, as a result of the factors
previously indicated. Operating income (loss) as a percentage of net sales
decreased from 20.0% in the three months ended March 31, 1998 to (4.2)% in the
three months ended March 31, 1999.
-14-
<PAGE>
Interest Expense. Interest expense increased $5.7 million from zero in the three
months ended March 31, 1998 to $5.7 million in the three months ended March 31,
1999. This increase was due to the increase in indebtedness in connection with
the Acquisition.
Income Taxes. Income tax expense decreased $8.1 million from an expense of $3.7
million in the three months ended March 31, 1998 to a benefit of $(4.4) million
in three months ended March 31, 1999. The decrease is due to the decrease in
operating income and increase in interest expense. The effective income tax rate
increased from 36.7% in the three months ended March 31, 1998 to 39.6% in the
three months ended March 31, 1999.
Net Income (loss). Net income (loss) decreased $13.0 million, or 205.7% from
$6.3 million in the three months ended March 31, 1998 to $(6.7) million in the
three months ended March 31, 1999. Net income (loss) as a percentage of net
sales decreased from 12.9% in the three months ended March 31, 1998 to (4.4)% in
the three months ended March 31, 1999.
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 $2.9 million and $10.6
million for the three months ended March 31, 1998 and 1999, respectively.
Capital expenditures were $3.5 million and $2.7 million for the three
months ended March 31, 1998 and 1999, respectively.
The Company's principal sources of funds are (i) funds generated from
operations and (ii) borrowings under the Company's Senior Secured Credit
Agreement with Credit Lyonnais, as agent, and other financial institutions (as
amended, the "Credit Agreement"). The Credit Agreement provides for a $125
million term loan (the "Tranche A Term Loan"), a $100 million term loan (the
"Tranche B Term Loan," and, together with the Tranche A Term Loan, the "Term
Loans") and a $150 million revolving credit and letter of credit facility. (the
"Revolving Credit Facility"). Proceeds from the Term Loans were used to finance
a portion of the purchase price of the Acquisition.
Under the Revolving Credit Facility, the Company can borrow, repay and
re-borrow from time to time up to $150 million in the aggregate. The Revolving
Credit Facility terminates on October 28, 2003. 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. Interest on the Tranche
A Term Loan and amounts outstanding under the Revolving Credit Facility 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 .50%,
plus a margin of zero to 1.50% depending on the Company's leverage ratio or (ii)
the Eurodollar rate, which is the reserve adjusted New York interbank offered
rate, plus a margin of 0.75% to 2.75% depending on the Company's leverage ratio.
The applicable margins for amounts outstanding on the Tranche B Term Loan are
(i) for base rate loans, either 1.50% or 2.00% depending on the Company's
leverage ratio and (ii) for Eurodollar rate loans, 2.75% or 3.25% depending on
the Company's leverage ratio. A commitment fee of .375% to .50% per annum,
depending on the Company's leverage ratio, on the unused portion of the
Revolving Credit Facility is due quarterly.
-15-
<PAGE>
The Tranche A Term loan is scheduled to be repaid in quarterly installments over
five years and the Tranche B Term loan is scheduled to be repaid in quarterly
installments over seven years as follows (in thousands):
<TABLE>
<CAPTION>
Tranche A Tranche B
Year Term Loan Term Loan Total
---- -------------------------------------------------
<S> <C> <C> <C> <C>
1999 (remainder of year) $ 8,750 $ 750 $ 9,500
2000 17,500 1,000 18,500
2001 27,500 1,000 28,500
2002 36,250 1,000 37,250
2003 30,000 12,625 42,625
2004 - 47,500 47,500
2005 - 35,625 35,625
</TABLE>
The Company is required to prepay amounts outstanding under the Credit
Agreement out of the excess cash flow of the Company. Prepayments will be
applied first to the Term Loans, pro rata, then to amounts outstanding under the
Revolving Credit Facility and finally as cash collateral against outstanding
letters of credit. So long as any amounts remain outstanding under the Tranche A
Term Loan, lenders under the Tranche B Term Loan may elect not to have their
portion of the Tranche B Term Loan prepaid until the Tranche A Term Loan is paid
in full.
The Company's obligations under the Credit Agreement are secured by all
of the assets of the Company and its domestic subsidiaries and by a pledge of
the capital stock of certain subsidiaries. The Credit Agreement also contains
covenants restricting the ability of the Company to, among other things, 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 minimum consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA"); consolidated leverage
ratio; interest coverage ratio and fixed charge coverage ratio.
The Company entered into the First Amendment to Credit Agreement and
Limited Waiver (the "Amendment") with its bank syndicate on March 31, 1999,
which, among other things, waived the event of default which resulted from the
Company not complying with the minimum EBITDA financial test, revised the
financial tests for 1999 and subsequent periods, adjusted the applicable margins
to those indicated above, and will restrict payments of dividends on the Series
A Convertible Preferred Stock for a period through at least the first quarter of
2000, as specified in the Amendment.
Over the next four years, the Company plans to invest up to $124
million in capital expenditures to expand and modernize its melting, forging and
finishing equipment, install new or upgrade existing business information
systems and make other investments to maintain its position as a technical
leader. Certain covenants in the Credit Agreement limit the annual amount of
capital expenditures. 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
which 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 " - Forward Looking
Statements."
