SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file No. 000-22029
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Special Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 25-1445468
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4317 Middle Settlement Road
New Hartford, NY 13413
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(Address of principal executive offices)
(Zip Code)
(315) 798-2900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01
par value per share
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 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or an amendment to this
Form 10-K. [X]
At March 1, 2000, the aggregate market value of the publicly traded voting stock
held by non-affiliates of the Registrant was $12,525,500 based upon the closing
price of the Registrant's common stock on that date as reported by the Nasdaq
National Market. At March 1, 2000 the Registrant had 15,479,000 shares of common
stock outstanding.
Documents Incorporated By Reference:
Portions of the proxy statement for the 2000 annual shareholders meeting are
incorporated by reference into Part III of this report.
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Special Metals Corporation
Form 10-K
Table Of Contents
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Item Page
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Part I
1 Business 1
2 Operating Facilities 15
3 Legal Proceedings 15
4 Submission of Matters to a Vote of Security Holders 19
Part II
5 Market for the Registrant's Common Equity and Related Stockholder Matters 20
6 Selected Financial Data 21
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 22
7A Quantitative and Qualitative Disclosures About Market Risk 31
8 Financial Statements and Supplementary Data 32
9 Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure 64
Part III
10 Directors and Executive Officers of the Registrant 65
11 Executive Compensation 65
12 Security Ownership of Certain Beneficial Owners and Management 65
13 Certain Relationships and Related Transactions 65
Part IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 66
Signatures 70
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Part I
Item 1. Business
General
Special Metals Corporation (herein referred to as the "Company" or
"Special Metals") is the world's largest and most diversified producer of
high-performance nickel-based alloys and superalloys. These highly engineered
materials are produced to exacting customer specifications for technically
demanding applications and are designed to withstand environmental extremes of
heat and stress, and corrosion-resistance. Special Metals offers a number of
alloy materials in a broad range of product forms, including sheet, strip, foil,
plate, tubing, billet, bar, rod, extruded shapes, rod-in-coil, wire and welding
consumables. The Company serves a diverse group of worldwide end-user markets,
including aerospace, land based gas turbine power generation, environmental
control, marine engineering, fossil-fuel power generation, thermal processing,
electronics, chemical and petrochemical processing, petroleum refining and
exploration, automotive and consumer products.
The Company is committed to offering products with the highest standards
of quality, technological excellence and customer service. Substantially all of
the Company's facilities have attained certification under the ISO international
quality standards and other domestic and international quality accreditations.
Industry Overview
The high-performance nickel-based alloy industry emerged out of the
requirement for materials with unique characteristics and physical properties
such as high temperature strength, corrosion-resistance in very caustic
environments, electrical properties, controlled thermal expansion or a
combination of these characteristics. In the 1970's and 1980's, many established
U.S. and European based specialty stainless metals companies were attracted by
the opportunities available in the high-performance nickel-based alloy industry.
Evolutionary advances in processing procedures and metallurgy expanded
the range of high-performance nickel-based alloys in terms of their obtainable
characteristics, physical properties and the range of product forms and sizes
available. Current industry participants offer several products to the
marketplace for a variety of applications. The relationship between the customer
and the alloy manufacturer is significant as new alloys are often developed in
close collaboration between the manufacturer and the customer.
Since high-performance nickel-based alloy production utilizes many of
the same processes as stainless steel manufacturing, several large industry
participants are principally diversified stainless steel enterprises. The
balance of the industry is comprised of a number of smaller manufacturers which
specialize in specific alloy types and/or product forms. Special Metals is
unique in that it is the only company that specializes in both the production of
high-performance nickel-based alloys and superalloys and downstream value-added
products. Special Metals offers a full range of products, properties, forms and
sizes across the entire spectrum of end-user industries.
Business Strategy
The Company's principal objective is to strengthen its position in the
superalloy and special alloy industry, enhance its ability to anticipate and
adapt to customer needs and market opportunities, and provide shareholders with
superior investment returns through strategies which maximize long-term
profitability and net asset values. The Company intends to achieve future growth
and earnings development through the following initiatives:
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Emphasize market-driven, higher value-added businesses. The largest end
market served by the Company is the aerospace market. The Company intends to
strengthen its existing position and establish new leading competitive positions
in the aerospace market and diversify into new markets by leveraging its
manufacturing capabilities and expertise in high-performance materials. In
carrying out this objective, the Company's divisions seek closer relationships
with their customers in order to provide higher value-added products and product
offerings which are aligned with customer requirements.
Continue long-term capital improvement initiatives. The Company
systematically invests in capital improvement initiatives directed towards
market-driven requirements, customer service, productivity improvements,
cost-reduction programs, new information technology, replacement projects, and
environmental compliance. These investments build long-term value by increasing
production capacity and operating efficiency and positioning the Company to
maintain its technological leadership. The Company anticipates that total
capital expenditures will approximate $15.0 million during 2000.
Develop New Products and Enter New Markets. The Company believes that
its expertise in the manufacture of high-performance nickel-based alloys and
superalloys affords it the ability to design new products and applications and
to enter new growth markets. The Company actively pursues internal development
programs which build on existing core competencies and may be applied to new
market segments. Approximately 85% of the Company's current nickel alloy and
superalloy production is comprised of alloys developed by the Company. The
Company engages in research and development activity to continue product
development for the core businesses.
Continue Performance Improvements and Cost Reductions. The Company has
realized significant productivity increases in recent years and is committed to
continued improvements in its operations and internal cost structure. Various
initiatives have been undertaken by the Company to reduce production and
operating costs, shorten manufacturing cycle times, improve quality and realize
economies of scale. Organizational teams employ statistical measurement tools to
increase utilization rates, optimize existing processes and reduce inventory
requirements, process variability, and operating expenses. The Company's
strategy is to integrate its manufacturing plants, both vertically and, where
appropriate horizontally, to develop competitive advantage. Intermediate
products produced in one Company facility are frequently distributed between
plants for downstream production. This integration provides the Company with
cost efficient and flexible manufacturing operations that permit the Company to
allocate capital more efficiently. The Company also exploits commercial
synergies between operations, such as the purchase of raw materials used in
production. There can be no assurance that the Company will be able to realize
or perform, within a particular time frame, the cost reductions, cash flow
increases or other synergies expected to result from acquisitions or other
transactions. I addition, the Company may not be able to generate additional
revenue to offset any unanticipated inability to realize such expected
synergies. See "- Forward Looking Statements."
Pursue Acquisitions or Strategic Alliances. The Company intends to
pursue selective acquisitions and strategic alliances which will enable the
Company to leverage its manufacturing expertise and metallurgical skills.
Potential acquisitions or strategic alliances may include investments in
companies, technologies, products, or related assets which complement the
Company's business or products. The Company continuously evaluates the strategy
and profitability of its existing business portfolio within the scope of its
long-term, value-oriented corporate policy.
Increase Product and Geographic Diversification. The Company is a global
enterprise with three principal manufacturing facilities in geographically
diverse locations from which the Company markets high-performance nickel-based
alloys and special alloys to a broad range of end customers. The Company's
facilities include downstream operations, such as tube manufacturing and wire
drawing, which increase its sales of value-added products. The Company seeks to
continue to expand its customer base and its product mix, and believes that such
market and product diversification allows it to mitigate the impact of cyclical
downturns in both geographical markets and markets for particular products.
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Operating Segments
The Company's businesses are organized, managed, and internally reported
as three principal operating segments. These segments are: (i) the Premium
Alloys Division; (ii) the Huntington Alloys Division; and (iii) the Wiggin
Alloys Division. In 1999, the Premium Alloys Division, the Huntington Alloys
Division, and the Wiggin Alloys Division accounted for 21.1%, 53.0%, and 25.9%
respectively, of the Company's net sales of $602.2 million.
Premium Alloys Division
The Premium Alloys Division is primarily engaged in the manufacture,
fabrication and distribution of wrought superalloy, superalloy powder, special
alloys, and shape memory alloy products. The principal manufacturing facilities
of the Premium Alloys Division are located in New Hartford, New York; Princeton,
Kentucky; and Ann Arbor, Michigan.
New Hartford, New York. This facility produces a broad range of premium
grade, nickel-based and cobalt-based wrought superalloy and special alloy long
products in billet and bar forms. These products are engineered to meet the high
performance requirements and stress applications of aircraft engine critical
rotating components and land-based steam and gas turbine generators. Principal
manufacturing operations at this facility include melting, remelting, forging,
bar rolling, and billet and bar cold finishing.
This facility also produces a class of nickel/titanium shape memory
alloys (known as Nitinol) which exhibit unique memory and flexibility
properties. Nitinol's principal uses include medical applications such as
orthodontic wire, stents, catheter guide wires and eye glass frames. Industrial
applications for Nitinol include cellular telephone antennas, temperature
control and clamping devices.
Princeton, Kentucky. The Company's powder metal facility in Princeton,
Kentucky has the capability to atomize and process alloy metal powders for use
in aerospace applications. Powder metallurgy superalloy products are used in
military jet engines and the latest generation of large commercial jet engines.
The Company pioneered the powder metallurgical processing of superalloys in the
1960s and remains the world's largest independent manufacturer of superalloy
powder products.
Ann Arbor, Michigan. This facility designs, manufactures, and markets
silver-based amalgamable dental alloys. Dental products are produced in the form
of very fine powder by melting, alloying and atomizing alloys of silver, copper,
tin, palladium, and other elements. A number of the division's dental products
are protected by patents extending to 2000 and beyond. The Company is the
leading North American producer of amalgamable dental alloys.
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Huntington Alloys Division
The Huntington Alloys Division is primarily engaged in the manufacture
and sale of nickel-based alloys in a range of product forms, including, billet,
bar, rod, sheet, strip, plate, tubulars and rod-in-coil. The division also
manufactures and sells nickel-based welding consumables and high-performance
nickel-based alloy and stainless steel wire. The primary manufacturing
facilities of the Huntington Alloys Division are located in Huntington, West
Virginia; Burnaugh, Kentucky; and Elkhart, Indiana. The division also operates
three specialty products subsidiaries.
The Huntington, West Virginia facility is the largest of its type in the
world devoted exclusively to the development, production, marketing and sales of
nickel-based alloys. Operations include melting, remelting, forging, hot rolling
and finishing of rod, sheet/strip, plate, and tubular products. The Huntington
facility serves as the principal production, management and marketing
headquarters for the Huntington Alloys Division's activities. Production in
Huntington is supported by melting, remelting, extrusion, large diameter tube
reduction, and powder manufacture in Burnaugh, Kentucky and by cold strip
finishing in Elkhart, Indiana.
In addition, the Division's operations include the following ancillary
businesses and operations, which specialize in unique product lines
complementing the core business:
Welding Products Company, Newton, North Carolina. This operation
manufactures nickel-based welding consumables for joining high-nickel alloys,
high-performance steels, and other materials. The Company's Newton operation
supplies products to the North American marketplace via direct sales and through
inventory-holding distributors. Specialized production processes include wire
drawing, annealing, straightening, cutting, and the production of
flux-containing electrodes and wires.
A-1 Wire Tech, Inc., Rockford, Illinois. This operation converts,
markets, and distributes specialty high-performance nickel alloy and stainless
steel wire, bar and shaped products for use in a broad range of industrial and
commercial applications.
Mechanically Alloyed Products, Huntington, West Virginia. This operation
supplies oxide dispersion strengthened alloys produced by the mechanical
alloying powder metallurgy process for high temperature aerospace and industrial
applications. Similar equipment and capabilities are possessed by the Company's
Hereford, England production facility.
Wiggin Alloys Division
The Wiggin Alloys Division is primarily engaged in the manufacture and
sale of nickel-based alloys including billet, bar, rod, extruded section, narrow
strip, rod-in-coil, and tubular product forms. Wide sheet and plate products are
provided for distribution in Europe through the Company's Huntington Alloys
Division. The primary manufacturing facility of the Wiggin Alloys Division is
located in Hereford, England. A European subsidiary affiliated with this
division produces cold-drawn nickel-based alloy wire and electrical resistance
alloy wire and ribbon products.
Operations of the Company's Hereford, England integrated production
facility include the melting, remelting, forging, extrusion, hot rolling and
finishing of rod, strip, foil, wire, and tubular products. In addition to these
manufacturing operations, the Hereford site is the management center for
marketing and sales to Europe, the Middle East, Africa, and India. This
organization also supports a network of distribution facilities in strategic
locations throughout Europe.
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The Wiggin Alloys Division also includes the following subsidiaries:
Rescal, S.A., Epone, France. Rescal is a major international supplier of
electrical resistance alloy wire and ribbon products for use primarily in
domestic appliances and heating furnaces. Rescal also specializes in the design
and production of high temperature electric annealing furnaces and industrial
furnace components.
Welding Products Company, Stratford-on-Avon, United Kingdom. The
facility performs service center operations for the sale and distribution of
welding consumables in England, continental western Europe, Africa, India and
the Middle East. This distribution effort is coordinated by the Welding Products
Company in North America.
Special Metals Services. This network of Company-owned service centers
support the marketing and distribution of nickel-based alloy, welding,
electrical resistance alloy, titanium, and cobalt-based hard facing alloy
products throughout Europe. Sales offices and service/distribution centers are
located in St. Priest (Lyon), France; Milan, Italy; and Rotterdam, Netherlands.
Products
Special Metals produces a comprehensive product range of high-quality
alloys which enables it to be a significant supplier to most end-market
industries from consumer products to aerospace. A substantial portion of the
Company's products are used where corrosion-resistance and/or strength at high
temperatures is required. Others are specified for physical properties such as
electrical resistance, controlled thermal expansion or magnetic characteristics.
Unique alloys, form combinations and innovative processing techniques
have been developed by the Company over the years to serve increasingly
demanding customer applications and specifications.
The Company's fully integrated manufacturing facilities and broad range
of metallurgical skills allow it to effectively serve its customers and lead the
development of new metal technologies. The Company's alloys are classified into
distinct families recognized worldwide by the trademarked designations listed
below:
FAMILY ALLOY TYPE (PRIMARY ELEMENTS)
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INCONEL Nickel-Chromium
INCOLOY Nickel-Iron-Chromium
NIMONIC Nickel-Chromium & Nickel-Chromium-Cobalt
UDIMET Nickel-Chromium-Cobalt
MONEL Nickel-Copper
BRIGHTRAY Nickel-Chromium & Nickel-Iron-Chromium
NILO Nickel-Iron
The principal nickel and superalloy product forms produced by the
Company include:
o Long Products (Ingot, Billet, Bar, and Cold Drawn Bar)
o Flat Products (Plate, Sheet, and Strip)
o Pipe, Tubulars, and Extruded Shapes
o Wire and Wire Rod
o Welding Products
o Niche and Other Products
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The Company's product strategy includes maintaining a strong portfolio
of proprietary products. These products include highly specialized formulations,
newly developed or improved from existing materials resulting from the joint
efforts of the Company's research and development, technical services, and
applications engineering groups.
Long Products
The Company is one of the world's leading producers of superalloy and
special alloy long products. This product group is comprised of various alloy
and form combinations which include ingot, billet, bar, and cold drawn bar. Long
products are produced utilizing ingots manufactured in the Company's New
Hartford, Huntington, and Hereford facilities and forging them to a smaller
size. The forging process consists of heating an ingot to a precisely controlled
temperature and reducing its diameter through pressing or extrusion, thereby
producing a billet. The Company's billet products include rounds or squares
ranging from 5 to 18 inches in diameter, in lengths up to thirty feet. End
market applications of billet products include forged turbine aircraft engine
disks, ring components, spacers, shafts and casings. The billet may be processed
further into bar by rolling it to a smaller cross section. The rolling process
entails heating the billet to a precisely controlled temperature and reducing
its diameter by passing it between shaped rolls. The Company produces bar
products in rounds, squares and rectangles ranging from 0.375 to 5 inches in
diameter, in common lengths from twenty to thirty feet. Bar products are sold
primarily to machine shops, forgers and distributors. Cold drawn bar products
are available in diameters less than 4 inches and include cold drawing in the
final fabrication process.
Flat Products
The Company manufactures an extended range of flat products which
provide high-strength, consistent formability, weldability and
corrosion-resistance. Flat products are produced from slabs melted in the
Company's Huntington and Burnaugh facilities and hot-rolled on a primary hot
sheet/strip facility in Huntington. The Company's Hereford facility also
produces flat products utilizing extrusion billet. The Company produces plate
products in gauges ranging from 0.187 to 4 inches. Sheet and strip products are
produced from slabs which are rolled on a hot reversing mill to form hot bands
and subsequently cold-worked into the final product. Sheet products are produced
in gauges ranging from 0.020 to 0.250 inches and maximum width of 48 inches.
Strip products are produced in gauges ranging from 0.008 to 0.250 inches and
maximum width of 36 inches. Customers use these materials to fabricate a variety
of products such as reaction vessels, heat exchangers and transfer piping for
industrial applications.
Pipe, Tubulars, and Extruded Shapes
The Company produces a full range of extruded and cold-worked seamless
and seam-welded pipe and tubular products used in corrosive and high temperature
service environments. The Company's products are utilized in the critical piping
systems of domestic and international fossil fuel and commercial power
facilities, equipment for petroleum and sour-gas exploration/development,
heat-exchanger tubing and thermocouple sheathing. The Company hot extrudes and
subsequently cold-works pipe to sizes ranging from 0.5 to 10 inches in diameter.
Wall thicknesses are contingent upon product or application requirements and may
range from 0.03 to 2 inches. Pipe and tubular products are produced in lengths
up to 40 feet. Extruded shapes may include a broad range of sectional shapes and
dimensions and are commonly produced in lengths up to 20 feet.