-16-
<PAGE>
The Company does not expect the future 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 " - Forward Looking
Statements."
The Company expects that 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 " - Forward Looking Statements."
Backlog
As of March 31, 1999, the Company's backlog orders aggregated approximately
$252.2 million, compared to approximately $126.9 million at March 31, 1998. The
increase in backlog orders is primarily due to the IAI acquisition. The Company
defines backlog as firm orders, which are generally subject to cancellation by
the customer. Substantially all orders in the backlog at March 31, 1999 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.
Impact Of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs in the Company's computer systems and plant equipment systems which
contain time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations resulting in disruptions in manufacturing operations or other
normal business activities.
The Company has undertaken multiple projects aimed at replacing its
current management information systems and information technology
infrastructure. However, the Company also believes that modifications to certain
of its process control computers will be required so that they will function
properly with respect to dates in the year 2000 and thereafter. The Company
presently believes that with modifications to existing software and conversions
to new software, the year 2000 issue will not pose significant operational
problems for its information technology systems and process control systems.
However, if such modifications and conversions are not made, or are not
completed timely, a material impact on the operations of the Company could
result.
The Company's plan to resolve the Year 2000 issues in each of its three
principal operating segments is as follows:
-17-
<PAGE>
SMC Premium Alloys Division
The SMC Premium Alloys Division has undertaken a formal program which
encompasses replacing its current management systems with an enterprise-wide
business information system, related upgrades to its information technology
infrastructure and modifications to its manufacturing process control systems.
The division's plan to resolve the Year 2000 issue includes the following four
phases: assessment, remediation, testing, and implementation. To date, the
division has fully completed its assessment of all computer systems and programs
which could be significantly affected by the Year 2000. Appraisal costs were
expensed prior to the division initiating a formal Year 2000 program. Systems
and programs which require modification have been identified and such
modifications and related testing is expected to be completed by August 1, 1999.
In addition to assessing its Year 2000 readiness, the division has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the division is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. Although less
than 70% of the division's suppliers and customers have responded, no respondent
indicated that they would not be Year 2000 compliant prior to December 31, 1999.
A second appraisal of significant suppliers and customers is scheduled for the
second quarter of 1999.
Inco Alloys North American Division
The Inco Alloys North American Division has established a formal
program which encompasses replacing its current management systems with an
enterprise-wide business information system, related replacements and upgrades
to its information technology infrastructure and modifications to manufacturing
process control systems. The division's plan to resolve the Year 2000 issue
involves the following four phases: assessment, remediation, testing, and
implementation. To date, the division has fully completed its assessment of all
computer systems and programs which could be significantly affected by the Year
2000. The division has also identified all software supplied by outside vendors
which is not currently Year 2000 compliant. With respect to such non-compliant
software, the division has acquired the most recent release and is currently
testing such versions for Year 2000 compliance. Systems and programs which
require modification or replacement have been identified and such modifications
and related testing is expected to be completed by July 31, 1999.
In addition to assessing its Year 2000 readiness, the division has
initiated formal communications with its significant suppliers to determine the
extent to which the division is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. Although less than 60% of the division's
suppliers have responded, no respondent indicated that they would not be Year
2000 compliant prior to December 31, 1999. The division has not initiated formal
communications with its customers to determine the extent to which the division
is vulnerable to those third parties' failure to remediate their Year 2000
issues.
Inco Alloys European Division
The Inco Alloys European Division has established a formal program for
monitoring and measuring Year 2000 readiness which encompasses replacement,
upgrades and modifications to management information systems, information
technology infrastructure, and manufacturing process control systems. The
division's resolution phases include assessment, remediation, testing and
implementation. The division has established a comprehensive inventory and risk
assessment of computing platforms and programs which require Year 2000
resolution. All hardware required for stand alone testing of systems has been
installed in order to provide an off-
-18-
<PAGE>
line production testing environment for Year 2000 program compliance. The
division has also identified all software supplied by outside vendors which is
not currently Year 2000 compliant. With respect to such non- compliant software,
the division has acquired the most recent release and is currently testing such
versions for Year 2000 compliance. Systems and programs which require
modification or replacement have been identified and such modifications and
related testing is expected to be completed by August 31, 1999.
In addition to assessing its Year 2000 readiness, the division has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the division is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. Several of the
division's significant suppliers and customers have responded and believe they
will be Year 2000 compliant prior to December 31, 1999. Although less than 75%
of the division's suppliers and customers have responded, no respondent
indicated that they would not be Year 2000 compliant prior to December 31, 1999.
The Company's overall Year 2000 project approach and status for each of
the respective divisions is as follows:
<TABLE>
<CAPTION>
($ millions)
Stage Estimated Timetable Total Costs Incurred
Description of Approach of Completion For Completion Budget To Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer Systems:
Assess systems for possible Year
2000 impact:
SMC Premium Alloys 100% Completed -- --
Inco Alloys North American 100% Completed -- --
Inco Alloys European 100% Completed -- --
Modify or replace non-compliant
systems and test systems with
system clocks set at current date:
SMC Premium Alloys 70% August 1, 1999 $ 6.5 $ 4.7
Inco Alloys North American 60% July 31, 1999 14.0 5.9
Inco Alloys European 90% August 31, 1999 .4 .3
Process Control Systems:
Computer-dependent process control
systems assessment and compliance
procedures
SMC Premium Alloys 75% June 30, 1999 $ .5 $ .1
Inco Alloys North American 90% July 31, 1999 .1 --
Inco Alloys European 80% August 31, 1999 .4 .1
</TABLE>
-19-
<PAGE>
The Company has determined it expects to have no exposure to
contingencies related to the year 2000 issue for the products it has sold. The
Company expects to utilize both internal and external resources to reprogram, or
replace, and test the software for year 2000 modifications. The Company at this
time has no plan to utilize independent verification and validation processes to
assure reliability of risk and cost estimates, nor does the Company plan to
utilize independent third party verification to test computer systems for Year
2000 compliance. The Company anticipates completing the year 2000 project in
1999, prior to any anticipated impact on its operating systems. Maintenance or
modification costs will be expensed as incurred, while the costs of new
information technology will be capitalized and amortized in accordance with
Company policy.
The time frame during which the Company believes it will complete the
year 2000 modifications is based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that the estimated time of
completion will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
The Company believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, the Company's ability to take
customer orders, manufacture and ship products, invoice customers or collect
payments could be impaired. In addition, disruptions caused by third-parties or
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Reference is made to Item 7A of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 for a description of Qualitative and Quantitative
Disclosures About Market Risk.
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and to Note 5 of the Notes to Condensed
Consolidated Financial Statements included in Part I of this Report for
descriptions of certain legal and environmental matters.
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
The Company held a Special Meeting of Stockholders on February 18, 1999. At the
meeting, the stockholders voted to approve and authorize the issuance by the
Company of shares of common stock issuable upon the conversion of the Company's
outstanding 6.625% Series A Senior Convertible Preferred Stock. Votes were cast
regarding the proposal as follows: 14,499,478 for; 6,955 against; 8,250
abstained.
-20-
<PAGE>
Item 5. Other Information
(a) Press Releases
The Company issued a press release dated May 6, 1999 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter ended March 31, 1999.
The Company issued a press release dated April 14, 1999 announcing the
appointment of T. Grant John to the newly created position of Executive Vice
President and Chief Operating Officer, responsible for the Company's core
nickel-based alloys business.
The Company issued a press release dated April 6, 1999 announcing re-negotiated
terms of its $375 million credit facility with its bank syndicate, headed by
Credit Lyonnais.
The Company issued a press release dated March 22, 1999 announcing corrections
to its fiscal quarter and year ended December 31, 1998 financial results.
The Company issued a press release dated February 25, 1999 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter and year ended December 31, 1998.
The Company issued a press release dated February 19, 1999 announcing a
tentative agreement with the United Steel Workers of America Local 40 to end the
strike at its Inco Alloys International West Virginia facility.
The Company issued a press release dated January 8, 1999 reporting that the
ongoing strike against one of its Inco Alloys International facilities, softness
in key markets and other factors relating to the acquisition of IAI will
negatively affect fourth quarter 1998, first quarter 1999 and full year 1999 net
income.
(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 a substantial portion 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.
-21-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment to the Credit Agreement dated as of April 1, 1999 by and
amount the Company, Credit Lyonnais and the other financial institutions
party thereto.
27.1 Financial Data Schedule.
(b) Reports On Form 8-K
The Company filed a report on Form 8-K dated January 13, 1999 in connection with
the resignation of Francis J. Petro from his position as President of the
Company's Inco Alloys International business unit and as a member of the
Company's Board of Directors.
-22-
<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 14, 1999 By: /s/ Donald R. Muzyka
--------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: May 14, 1999 By: /s/ Donald C. Darling
---------------------
Donald C. Darling
Chief Financial Officer and
Chief Accounting Officer
-23-
FIRST AMENDMENT TO
CREDIT AGREEMENT AND LIMITED WAIVER
This First Amendment to Credit Agreement and Limited Waiver (this
"Amendment") is dated as of March 31, 1999 and entered into by and among SPECIAL
METALS CORPORATION, a Delaware corporation (the "Borrower"), the banks and other
financial institutions signatory hereto that are party as Lenders to the Credit
Agreement referred to below (the "Lenders") and CREDIT LYONNAIS NEW YORK BRANCH,
as Agent and as Issuing Bank.