Wire and Wire Rod
Special Metals manufactures specialty wire products at its A-1 Wire Tech
operations in Rockford, Illinois, at its Rescal operations in Epone, France and
at its wire mill in Hereford, England. Each of these operations draws wire from
high-performance nickel-based alloys supplied by other Company facilities in the
United States and England, purchased stainless steel and other specialty alloy
wire rod. Both Rescal and A-1 Wire Tech market and distribute these products
globally. In addition to consuming output of the Company's primary operations,
these wire products allow Special Metals to proceed downstream to higher
value-added products.
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Both A-1 Wire Tech and the Hereford, England wire mill manufacture
products for cold heading, spring wire, weaving wire and other industrial
applications. The products are produced as coil, shaped wire or as straightened
and cut bar. Finishes include cold drawn, electropolish quality or centerless
ground. Rescal produces fine wire and ribbon from electrical resistance alloys
for markets in Europe, Asia and the Pacific Rim. In addition, Rescal also
produces electric annealing furnaces and components for industrial furnaces.
The Company also manufactures wire rod products in its Huntington and
Hereford facilities. Wire rod products are supplied to customers for further
fabrication or for further cold working to smaller diameters.
Welding Products
The Company produces approximately 50 distinct welding electrodes, bare
filler wires and flux products. The Company's aggregation of welding products
supports the sale of primary mill products, which require welding, and markets
high-value added welding products. The Company manufactures numerous types of
filler metals, flux-coated electrodes, flux-cored wires, and fluxes, which may
be used to join the high-performance nickel-based alloys it produces. Additional
welding product applications include: i) the welding or repair-welding of cast
irons, ii) welding dissimilar metal combinations, iii) welding copper-nickel
alloys, and iv) overlaying corrosion-resisting layers on steels using welding
techniques. Flux coated electrodes (for shielded-metal-arc welding), flux-cored
wires (for flux-cored arc welding) and fluxes are produced in the Company's
Newton, North Carolina facility. Bare filler wires (for gas-tungsten-arc,
gas-metal-arc and submerged arc welding) are manufactured in both the Company's
Newton, North Carolina and Hereford, England facilities. Other product offerings
include thermal spray wire, flux-core wire and weld strip which are produced in
a variety of alloy and chemical compositions.
Niche and Other Products
Powder Metallurgy. In the most technologically advanced jet engines, the
requirements for strength, high temperature corrosion-resistance and toughness
exceed the capabilities of conventional cast or wrought mill forms. Powder
metallurgy alloys are manufactured using inert gas atomization to break up a
molten metal stream into droplets, which rapidly solidify into metal powder
particles. Superalloys produced in the Company's Princeton, Kentucky facility
are supplied as powder, hot isostatically pressed consolidated shapes or
extruded billet and bar.
Dental Products. The Company's Ann Arbor, Michigan facility designs,
manufactures and markets silver-based amalgamable alloys used principally for
conventional tooth restoration.
Shape Memory Alloys (Nitinol). Nitinol is a family of specialty
nickel/titanium alloys which exhibit unique shape memory and super-elastic
characteristics. This class of materials may be formed into a product, bent or
twisted into a different shape, and then easily returned to their original
shape. Principal applications include medical devices, orthodontic wire,
eyeglass frames, temperature control devices and clamping devices.
Mechanically Alloyed Products. Special Metals produces Oxide Dispersion
Strengthened (ODS) materials in diverse alloys and forms by applying a
Mechanical Alloying (MA) powder metallurgy process. The properties of
Mechanically Alloyed materials are not obtainable from conventionally melted
alloys, or from alloys produced by alternative powder processes. The
manufacturing activities in support of this business are fully integrated into
the operations of the Company. Mechanically Alloyed powders produced in Company
facilities are consolidated using conventional extrusion or hot isostatic
pressing processes, and the resulting consolidated materials are processed into
finished product using standard hot and cold working processes and equipment.
Extensive product and market development efforts are being undertaken to expand
the use of Mechanically Alloyed products to a broad range of high temperature
and stress-rupture industrial applications which require performance beyond
conventional materials. Current applications for mechanically alloyed products
include
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molten glass processing, marine and diesel engines, and other high temperature
thermal processing operations, such as furnace parts, skid rails and hearth
rollers.
Markets
The Company markets and distributes its products to various defined
industrial end markets which include the following:
Aerospace Marine
Chemical Thermal Processing
Power / Pollution Control Automotive
Oil / Petrochemical Electrical / Heating Elements
Electronics Welding
The key product requirements of each industrial market are as follows:
Aerospace - The aerospace market utilizes high-performance nickel-based
superalloys for service in both the static and rotating components of turbine
aircraft engines. Jet engines may produce in excess of 100,000 pounds of thrust
and may subject parts to temperatures reaching 2,100(degree) Fahrenheit. Demand
for the Company's products, which includes ingot, billet, rod, bar, plate,
extruded shapes and sheet is based on the new and replacement market for jet
engines and the maintenance requirements of commercial and military aircraft
operators. Aerospace applications include turbine disks, casings, blades, vanes,
ring components, ducting, thermal protection and fasteners. The aerospace market
is the single largest market for the Company's products, aggregating
approximately 35% of the Company's net revenues in 1999.
Chemical - The Chemical processing industry requires high temperature
strength and corrosion resistant nickel-based alloys for process containment and
the material transfer of corrosive gas and fluids. Demand for the Company's
tubular, plate, sheet and welding products is based on the level of maintenance,
repair and expansion of existing chemical processing facilities as well as the
construction of new facilities.
Power/Pollution Control - Demand for the Company's ingot, plate, sheet
and welding products is driven by the construction of land-based gas turbine
cogeneration facilities, industrial and municipal hazardous waste management
systems and by government legislated and self-imposed programs aimed at
significantly reducing the level of sulphur dioxide emissions from fossil-fuel
powered electric generating facilities.
Oil/Petrochemical - The oil and petrochemical industry utilizes
nickel-based plate and tubular products for projects such as downhole tubulars
and tools for oil and gas extraction, transfer piping and process furnaces used
in hydrocarbon cracking, and sour-gas exploration/development. Demand for the
Company's products is driven by the global demand and price of natural gas,
development of sour-gas fields and petrochemical processing.
Electronics - The Company's wire and wire rod products are utilized
primarily in industrial and commercial lighting applications.
Marine - Nickel-based alloys possess reliable aqueous corrosion
resistance in seawater environments. Marine applications include critical
components aboard nuclear-powered submarines and shipboard systems required to
resist seawater corrosion.
Thermal Processing - The high temperature strength and corrosion-
resistance of the Company's portfolio of alloys is well-suited for service in
industrial processing furnaces used for diverse applications from heat treatment
to glassmaking. Rod, bar, wire rod, wire, sheet and plate are common thermal
processing forms supplied by the Company.
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Automotive - The requirement for cleaner burning, extended warranty,
fuel efficient engines has created global opportunities for nickel-based alloys
in automobile exhaust valves, exhaust system bellows, oxygen sensors, catalytic
converters, and high-temperature fasteners. The primary product forms supplied
to the automotive end market include rod and strip.
Electrical/Heating Elements - Nickel-based alloys are used in this
industry for a wide variety of applications in connectors, leads, resistors,
magnetostrictive devices, battery cases, semiconductor packaging, and sheathing
for heating elements. The predominant product forms supplied to this industry
include thin strip and small diameter wire. Wire products are also used in
electrical applications as resistance elements and thermocouples.
Welding - Nickel-based welding materials are a requisite for the
manufacture of fabrications of nickel alloys and other materials. The primary
applications include: joining similar or dissimilar nickel-based materials,
welding or repair-welding of cast irons, and overlaying nickel-based alloys on
dissimilar base materials.
Marketing and Distribution
The Company serves a diversified global marketplace through a number of
strategic distribution channels. These routes to market are structured to be the
most effective and efficient for both Special Metals and the customer, and
represent the products of the mills in Huntington, New Hartford and Hereford.
The Company's other businesses control their individual routes-to-market using a
similar mix of channels as appropriate.
The Company's global sales and marketing organization identifies
potential markets and growth opportunities for its products and determines
effective strategies to service those markets and to sustain a position as a
preferred supplier. The critical elements of this strategy include:
o Maintaining an appropriate presence in emerging market countries
o Participating in appropriate route-to-market development
o Developing partnerships with leading industry customers and suppliers
The Company continually evaluates and modifies its routes-to-market,
thereby increasing customer awareness of Special Metals' products and providing
end-market visibility for the sales and marketing groups.
The Company's marketing representatives build collaborative
relationships with end-market customers in order to manufacture and sell
products which meet their specific technical requirements and applications. The
Company's marketing efforts also provide the highest level of quality customer
technical/engineering support and product planning.
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The Company maintains a global presence in all major geographic regions
through the following types of outlets:
o Direct Sales Representatives
o Wholly or jointly owned sales and distribution operations such as
Special Metals Services in Europe, Special Metals Services (Pacific)
Pte. Ltd. in the Pacific Rim and Daido-Special Metals, Ltd. in Japan
o Distributors and Agents
o Value-added business units of the Company such as A-1 Wire Tech, Rescal,
and the Welding Products Company
The Company distributes alloy products principally through its own
direct sales organization to markets in North America, Europe, portions of
Central and South America, and the Middle East.
The Company maintains a strong presence in the continental United States
through field sales personnel located in three geographic regions, each of which
is administered by a regional sales manager. Regional focus has allowed the
Company to achieve operating efficiencies between its manufacturing,
distribution, and marketing operations. Field sales personnel utilize
computerized information systems which enable them to coordinate efforts with
the manufacturing facilities and order entry personnel. The principal sales
efforts of the Company in Canada are managed directly through Huntington Alloys
Canada Ltd. located in Toronto, Ontario.
The Company's direct sales efforts in Europe are coordinated through its
principal marketing and sales offices headquartered in Hereford, England and
field sales office located in Dusseldorf. The coverage of this organization also
includes emerging Eastern European nations and the Commonwealth of Independent
States.
The Company operates a sales office in Bangalore, India which services
the Indian sub-continent with wrought nickel-based alloy products manufactured
by Company facilities in the United States and United Kingdom.
In addition to these direct sales organizations, the Company operates a
Singapore based trading company, Special Metals Services (Pacific) Pte. Ltd.,
which also has an office in Hong Kong. This organization serves the Pacific Rim
with products of the Company and trades in other appropriate, complementary
metal products.
The Company and Daido Steel Co., Ltd. of Japan participate in a
joint-venture marketing and sales organization referred to as Daido-Special
Metals, Ltd. This organization, in cooperation with Special Metals Services
(Pacific) Pte. Ltd., markets an extensive range of superalloys and
high-performance alloys produced by Special Metals and Daido Steel Co., Ltd. in
Japan. This affiliation has led to a strong relationship between the two
companies and has promoted joint efforts in product and process development.
Marketing efforts of the joint venture are conducted through sales offices in
Tokyo, Osaka, and Fukuoka and a service/distribution center and sales office in
Nagoya.
The sale of Special Metals products through distribution channels
complements the direct sales efforts of the Company. The Company's distribution
network has evolved over a period of years and is continuously improved to
ensure the most efficient structure for timely response to customer
requirements. The Company continually seeks to refine its distribution base by:
i) offering effective market and product support to existing distributors; ii)
selectively expanding wholly-owned Company distribution center locations; and
iii) increasing the number of customer supply partnerships with exclusive
distributors in the United States and the United Kingdom.
The Company also has formed long established relationships with agents
and distributors worldwide. These distributors generally sell a comprehensive
range of products offered exclusively by the Huntington and Hereford facilities.
The Company maintains distribution operations in France, Italy and the
Netherlands under the name Special Metals Services. Special Metals Services
sales offices and service/distribution centers are located in St. Priest (Lyon),
France; Milan, Italy; and Rotterdam, Netherlands.
-10-
<PAGE>
The Company's other businesses, which include the Welding Products
Company, A-1 Wire Tech, Rescal, powder products, shape memory alloy products and
dental products, have developed their own distribution channels to suit their
specific business requirements.
Pricing
Pricing of nickel-based alloys can be volatile and is influenced by key
raw materials, such as nickel and cobalt. Sales of the Company's products are
made under conventional purchase orders, one-year supply contracts and long-term
firm price or indexed price contracts. Firm price contracts will continue to be
a significant part of the superalloy industry because the end users of
superalloy products, primarily jet engine manufacturers, require the ability to
quote firm prices on products deliverable in the future. The Company will
continue to attempt to minimize raw material price risks in connection with firm
price contracts by hedging prices of certain raw materials, purchasing raw
materials under fixed price arrangements and entering into scrap purchase
arrangements with customers.
Supply and Cost of Raw Materials
Raw material costs constitute a substantial portion of the Company's
cash cost of production. The major raw materials utilized in the manufacture of
superalloys and special alloys include scrap and various virgin materials such
as nickel, chromium, cobalt, columbium, molybdenum, titanium and aluminum. Over
half of the raw materials used in superalloy production is scrap, either
internal scrap reclamation from the Company's own production process, or scrap
purchased on the open market or from customers. The Company has entered into a
long-term supply arrangement with Inco Limited ("Inco"), whereby Inco will
supply all of the virgin nickel requirements of the Huntington Alloys and Wiggin
Alloys Divisions. Although there can be no assurances, the Company believes that
a number of suppliers can produce sufficient quantities of either scrap or
virgin raw materials and that it is not dependent on any one supplier for any of
the raw materials used to manufacture its products.
Commercial deposits of certain raw materials used by the Company are
found in only a few parts of the world. The availability and prices of these
materials may be influenced by cartels, changes in world politics, unstable
governments in exporting nations and inflation. Although the Company believes
that raw materials are available in adequate quantities at market prices, and
that it has not experienced any interruption in the supply of such raw
materials, the availability and prices of raw materials may be subject to
curtailment or to change due to, among other things, interruptions in production
by suppliers, worldwide price levels and allocations to other purchasers.
Any protracted interruption in the supply of raw materials or
substantial increases in their costs could have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company.
-11-
<PAGE>
Cyclicality of Aerospace Industry
The aerospace industry is one of the largest end-user markets of the
Company's products and has historically been characterized by severe cyclicality
which has had a significant impact on the sales and profitability of superalloy
producers, including Special Metals. The worldwide market for commercial
aircraft is predominantly driven by long-term trends in airline passenger
traffic. Principal factors underlying long-term traffic growth include sustained
economic growth, both in developed and emerging countries, and political
stability. According to forecasts prepared by the Boeing Company ("Boeing"), for
the five-year period 1995-1999, the average growth rate for worldwide passenger
traffic was approximately 5.5%. Boeing's 20-year forecast projects an annual
growth rate of approximately 4.7% in worldwide airline passenger traffic.
In addition, a mandate went into effect January 1, 2000, requiring that
all aircraft operators entering and exiting U.S. airports must comply with
federal Stage 3 noise regulations. This environmental compliance requires
airline operators to replace existing Stage 2 engines or retrofit such engines
with hush kits. Demand for commercial aircraft is further influenced by airline
profitability, world trade policies, bilateral government relations, and
technological changes.
In 1995, the commercial aircraft industry began recovering from the
recession of the early 1990's. Deliveries of large commercial aircraft have
increased by 47% from 1995 to 1997, 42% from 1997 to 1998 and 12% from 1998 to
1999. Boeing's average production rate decreased to 49 aircraft per month in
1999 with Airbus Industrie, S.A. ("Airbus") increasing to an average of 25
planes per month. Boeing projects that 2000 average production rates will
approximate 41 aircraft per month, with Airbus projecting 26 aircraft per month.
Substantially all of the revenues of the Company are derived from the
sale of superalloy, special alloy and related products. Accordingly, any
significant decrease in demand or decline in prices for such products could have
a material adverse effect on the business, financial condition, results of
operations or prospects of the Company.
Competition
Several of the Company's production capabilities are possessed in
varying degrees by other companies in the industry, including both domestic and
foreign manufacturers. The global industry is highly competitive and dominated
by a few major producers. The Company's largest competitors include Allegheny
Technologies, Inc. (formerly Allegheny Teledyne, Inc.), Carpenter Corporation,
Haynes International, Inc., Krupp VDM GmbH, and Sumitomo (Japan).
In the future, the Company may face increased competition from companies
that currently have the required manufacturing equipment, but lack sufficient
technological or financial resources. Demanding end-user specifications, a
multi-stage manufacturing process and the technical, marketing and manufacturing
expertise required to develop new applications combine to create significant
barriers to entry. Factors which affect the Company's competitive posture
include the quality of its products, marketing strategies, service and delivery
capabilities, pricing, and engineering/production expertise. Although the
Company believes that it exhibits strength in these areas and is well positioned
to compete in the markets in which it operates, the competitive nature of the
industry has had, and in the future could have, an adverse effect on the
business, financial condition, results of operations or prospects of the
Company.
-12-
<PAGE>
Research & Development
Special Metals Corporation is an industry leader in research and
technology development. The Company's research and development efforts are
closely aligned with its key business objectives - to reduce the cost of
producing its core business products, developing and improving proprietary
alloys and metallurgical processes, and applying its technology to the
manufacture of specialty alloys and materials for new market sectors. The
Company's applied research, technical, development and metallurgical production
efforts are staffed by approximately 75 individuals with engineering and science
degrees. The Company conducts research and development activities at its New
Hartford, Princeton, Ann Arbor and Huntington facilities. In addition to
complete metal analysis and testing capabilities to support the Company's
production and testing of nickel alloys, the New Hartford and Huntington
facilities have dedicated research laboratories for physical and mechanical
metallurgical analyses and process laboratories for pilot scale processing of
new alloys. The research and development staffs collaborate with the Company's
production staffs and sales and marketing forces to help identify and develop
new products as well as to improve existing products and processes.
The Company is presently an active participant in several industrial
consortia including the U.S. Department of Energy sponsored Specialty Metals
Processing Consortium ("SMPC") which includes other U.S. superalloy producers
and the EU THERMIE program which has members from the European metal alloy
producers and power industry equipment designer, fabricator, and utility
companies. The SMPC's purpose is to pursue melting and solidification technology
and to better understand the very complex nature of alloy melting and
solidification. SMPC's research is conducted at the Sandia National Laboratory
and also includes industrial experiments conducted at the member companies.