Recitals
Whereas, the Borrower, the Lenders, the Issuing Bank and the Agent have
entered into that certain Credit Agreement dated as of October 28, 1998 (the
"Credit Agreement"; capitalized terms used in this Amendment without definition
shall have the meanings given such terms in the Credit Agreement); and
Whereas, the Borrower has requested that the Lenders agree, subject to
the conditions and upon the terms set forth in this Amendment, to amend certain
provisions of the Credit Agreement and to waive an Event of Default that
occurred at December 31, 1998 under subsection 9.1(a) of the Credit Agreement
and an Event of Default that occurred after February 1, 1999 under subsection
9.2(i) of the Credit Agreement; and
Whereas, the Lenders are willing to agree to such amendments and
waiver, subject to the conditions and on the terms set forth herein;
Now Therefore, in consideration of the premises and the mutual
agreements set forth herein, the Borrower, the Lenders, the Issuing Bank and the
Agent agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions and upon
the terms set forth in this Amendment and in reliance on the representations and
warranties of the Borrower set forth in this Amendment, the Credit Agreement is
hereby amended as follows:
1.1 Applicable Margin. The definition of "Applicable Margin" set forth
in subsection 1.1 of the Credit Agreement is deleted in its entirety and
replaced with the following:
"Applicable Margin": a per annum rate that:
(a) with respect to Revolving Credit Loans and the Tranche A
Term Loans, shall be the amount set forth below for the applicable Type
of Loan (with (lambda) being the Leverage Ratio), as of the last day of
the most recent fiscal quarter:
<PAGE>
Level Leverage Ratio Base Rate Eurodollar Rate
I (lambda)<2.00 0.00% 0.75%
II 2.00<=(lambda)<2.50 0.00% 1.00%
III 2.50<=(lambda)<3.00 0.00% 1.25%
IV* (lambda)>=3.00 1.50% 2.75%
* includes V and VI, for purposes of subsection 3.4
provided that (i) for any day preceding the date on which the First
Amendment became effective, the Applicable Margin shall be as
prescribed by this Agreement as in effect on such day, (ii) on each day
on which an Event of Default has occurred and is continuing, the
Applicable Margin shall be 1.50% per annum if such Loans are Base Rate
Loans and 2.75% per annum if such Loans are Eurodollar Loans, and (iii)
if the Borrower fails to deliver the financial statements required by
subsection 8.1(a) or (b) when due (without giving effect to any grace
period or notice requirement), the Applicable Margins shall be as set
forth in clause (ii) above until such time as such delivery is made;
and
(b) with respect to the Tranche B Term Loans, shall be 2.00%
per annum if such Loans are Base Rate Loans and 3.25% per annum if such
Loans are Eurodollar Loans, except that when and so long as the
Leverage Ratio as of the last day of the most recent fiscal quarter is
less than or equal to 2.75:1, the Applicable Margin for Tranche B Term
Loans shall be 1.50% per annum if such Loans are Base Rate Loans and
2.75% per annum if such Loans are Eurodollar Loans; provided that (i)
for any day preceding the date on which the First Amendment became
effective, the Applicable Margin shall be as prescribed by this
Agreement as in effect on such day, (ii) on each day on which an Event
of Default has occurred and is continuing, the Applicable Margin shall
be 2.00% per annum if such Loans are Base Rate Loans and 3.25% per
annum if such Loans are Eurodollar Loans, and (iii) if the Borrower
fails to deliver the financial statements required by subsection 8.1(a)
or (b) (without giving effect to any grace period or notice
requirement), the Applicable Margins shall be as set forth in clause
(ii) above until such time as such delivery is made.
Any change in the Applicable Margin shall be effective on the
Business Day following delivery of the financial statements under
subsection 8.1(a) or (b), subject to the provisos above.
-2-
<PAGE>
1.2 Fixed Charges. The definition of "Fixed Charges" contained in
subsection 1.1 of the Credit Agreement is amended by inserting therein,
immediately after the text "Preferred Stock Dividends":
(except Deferred Preferred Stock Dividend Accruals)
1.3 Permitted Acquisitions. The definition of "Permitted Acquisition"
contained in subsection 1.1 of the Credit Agreement is deleted in its entirety
and the uses of that term elsewhere in the Credit Agreement are eliminated by:
A. Deleting, in the definition of "Excess Cash Flow" in
subsection 1.1 of the Credit Agreement, the entire text of clause (vi)
therein and replacing such text with "[deleted by First Amendment],"
B. Deleting the text ", Permitted Acquisitions" in subsection
3.6 of the Credit Agreement,
C. Deleting, in subsection 9.5 of the Credit Agreement, the
entire text of paragraph (e) therein and replacing such text with
"[deleted by First Amendment],"
D. Deleting, in subsection 9.9 of the Credit Agreement, the
entire text of paragraph (e) therein and replacing such text with
"[deleted by First Amendment]," and
E. Deleting, in subsection 9.15 of the Credit Agreement, all
of the text therein that follows the words "directly related thereto."
1.4 Qualifying Insurance and Other Proceeds. The definition of
"Qualifying Insurance and Other Proceeds" set forth in subsection 1.1 of the
Credit Agreement is amended by deleting all of the text therein that consists of
or follows clause (b) thereof and replacing it with the following:
(b) all payments, credits, purchase price adjustments and indemnities
which the Borrower or any of its Subsidiaries receives at any time
after the Closing Date by reason of any claim asserted against any of
the Sellers for any indemnity or payment due under the Purchase
Agreement or for breach thereof or for any adjustment to the purchase
consideration paid or payable thereunder or otherwise directly or
indirectly based on, arising or derived from or relating to the
Purchase Agreement or any of the transactions or matters contemplated
thereby or any loss or claim resulting therefrom (other than payments
made by any Seller to the Borrower or any of its Subsidiaries on
account of a liability incurred by the Borrower or any of its
Subsidiaries to a third party, for reimbursement of costs and expenses
paid by the Borrower or any of its Subsidiaries or for goods sold or
services rendered by the Borrower or any of its Subsidiaries), whether
such payment, credit, adjustment or indemnity is received in cash,
securities or
-3-
<PAGE>
property or credited or offset (or held for credit or offset) against
any obligation outstanding to any of the Sellers under the Purchase
Agreement or in respect of any other agreement, transaction or event,
minus, in the case of clauses (a) and (b), reasonable costs and
expenses (including legal and accounting fees) actually incurred by the
Borrower or its Subsidiaries in recovering such proceeds, payment,
credit, adjustment or indemnity.
1.5 Additional Definitions. Subsection 1.1 of the Credit Agreement is
amended by adding the following additional definitions in the proper
alphabetical sequence:
"Deferred Preferred Stock Dividend Accruals": all dividends on
the Preferred Stock accrued or accruing at any time prior to October
28, 1999 pursuant to the Preferred Stock Documents (as in effect on the
Closing Date) and all dividends required or permitted under the
Preferred Stock Documents (as in effect on the Closing Date) to be
declared or paid in respect of any period of time prior to October 28,
1999, in each case whether or not paid and whenever payable or paid.
"First Amendment": the First Amendment to Credit Agreement and
Limited Waiver dated as of March 31, 1999 by and among the Borrower,
the Lenders signatory thereto and Credit Lyonnais New York Branch as
Agent and Issuing Bank.
1.6 Monthly Financial Reports. Subsection 8.1 of the Credit Agreement
is amended by inserting the following new paragraph (c) immediately after
paragraph (b) thereof:
(c) as soon as available, but in any event not later than 45
days after the end of each fiscal month of the Borrower in each of the
fiscal years ending on December 31, 1999 and December 31, 2000, the
unaudited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at the end of such month and the related
unaudited consolidated statements of income and retained earnings and
of cash flows of the Borrower and its consolidated Subsidiaries for
such month, certified by a Responsible Officer as fairly presenting the
financial condition and results of operations of the Borrower and its
consolidated Subsidiaries (subject to normal year-end audit adjustments
and the absence of certain notes).
1.7 Financial Condition Covenants. Subsection 9.1 of the Credit
Agreement is deleted in its entirety and replaced with the following:
9.1 Financial Condition Covenants.
(a) EBITDA Maintenance. Permit Consolidated EBITDA of the
Borrower and its consolidated Subsidiaries for any period of four
consecutive
-4-
<PAGE>
fiscal quarters ending on a date specified below to be less than the
amount set forth opposite such period below:
Period Ending Consolidated EBITDA
------------- -------------------
3/31/99 49,000,000
6/30/99 40,000,000
9/30/99 40,000,000
12/31/99 48,500,000
3/31/2000 59,900,000
6/30/2000 66,900,000
9/30/2000 74,500,000
12/31/2000 82,000,000
3/31/2001 97,800,000
6/30/2001 104,800,000
9/30/2001 112,400,000
12/31/2001 120,000,000
3/31/2002 120,000,000
6/30/2002 125,000,000
9/30/2002 130,000,000
12/31/2002 135,000,000
3/31/2003 135,000,000
6/30/2003 135,000,000
9/30/2003 140,000,000
12/31/2003 145,000,000
and thereafter
(b) Leverage Ratio. Permit the Leverage Ratio as of the last
day of each fiscal quarter set forth below to exceed the ratio set
forth opposite such fiscal quarter below:
Period Ending Ratio
------------- -----
12/31/98 4.35
3/31/99 6.75
6/30/99 6.75
9/30/99 6.75
12/31/99 5.50
3/31/2000 4.40
6/30/2000 4.00
9/30/2000 3.60
12/31/2000 3.00
3/31/2001 3.00
6/30/2001 3.00
9/30/2001 3.00
12/31/2001 2.75
3/31/2002 2.75
6/30/2002 2.75
9/30/2002 2.75
-5-
<PAGE>
Period Ending Ratio
------------- -----
12/31/2002 2.50
3/31/2003 2.50
6/30/2003 2.50
9/30/2003 2.50
12/31/2003 2.25
and thereafter
(c) Interest Coverage Ratio. Commencing the fiscal quarter
ended December 31, 1998, permit the ratio of Consolidated EBITDA of the
Borrower and its consolidated Subsidiaries for any period of four
consecutive fiscal quarters of the Borrower and its consolidated
Subsidiaries to Consolidated Interest Expense of the Borrower and its
consolidated Subsidiaries for such period to be less than the ratio set
forth opposite such fiscal quarter below:
Period Ending Ratio
------------- -----
12/31/98 2.75
3/31/99 1.65
6/30/99 1.55
9/30/99 1.50
12/31/99 1.75
3/31/2000 2.25
6/30/2000 2.50
9/30/2000 2.75
and thereafter
(d) Fixed Charge Ratio. Commencing the fiscal quarter ended
December 31, 1998, permit the ratio of Consolidated EBITDA of the
Borrower and its consolidated Subsidiaries for any period of four
consecutive fiscal quarters ending on the last day of such quarter, to
Fixed Charges of the Borrower and its consolidated Subsidiaries for
such period to be less than the ratio set forth opposite such fiscal
quarter below:
Period Ending Ratio
------------- -----
12/31/98 1.00
3/31/99 0.85
6/30/99 0.85
9/30/99 0.85
12/31/99 1.00
and thereafter
1.8 Receivables Program Indebtedness. Subsection 9.2(i) of the Credit
Agreement is amended by deleting "February 1, 1999" and replacing it with
"September 30, 1999" and by inserting after "$35,000,000" and prior to the
period at the end thereof:
from the Closing Date until February 1, 1999, and not to exceed
$11,700,000 thereafter until September 30, 1999
-6-
<PAGE>
1.9 Preferred Stock Dividends. Subsection 9.7 of the Credit Agreement
is amended by deleting the text "(a) the Borrower may declare and pay cash
dividends on its Preferred Stock in accordance with the terms of the Preferred
Stock Documents as in effect on the Closing Date;" and replacing such text with:
(a) at any time after the Borrower delivers, in conformity with