Funding for the consortium is generated through membership fees, matching
support from the U.S. Department of Energy and other sources. The THERMIE
program involves developing and qualifying critical component materials,
including nickel alloys, that can withstand the high operating temperatures of
combustion and steam handling applications and designing an advanced
700(degree)C steam, pulverized fuel (PF) power plant with at least 10% higher
operating efficiency than present coal fired power plant systems. The THERMIE
program is funded by members of the European Union.
The Company is a world leader in the development, invention, and
production of high-performance nickel-based alloys. Research programs undertaken
in laboratories in the New Hartford and Huntington facilities are aimed at
creating new proprietary, value-added products, evaluating alloy performance in
simulated process environments, improving the technology of Company owned
manufacturing facilities, and supporting the daily quality assurance systems and
procedures which are an integral part of all production activities.
Approximately 85% of all alloys sold by the Company were invented in its
laboratories.
Non-aerospace special alloys under development include products in the
Company's shape memory alloys product line. These products, as with Nitinol,
utilize precise chemistries and thermomechanical processing and are being
designed for use in medical, industrial and consumer product applications.
Additional non-aerospace products under development include dental alloys, such
as a recently patented restoration alloy system which offers a unique
combination of properties and handling characteristics during application. The
Company spent approximately $1.9 million, $2.9 million and $4.4 during 1997,
1998, and 1999, respectively, for research and development activities.
The Company has also developed research and development initiatives with
a number of customers in several industries and with several major universities
in North America, Europe and Asia.
The Company owns over 95 United States patents (with approximately 380
foreign equivalent patents) which protect its proprietary technology and
processes, many of which are also filed under the patent laws of other nations.
Although these patents, as well as the Company's numerous trademarks, technical
information license agreements, and other intellectual property, have been and
are expected to be of value, management believes that the loss or termination of
any single such item or technically related group would not materially affect
the conduct of its overall business.
-13-
<PAGE>
Customer Concentration
There are a small number of large consumers of high-performance
nickel-based alloys in the world, and Special Metals believes it enjoys good
relations with them. A substantial portion of the Company's business is
conducted with a relatively small number of large customers. Although no one
customer accounted for 10% or more of the Company's net sales in 1999, the
Company's top ten customers accounted for approximately 31% of the Company's
1999 net sales. In 1998, Wyman Gordon Forgings, Inc. accounted for approximately
16% of the Company's net sales. In 1997, the Company's three largest customers
accounted for approximately 21%, 11%, and 10%, respectively, of the Company's
net sales.
Employees
As of December 31, 1999, the Company had approximately 3,230 employees,
approximately 61% of whom are represented by labor unions. The Company has
entered into collective bargaining agreements with these union employees as
follows:
<TABLE>
<CAPTION>
Number of
Employees Covered
By Bargaining
Location Agreements Effective Date Expiration Date
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New Hartford, New York:
Production 302 September 1997 August 2003
Support Technicians 18 April 1999 April 2002
Princeton, Kentucky 48 August 1997 August 2000
Dunkirk, New York 49 August 1999 August 2002
Huntington, West Virginia 754 February 1999 February 2002
Burnaugh, Kentucky 154 April 1999 March 2002
Hereford, England:
Production 471 November 1999 November 2000
Craft 120 November 1999 November 2000
Staff (Junior) 17 November 1999 November 2000
Staff (Senior) 31 January 2000 January 2001
</TABLE>
The Company believes it has good relations with its employees, but there
can be no assurances that the Company will not experience a strike or other work
stoppage or that acceptable collective bargaining agreements can be negotiated
when the existing collective bargaining agreements expire.
-14-
<PAGE>
Item 2. Operating Facilities
The following table sets forth certain information with respect to the
Company's principal operating facilities. The Company believes that its
operating facilities are well maintained, are suitable to support the Company's
business and are adequate for the Company's present and anticipated needs.
<TABLE>
<CAPTION>
Facility Approximate Nature of
Location Size (Square Feet) Occupancy Product/Function
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Huntington, WV 1,755,000 Owned Melting & Finishing Plant
Research & Development
Hereford, UK 1,102,000 Owned Melting & Finishing Plant
Burnaugh, KY 400,000 Owned Melting & Finishing Plant
New Hartford, NY 358,000 Leased Melting & Finishing Plant
Research & Development
Corporate Headquarters
Elkhart, IN 160,000 Owned Cold Strip Finishing and Conversion
Epone, FR 150,000 Leased Wire Products
Rockford, IL 115,000 Leased Wire Products
Newton, NC 100,000 Owned Welding Products
Dunkirk, NY 98,000 Leased Forging Plant
Princeton, KY 70,000 Leased Powder Products
Research & Development
Ann Arbor, MI 9,000 Owned Dental Products
Research & Development
</TABLE>
The facilities in New Hartford, Dunkirk and Princeton are leased from
government agencies under arrangements in which the Company pays rent in lieu of
taxes and has options to purchase such facilities at a nominal purchase price.
These arrangements for the New Hartford, Dunkirk and Princeton facilities expire
in 2007, 2001, and 2000 respectively. The Princeton facility lease is subject to
extensions for an additional 15 years beyond the current term.
Item 3. Legal Proceedings
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
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.
-15-
<PAGE>
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 December 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. The Company's 2000 capital budget provides $2.7 million for
environmental protection and compliance matters. The Company incurred average
annual capital expenditures for environmental matters of $.2 million during
1997, $1.4 million during 1998 and $3.5 million during 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:
Asbestos Exposure Actions. Huntington Alloys, a domestic subsidiary of
the Company ("Huntington"), is a co-defendant in various consolidated and
unconsolidated actions by plaintiffs, including former employees of Huntington
and former employees of contractors to Huntington, alleging exposure to asbestos
at the Company's Huntington, West Virginia facility. Plaintiffs' counsel have
also informed Huntington 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 Huntington 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. Huntington is a defendant in sixteen 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 the
Company's Huntington, West Virginia facility, while an employee of the
Huntington Sanitary Board. The 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.
-16-
<PAGE>
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 Department of Environmental Conservation (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. The Company is currently awaiting DEC approval
of the remedial alternative, which will include removal of PCB-impacted soils.
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 $70,000 per year. In addition, the Company may be required to
conduct certain post-closure activities.
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. In July of 1999, the DEC decided
not to pursue further at that time its request for the Company to undertake
biota sampling. The DEC retains the right to sample biota. The DEC may renew its
request for the inclusion of biota sampling in the post-closure operations and
maintenance plan.
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 flows, 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 DEC is dividing the site into two separate sites. The Utica Alloys
site (1.5 acre occupied by the industrial concern known as Utica Alloys, Inc.)
and the Universal Waste site (the remainder of the original 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 Huntington have been subject to
site inspections pursuant to RCRA. Draft reports issued by the respective
inspecting agencies recommended environmental investigation at Huntington and
Burnaugh.
Neither report was ever issued in final form. No action has been taken
by the inspecting agency since January 1996 in the case of Huntington. Burnaugh
has recently been listed as one of over 1,700 high priority facilities. The
Kentucky Division of Waste Management is in the process of revising the RCRA
Facility Assessment report for Burnaugh. If such investigation is ultimately
required in Huntington, and when such is required in Burnaugh, 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.
Huntington West Pickle House. The Company expects that the Huntington,
West Virginia facility of Huntington will need to install a wet scrubber exhaust
system to remove ammonia vapor directly from an
-17-
<PAGE>
ammonia/water solution tank within its West Pickle House. The cost is estimated
to be about $500,000 and is expected to be incurred in calendar year 2000.
Pennsauken Landfill / Puchack Well Field. The Company recently received
notice that Huntington has been named as a third-party defendant in a lawsuit
filed in New Jersey Superior Court (the "Pennsauken Action"). The plaintiffs in
the Pennsauken Action, the Township of Pennsauken and the Pennsauken Solid Waste
Management Authority, filed the Pennsauken Action in 1991 against various
defendants seeking to hold the defendants liable for the costs of remediation of
the Pennsauken Landfill, the Puchack Well Field and/or surrounding areas. In
September of 1999, two defendants in the Pennsauken Action filed a third-party
complaint against numerous third-party defendants, one of which is Huntington.
Several of the named third-party defendants, including Huntington, had
previously been PRP's at a nearby Superfund site known as the Swope Oil Field.
Huntington was a de minimis participant in the Swope Oil Field site and
has, to date, paid less than $70,000 for its share of the remediation.
The third-party complaint in the Pennsauken Action alleges that
contamination at the Swope Oil Field migrated via groundwater to the Pennsauken
Landfill, the Puchack Well Field and/or surrounding areas. The third-party
plaintiffs assert that if they are found to be liable for remediation of those
sites, Huntington and the other third-party defendants which were PRP's at the
Swope Oil Field are in turn liable to the third-party plaintiffs. Huntington has
not, to date, filed an answer to the third-party complaint. The Company is in
the preliminary stages of investigating the claim against it. It is not possible
at this time to provide a reasonable estimate of the cost of any investigative
or remedial work which may be required, or Huntington's share.
Wiggin Tube Degreaser. A United Kingdom subsidiary (Special Metals
Wiggin Ltd., "Wiggin") may be required to make an expenditure of approximately
$3.2 million to upgrade its degreasing operations at its facility in Hereford,
England in order to reduce emissions of volatile organic compounds. This
expenditure is unlikely to be incurred before 2003.
Wiggin Electrical Switchgears. The Company expects that the Hereford,
England facility of Wiggin will need to institute a phased program over ten
years to replace its electrical switchgears, including oil-filled manual direct
switchgears, air breakers and all other oil-filled switchgears. The cost of a
program to replace the oil-filled manual direct switches is estimated to be
approximately $0.7 million over the next two years. The cost of a program to
replace the remainder of the electrical switchgears is estimated to be
approximately $4.6 million, to be incurred during the period from 2002 through
2009.
Wiggin Water Drainage Arrangements. The Environment Agency has informed
the Company that they are considering improvements for the water drainage
arrangements at the Hereford, England facility of Wiggin. They may request that
Wiggin separate their process and storm water drainage systems.
Consent Order - New Hartford. The New York State Department of
Environmental Conservation has alleged that the Company's New Hartford facility
has violated certain regulations pertaining to hazardous waste management
promulgated under the authority of Environmental Conservation Law Article 27,
Title a. The department is seeking a penalty for the cited violation in the
amount of $54,500. The violations pertain to a number of matters including a
fire and a RCRA inspection.
-18-
<PAGE>
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.
Inco
The Company has filed a lawsuit against Inco and certain of Inco's
subsidiaries (the "Sellers"), alleging that they made fraudulent and negligent
misrepresentations in connection with the IAI Acquisition and that the Sellers
breached the terms of the Stock Purchase Agreement. The Sellers have moved to
dismiss the lawsuit, and the motion is pending before the court. The Sellers
have advised the Company that in the event the court denies their motion to
dismiss, they intend to file a counterclaim against the Company seeking in
excess of $12 million, which the Seller's claim is owed by the Company under the
terms of the Stock Purchase Agreement. The Company has established a reserve of
$12 million for the Seller's potential counterclaim, although the Company
intends to vigorously defend against such a counterclaim if, in fact, it is
filed. Because of the preliminary nature of the lawsuit, it is not possible at
this time to know if the Company may ultimately be required to pay any or all of
the amount sought by the Sellers.
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 operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None
-19-
<PAGE>
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is traded on the NASDAQ National Market under
the symbol "SMCX." As of March 1, 2000 there were approximately 75 shareholders
of record (including holders who are nominees for an undetermined number of
beneficial owners) of the Company's common stock. The quarterly common stock
ranges for the previous two fiscal years are indicated below:
<TABLE>
<CAPTION>
1999 1998
Quarter Ended High Low High Low
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31 $ 9.31 $ 3.81 $ 18.00 $ 15.50
June 30 7.00 3.63 18.81 14.00
September 30 5.59 4.31 16.50 10.00
December 31 4.19 2.63 10.44 7.00
</TABLE>
The Company has not paid dividends on its common stock during 1999 or
1998 and does not currently pay dividends on its common stock. Future decisions
as to the payment of dividends will be at the discretion of the Company's Board
of Directors, subject to applicable law. The Company's ability to pay dividends
on its common stock is also subject to the covenants contained in its credit
agreements, which effectively preclude the Company from paying dividends on its
common stock for the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
-20-
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected historical financial data of the
Company as of, and for the years ended December 31, 1995, 1996, 1997, 1998, and
1999. The financial data set forth below should be read in conjunction with the
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7 of this Form 10-K and the
Financial Statements of the Company and the notes thereto included in Item 8 of
this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997 1998 1999
--------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ 132,245 $ 162,300 $ 186,071 $ 253,226 $ 602,249
Cost of goods sold 114,752 133,828 142,029 219,110 562,486
--------------------------------------------------------------------
Gross profit 17,493 28,472 44,042 34,116 39,763
Selling, general and
administrative expenses 5,207 5,408 6,958 16,063 59,520
--------------------------------------------------------------------
Operating income (loss) 12,286 23,064 37,084 18,053 (19,757)
Interest expense 4,727 4,079 670 4,109 25,711
Other income - - (107) (914) (4,026)
--------------------------------------------------------------------
Income (loss) before income taxes 7,559 18,985 36,521 14,858 (41,442)
Income tax expense (benefit) (1) 354 (96) 13,519 5,018 (16,132)
--------------------------------------------------------------------
Net income (loss) $ 7,205 $ 19,081 $ 23,002 $ 9,840 $ (25,310)
====================================================================
Net income (loss) attributable
to common shareholders $ 7,205 $ 19,081 $ 23,002 $ 8,769 $ (31,733)
====================================================================
Net income (loss) per share -
Basic and assuming dilution $ .58 $ 1.54 $ 1.53 $ .57 $ (2.05)
Weighted average shares
outstanding 12,400 12,400 15,004 15,479 15,479
Balance Sheet Data (at
period end):
Working capital $ 35,779 $ 47,450 $ 68,825 $ 323,764 $ 283,722
Total assets 106,945 116,492 141,750 840,154 811,287
Current portion of long-term
debt and capital lease
obligations 5,270 4,296 316 13,155 21,356
Long-term debt and capital
lease obligations (excluding
current maturities) 41,587 42,522 174 282,792 259,035
Subordinated notes payable to
affiliates 8,500 1,500 - - 5,000
Stockholders' equity 15,666 34,775 103,971 111,359 76,277
</TABLE>
- --------------------------------
(1) Income tax expense for 1995 and 1996 differs from the amount which is
derived by applying the combined statutory income tax rates due to the
utilization of previously unrecognized net operating loss and other tax
carryforwards in 1995 and 1996 and the recognition of previously
unrecognized deferred income tax assets in 1996.
-21-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in this Management Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this document 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 significant 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; and 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
IAI 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 purchase price was
$328 million cash (subject to a purchase price adjustment). The purchase price
of the non-competition agreement was $37 million, consisting of $20 million cash
and $17 million fair value Series A Convertible Preferred Stock (340,000
shares). The Company financed the cash portion of the aggregate purchase price
with funds drawn under a new $375 million bank credit facility and with proceeds
from the issuance of $80 million fair value Series A Senior Convertible
Preferred Stock (1,600,000 shares) to TIMET Finance Management Company
("TIMET"), a wholly-owned subsidiary of Titanium Metals Corporation ("TMC"). In
connection with the Acquisition and related financing, the Company also incurred
fees totaling approximately $11.3 million.
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 October 28, 1998, the date of
acquisition. The initial purchase price of $328 million, subject to a purchase
price adjustment defined in the purchase agreement, was allocated during 1998 to
the assets acquired and liabilities assumed based upon their estimated fair
values. During the fourth quarter of 1999, the purchase price adjustment process
was concluded, resulting in a net decrease to the purchase price of
approximately $2 million. This purchase price adjustment was allocated to the
assets acquired. See Note 2 to the Consolidated Financial Statements included in
Item 8. "Financial Statements and Supplementary Data."
General
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 Premium Alloys Division
manufactures a comprehensive range of premium grade, nickel-based and
cobalt-based wrought superalloy and special alloy long
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<PAGE>
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
Huntington Alloys Division manufactures nickel-based alloys in a broad range of
product forms, including billet, bar, rod, sheet, strip, plate, tubulars, 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 Wiggin Alloys 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. In 1999, the Premium Alloys Division, the
Huntington Alloys Division, and the Wiggin Alloys Division accounted for 21.1%,
53.0%, and 25.9% respectively, of the Company's net sales of $602.2 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.
Export sales represent a significant portion of the Company's business.
In 1997, 1998 and 1999, sales by domestic businesses of the Company to
purchasers outside of the United States totaled 31%, 24% and 15% of the
Company's net sales, respectively.
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 December 31, 1999,
the Company had open purchase contracts, none of which are expected to be
settled in cash, with a notional principal value of approximately $40.0 million.
The fair value of the material covered by these contracts, based on the December
31, 1999 price quoted on the LME, was approximately $46.2 million. Unrealized
gains and losses on the contracts which have been designated, and are effective,
as hedges for firm sales commitments have been deferred.
-23-
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, legal expenses, and general corporate administration.
Results Of Operations
The following table sets forth, for the periods indicated, the
percentage of total sales represented by the line items reflected in the
Company's condensed consolidated income statements.