subsection 8.1, its audited annual financial statements as at December
31, 1999 and for the fiscal year then ended, the Borrower may:
(i) declare and pay cash dividends (other than in
respect of Deferred Preferred Stock Dividend Accruals) on its
Preferred Stock in accordance with the terms of the Preferred
Stock Documents as in effect on the Closing Date; and
(ii) declare and pay a single cash dividend in
respect of Deferred Preferred Stock Dividend Accruals, but
only if (A) such dividend does not exceed $7,000,000, (B)
Consolidated EBITDA of the Borrower and its consolidated
Subsidiaries for the period of three consecutive fiscal
quarters ending on December 31, 1999 (as confirmed to the
Agent and Lenders by a certificate of a Responsible Officer of
the Borrower accompanied by a review letter, satisfactory to
the Required Lenders, from the accountants that audited such
financial statements) was not less than $49,500,000, and (C)
the ratio of (x) Consolidated EBITDA of the Borrower and its
consolidated Subsidiaries for the period of three consecutive
fiscal quarters ending on December 31, 1999 (as so confirmed)
to (y) the sum of (I) Fixed Charges for such period (as
likewise so confirmed) and (II) the amount of such dividend is
not less than 1.00 to 1;
1.10 Capital Expenditures. Subsection 9.8 of the Credit Agreement is
deleted in its entirety and replaced with the following:
9.8 Limitation on Capital Expenditures. Make (by way of the
acquisition of securities of a Person or otherwise) any Capital
Expenditures, except for expenditures in the ordinary course of
business not exceeding, in the aggregate for the Borrower and its
consolidated Subsidiaries, during any fiscal year ending on December 31
an amount equal to:
(a) $44,000,000 in the fiscal year 1998;
(b) $20,000,000 in the fiscal year 1999;
(c) in each fiscal year after 1999, if the EBITDA Threshold
was met for the immediately preceding fiscal year, the amount set forth
below:
-7-
<PAGE>
Fiscal Year Amount
----------- ------
2000 30,000,000
2001 36,800,000
2002 37,500,000
2003 39,100,000
2004 41,100,000
2005 and thereafter 38,000,000
(d) in each fiscal year after 1999, if the EBITDA Threshold
was not met for the immediately preceding fiscal year, the greater of
(i) $15,000,000 and (ii) the amount set forth in the table in paragraph
(c) above for the applicable fiscal year less the difference (if a
positive number) between (i) the EBITDA Threshhold for the immediately
preceding fiscal year and (ii) Consolidated EBITDA of the Borrower and
its consolidated Subsidiaries for the immediately preceding fiscal
year; and
(e) for the purposes of paragraphs (c) and (d) above, the
"EBITDA Threshold" for any fiscal year shall be met if Consolidated
EBITDA for the Borrower and its consolidated Subsidiaries for such
fiscal year is at least the amount set forth below:
Fiscal Year Amount
----------- ------
1999 57,000,000
2000 96,500,000
2001 130,000,000
2002 145,000,000
2003 and thereafter 150,000,000
(f) The amount of Capital Expenditures permitted in any fiscal
year after 1999 shall be increased by the difference (if a positive
number) between (i) the amount of Capital Expenditures permitted in the
immediately preceding fiscal year pursuant to this subsection 9.8,
without giving effect to this subparagraph (f), and (ii) the aggregate
Capital Expenditures made in the preceding fiscal year by the Borrower
and its consolidated Subsidiaries.
2. WAIVER. Subject to the conditions and upon this terms set forth in
this Amendment and in reliance on the representations and warranties of the
Borrower set forth in this Amendment, the Lenders hereby waive compliance with
(a) subsection 9.1(a) of the Credit Agreement, as in effect on December 31,
1998, insofar as it requires the Consolidated EBITDA of the Borrower and its
consolidated Subsidiaries for the period ending December 31, 1998 not to be less
than $85,000,000, and (b) subsection 9.2(i) of the Credit Agreement, as in
effect from February 1, 1999 and prior to the effective date of this Amendment,
insofar as it prohibited Indebtedness that would have been permitted thereunder
if this Amendment had then been effective. This waiver is limited solely to the
matters set forth in clauses (a) and (b) above, as at the dates and for the
period stated therein, and does not constitute a waiver of any other Default or
Event of Default or compliance with any other term or condition of the Loan
Documents.
-8-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce
the Lenders, Agent and Issuing Bank to enter into this Amendment, the Borrower
represents and warrants to each Lender, the Agent and the Issuing Bank that the
following statements are true, correct and complete:
3.1 Power and Authority. Each of the Loan Parties has all corporate
power and authority to enter into this Amendment and, as applicable, the Consent
of Guarantors attached hereto (the "Consent"), and to carry out the transactions
contemplated by, and to perform its obligations under or in respect of, this
Amendment and the Credit Agreement as amended hereby.
3.2 Corporate Action. The execution and delivery of this Amendment and
the Consent and the performance of the obligations of each Loan Party under or
in respect of this Amendment and the Credit Agreement as amended hereby have
been duly authorized by all necessary corporate action on the part of each of
the Loan Parties.
3.3 No Conflict or Violation or Required Consent or Approval. The
execution and delivery of this Amendment and the Consent and the performance of
the obligations of each Loan Party under or in respect of this Amendment and the
Credit Agreement as amended hereby do not and will not conflict with or violate
(a) any provision of the articles or certificate of incorporation or bylaws of
any Loan Party or the Preferred Stock Documents, (b) any Requirement of Law, (c)
any order, judgment or decree of any court or other governmental agency binding
on any Loan Party, or (d) any indenture, agreement or instrument to which the
Borrower or any of its Subsidiaries is a party or by which the Borrower or any
of its Subsidiaries, or any property of any of them, is bound, and do not and
will not require any consent or approval of any Person, except the consents and
approvals described in Annex A attached hereto, each of which has been duly
obtained.
3.4 Execution, Delivery and Enforceability. This Amendment and the
Consent and the Credit Agreement as amended hereby and each other Loan Document
have been duly executed and delivered by each Loan Party party thereto and are
the legal, valid and binding obligations of such Loan Party, enforceable in
accordance with their terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement creditors' rights generally or by general equitable
principles.
3.5 No Default or Event of Default. After giving effect to this
Amendment, no event has occurred and is continuing or will result from the
execution and delivery of this Amendment that would constitute a Default or an
Event of Default.
3.6 Financial Projections. The projected financial statements for the
Borrower and its Subsidiaries dated March 8, 1999 delivered to the Agent and the
Lenders in connection with this Amendment were prepared by the Borrower in good
faith and on the basis
-9-
<PAGE>
of the best information available at that time and on the assumptions stated
therein, which assumptions the Borrower believes to be reasonable.
3.7 No Material Adverse Effect. No event has occurred (other than
events reflected in the financial statements referred to in Section 3.6 ) that
has resulted, or could reasonably be expected to result, in a Material Adverse
Effect.
3.8 Representations and Warranties. Each of the representations and
warranties contained in the Loan Documents is and will be true and correct in
all material respects on and as of the date hereof and as of the effective date
of this Amendment, except to the extent that such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects as of such earlier date.
4. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment
(including the waiver set forth in Section 2 above) shall be effective only if
and when signed by, and when counterparts hereof shall have been delivered to
the Agent (by hand delivery, mail or telecopy) by, the Borrower and the Required
Lenders and only if and when each of the following conditions is satisfied:
4.1 Consent of Guarantors. Each of the Guarantors shall have executed
and delivered to the Agent the Consent.
4.2 No Default or Event of Default; Accuracy of Representations and
Warranties. After giving effect to this Amendment, no Default or Event of
Default shall exist and each of the representations and warranties made by the
Borrower or any of its Subsidiaries in or pursuant to the Loan Documents shall
be true and correct in all material respects as if made on and as of the date on
which this Amendment becomes effective (except that any such representation or
warranty that is expressly stated as being made only as of a specified earlier
date shall be true and correct as of such earlier date), and the Borrower shall
have delivered to the Agent a certificate confirming such matters.
4.3 Supporting Documents and Opinion of Counsel. The Borrower shall
have delivered to the Agent copies of resolutions of each of the Loan Parties
approving and authorizing this Amendment and the Consent, together with an
incumbency certificate for the persons executing this Amendment or the Consent
and an opinion of Bond, Schoenick & King, LLP, counsel to the Borrower, as to
the matters set forth in Sections 3.1, 3.2, 3.3 and 3.4 hereof and such other
matters as the Agent or Required Lenders may reasonably request, all in form and
substance satisfactory to the Agent.
4.4 Amendment Fee. The Borrower shall have paid to the Agent an
amendment fee equal to 0.15% applied to the aggregate outstanding Loans and
unused Commitments of each Lender that delivers to the Agent, by hand delivery
or telefax no later than 5:00 p.m. on April 7, 1999, a counterpart of this
Amendment executed by such Lender. Such fee (a) shall be received by the Agent
ratably for account of, and shall be remitted by the Agent solely to, such
Lenders and (b) shall be fully earned and nonrefundable when paid.
-10-
<PAGE>
4.5 Expense Reimbursements. The Borrower shall have paid all expense
reimbursements due to the Agent pursuant to Section 12.5 of the Credit
Agreement.
5. EFFECT OF AMENDMENT. From and after the date on which this Amendment
becomes effective, all references in the Loan Documents to the Credit Agreement
shall mean the Credit Agreement as amended hereby. Except as expressly amended
hereby or waived herein, the Credit Agreement and the other Loan Documents,
including the Liens granted thereunder, shall remain in full force and effect,
and are hereby ratified and confirmed.
6. APPLICABLE LAW. This Amendment shall be governed by, and construed
and interpreted in accordance with, the laws of the State of New York.
7. COMPLETE AGREEMENT. This Amendment sets forth exhaustively the
complete agreement of the parties in respect of any amendment to any of the
provisions of any Loan Document or any waiver thereof.