1997 1998 1999
--------------------------------------
Net sales 100.0% 100.0% 100.0%
Costs of goods sold 76.3 86.5 93.4
--------------------------------------
Gross profit 23.7 13.5 6.6
Selling, general and
administrative expenses 3.7 6.3 9.9
--------------------------------------
Operating income (loss) 20.0 7.2 (3.3)
Interest expense .4 1.6 4.3
Abandoned acquisition costs .3 - -
Other income (.4) (.3) (.7)
--------------------------------------
0.3 1.3 3.6
--------------------------------------
Income (loss) before income taxes 19.7 5.9 (6.9)
Income taxes expense (benefit) 7.3 2.0 (2.7)
---------------------------------------
Net income (loss) 12.4% 3.9% (4.2)
=======================================
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Net Sales. Net sales increased $349.0 million, or 137.8%, from $253.2
million in 1998 to $602.2 million in 1999. This increase is the result of the
inclusion of IAI sales for a full year, offset in part by lower average realized
selling prices due to continuing difficult pricing conditions and reduced sales
volumes for high performance metals in the commercial aerospace, chemical and
oil/petrochemical end markets.
Export sales decreased from 24% of the Company's net sales for 1998 to
15% of the Company's net sales for 1999.
Cost of Goods Sold. Cost of goods sold increased $343.4 million, or
156.7%, from $219.1 million in 1998 to $562.5 million in 1999. As a percentage
of net sales, cost of goods sold increased from 86.5% in 1998 to 93.4% in 1999,
primarily as a result of lower average selling prices and higher raw material
costs, primarily nickel.
Gross Profit. Gross profit increased $5.7 million, or 16.6% from $34.1
million in 1998 to $39.8 million in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $43.4 million from $16.1 million in 1998 to
$59.5 million in 1999. This increase is principally the consequence
-24-
<PAGE>
of including the results of operations of IAI for a full year. Selling, general
and administrative expenses as a percentage of net sales increased from 6.3% in
1998 to 9.9% in 1999.
Operating Income (Loss). Operating income (loss) decreased $37.9 million
from $18.1 million in 1998 to $(19.8) million in 1999. Operating income as a
percentage of net sales decreased from 7.2% in 1998 to (3.3)% in 1999.
Interest Expense. Interest expense increased $21.6 million from $4.1
million in 1998 to $25.7 million in 1999, primarily due to the increase in
indebtedness in connection with the Acquisition.
Income Taxes. Income tax expense decreased $21.1 million from an expense
of $5.0 in 1998 to a benefit of $(16.1) million in 1999, primarily due to the
decrease in operating income and the increase in interest expense. The effective
tax rate increased from 33.8% in 1998 to 38.9% in 1999, primarily due to
decreased benefits from the Company's foreign sales corporations.
Net Income (Loss). Net income (loss) decreased $35.1 million from $9.8
million in 1998 to $(25.3) million in 1999. Net income as a percentage of net
sales decreased from 3.9% for 1998 to (4.2)% for 1999.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Net Sales. Net sales increased $67.1 million, or 36.1%, from $186.1
million in 1997 to $253.2 million in 1998. This increase is the result of
including two months' sales of IAI, offset in part by reduced sales of the
Premium Alloys Division as a consequence of global economic pressures which
resulted in reduced volumes and increased pressure on prices during 1998, and
customer inventory adjustments in response to earlier order patterns which had
led to overstocking in customer plants.
Export sales decreased from 31% of the Company's net sales for 1997 to
24% of the Company's net sales for 1998. This decrease is a result of the
Acquisition.
Cost of Goods Sold. Cost of goods sold increased $77.1 million, or
54.3%, from $142.0 million in 1997 to $219.1 million in 1998. As a percentage of
net sales, cost of goods sold increased from 76.3% in 1997 to 86.5% in 1998.
This increase is the result of including IAI's results of operations for the two
months subsequent to its acquisition. For the Premium Alloys Division, cost of
goods sold, as a percentage of net sales, increased from 76.3% in 1997 to 81.3%
in 1998. This increase is due primarily to the decrease in net sales of the
division.
Gross Profit. Gross profit decreased $10.0 million, or 22.5% from $44.1
million in 1997 to $34.1 million in 1998, as a consequence of global economic
pressures and customer inventory adjustments in response to earlier order
patterns which led to overstocking in customer plants.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.1 million, or 130.9% from $7.0 million in
1997 to $16.1 million in 1998. Selling, general and administrative expenses as a
percentage of net sales increased from 3.7% in 1997 to 6.3% in 1998. The
increase was due to including IAI's results of operations for the two months
subsequent to the Acquisition.
Operating Income. Operating income decreased $19.0 million, or 51.3%
from $37.1 million in 1997 to $18.1 million in 1998. Operating income as a
percentage of net sales decreased from 20.0% in 1997 to 7.2% in 1998.
Interest Expense. Interest expense increased $3.4 million from $.7
million in 1997 to $4.1 million in 1998, primarily due to the increase in
indebtedness in connection with the Acquisition.
-25-
<PAGE>
Income Taxes. Income tax expense decreased $8.5 million from $13.5 in
1997 to $5.0 million in 1998, primarily due to the decrease in operating income
and the increase in interest expense. The effective tax rate was 37.0% in 1997
and 33.8% in 1998.
Net Income. Net income decreased $13.2 million, or 57.2% from $23.0
million in 1997 to $9.8 million in 1998. Net income as a percentage of net sales
decreased from 12.4% for 1997 to 3.9% for 1998.
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 $22.1 million, $21.3
million and $8.4 million for 1997, 1998 and 1999, respectively.
Capital expenditures were $9.9 million, $20.3 million and $12.0 million
for 1997, 1998 and 1999, respectively.
The Company's principal sources of funds are (i) funds generated from
operations; (ii) borrowings under the Company's Senior Secured Credit Agreement
with Credit Lyonnais, as agent, and other financial institutions (the "Credit
Agreement"), which the Company entered into in connection with the Acquisition;
and (iii) borrowings under the Company's Subordinated Loan Agreement (the
"Subordinated Loan Agreement") with Societe Industrielle de Materiaux Avances
("SIMA").
The Credit Agreement provides for two term loans (the "Tranche A Term
Loan" and the "Tranche B Term Loan," collectively, the "Term Loans") and a $100
million revolving credit and letter of credit facility (the "Revolving Credit
Facility"). Proceeds from the Term Loans and a portion of the Revolving Credit
Facility were used to finance a portion of the purchase price of the IAI
Acquisition.
Under the Revolving Credit Facility, the Company can borrow, repay and
re-borrow from time to time up to $100 million in the aggregate, subject to
certain restrictions described below. 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.
Amounts outstanding 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.
The Tranche A Term loan is scheduled to be repaid in quarterly
installments through 2003 and the Tranche B Term loan is scheduled to be repaid
in quarterly installments through 2005 as follows (in thousands):
-26-
<PAGE>
Tranche A Tranche B
Year Term Loan Term Loan Total
---- --------- --------- -----
2000 $ 18,560 $ 1,940 $ 20,500
2001 27,500 1,000 28,500
2002 36,250 1,000 37,250
2003 28,940 12,625 41,565
2004 - 47,500 47,500
2005 - 34,685 34,685
The Company has made all scheduled repayments that have come due.
The Company is required to prepay amounts outstanding under the Credit
Agreement out of the excess cash flow of the Company. Excess cash flow is
defined as consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"), minus the sum of debt service for the year, voluntary
prepayments of the Term Loans, capital expenditures, income tax expense,
restricted payments (as defined), and consideration for permitted acquisitions
(as defined). 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 Stock Purchase Agreement regarding the Acquisition ( the "Stock
Purchase Agreement") sets forth a post-closing procedure for adjusting the
purchase price. The Company is required to prepay amounts outstanding under the
Credit Agreement in an amount equal to any adjustments to the purchase price
received by the Company or credited to the Company, whether payable in cash or
credited or offset against any obligations owed to Inco Limited and certain of
its affiliates (collectively, the "Sellers"), less the expenses reasonably
incurred by the Company in obtaining any adjustment to the purchase price.
During 1999, the Company and the Sellers followed the post-closing procedure
provided in the Stock Purchase Agreement for adjusting the purchase price. As a
result of this process and pursuant to the terms of the Credit Agreement, the
Company is required to prepay $2 million toward the Term Loans.
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 Credit Agreement also requires the Company to
satisfy certain financial tests relating to, among other things, the Company's
minimum consolidated EBITDA; consolidated leverage ratio; interest coverage
ratio and fixed charge coverage ratio.
Effective March 31, 1999, the Company entered into the First Amendment
to Credit Agreement and Limited Waiver (the "First Amendment") which, among
other things, waived the event of default which resulted from the Company not
complying with the minimum EBITDA financial test at December 31, 1998, revised
the financial tests for 1999 and subsequent periods, adjusted the applicable
margins to those indicated above, and restricted payments of dividends on the
Series A Convertible Preferred Stock.
At September 30, 1999, the Company was in violation of the revised
minimum EBITDA and leverage ratio financial tests. The lenders under the Credit
Agreement (the "Senior Lenders") agreed to amend the terms of the Credit
Agreement and waive the defaults provided the Company agree to pursue additional
capital in the form of subordinated loans.
Effective December 17, 1999, the Company entered into the Subordinated
Loan Agreement with SIMA, which is the owner of 38.5% of the Company's
outstanding common stock. The Subordinated Loan Agreement provides for $20
million in term loans (the "Subordinated Term Loans") and a $30 million
revolving credit
-27-
<PAGE>
facility (the "Subordinated Revolving Credit Facility"). Proceeds from the
Subordinated Term Loans were used for working capital purposes and to make
required repayments to the Senior Lenders. Under the Subordinated Revolving
Credit Facility, the Company can borrow ("Subordinated Revolving Loans"), repay
(subject to certain restrictions) and re-borrow from time to time up to $30
million in the aggregate.
Amounts outstanding under the Subordinated Loan Agreement bear interest
at a rate per year equal to the three-month London Interbank Offered Rate plus
1%. Accrued interest on both the Subordinated Term Loans and Subordinated
Revolving Loans is to be paid in kind by addition to the principal of the
Subordinated Term Loans on the last day of each calendar quarter. The
Subordinated Term Loans mature on July 28, 2006 (the "Maturity Date"). The
Subordinated Revolving Credit Facility terminates, and any outstanding
Subordinated Revolving Loans mature, on the Maturity Date.
Effective December 29, 1999, the Company entered into the Third
Amendment to Credit Agreement and Limited Waiver (the "Third Amendment"). Among
other things, the Third Amendment: waived the events of default which resulted
from the Company not complying with the minimum EBITDA and leverage ratio
financial tests at September 30, 1999; reduced the maximum amount available to
the Company under the Revolving Credit Facility from $150 million to $100
million; provided that the aggregate amount outstanding under the Revolving
Credit Facility may not exceed $76 million unless Subordinated Revolving Loans
are outstanding in a principal amount of at least $30 million; revised the
minimum EBITDA financial tests through the period ending March 31, 2001, and
suspended all other financial tests until the quarter ended June 30, 2001, at
which time all financial tests as set forth in the First Amendment will again be
effective; limited capital expenditures to a maximum of $15 million in 2000 and
$7.5 million during the first six months of 2001, unless capital expenditures in
excess of those amounts are funded by the issuance and sale of stock of the
Company to SIMA or from additional advances by SIMA of Subordinated Term Loans;
and prohibited payments of dividends on the Series A Convertible Preferred Stock
unless such payments are funded by the issuance and sale of stock of the Company
to SIMA or from additional advances by SIMA of Subordinated Term Loans.
The Third Amendment also prescribes a procedure to be followed in the
event that the Company's actual consolidated EBITDA through the period ending
March 31, 2001 is less than the amounts required by the revised minimum EBITDA
financial tests. As of the end of each quarter during such period, if the
Company's actual consolidated EBITDA for the prior twelve months is less than
the minimum EBITDA levels required by the Third Amendment, any outstanding
Subordinated Revolving Loans will be converted to Subordinated Term Loans in an
amount equal to the difference between the Company's actual consolidated EBITDA
and certain amounts set forth in the Third Amendment. If the amount to be
converted exceeds the outstanding balance of Subordinated Revolving Loans, the
Company shall borrow additional Subordinated Revolving Loans to the extent
necessary to fund the amount to be converted, until SIMA's entire $30 million
commitment to make Subordinated Revolving Loans has been funded. SIMA's
obligation to make Subordinated Revolving Loans to the Company is backed by a
$30 million letter of credit. In the event that the required amount is converted
from Subordinated Revolving Loans to Subordinated Term Loans, the Company will
be deemed to have satisfied the minimum EBITDA financial test for the
twelve-month period, and the amount so converted shall be included for purposes
of calculating whether the Company has satisfied the minimum EBITDA financial
test for succeeding periods through the period ending March 31, 2001.
The Company's obligations under the Subordinated Loan Agreement are
unsecured and expressly subordinated to its obligations under the Credit
Agreement. Pursuant to a Debt Subordination Agreement entered into by SIMA and
the Company for the benefit of the Senior Lenders, the Company may not repay the
Subordinated Term Loans until all amounts due to the Senior Lenders have been
paid. Additionally, the Company may not repay Subordinated Revolving Loans if an
event of default exists under the Credit Agreement or would occur as a result of
the payment or if the aggregate amount outstanding under the Revolving Credit
Facility exceeds $76 million.
At December 31, 1999, the aggregate amount outstanding under the
Revolving Credit Facility was $66 million, and there was no amount outstanding
under the Subordinated Revolving Credit Facility. At February 29,
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<PAGE>
2000, the aggregate amount outstanding under the Revolving Credit Facility was
$76 million, and there was no amount outstanding under the Subordinated
Revolving Credit Facility.
In connection with the IAI acquisition, the Company issued an aggregate
of $97 million liquidation value Series A Senior Convertible Preferred Stock
(the "Senior Preferred Stock"). See "- Overview - IAI Acquisition" and Footnotes
2 and 13 to the Condensed Financial Statements in Item 8. "Financial Statements
and Supplementary Data." The Senior Preferred Stock has a par value of $0.01 per
share and a liquidation preference of $50 per share. The Senior Preferred Stock
accrues cumulative dividends at the rate of 6.625% per annum, payable quarterly
each January 28, April 28, July 28 and October 28, commencing January 28, 1999
(each a "Dividend Payment Date"). The Company has the right to defer payment of
accumulated dividends, and has exercised this right to defer payment on each
Dividend Payment Date since the issuance of the Senior Preferred Stock. As of
December 31, 1999, the total amount of dividends accrued and unpaid was $7.5
million. In the event that the Company defers payment of dividends for more than
six quarterly dividend periods, the number of directors constituting the
Company's Board of Directors will be increased by at least two members, and the
holders of the Senior Preferred Stock will have the special right, voting
separately as a single class, to elect two individuals to fill the newly created
directorships.
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 and
Subordinated Loan 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 December 31, 1999, the Company's backlog orders aggregated
approximately $218.4 million, compared to $298.1 million at December 31, 1998.
The Company defines backlog as firm orders, which are generally subject to
cancellation by the customer. Substantially all orders in the backlog at
December 31, 1999 are expected to be shipped within the 12 months beginning
January 1, 2000. 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 price
orders will not be canceled or delayed.
-29-
<PAGE>
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 operations for the periods
presented.
Legal Proceedings
Reference is made to the information included in Item 3 "Legal
Proceedings" of this Form 10-K, which is hereby incorporated by reference.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its
comprehensive enterprise-wide "Year 2000" program to become Year 2000 compliant.
The Company's Year 2000 efforts focused primarily on four areas of potential
impact: internal information technology systems ("IT"); internal process control
systems; products and services provided by the Company; and the readiness of
significant third parties with whom the Company has material business
relationships. As of December 31, 1999, the Company had completed all of its
Year 2000 compliance efforts on critical domestic and international systems in
each of its respective business units. As a result of these remediation and
planning programs, the Company experienced no significant disruptions as a
result of the Year 2000 date change, and the Company is not aware of any
problems resulting from Year 2000 issues, either with its IT systems, internal
process control systems, or products. Likewise, the Company is currently not
aware of any significant Year 2000 or similar problems that have arisen for its
key customers and suppliers. The Company will continue to monitor Year 2000
risks and issues for all business units, customers and suppliers. Problems
encountered will be resolved using resources normally available to the Company.
There can be no assurance that the Company has fully and accurately assessed its
Year 2000 readiness or of the effectiveness of the Company's corrective actions,
nor can there be any assurance that the Company's customers and suppliers have
fully and accurately assessed their Year 2000 readiness or of the effectiveness
of their corrective actions. Such interruptions, if they were to occur, could
have a material adverse affect upon the consolidated results of operations or
financial condition of the Company.
The costs associated with the Company's internal IT readiness actions
are a combination of incremental external spending and the use of existing
internal resources. As of December 31, 1999, the Company estimates that it had
incurred approximately $28.0 million for its Year 2000 efforts. The Company does
not expect that any future expenditures related to the Year 2000 issue will be
material. The statements set forth herein concerning the Year 2000 issue which
are not historical facts are forward looking statements. There can be no
guarantee that any estimates or other forward looking statements will be
achieved and actual results could differ significantly from those contemplated.
Impact of New Accounting Standards
The Company adopted SOP 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal Use," which requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use, effective January 1, 1999. The adoption of
SOP 98-1 resulted in the Company capitalizing certain costs totaling $1,359,000
which, under the Company's prior policies, would have been expensed as incurred.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 in 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments
-30-
<PAGE>
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
intended use of the derivative and its designation as either (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or a
firm commitment (a fair value hedge), (2) a hedge of the exposure to variable
cash flows of a forecasted transaction (a cash flow hedge), or (3) a hedge of
the foreign currency exposure of a net investment in a foreign operation (a
foreign currency hedge), will determine when the gains or losses on the
derivatives are to be reported in earnings and when they are to be reported as a
component of other comprehensive income. The impact of SFAS No. 133 on the
Company's consolidated financial statements has not yet been determined.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as commodity prices, foreign currency exchange and
interest rates. The Company is exposed to various market risks, including
changes in commodity prices, foreign currency exchange rates and interest rates.
The Company has entered into financial instrument transactions which attempt to
manage and reduce the impact of changes in commodity prices, foreign currency
exchange rates, and interest rates. The Company does not enter into derivatives
or other financial instruments for trading or speculative purposes.
The Company is exposed to risk from changes in the price of commodities
used in production between the date of a firm sales commitment and the date of
delivery. The Company purchases forward commodity contracts to manage its
exposure to changes in commodity prices, primarily nickel. A substantial portion
of the forward commodity contracts result in the Company actually taking
possession of the material, however, certain of the forward contracts result in
the Company making or receiving payments equal to the net change in the value of
the contract, which fluctuates with the price of the commodity. However, since
these contracts hedge the Company's firm sales commitments, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transaction being hedged.
A portion of the Company's operations consist of manufacturing and sales
activities in foreign jurisdictions, principally in Europe. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company
enters into forward currency and currency option contracts to mitigate the
effect of currency transaction exposures. An overall 10% fluctuation in exchange
rates would change the fair value of these contracts by approximately $75,000.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts would be offset by changes in the
underlying value of the transaction being hedged.
At December 31, 1999, the Company has approximately $276 million of
variable rate long-term debt. The Company has entered into interest swap
agreements to manage a portion of its exposure to interest rate changes. At
December 31, 1999, the Company had outstanding interest rate swap agreements
with a notional value of approximately $130 million, maturing in September 2003,
which effectively fix the interest rates on the underlying debt at a weighted
average 5.86% plus the applicable margins based on the Company's leverage ratio.
Under these agreements, the Company makes or receives payments equal to the
difference between fixed and variable interest rate payments on the notional
amount. A 1% fluctuation in interest rates would change future interest expense
on the $146 million of debt that is not covered by the swap agreements by
approximately $1.5 million.
-31-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page in
Form 10-K
---------
Report of Independent Auditors 33
Consolidated Balance Sheets as of
December 31, 1998 and 1999 34
Consolidated Statements of Operations for the
Years Ended December 31, 1997, 1998 and 1999. 35
Consolidated Statements of Shareholders'
Equity for the Years Ended December 31,
1997, 1998 and 1999 36
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1998 and 1999 37
Notes to Consolidated Financial Statements 38
-32-
<PAGE>
Report of Independent Auditors
Board of Directors
Special Metals Corporation
We have audited the accompanying consolidated balance sheets of Special Metals
Corporation as of December 31, 1998 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Special Metals
Corporation at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
---------------------
Buffalo, New York
February 10, 2000
-33-
<PAGE>
Special Metals Corporation
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,622 $ 9,064
Restricted deposits 352 -
Accounts receivable - trade, less
allowance for doubtful accounts of
$3,179 and $2,894, respectively 130,696 120,643
Accounts receivable - affiliates 6,938 12,529
Inventories 271,812 262,474
Prepaid expenses and other current
assets 16,991 25,746
--------------------------------
Total current assets 466,411 430,456
Property, plant and equipment 309,025 278,503
Non-competition agreement, net of
accumulated amortization of $617 and
$4,317, respectively 36,383 32,683
Other assets 28,335 69,645
--------------------------------
Total assets $ 840,154 $ 811,287
================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 46,313 $ 64,382
Accounts payable - affiliates 530 1,660
Accrued liabilities 79,486 55,611
Notes payable 3,163 3,725
Current portion of long-term debt
and capital lease obligations 13,155 21,356
--------------------------------
Total current liabilities 142,647 146,734
Long-term debt and capital lease
obligations 282,792 259,035
Subordinated notes payable to affiliate - 5,000
Postretirement benefits obligation 188,748 194,524
Other long-term liabilities 16,537 25,223
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 98,071 104,494
Shareholders' equity:
Common stock, $0.01 par value, 35,000,000
shares authorized, 15,479,000 shares
issued and outstanding 155 155
Paid-in surplus 75,712 75,712
Accumulated other comprehensive loss (1,911) (5,260)
Retained earnings 37,403 5,670
--------------------------------
Total shareholders' equity 111,359 76,277
--------------------------------
Total liabilities and shareholders' equity $ 840,154 $ 811,287
================================
</TABLE>
See accompanying notes.
-34-
<PAGE>
Special Metals Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
----------------------------------------------
<S> <C> <C> <C>
Net sales to non-affiliates $ 175,570 $ 243,457 $ 552,026
Net sales to affiliates 10,501 9,769 50,223
----------------------------------------------
186,071 253,226 602,249
Cost of goods sold 142,029 219,110 562,486
----------------------------------------------
Gross profit 44,042 34,116 39,763
Selling, general and
administrative expenses 6,958 16,063 59,520
----------------------------------------------
Operating income (loss) 37,084 18,053 (19,757)
Other expense (income):
Interest expense 670 4,109 25,711
Abandoned acquisition
costs 554 - -
Other (661) (914) (4,026)
----------------------------------------------
563 3,195 21,685
----------------------------------------------
Income (loss) before
income taxes 36,521 14,858 (41,442)
Income tax expense
(benefit) 13,519 5,018 (16,132)
----------------------------------------------
Net income (loss) 23,002 9,840 (25,310)
Accumulated preferred
stock dividends - 1,071 6,423
----------------------------------------------
Net income (loss) attributable
to common shareholders $ 23,002 $ 8,769 $ (31,733)
==============================================
Earnings (loss) per common share,
basic and assuming dilution $ 1.53 $ 0.57 $ (2.05)
==============================================
</TABLE>
See accompanying notes.
-35-
<PAGE>
Special Metals Corporation
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Paid-in Comprehensive Retained
Shares Par Surplus Loss Earnings Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 12,400 $ 124 $ 29,716 $ (697) $ 5,632 $ 34,775
Sale of common stock 3,075 31 45,926 - - 45,957
Common stock
grants 2 - 36 - - 36
Comprehensive income:
Net income - - - - 23,002 23,002
Minimum pension liability
adjustment, net of
tax of $161 - - - 201 - 201
---------
Comprehensive income 23,203
---------------------------------------------------------------------
Balance - December 31, 1997 15,477 155 75,678 (496) 28,634 103,971
Common stock grants 2 - 34 - - 34
Comprehensive income:
Net income - - - - 9,840 9,840
Minimum pension liability
adjustment, net of
tax of ($659) - - - (1,075) - (1,075)
Foreign currency translation
adjustment - - - (340) - (340)
---------
Comprehensive income 8,425
Accumulated preferred stock
dividends - - - - (1,071) (1,071)
---------------------------------------------------------------------
Balance - December 31, 1998 15,479 155 75,712 (1,911) 37,403 111,359
Comprehensive income:
Net loss - - - - (25,310) (25,310)
Minimum pension liability
adjustment, net of
tax of $957 - - - 1,560 - 1,560
Foreign currency translation
adjustment - - - (4,909) - (4,909)
---------
Comprehensive loss (28,659)
Accumulated preferred
stock dividends - - - - (6,423) (6,423)
---------------------------------------------------------------------
Balance - December 31, 1999 15,479 $ 155 $ 75,712 $ (5,260) $ 5,670 $ 76,277
=====================================================================
</TABLE>
See accompanying notes.
-36-
<PAGE>
Special Metals Corporation
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
----------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 23,002 $ 9,840 $ (25,310)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,612 8,222 37,260
Provision for deferred income
taxes 584 570 124
Other adjustments 38 34 (145)
Change in assets and liabilities,
net of effects from businesses
acquired:
Accounts receivable (1,583) 25,739 1,111
Inventories (7,841) 9,756 7,128
Prepaid expenses and other
current assets 166 446 (694)
Income taxes 306 (5,653) (15,858)
Accounts payable - trade 2,832 (11,883) 28,867
Accrued liabilities (108) (13,216) (30,259)
Postretirement benefits
obligation 567 (418) 5,652
Other long-term liabilities 508 (2,105) 501
----------------------------------------------
Net cash provided by operating
activities 22,083 21,332 8,377
Investing Activities
Payments for businesses acquired,
net of cash acquired - (320,010) -
Payment for covenant not to
compete - (20,000) -
Capital expenditures (9,935) (20,264) (12,004)
Capitalized software - (681) (14,999)
Net change in restricted deposits (1,161) 809 352
Proceeds from sale of fixed assets 8 - -
----------------------------------------------
Net cash used in investing
activities (11,088) (360,146) (26,651)
Financing Activities
Proceeds from sale of preferred stock - 80,000 -
Proceeds from sale of common stock 45,957 - -
Proceeds from term loans and
other long-term debt - 225,000 2,000
Borrowings under revolving credit
facilities - 70,000 24,000
Repayment of revolving credit
facilities (26,000) - (28,000)
Repayment of term loans and other
long-term debt (20,319) (2,910) (12,897)
Proceeds from (repayment of)
subordinated notes payable to
affiliates (1,500) - 5,000
Financing costs (232) (5,781) (1,979)
----------------------------------------------
Net cash (used in) provided by
financing activities (2,094) 366,309 (11,876)
Net effect of exchange rate
changes on cash - (110) (408)
----------------------------------------------
Net increase (decrease) in cash 8,901 27,385 (30,558)
Cash and cash equivalents at
beginning of year 3,336 12,237 39,622
----------------------------------------------
Cash and cash equivalents at end
of year $ 12,237 $ 39,622 $ 9,064
==============================================
</TABLE>
See accompanying notes.
-37-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
1. Accounting Policies
Description of Business
Special Metals Corporation (the Company) is a manufacturer of high-performance,
nickel-based alloys and superalloys. The Company sells its products world-wide
to customers in several industries, the most significant of which include the
aerospace, power generation/pollution control, and chemical processing
industries. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. An allowance for
doubtful accounts is maintained at a level which management believes is
sufficient to cover potential credit losses.
Consolidation
The consolidated financial statements include the accounts of the Company and
its domestic and foreign subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Foreign Currency Translations
The financial statements of the Company's foreign subsidiaries are translated
into U.S. dollars assuming the functional currency of the foreign subsidiaries
is the applicable local currency. Accordingly, all items of income and expense
are translated at average exchange rates for the year and all assets and
liabilities are translated at the year-end exchange rate. Gains or losses on
translations are accumulated in other comprehensive income (loss) in the
shareholders' equity section of the balance sheet.
Revenue Recognition
Revenue from sales of product is recognized at the time of shipment to the
customer. The Company periodically enters into long-term sales contracts, the
terms of which may include firm prices. The Company recognizes revenues on those
sales contracts as the related product is shipped. The Company also performs
certain conversion services for which a tolling fee is received. Revenue from
conversion services is recognized when the services are performed.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Restricted Deposits
The Company is required to maintain on deposit with a broker, a margin account
to cover unrealized losses on its forward purchase contracts in excess of
certain specified amounts. Such amounts were recorded on the Company's balance
sheet as restricted deposits.
-38-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Inventories
Inventories are valued at the lower of cost or market. The cost of approximately
48% and 54% of 1998 and 1999 inventories, respectively, were valued using the
LIFO (last-in, first-out) method. All remaining inventories are accounted for
under the FIFO (first-in, first-out) or average methods of accounting.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful lives of the assets, principally
10-40 years for buildings and improvements, 5-20 years for machinery and
equipment, 3 years for data processing equipment, and 5-20 years for furniture
and fixtures. The cost of property, plant and equipment held under capital
leases is equal to the lower of the net present value of the minimum lease
payments, using interest rates appropriate at the inception of the lease, or the
fair value of the leased property, plant and equipment at the inception of the
lease. Depreciation expense includes the amortization of property, plant and
equipment recorded under capital leases.
Non-Competition Agreement
The non-competition agreement is being amortized on the straight line basis over
its contractual life of ten years.
Investment in Joint Venture
The Company's investment in joint venture represents its 50% investment in
Daido-Special Metals, Ltd. ("DSML"). DSML is a Japanese marketer of an extensive
range of superalloys and high-performance alloys produced by the Company and
Daido Steel Co., Ltd. in Japan. The Company accounts for its investment using
the equity method.
Computer Software Costs
The Company adopted SOP 98-1, "Accounting For the Costs of Computer Software
Developed For or Obtained For Internal Use," which requires the capitalization
of certain costs incurred in connection with developing or obtaining software
for internal use, effective January 1, 1999. The adoption of SOP 98-1 resulted
in the Company capitalizing certain internal labor costs totaling $1,359,000
which, under the Company's prior policies, would have been expensed as incurred.
Internal use software development costs are amortized on the straight-line
method over the estimated useful lives of the software, not to exceed five
years. Unamortized internal use software development costs have been included in
other assets in the accompanying consolidated balance sheets and totaled
$2,983,000 and $17,328,000, net of accumulated amortization of $65,000 and
$1,358,000 at December 31, 1998 and 1999, respectively. Amortization of
capitalized internal use software development costs totaled $65,000 and
$1,293,000 during 1998 and 1999, respectively.
-39-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Impairment of Long-Lived Assets
The Company reviews asset carrying amounts whenever events or circumstances
indicate that such carrying amounts may not be recoverable. When considered
impaired, the carrying amount of the asset is reduced, by a charge to income, to
its current fair value.
Environmental Liabilities
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and that are not allocable to current or
future earnings are expensed. Liabilities for environmental costs are recognized
when environmental assessments or clean-ups are probable and the associated
costs can be reasonably estimated.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities by applying enacted statutory rates
applicable to future years to the differences. The effect of a change in tax
rates is recognized in the period that includes the enactment date. The Company
has not recognized a deferred tax liability for the undistributed earnings of
its foreign subsidiaries and affiliated joint venture, totaling approximately
$65 million at December 31, 1999, as the Company does not currently expect those
unremitted earnings to reverse and become taxable in the foreseeable future. A
deferred tax liability will be recognized when the Company expects that it will
recover those undistributed earnings in a taxable manner. The Company believes
that available foreign tax credits would largely eliminate any U.S. tax and
offset any foreign withholding tax that might otherwise be due.
Stock-Based Compensation
The Company accounts for stock options granted under its stock-based
compensation plan in accordance with the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as allowed under
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, compensation expense for stock options
is measured as the excess, if any, of the fair market value of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.
Research and Development Costs
Product research and development costs are charged to expense as incurred.
Research and development expense for the years ended December 31, 1997, 1998 and
1999 was $1,906,000, $2,920,000, and $4,418,000, respectively.
-40-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Financial Instruments
As part of its risk management strategy, the Company periodically purchases
forward contracts to manage its exposure to changes in commodity prices,
primarily nickel. 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 short-term in
nature to correspond to the commitment period, and are effective in hedging the
Company's exposure to changes in nickel prices during that cycle.
In the normal course of business, the Company enters into forward currency and
currency option contracts to mitigate the effect of currency transaction
exposures on its operations. The Company does not engage in any foreign currency
activities which have not been specifically designated as hedges.
Forward contracts are marked to market with unrealized gains and losses deferred
and recognized in earnings when realized as an adjustment to cost of goods sold
(the deferral accounting method). Unrealized changes in fair value of contracts
not effective as hedges are recognized in income. Historically, the Company has
not closed any contracts prior to the execution of the underlying sale
transaction, nor have any of the underlying sales transactions failed to occur.
The Company has also entered into interest rate swap agreements to manage its
exposure to interest rate fluctuations. Net payments or receipts under the swap
agreements are recorded as adjustments to interest expense.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 in 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
intended use of the derivative and its designation as either a fair value hedge,
a cash flow hedge, or a foreign currency hedge, will determine when the gains or
losses on the derivatives are to be reported in earnings and when they are to be
reported as a component of other comprehensive income. The impact of SFAS No.
133 on the Company's consolidated financial statements has not yet been
determined.
Reclassifications
Certain reclassifications have been made within the 1998 financial statements to
conform to the 1999 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
-41-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
2. 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"). IAI produces high-performance
nickel-based alloys in various forms, including sheet, strip, foil, plate,
tubulars, billet, bar, rod, extruded shapes, wire rod and welding products.
IAI's products are used in the aerospace, chemical processing, environmental,
off-shore drilling, industrial gas turbine, and automotive markets. The purchase
price was $328 million cash (subject to a purchase price adjustment). The
purchase price of the non-competition agreement was $37 million, consisting of
$20 million cash and $17 million fair value Series A Convertible Preferred Stock
(340,000 shares). The Company financed the cash portion of the aggregate
purchase price with funds drawn under a new $375 million bank credit facility
and with the proceeds from the issuance of $80 million fair value Series A
Convertible Preferred Stock (1,600,000 shares) to TIMET Finance Management
Company, a wholly-owned subsidiary of Titanium Metals Corporation. In connection
with the Acquisition and the related financing, the Company also incurred fees
totaling approximately $11.3 million.
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 purchase
price of $328 million, subject to a purchase price adjustment defined in the
purchase agreement, was allocated during 1998 to the assets acquired and
liabilities assumed based upon their estimated fair values. During the fourth
quarter of 1999, the purchase price adjustment process was concluded, resulting
in a net decrease to the purchase price of approximately $2 million. This
purchase price adjustment was allocated to the assets acquired.
The following unaudited pro forma information presents the results of operations
of the Company as if the Acquisition had taken place at the beginning of the
respective periods. 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.
<TABLE>
<CAPTION>
December 31
1997 1998
---------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Net sales $ 854,541 $ 761,095
Net income 41,349 13,802
Net income attributable to common shareholders 34,923 7,376
Net income per share:
Basic 2.33 0.48
Diluted 1.98 0.48
</TABLE>
-42-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
---------------------------------
(In thousands)
<S> <C> <C>
Raw materials and supplies $ 67,198 $ 65,167
Work-in-process 151,136 133,436
Finished goods 57,478 73,955
--------------------------------
275,812 272,558
Adjustment to LIFO cost (4,000) (10,084)
--------------------------------
$ 271,812 $ 262,474
================================
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
---------------------------------
(In thousands)
<S> <C> <C>
Land $ 7,379 $ 7,370
Buildings and improvements 78,665 92,557
Machinery and equipment 230,148 239,026
Furniture and fixtures 2,798 2,832
Construction-in-progress 37,022 10,972
---------------------------------
356,012 352,757
Less accumulated depreciation 46,987 74,254
---------------------------------
$ 309,025 $ 278,503
================================
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999 was
$3,429,000, $6,500,000 and $28,473,000, respectively.
-43-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
5. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
---------------------------------
(In thousands)
<S> <C> <C>
Accrued payroll and employee benefits $ 34,077 $ 26,828
Amounts due to former affiliates 15,706 11,145
Other 29,793 17,638
---------------------------------
$ 79,576 $ 55,611
=================================
</TABLE>
6. Long-Term Debt and Capital Leases
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
---------------------------------
(In thousands)
<S> <C> <C>
Credit Agreement:
Term Loans
Tranche A $ 122,500 $ 111,250
Tranche B 99,750 98,750
Revolving Credit Facility 70,000 66,000
Capital leases 2,188 1,550
Other 1,509 2,841
---------------------------------
295,947 280,391
Current portion 13,155 21,356
---------------------------------
$ 282,792 $ 259,035
=================================
</TABLE>
The Company has entered into a Senior Secured Credit Agreement with Credit
Lyonnais, as agent, and other financial institutions (the "Credit Agreement")
that provides for two term loans (the "Tranche A Term Loan" and the "Tranche B
Term Loan," collectively, the "Term Loans") and a revolving credit and letter of
credit facility (the "Revolving Credit Facility").
-44-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt and Capital Leases (continued)
During 1999, the Company entered into amendments to the Credit Agreement and, in
connection with these amendments, a shareholder of the Company agreed to provide
up to $50 million of subordinated loans, including $20 million of term loans and
up to an additional $30 million on a revolving basis (see Note 9). The
amendments, among other things, reduced the availability of the Revolving Credit
Facility from $150 million to a maximum of $100 million; waived the events of
default which resulted from the Company not complying with certain financial
covenants; adjusted the applicable interest rate margins; restricted payments of
dividends on the Series A Convertible Preferred Stock; suspended the existing
financial covenants until the quarter ending June 30, 2001; limit capital
expenditures for the year 2000 and the first six months of 2001 to $15 million
and $7.5 million, respectively; and added a minimum quarterly earnings before
interest, taxes, depreciation and amortization ("EBITDA") requirement of $25
million for the 12 months ending December 31, 1999 increasing in a number of
steps to $55 million for the 12 months ending March 31, 2001. Also, under the
amended terms of the Credit Agreement, no borrowings in excess of $76 million
will be permitted under the Revolving Credit Facility until the additional $30
million in subordinated revolving loans from the shareholder has been advanced.
Under the Revolving Credit Facility, the Company can borrow, repay and re-borrow
from time to time up to $100 million in the aggregate, subject to the
restrictions described above. The Revolving Credit Facility matures on October
28, 2003. The amount the Company may borrow under the Revolving Credit Facility
is reduced by the aggregate amount of any letters of credit issued for the
account of the Company. Amounts outstanding under the Credit Agreement bear
interest at either a base rate, as defined, or a Eurodollar rate, which is the
reserve-adjusted New York interbank offered rate, at the Company's option, plus
a margin, as defined in the Credit Agreement, dependent upon the Company's
leverage ratio. The weighted-average interest rate at December 31, 1999 was
9.17% (7.07% at December 31, 1998). 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.
The Tranche A Term loan is scheduled to be repaid in quarterly installments
through 2003 and the Tranche B Term loan is scheduled to be repaid in quarterly
installments through 2005. The Company is required to prepay amounts outstanding
under the Credit Agreement out of the excess cash flow of the Company. The
Company is also required to prepay amounts equal to any adjustments received by
the Company or credited to the Company as a result of the purchase price
adjustment process in connection with the Acquisition. As a result, the Company
is required to prepay $2 million toward the Term Loans. 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.
-45-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt and Capital Leases (continued)
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, including dividends, 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
EBITDA; consolidated leverage ratio; interest coverage ratio and fixed charge
coverage ratio. As a result of the amendments to the Credit Agreement described
above the existing financial covenants have been suspended until the quarter
ending June 30, 2001.
Scheduled principal repayments on long-term debt for the next five years and
thereafter are as follows (in thousands):
2000 $ 21,356
2001 29,130
2002 37,586
2003 106,985
2004 47,887
Thereafter 37,447
-------------
$ 280,391
=============
7. Operating Leases
The Company leases certain equipment under operating leases which contain
renewal options and escalation clauses in some cases. Rental expense under these
leases amounted to approximately $460,000, $1,290,000 and $5,860,000 for the
years ended December 31, 1997, 1998, 1999, respectively. The following amounts
represent future minimum payments under operating leases with initial or
remaining noncancelable terms extending beyond one year (in thousands):
2000 $ 3,136
2001 1,749
2002 668
2003 125
2004 16
-46-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
8. Retirement Plans
The Company provides defined benefit pension and other postretirement benefit
plans to employees. The following provides a reconciliation of benefit
obligations, plan assets, and funded status of the plans:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
1998 1999 1998 1999
--------------------------- ---------------------------
(In thousands)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning
of year $ 41,174 $ 338,526 $ 5,506 $ 197,880
Benefit obligations of businesses
acquired 291,026 - 191,825 -
Service cost 3,179 9,450 491 3,310
Interest cost 6,107 21,459 2,383 11,420
Effect of amendments 337 2,032 (663) (604)
Actuarial loss (gain) 3,238 (33,007) 53 (37,261)
Benefits paid (5,901) (25,800) (1,715) (8,671)
Currency translation impact (634) (3,412) - -
Curtailment - 2,993 - -
--------------------------- ---------------------------
Benefit obligation at end
of year 338,526 312,241 197,880 166,074
Change in Plan Assets
Fair value of plan assets at
beginning of year 39,475 355,694 - -
Assets of businesses acquired 296,453 - - -
Actual return on plan assets 25,432 41,162 - -
Employer contribution 918 3,633 - -
Benefits paid (5,901) (25,800) - -
Currency translation impact (683) (3,854) - -
--------------------------- ---------------------------
Fair value of plan assets
at end of year 355,694 370,835 - -
--------------------------- ---------------------------
Funded status 17,168 58,594 (197,880) (166,074)
Unrecognized transition
obligation - - 2,554 2,372
Unrecognized actuarial gain (13,226) (56,830) (484) (37,289)
Unrecognized prior service
cost (764) 1,282 62 (533)
--------------------------- ---------------------------
Net amount recognized $ 3,178 $ 3,046 $ (195,748)$ (201,524)
=========================== ===========================
</TABLE>
-47-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
8. Retirement Plans (continued)
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
1998 1999 1998 1999
--------------------------- ---------------------------
(In thousands)
<S> <C> <C> <C> <C>
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability:
Other assets $ 5,469 $ 8,173 $ - $ -
Accrued liabilities (4,969) (5,267) (7,000) (7,000)
Postretirement benefits obligation - - (188,748) (194,524)
--------------------------- ---------------------------
500 2,906 (195,748) (201,524)
Intangible asset 144 123 - -
Accumulated other comprehensive
income 1,571 11 - -
Deferred tax effect of equity charge 963 6 - -
--------------------------- ---------------------------
Net amount recognized $ 3,178 $ 3,046 $ (195,748)$ (201,524)
=========================== ===========================
Weighted-average assumptions as of
December 31
Discount rate 6.5% 7.5% 6.5% 7.5%
Expected return on plan assets 9.0% 9.0% n/a n/a
Rate of compensation increase 3.5% - 5.5% 3.5%-5.5% n/a n/a
</TABLE>
During 1999, the Company instituted an early retirement incentive program as
part of a workforce reduction plan. This early retirement incentive program
resulted in a curtailment loss of $2,993,000.
The aggregate accumulated benefit obligation and aggregate fair value of plan
assets for the pension plans with accumulated benefit obligations in excess of
plan assets were $31,395,000 and $21,464,000, respectively, as of December 31,
1999 and $52,808,000 and $37,839,000, respectively, as of December 31, 1998.
The aggregate projected benefit obligation and aggregate fair value of plan
assets for the pension plans with projected benefit obligations in excess of
plan assets were $36,320,000 and $25,601,000, respectively, as of December 31,
1999 and $58,260,000 and $41,564,000, respectively, as of December 31, 1998.
The unrecognized transition obligation is being amortized on a straight-line
basis over 20 years. Unrecognized gains and losses are amortized on a
straight-line basis over the average remaining service period of active
participants.
-48-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
8. Retirement Plans (continued)
Net periodic benefit cost included the following:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Pension benefits:
Service cost - benefits earned
during the period $ 1,459 $ 3,179 $ 9,450
Interest cost on projected benefit
obligation 2,577 6,107 21,459
Curtailment - - 2,993
Expected return on plan assets (2,749) (7,947) (30,773)
Amortization of unrecognized prior
service cost (181) (152) (14)
Recognized actuarial loss - - 173
-----------------------------------------------
Net periodic pension benefit cost $ 1,106 $ 1,187 $ 3,288
===============================================
Other postretirement benefits:
Service cost - benefits earned
during the period $ 65 $ 491 $ 3,310
Interest cost on projected
benefit obligation 365 2,383 11,420
Amortization of unrecognized portion
of net obligation at transition 223 183 183
Amortization of unrecognized prior
service cost 20 15 (9)
Recognized actuarial loss (25) (23) (3)
-----------------------------------------------
Net periodic postretirement benefit cost $ 648 $ 3,049 $ 14,901
===============================================
</TABLE>
For measuring the postretirement benefit obligation, an annual rate of increase
in the net medical claims cost of 8.5% - 9.0% was assumed. The rate was assumed
to decrease gradually to 5.5% in 2005 and remain at that level thereafter.
Assumed medical claims cost trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in assumed
health care cost trend rates would have the following effect:
<TABLE>
<CAPTION>
One Percentage One Percentage
Point Increase Point Decrease
-------------------------------------
(In thousands)
<S> <C> <C>
Effect on total of service and
interest cost components $ 2,194 $ (1,878)
Effect on postretirement
benefit obligation 20,878 (18,477)
</TABLE>
-49-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
8. Retirement Plans (continued)
The Company also sponsors a number of defined contribution plans covering
substantially all employees. Participants may elect to contribute basic
contributions. The Company may make discretionary matching contributions, as
well as additional discretionary contributions. The Company recorded a charge
for such contributions of approximately $290,000, $760,000 and $2,100,000 in
1997, 1998, and 1999, respectively.
9. Related Party Transactions
The Company and an affiliate share common insurance coverage for product
liability related, contingent and excess liabilities, and business interruption.
The Company is charged a pro rata premium based on the net sales of the covered
parties. The Company was charged $200,000, $204,000, and $1,123,000 for the
years ended December 31, 1997, 1998, and 1999 respectively.
The Company made purchases of products used in the manufacturing process from
affiliates totaling $3,960,000 during the year ended December 31, 1999 ($0 for
1997 and 1998).
During 1997, the Company and one of its shareholders entered into a Managerial
Assistance Agreement, whereby the shareholder provides the Company with
information and advice regarding the management of its existing business and the
expansion of the Company's business into new products and markets. Under the
agreement, which is cancellable upon 30 days written notice, the Company is
required to pay the shareholder a pre-established monthly fee and to reimburse
the shareholder for expenses. The Company was charged $360,000 in connection
with this agreement during 1997, 1998 and 1999.
In connection with the amendments to the Credit Agreement during 1999, the
Company entered into a Subordinated Loan Agreement with a shareholder, whereby
the shareholder agreed to provide up to $50 million of subordinated loans,
including $20 million of term loans and up to an additional $30 million on a
revolving basis. Amounts outstanding under the Subordinated Loan Agreement
accrue interest at a rate per annum equal to LIBOR plus 1.0%. Accrued interest
is paid in kind by addition to the principal of the term loan on a quarterly
basis. This debt is evidenced by notes and is subordinate to the Company's
obligations under the Credit Agreement. In addition, the Company's senior
lenders have placed restrictions on the repayment of these amounts. As a result
of these restrictions, amounts owing to the shareholder under the subordinated
notes payable have been classified as long-term. The amount outstanding at
December 31, 1999 under the term loan portion was $5,000,000. No amounts were
outstanding under the revolving loan portion at December 31, 1999. The weighted
average interest rate at December 31, 1999 was 7.13%.
Subsequent to December 31, 1999, the Company borrowed an additional $15,000,000
under the term loan portion of the Subordinated Loan Agreement.
-50-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
10. Income Taxes
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Domestic $ 36,521 $ 13,967 $ (43,347)
Foreign - 891 1,905
-----------------------------------------------
$ 36,521 $ 14,858 $ (41,442)
===============================================
</TABLE>
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 11,665 $ 4,856 $ (13,681)
State 1,270 271 (1,180)
Foreign - 784 (1,395)
-----------------------------------------------
12,935 5,911 (16,256)
Deferred:
Domestic 584 (845) (1,622)
Foreign - (48) 1,746
-----------------------------------------------
584 (893) 124
-----------------------------------------------
$ 13,519 $ 5,018 $ (16,132)
===============================================
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory income tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income before income taxes at 35% $ 12,782 $ 5,200 $ (14,505)
Permanent income tax disallowances 64 116 339
State taxes, net of federal effect 1,321 197 (1,180)
Benefit of foreign sales corporation (700) (653) (442)
Taxes on foreign income in excess of
Federal rate - 62 (681)
Foreign losses with no tax benefit - - 623
Other 52 96 (286)
-----------------------------------------------
$ 13,519 $ 5,018 $ (16,132)
===============================================
</TABLE>
-51-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Deferred tax liabilities and assets recorded in the Company's balance sheets
consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ (70,852) $ (49,206)
Inventory (7,360) (11,997)
Other (4,084) (4,470)
--------------------------------
Gross deferred tax liabilities (82,296) (65,673)
Deferred tax assets:
Employee retirement plans 75,447 74,434
Accrued liabilities 18,454 12,385
New York State investment tax credit
carryforward 1,016 1,040
Other 2,883 2,865
--------------------------------
Gross deferred tax assets 97,800 90,274
--------------------------------
Net deferred taxes $ 15,504 $ 25,051
================================
</TABLE>
Deferred tax liabilities and assets are recorded in the Company's balance sheets
as follows:
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
(In thousands)
<S> <C> <C>
Prepaid expenses and other current assets $ 12,382 $ 5,291
Other assets 3,122 26,552
Other long-term liabilities - (6,792)
--------------------------------
Net deferred taxes $ 15,504 $ 25,051
================================
</TABLE>
-52-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
11. Fair Value of Financial Instruments
Forward Purchase Contracts
As part of its risk management strategy, the Company periodically purchases
forward contracts, some of which may be settled in cash, to manage its exposure
to changes in commodity prices, primarily nickel. The contracts mature
principally in 2000. At December 31, 1999, the Company had open purchase
contracts, none of which are expected to be settled in cash, with a notional
principal value of approximately $40,048,000. The fair value of the material
covered by these contracts, based on the December 31, 1999 price quoted on the
London Metal Exchange, was approximately $46,238,000. At December 31, 1999,
substantially all of the forward contracts were designated and were effective as
hedges for firm price sales agreements the Company had entered into. Unrealized
gains and losses on these forward contracts have been deferred.
Forward Currency and Currency Option Contracts
Certain of the Company's purchases and sales are denominated in foreign
currencies. As part of its risk management strategy, the Company periodically
enters into forward currency and currency option contracts to manage its
exposure to changes in exchange rates. At December 31, 1999, the Company had the
following outstanding forward contracts to buy or sell currencies at the
following rates:
o Buy $2,338,000 at an average rate to GBP of $1.66
o Buy $1,000,000 at an average rate to FF of $0.16
o Sell DM 1,173,000 at an average rate to USD of DM 1.81
o Sell ITL 579,000,000 at an average rate to GBP of ITL 2,943
o Sell EUR 945,000 at an average rate to USD of EUR 0.97
o Sell EUR 200,000 at an average rate to JPY of EUR 0.008
o Sell EUR 522,000 at an average rate to GBP of EUR 1.51
The fair value of forward currency and currency option contracts for any
individual currency and in the aggregate is not significant.
Interest Rate Swap Agreements
To manage its exposure to interest rate fluctuations, the Company has interest
rate swap agreements with a notional amount of $65,000,000 through September 15,
2003 based on LIBOR at 5.95% and $65,000,000 through September 15, 2003 based on
LIBOR at 5.76%. Under these agreements, the Company pays interest at fixed rates
based upon the established LIBOR rates plus the applicable margins set forth in
the Credit Agreement, and receives payments based upon the variable rates. Net
payments or receipts under the swap agreements are recorded as adjustments to
interest expense. The fair value of the swap agreements is approximately
$1,000,000.
-53-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
11. Fair Value of Financial Instruments (continued)
Fair Value Disclosure
The carrying amounts reported in the Company's balance sheets for cash and cash
equivalents approximate fair value. The carrying amounts reported in the
Company's balance sheets for long-term debt, including current portion,
approximate fair value, as the underlying long-term debt instrument is comprised
of notes that are repriced on a short-term basis. The fair values of the
Company's off-balance-sheet instruments are based on the settlement of the
agreements.
12. Commitments and 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 investigation
and remediation at an 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
responsible for operation and maintenance costs through 2027. The costs for
these are estimated to be approximately $70,000 per year. The total estimated
costs of approximately $2.0 million have been discounted at an annual rate of 5%
in the accompanying financial statements. The DEC may also seek post-excavation
biota monitoring, a procedure to assess the toxicity of water contamination.
This claim is not expected to be material. 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. Based on this study, the Company has developed
a remediation plan for the site and is currently negotiating the plan with the
DEC. The Company anticipates that it will be responsible for operation and
maintenance costs for an extended period following the remediation. Based upon
information available, the Company estimates the total cost of remediation to be
$1.8 million. The Company has reserved a total of approximately $2.9 million
with respect to the Ludlow Landfill and North Gravel Pit.
-54-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Environmental (continued)
The Company has also been identified as potentially responsible for
investigation and remediation of the Universal Waste Site, an allegedly
contaminated site in Utica, New York. The owners and operators of the Universal
Waste Site 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 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.
One of the Company's domestic subsidiaries (Huntington Alloys, "Huntington") is
a co-defendant in various consolidated and unconsolidated actions by plaintiffs,
including former employees of Huntington and former employees of contractors to
Huntington, alleging exposure to asbestos at the Company's Huntington, West
Virginia facility. Plaintiffs' counsel have also informed Huntington 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.
The Company is also a defendant in several actions 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 the Company's Huntington, West Virginia facility.
The 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.
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
position, or cash flows.
-55-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Other
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.
From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.
In December 1999, the Company brought an action against Inco Limited ("Inco")
and certain of Inco's direct or indirect subsidiaries (collectively, the
"Sellers") alleging fraud, misrepresentation and breach of contract in
connection with the Acquisition, and seeking compensatory and punitive damages.
The Sellers have responded by making a motion to dismiss the complaint and have
indicated that they may assert counterclaims against the Company. At this time,
the Company is unable to assess what the ultimate outcome of this matter will
be.
13. Preferred Stock
In connection with the Acquisition, the Company issued non-voting Series A
Convertible Preferred Stock with an aggregate fair value of $97 million
(1,940,000 shares). The Company received cash proceeds of $80 million, which
were used to finance a portion of the Acquisition, and the remaining $17 million
fair value was issued as partial consideration for the non-competition
agreement. The Series A Preferred Stock has a par value of $0.01 per share and a
liquidation preference of $50 per share. The preferred stock accrues cumulative
dividends at the rate of 6.625% per annum, payable quarterly, and is convertible
into common stock at a conversion price of $16.50 per share. A total of
5,878,788 shares of common stock have been reserved for future issuance upon
conversion of the Series A Convertible Preferred Stock. The preferred stock is
mandatorily redeemable after seven and one-half years and is subject to optional
redemption by the Company commencing October 28, 2001 at a redemption price of
103.975% of the liquidation amount plus accumulated and unpaid dividends. The
redemption price declines incrementally on each subsequent October 28 until
October 28, 2006 after which the redemption price is 100% of the liquidation
amount plus accumulated and unpaid dividends.
Cumulative dividends in arrears on the Series A Preferred Stock totaled
$6,423,000 at December 31, 1999 ($0 at December 31, 1998).
-56-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
14. Capital Stock
Effective February 26, 1997, the Company sold 3,075,000 shares of its common
stock at $16.50 per share in an initial public offering. Proceeds from the
offering, net of underwriting discounts and commissions and other related
expenses totaling approximately $4.8 million, were approximately $46.0 million.
The proceeds were used primarily to reduce the Company's outstanding
indebtedness.
15. Stock Options and Restricted Stock
The Company has granted restricted stock and options to purchase common stock to
certain employees and directors under the Special Metals Corporation 1997
Long-Term Stock Incentive Plan (the "Stock Incentive Plan"). In connection with
the Stock Incentive Plan, 800,000 shares of the Company's common stock were
reserved for the grant of stock options, stock appreciation rights, restricted
stock, performance awards, and other stock-based awards to certain key employees
and certain directors. Stock options are granted at an exercise price equal to
the market value on the respective grant date. The options granted in 1997
become exercisable at a rate of 50% on the second anniversary of the date of
grant, 25% on the third anniversary of the date of grant, and 25% on the fourth
anniversary of the date of grant. The options granted subsequent to 1997
generally become exercisable ratably over a 3 year period. The options expire 10
years from the date of grant. No awards shall be granted under the Stock
Incentive Plan after December 31, 2007.
A summary of stock option activity and related information for the years ended
December 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year - $ - 295,500 $ 16.50 413,000 $ 16.28
Granted 295,500 16.50 117,500 15.74 344,100 4.93
-------- -------- --------
Outstanding - end of year 295,500 $ 16.50 413,000 $ 16.28 757,100 $ 11.12
======== ======== ========
Exercisable at end of year - - - - 186,917 $ 16.34
======== ======== ========
Weighted-average fair value
of options granted during
the year $ 7.62 $ 9.15 $ 3.91
======== ======== ========
</TABLE>
-57-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
15. Stock Options and Restricted Stock (continued)
The following table summarizes information for stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Prices Options Life Exercise Price Options Exercise Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 - 6.00 344,100 9.57 years $ 4.93 - $ -
$8.25 14,000 9.00 years 8.25 4,667 8.25
$16.00 - 17.00 399,000 7.43 years 16.56 182,250 16.55
</TABLE>
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value based method of accounting as prescribed by APB 25. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the grant date, no
compensation cost is recognized. SFAS 123 requires companies that do not account
for stock-based compensation using the fair value based method to disclose pro
forma net income and earnings per share under the fair value based method. The
fair value of each option on the date of grant was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6% 6% 6%
Dividend yield 0% 0% 0%
Volatility factor of the expected market
price of the Company's common stock 0.364 0.544 0.931
Weighted-average expected life of the
option (in years) 6 6 6
</TABLE>
If the fair value based method accounting provisions of SFAS 123 had been
adopted, net income (loss) and earnings per share (both basic and diluted) would
have been as follows. The effects of applying SFAS 123 for providing pro forma
disclosures are not likely to be representative of the effects on reported net
income (loss) for future years.
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income (loss) $ 22,697 $ 9,345 $ (25,972)
Net income (loss) per share (basic and diluted) 1.51 0.53 (2.09)
</TABLE>
-58-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
15. Stock Options and Restricted Stock (continued)
During 1997, the Company awarded 4,000 shares of restricted stock to two
executive officers under the Stock Incentive Plan. A total of 2,000 shares
vested immediately at the date of grant, and the remaining 2,000 shares became
vested during 1998. The weighted-average fair value of the shares that vested
during 1998 was $16.75 per share. The weighted-average fair value of the shares
that vested during 1997 was $18.00 per share.
During 1999, the Company awarded 20,465 shares of restricted stock to an
executive officer under the Stock Incentive Plan. Fifty percent of the
restricted stock will vest over a three year period starting in 2000. The
remaining restricted stock will vest based upon achievement of certain
performance objectives.
16. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of related tax, is
as follows:
December 31
1998 1999
---------------------------
(In thousands)
Minimum pension liability adjustment $ (1,571) $ (11)
Currency translation adjustment (340) (5,249)
---------------------------
$ (1,911) $ (5,260)
===========================
17. Business Segment Information
The Company has identified three reportable business segments. The Premium
Alloys segment manufactures and distributes superalloy and other
high-performance nickel-based alloy products, principally to the aerospace
industry. The Huntington Alloys (previously Inco Alloys North America) and
Wiggin Alloys (previously Inco Alloys Europe) segments manufacture and
distribute high-performance nickel-based alloy products to a wide range of
industries.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales prices are
market based. The Company evaluates performance based on operating earnings of
the respective business units.
-59-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
17. Business Segment Information (continued)
Segment information as of and for the years ended December 31, 1998 and 1999 is
as follows. For 1997, the Company consisted solely of the Premium Alloys
segment.
<TABLE>
<CAPTION>
Premium Huntington Wiggin
Alloys Alloys Alloys Corporate Total
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
1998
Sales to external customers $ 174,997 $ 50,253 $ 27,976 $ - $ 253,226
Intersegment sales 220 8,287 3,140 - 11,647
Operating income (loss) 26,346 (8,662) 1,428 (1,059) 18,053
Depreciation and amortization 4,562 2,233 541 886 8,222
Total assets 146,961 470,094 175,748 47,351 840,154
Capital expenditures 9,061 5,620 5,583 - 20,264
1999
Sales to external customers $ 126,826 $ 319,491 $ 155,932 $ - $ 602,249
Intersegment sales 19,183 24,034 15,278 - 58,495
Operating income (loss) 11,395 (35,462) 10,409 (6,099) (19,757)
Depreciation and amortization 5,258 20,668 5,235 6,099 37,260
Total assets 122,942 501,169 141,462 45,714 811,287
Capital expenditures 3,565 5,990 2,449 - 12,004
</TABLE>
Financial information relating to the Company's operations by geographic area is
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Net sales
United States $ 128,247 $ 165,457 $ 325,604
United Kingdom 4,909 18,915 67,340
France 29,902 23,788 57,811
Other 23,013 45,066 151,494
----------------------------------------
$ 186,071 $ 253,226 $ 602,249
========================================
Long-lived assets
United States $ 39,727 $ 271,525 $ 245,609
United Kingdom - 33,587 32,533
Other - 3,913 361
----------------------------------------
$ 39,727 $ 309,025 $ 278,503
========================================
</TABLE>
-60-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
18. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1998 1999
-----------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 23,002 $ 9,840 $ (25,310)
Preferred stock dividends - 1,071 6,423
-----------------------------------------------
Numerator for basic earnings per share -
income available to common shareholders 23,002 8,769 (31,733)
Effect of dilutive securities:
Preferred stock dividends - - -
-----------------------------------------------
Numerator for diluted earnings per share -
income available to common shareholders
after assumed conversions $ 23,002 $ 8,769 $ (31,733)
===============================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 15,004 15,479 15,479
Effect of dilutive securities:
Employee stock options 12 - -
Preferred stock - - -
-----------------------------------------------
Denominator for diluted earnings
per share - adjusted
weighted-average shares 15,016 15,479 15,479
===============================================
Basic earnings per share $ 1.53 $ 0.57 $ (2.05)
===============================================
Diluted earnings per share $ 1.53 $ 0.57 $ (2.05)
===============================================
</TABLE>
Potential common shares resulting from stock options and convertible preferred
stock at December 31, 1998 and 1999 were excluded from the calculation of
diluted earnings per share because their inclusion would have had an
antidilutive effect on earnings per share.
-61-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
19. Statement of Cash Flow - Supplemental Disclosures
Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 750 $ 1,166 $ 25,243
Income taxes 12,570 11,483 1,870
Non-cash activities:
Intangible pension asset $ 138 $ (21) $ (21)
Accumulated pension adjustment (201) 1,075 (1,560)
Deferred taxes (161) 659 (957)
----------------------------------------
Net accrued pension liability $ (224) $ 1,713 $ (2,538)
========================================
</TABLE>
During 1998, the Company financed $17,000,000 of the non-competition agreement
with the issuance of 340,000 shares of non-voting Series A Convertible Preferred
Stock.
20. Concentrations
For the year ended December 31, 1997, sales made to the Company's three largest
customers represented approximately 21%, 11% and 10%, respectively, of the
Company's total sales. For the year ended December 31, 1998, sales made to the
Company's largest customer represented approximately 16%, of the Company's total
sales. No other customers, in any year, represented over 10% of the Company's
total sales.
At December 31, 1997, accounts receivable from three customers represented
approximately 37% of total accounts receivable. No other customers accounted for
over 10% of the Company's total accounts receivable at December 31, 1997, 1998
or 1999.
Approximately 61% of the Company's employees are represented by nine separate
domestic and international collective bargaining agreements which terminate at
various times between November 2000 and August 2003. Approximately 20% of the
labor force is covered by collective bargaining agreements that will expire
within one year.
-62-
<PAGE>
Special Metals Corporation
Notes to Consolidated Financial Statements (continued)
21. Quarterly Financial Data (unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Quarter
First Second Third Fourth
------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Net sales $ 49,191 $ 43,852 $ 41,645 $ 118,538
Gross profit 11,678 8,814 7,820 5,804
Net income (loss) 6,335 4,611 4,089 (5,195)
Net income (loss) attributable to
common shareholders 6,335 4,611 4,089 (6,266)
Earnings per common share,
basic and assuming dilution 0.41 0.30 0.26 (0.40)
Year ended December 31, 1999:
Net sales 151,708 158,842 139,344 152,355
Gross profit 8,771 19,451 10,967 574
Net loss (6,693) (337) (5,445) (12,835)
Net loss attributable to common
shareholders (8,299) (1,943) (7,051) (14,440)
Earnings per common share,
basic and assuming dilution (0.54) (0.13) (0.46) (0.93)
</TABLE>
-63-
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Dollars in Thousands
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Balance
Beginning Charged to Other at End of
Description of Period Expense Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 3,179 $ (167) $ (43) (d) $ 75 (b) $ 2,894
Allowance for obsolescence 7,526 1,497 (109) (d) - 8,914
-------------------------------------------------------------
Total $ 10,705 $ 1,330 $ (152) $ 75 $ 11,808
=============================================================
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 168 $ 8 $ 3,358 (a) $ 355 (b) $ 3,179
Allowance for obsolescence 1,297 674 5,775 (a) 220 (c) 7,526
-------------------------------------------------------------
Total $ 1,465 $ 682 $ 9,133 $ 575 $ 10,705
=============================================================
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 120 $ 48 $ - $ - $ 168
Allowance for obsolescence 1,110 261 - 74 (c) 1,297
-------------------------------------------------------------
Total $ 1,230 $ 309 $ - $ 74 $ 1,465
=============================================================
</TABLE>
(a) Valuation allowances of businesses acquired.
(b) Uncollectible accounts written off, net of recoveries.
(c) Physical inventory adjustments
(d) Impact of foreign currency translation adjustments
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-64-
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information regarding Directors and Executive Officers of the
Company will be included in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission prior to April 29, 2000.
Item 11. Executive Compensation
The information regarding Executive Compensation will be included in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission prior to April 29, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding Security Ownership of Certain Beneficial
Owners and Management will be included in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission prior to April
29, 2000.
Item 13. Certain Relationships and Related Transactions
The information regarding Certain Relationships and Related Transactions
will be included in the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission prior to April 29, 2000.
-65-
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page in
Form 10-K
---------
(a) The following are filed as part of this report:
(1) Audited financial statements of the Company as of December 31,
1998 and 1999, and for the three years in the period ended 32
December 31, 1999.
(2) Financial statement schedule
II - Valuation and Qualifying Accounts 64
All other schedules have been omitted as the required
information is not applicable or the information is presented
in the financial statements or the notes thereto.
(3) Exhibits
Exhibit No. Description
- --------------------------------------------------------------------------------
2.1 Stock Purchase Agreement, dated as of July 8, 1998, between Special
Metals Corporation and Inco Limited, Inco United States, Inc., Inco
Europe Limited and Inco S.A. (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on July 10, 1998).
2.2 Letter Agreement, dated October 28, 1998, between Special Metals
Corporation, Special Metals S.A.R.L., IAII Acquisition Co., IACL
Acquisition Inc. and IAL Holdings Limited and Inco, Inco United
States, Inc., Inco Europe Limited, Inco S.A. and Inco Alloys
International, Inc. (Incorporated by reference to the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on November 12, 1998).
3.1.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-18499)).
3.1.2 Certificate of Designations for Series A Preferred Stock, filed on
October 28, 1998, with the Secretary of State of Delaware
(Incorporated by reference to the Company's current report on Form
8-K filed with the Securities and Exchange Commission on November 12,
1998).
3.2 Amended and Restated By-Laws (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-18499)).
4.1 Investment Agreement, dated as of July 8, 1998, among Special Metals
Corporation, TIMET and TMC (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on July 10, 1998).
4.2 Amendment to Investment Agreement, dated October 28, 1998, among
Special Metals Corporation, TIMET and TMC (Incorporated by reference
to the Company's current report on Form 8-K filed with the Securities
and Exchange Commission on November 12, 1998).
-66-
<PAGE>
4.3 Investment Agreement, dated October 28, 1998, between Special Metals
Corporation and Inco (Incorporated by reference to the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on November 12, 1998).
4.4 Voting Agreement, dated October 28, 1998, among TIMET, TMC, Societe
Industrielle de Materiaux Avances, LWH Holding S.A. and Advanced
Materials Investments Holding S.A. (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1998).
10.1 Form of Registration Rights Agreement among Special Metals
Corporation, SIMA, LWH and AMI (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-18499)).
10.2 Registration Rights Agreement, dated October 28, 1998, between TIMET
and Special Metals Corporation (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1998).
10.3 Registration Rights Agreement, dated October 28, 1998, between Inco
and Special Metals Corporation (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission November 12, 1998).
10.4 Amended and Restated Stockholders Agreement among the Company, SIMA,
LWH and AMI (Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-18499)).
10.5 Amendment No. 1 to Stockholders Agreement dated as of March 1, 1998.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission August 11,
1998)
10.6 Technical Exchange Agreement between the Company and SIMA
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-18499)).
10.7 Managerial Assistance Agreement between the Company and SIMA
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-18499)).
10.8 Lease Agreement, dated as of February 1, 1994 between the Oneida
County Development Agency and the Company (Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-18499)).
10.9 Lease Extension and Modification Agreement, dated as of February 28,
1997, by and between the Oneida County Industrial Development Agency
and the Company (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
10.10 Amended and Restated Payment in Lieu of Taxes Agreement, dated
February 28, 1997, by and between the Oneida County Industrial
Development Agency and the Company (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
10.11 First Amendment to Amended and Restated Payment in Lieu of Taxes
Agreement, dated January 22, 1998, by and between the Oneida County
Industrial Development Agency and the Company (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q filed
November 12, 1998).
-67-
<PAGE>
10.12 Lease, dated as of November 1, 1990 between the County of Chautauqua
Industrial Development Agency and the Company (Incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-18499)).
10.13 Payment in Lieu of Taxes Agreement, dated as of November 1, 1990
between the Company and the County of Chautauqua Industrial
Development Agency (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-18499)).
10.14 Amended and Restated Lease Agreement, dated as of September 1, 1990
between the City of Princeton, Kentucky and the Company (Incorporated
by reference to the Company's Registration Statement on Form S-1
(File 333-18499)).
10.15 + Special Metals Corporation Equity Appreciation Rights Plan
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-18499)).
10.16 + Special Metals Corporation Supplemental Retirement Income Plan
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File 333-18499)).
10.17 + Special Metals Corporation 1997 Long-Term Stock Incentive Plan,
together with Form of Stock Option Award Agreement (Incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-18499)).
10.18 + Amended and Restated Employment Agreement, dated December 30, 1994,
between the Company and Donald R. Muzyka (Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-18499)).
10.19 + Amended and Restated Employment Agreement, dated December 30, 1994,
between the Company and Robert F. Dropkin (Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-18499)).
10.20.1 *+ Employment Agreement, dated April 15, 1999 between the Company and T.
Grant John.
10.20.2 *+ Restricted Stock Award Agreement between the Company and T. Grant
John.
10.20.3 *+ Nonqualified Stock Option Agreement between the Company and T. Grant
John.
10.21 + Employment Agreement, dated December 30, 1994, between the Company
and Donald C. Darling (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-18499)).
10.22 Noncompetition Agreement, dated as of October 28, 1998, between Inco
and Special Metals Corporation (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1998).
10.23 Agreement in Principle, dated July 8, 1998 between Special Metals
Corporation and TMC (Incorporated by reference to the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on July 10, 1998).
10.24 Agreement, dated October 28, 1998, among Special Metals Corporation,
the Lenders and Credit Lyonnais New York Branch as Issuing Bank and
Agent (Incorporated by reference to the Company's current report on
Form 8-K filed with the Securities and Exchange Commission on
November 12, 1998).
-68-
<PAGE>
10.25 First Amendment to the Credit Agreement dated as of April 1, 1999 by
and among the Company, Credit Lyonnais New York Branch and the other
financial institutions party thereto (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q filed on May 17, 1999)
10.26 * Second Amendment to the Credit Agreement dated as of June 8, 1999 by
and among the Company, Credit Lyonnais New York Branch and the other
financial institutions party thereto.
10.27 * Third Amendment to the Credit Agreement and Limited Waiver dated as
of December 29, 1999 by and among the Company, Credit Lyonnais New
York Branch and the other financial institutions party thereto.
10.28 * Subordinated Loan Agreement dated as of December 17, 1999 between the
Company and SIMA.
10.29 * Debt Subordination Agreement dated as of December 29, 1999 by and
among the Company, SIMA and Credit Lyonnais New York Branch.
21.1 * Subsidiaries of the Company
23.1 * Consent of Ernst & Young LLP
27.1 * Financial Data Schedule
- ------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
(c) Exhibits
All exhibits required by Item 601 of Regulation S-K are included in Item
14(a)(3).
-69-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 29, 2000.
By: /s/ Donald R. Muzyka
--------------------
Donald R. Muzyka, President and
Chief Executive Officer
-70-
<PAGE>
BE IT KNOWN TO ALL BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald C. Darling and Donald R. Muzyka
such person's true and lawful attorney-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments to this
report filed pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, as amended, and to file the same with all exhibits
thereto, and the other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as such persons might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Robert D. Halverstadt Chairman of the Board March 24, 2000
- -------------------------
Robert D. Halverstadt
/s/ Donald R. Muzyka President, Chief Executive Officer March 29, 2000
- ------------------------- and Director (Principal Executive
Donald R. Muzyka Officer)
/s/ Donald C. Darling Chief Financial Officer and Director March 29, 2000
- ------------------------- (Principal Financial and Accounting
Donald C. Darling Officer)
/s/ Robert F. Dropkin Director March 29, 2000
- -------------------------
Robert F. Dropkin
/s/ Edouard Duval Director March 27, 2000
- -------------------------
Edouard Duval
/s/ Antoine G. Treuille Director March 27, 2000
- -------------------------
Antoine G. Treuille
/s/ Raymond F. Decker Director March 25, 2000
- -------------------------
Raymond F. Decker
/s/ Andrew R. Dixey Director March 24, 2000
- -------------------------
Andrew R. Dixey
-71-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- --------------------------------------------------------------------------------
2.1 Stock Purchase Agreement, dated as of July 8, 1998, between Special
Metals Corporation and Inco Limited, Inco United States, Inc., Inco
Europe Limited and Inco S.A. (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on July 10, 1998).
2.2 Letter Agreement, dated October 28, 1998, between Special Metals
Corporation, Special Metals S.A.R.L., IAII Acquisition Co., IACL
Acquisition Inc. and IAL Holdings Limited and Inco, Inco United
States, Inc., Inco Europe Limited, Inco S.A. and Inco Alloys
International, Inc. (Incorporated by reference to the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on November 12, 1998).
3.1.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-18499)).
3.1.2 Certificate of Designations for Series A Preferred Stock, filed on
October 28, 1998, with the Secretary of State of Delaware
(Incorporated by reference to the Company's current report on Form
8-K filed with the Securities and Exchange Commission on November 12,
1998).
3.2 Amended and Restated By-Laws (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-18499)).
4.1 Investment Agreement, dated as of July 8, 1998, among Special Metals
Corporation, TIMET and TMC (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on July 10, 1998).
4.2 Amendment to Investment Agreement, dated October 28, 1998, among
Special Metals Corporation, TIMET and TMC (Incorporated by reference
to the Company's current report on Form 8-K filed with the Securities
and Exchange Commission on November 12, 1998).
4.3 Investment Agreement, dated October 28, 1998, between Special Metals
Corporation and Inco (Incorporated by reference to the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on November 12, 1998).
4.4 Voting Agreement, dated October 28, 1998, among TIMET, TMC, Societe
Industrielle de Materiaux Avances, LWH Holding S.A. and Advanced
Materials Investments Holding S.A. (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1998).
72
<PAGE>
10.1 Form of Registration Rights Agreement among Special Metals
Corporation, SIMA, LWH and AMI (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-18499)).
10.2 Registration Rights Agreement, dated October 28, 1998, between TIMET
and Special Metals Corporation (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1998).
10.3 Registration Rights Agreement, dated October 28, 1998, between Inco
and Special Metals Corporation (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission November 12, 1998).
10.4 Amended and Restated Stockholders Agreement among the Company, SIMA,
LWH and AMI (Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-18499)).
10.5 Amendment No. 1 to Stockholders Agreement dated as of March 1, 1998.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission August 11,
1998)
10.6 Technical Exchange Agreement between the Company and SIMA
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-18499)).
10.7 Managerial Assistance Agreement between the Company and SIMA
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-18499)).
10.8 Lease Agreement, dated as of February 1, 1994 between the Oneida
County Development Agency and the Company (Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-18499)).
10.9 Lease Extension and Modification Agreement, dated as of February 28,
1997, by and between the Oneida County Industrial Development Agency
and the Company (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
10.10 Amended and Restated Payment in Lieu of Taxes Agreement, dated
February 28, 1997, by and between the Oneida County Industrial
Development Agency and the Company (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
10.11 First Amendment to Amended and Restated Payment in Lieu of Taxes
Agreement, dated January 22, 1998, by and between the Oneida County
Industrial Development Agency and the Company (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q filed
November 12, 1998).
10.12 Lease, dated as of November 1, 1990 between the County of Chautauqua
Industrial Development Agency and the Company (Incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-18499)).
73
<PAGE>
10.13 Payment in Lieu of Taxes Agreement, dated as of November 1, 1990
between the Company and the County of Chautauqua Industrial
Development Agency (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-18499)).
10.14 Amended and Restated Lease Agreement, dated as of September 1, 1990
between the City of Princeton, Kentucky and the Company (Incorporated
by reference to the Company's Registration Statement on Form S-1
(File 333-18499)).
10.15 + Special Metals Corporation Equity Appreciation Rights Plan
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-18499)).
10.16 + Special Metals Corporation Supplemental Retirement Income Plan
(Incorporated by reference to the Company's Registration Statement on
Form S-1 (File 333-18499)).
10.17 + Special Metals Corporation 1997 Long-Term Stock Incentive Plan,
together with Form of Stock Option Award Agreement (Incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-18499)).
10.18 + Amended and Restated Employment Agreement, dated December 30, 1994,
between the Company and Donald R. Muzyka (Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-18499)).
10.19 + Amended and Restated Employment Agreement, dated December 30, 1994,
between the Company and Robert F. Dropkin (Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-18499)).
10.20.1 *+ Employment Agreement, dated April 15, 1999 between the Company and T.
Grant John.
10.20.2 *+ Restricted Stock Award Agreement between the Company and T. Grant
John.
10.20.3 *+ Nonqualified Stock Option Agreement between the Company and T. Grant
John.
10.21 + Employment Agreement, dated December 30, 1994, between the Company
and Donald C. Darling (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-18499)).
10.22 Noncompetition Agreement, dated as of October 28, 1998, between Inco
and Special Metals Corporation (Incorporated by reference to the
Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1998).
10.23 Agreement in Principle, dated July 8, 1998 between Special Metals
Corporation and TMC (Incorporated by reference to the Company's
current report on Form 8-K filed with the Securities and Exchange
Commission on July 10, 1998).
10.24 Agreement, dated October 28, 1998, among Special Metals Corporation,
the Lenders and Credit Lyonnais New York Branch as Issuing Bank and
Agent (Incorporated by reference to the Company's current report on
Form 8-K filed with the Securities and Exchange Commission on
November 12, 1998).
74
<PAGE>
10.25 First Amendment to the Credit Agreement dated as of April 1, 1999 by
and among the Company, Credit Lyonnais New York Branch and the other
financial institutions party thereto (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q filed on May 17, 1999)
10.26 * Second Amendment to the Credit Agreement dated as of June 8, 1999 by
and among the Company, Credit Lyonnais New York Branch and the other
financial institutions party thereto.
10.27 * Third Amendment to the Credit Agreement and Limited Waiver dated as
of December 29, 1999 by and among the Company, Credit Lyonnais New
York Branch and the other financial institutions party thereto.
10.28 * Subordinated Loan Agreement dated as of December 17, 1999 between the
Company and SIMA.
10.29 * Debt Subordination Agreement dated as of December 29, 1999 by and
among the Company, SIMA and Credit Lyonnais New York Branch.
21.1 * Subsidiaries of the Company
23.1 * Consent of Ernst & Young LLP
27.1 * Financial Data Schedule
- ------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
75
Exhibit 10.20.1
April 15, 1999
Dr. T. Grant John
989 Whitetale Lane
Westchester, Pennsylvania 19382
Re: Employment Agreement
------------------------
Dear Dr. John:
Special Metals Corporation (the "Company"), desires to employ you on
the terms set forth herein, and by your signature below you have indicated that
you desire to be employed by the Company on the terms set forth herein. In
consideration of the mutual covenants contained in this Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which
consideration are hereby acknowledged, the parties agree as follows:
1. Duties. You shall serve as the Executive Vice President and Chief
Operating Officer of the Company, with responsibility for all operations of the
Company's core business, including the commercial functions, performing all
duties reasonably or necessarily relating to your position as shall be assigned
to you from time to time by the Chief Executive Officer and/or Board of
Directors of the Company, devoting your full business time, attention, best
energies and abilities to the performance of such duties. During the Employment
Period (as defined below), your employment hereunder shall be your exclusive
employment, and you shall not be engaged in any other trade or business, without
the consent of the Company. You shall report to the Chief Executive Officer and
Board of Directors of the Company. You will be appointed to the Boards of
Directors of the Company and various other subsidiaries of the Company, and
shall enjoy the duties and privileges of such directorships as provided by the
by-laws of these respective corporations, after satisfactory service prior to or
by the end of the first year of your employment with the Company. You shall
serve on these Boards without further compensation.
2. Term. The initial term of employment with the Company shall be for
the period commencing on April 19, 1999 or earlier (the "Commencement Date") and
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 2
ending on April 19, 2002 or the third anniversary of the Commencement Date; and
the term shall be automatically extended for an additional period of one year
and upon each one year anniversary date thereafter upon the terms and conditions
set forth herein (the "Employment Period"), unless either party gives six (6)
months prior written notice of his or its intention not to extend the term of
this Agreement prior to the end of the initial term or any extended term;
however, in all events, this Agreement shall expire in all respects on April 19,
2004.
3. Base Salary. Your base salary shall be at least Two Hundred
Seventy-five Thousand Dollars ($275,000) per annum. Your base salary shall be
payable in periodic installments no less frequently than on a monthly basis. You
shall be eligible for salary increases based on your performance periodically
during the term of this Agreement. Salary reviews will be in accordance with the
Company's salary review policy then applicable.
4. Incentive Compensation. On the Commencement Date of your
employment, you will be eligible to receive a contingent grant of restricted
shares of the Company's stock, the number of which shares will be determined by
dividing forty percent (40%) of your base salary by the value of the Company's
shares on the Commencement Date (i.e. $275,000 x 40% = $110,000 / share value as
of the Commencement Date = number of restricted shares) (the "Restricted
Shares"). The share value as of the Commencement Date shall be calculated in
accordance with the terms of the Company's Nonqualified Stock Option Agreement
and Long-Term Stock Incentive Plan (collectively referred to herein as "Stock
Option Plan"). One half of the Restricted Shares so determined will vest subject
to your continued employment on each of the first three anniversary dates of the
Commencement Dates in equal one- third pro rata amounts each year; and the
balance of the Restricted Shares so determined will be vested based upon your
achievement of your performance objectives that are reasonably consistent with
the business objectives of the Company and as negotiated with the Chief
Executive Officer. During your first ninety (90) days of employment, you and the
Chief Executive Officer will set goals and times of achievement which cover a
mutually agreed upon time schedule to result in vesting of the Restricted Shares
that are dependent upon your performance. The Restricted Shares will vest within
twelve (12) months of the Commencement Date if you have achieved your
performance objectives within that time, unless the completion date of the
performance goals that are agreed to with the Chief Executive Officer is
mutually agreed to be at a later date. The vested Restricted Shares that you are
eligible to receive will be transferred to you twenty-four (24) months after the
vesting date or at a later date elected by you (such election to be made at
least 24 months before the scheduled transfer date, unless the Company consents
to a shorter election period). All incentive compensation based upon the
Company's shares will be adjusted for splits, dilution, dividends and other such
events as set forth in the Company's Stock Option Plan. Your achievement of your
performance objectives will be assessed by
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 3
the Chief Executive Officer at the end of your first year with the Company, and
on or about each anniversary of the Commencement Date, unless there is mutual
agreement that a longer time is required.
As of the second year of your employment and for the remainder of
your Employment Period, you will eligible to participate in, and be subject to,
the Company's Guide to Incentive Compensation Program as it may then exist, at
the forty percent (40%) target level as defined in the applicable plan. Since
the incentive compensation that you will be eligible to receive for the first
four months of the year 2000 overlaps with the first year of your employment,
the incentive compensation that you will be eligible to receive for the balance
of the year 2000 will be prorated to eight-twelfths for the eight remaining
months of that year.
5. Pension Plan. You shall be entitled to participate in the
Company's pension plan. The Company agrees that to supplement the Company's
pension plan, it will multiply your pension benefits as if you were fully vested
by one and two-thirds (12/3) after three (3) years of employment, so that you
will have five (5) years vested after three (3) years of employment, and it will
continue to be multiplied as if you were fully vested by one and two-thirds
(12/3) for the balance of your service until the termination of your employment.
6. Other Benefits.
6.1 Stock Option Grant. During the Employment Period, you
will be eligible to participate in the Company's Stock Option Plan as it may
then exist. Upon the Commencement Date, you will receive a grant of forty
thousand (40,000) shares, vesting one-third (1/3) on each of the first three (3)
anniversary dates of the Commencement Date, as described in the Stock Option
Plan.
6.2 Employee Fringe Benefits. During the Employment Period,
you will be eligible to participate in the standard employee fringe benefits
plans, including, without limitation, 401(k), medical, dental and life insurance
and other fringe benefits, pursuant to their respective terms and conditions as
they may be modified, amended or terminated from time to time. If your
employment with the Company is terminated between April 19, 2002 and April 19,
2004 for any reason, except for "cause" as defined in paragraph 9.3(e) in this
Agreement, and at that time your present wife remains married to you, but is not
covered by any medical benefits under the Company's medical benefits plan, the
Company will at that time provide medical benefits to her until she becomes
eligible for Medicare on or before she reaches age 65. If your employment is
terminated for "cause," your wife will not receive the Company's medical
benefits.
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 4
6.3 Reimbursement of Business Expenses. The Company will,
upon substantiation thereof, reimburse you for all reasonable expenses incurred
by you in connection with the Company's business affairs. You must regularly
submit to the Company's Chief Executive Officer a statement of these expenses
and comply with such other accounting and reporting requirements that the
Company may from time to time establish.
6.4 Vacation. You are entitled to four (4) weeks vacation
per calendar year.
7. Automobile; Club Membership. The Company will reimburse you for
your use of your personal car for Company business when automobile
transportation is called for and it is reasonable to expect you to use your
personal car. Such reimbursement shall be at the mileage rate typically paid at
the time by the Company for reimbursement for use of a personal car for Company
business. In addition, the Company will reimburse you for one club membership
pursuant to the terms of its applicable policy relating to same with the
approval of the Chief Executive Officer in advance and with reimbursement at a
level consistent with Company established practice. The foregoing reimbursement
arrangements may be modified by the Company from time to time.
8. Change of Control. "Change of Control" shall mean the occurrence
of any of the following: (i) the sale, lease, transfer, conveyance or other
disposition, in one or a series of related transactions, of all or substantially
all of the assets of the Company to any "person" or "group" (as such terms are
used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), (ii) any person or
group is or becomes the "beneficial owner" (as defined in Rules 13d-3 and l3d-5
under the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total voting power of the voting
stock of the Company, including by way of merger, consolidation or otherwise or
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board (together with any new directors
whose election by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors of the