8. CATCHLINES & COUNTERPARTS. The catchlines and captions herein are
intended solely for convenience of reference and shall not be used to interpret
or construe the provisions hereof. This Amendment may be executed by one or more
of the parties to this Amendment on any number of separate counterparts
(including by telecopy), all of which taken together shall constitute but one
and the same instrument.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by a duly authorized officer as of the date first above written.
SPECIAL METALS CORPORATION
By: /s/ Donald C. Darling
-------------------------
Name: Donald C. Darling
Title: V.P. of Administration & CFO
CREDIT LYONNAIS NEW YORK BRANCH, as
Agent, as a Lender and as Issuing Bank
By: /s/ Mark Koneval
--------------------
Name: Mark Koneval
Title: VP
MANUFACTURERS & TRADERS TRUST COMPANY,
as Documentation Agent and as a Lender
By: /s/ Stephen J. Gorczynski
-----------------------------
Name: Stephen J. Gorczynski
Title: Vice President
MELLON BANK, N.A., as Syndication Agent
and as a Lender
By: /s/ Brian V. Ciavarella
---------------------------
Name: Brian V. Ciavarella
Title: Vice President
-12-
<PAGE>
THE BANK OF NOVA SCOTIA, as Co-Agent and
as a Lender
By: /s/ J. W. Campbell
----------------------
Name: J. W. Campbell
Title: Unit Head
KEYBANK NATIONAL ASSOCIATION, as Lender
By: /s/ Marianne Meil
---------------------
Name: Marianne Meil
Title: Vice President
BANK UNITED, as Lender
By: /s/ Phil Green
------------------
Name: Phil Green
Title: Director
BANQUE NATIONALE DE PARIS, as Lender
By: /s/ Richard L. Sted
-----------------------
Name: Richard L. Sted
Title: Vice President
By: /s/ Nathalie Herrington
---------------------------
Name: Nathalie Herrington
Title: Vice President
-13-
<PAGE>
SOCIETE GENERALE, NEW YORK BRANCH, as
Lender
By: /s/ Cynthia Colucci
-----------------------
Name: Cynthia Colucci
Title: Vice President
FLEET NATIONAL BANK, as Lender
By: /s/ Greg L. Gilroy
----------------------
Name: Greg Gilroy
Title: V.P.
NATIONAL BANK OF CANADA, as Lender
By: /s/ Michael R. Brace
------------------------
Name: Michael R. Brace
Title: Marketing Officer
By: /s/ Michael S. Woodard
--------------------------
Name: Michael S. Woodard
Title: Vice President
CREDIT AGRICOLE-INDOSUEZ, As Lender
By: /s/ Craig Welch
-------------------
Name: Craig Welch
Title: FVP
By: /s/ Rene LeBlanc
--------------------
Name: Rene LeBlanc
Title: VP, Sr. Rel. Mgr.
-14-
<PAGE>
NATEXIS BANQUE, as Lender
By: /s/ P. J. Van Tulken
------------------------
Name: P. J. Van Tulken
Title: VP & Manager
By: /s/ John Rigo
-----------------
Name: John Rigo
Title: Vice President
FIRSTAR BANK, N.A., as Lender By:
/s/ David J. Dannsmiller
------------------------
Name: David J. Dannsmiller
Title: Vice President
-15-
<PAGE>
Annex A
CONSENTS AND APPROVALS
None
-16-
<PAGE>
CONSENT OF GUARANTORS
Each of the undersigned is a Guarantor of the Obligations of the
Borrower under the Credit Agreement and hereby (a) consents to the foregoing
Amendment, (b) acknowledges that notwithstanding the execution and delivery of
the foregoing Amendment, the obligations of each of the undersigned Guarantors
are not impaired or affected and the Guaranties continue in full force and
effect, and (c) ratifies its Guaranty.
IN WITNESS WHEREOF, each of the undersigned has executed and delivered
this Consent of Guarantors as of the 31st day of March, 1999.
SPECIAL METALS DOMESTIC SALES
CORPORATION
By: /s/ Donald C. Darling
-------------------------
Name: Donald C. Darling
Title: Treasurer
INCO ALLOYS INTERNATIONAL, INC.
By: /s/ Donald C. Darling
-------------------------
Name: Donald C. Darling
Title: Treasurer
A-1 WIRE TECH, INC.
By: /s/ Donald C. Darling
-------------------------
Name: Donald C. Darling
Title: Treasurer
-17-
<PAGE>
CONTROLLED PRODUCTS GROUP INTERNATIONAL,
INC.
By: /s/ Donald C. Darling
-------------------------
Name: Donald C. Darling
Title: Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements contained in the Report to which
this schedule 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,499
<SECURITIES> 0
<RECEIVABLES> 137,355
<ALLOWANCES> (3,122)
<INVENTORY> 250,373
<CURRENT-ASSETS> 449,836
<PP&E> 357,955
<DEPRECIATION> (53,333)
<TOTAL-ASSETS> 819,893
<CURRENT-LIABILITIES> 136,171
<BONDS> 279,835
99,678
0
<COMMON> 155
<OTHER-SE> 98,888
<TOTAL-LIABILITY-AND-EQUITY> 819,893
<SALES> 151,708
<TOTAL-REVENUES> 151,708
<CGS> 142,937
<TOTAL-COSTS> 142,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,669
<INCOME-PRETAX> (11,080)
<INCOME-TAX> (4,387)
<INCOME-CONTINUING> (6,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,693)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
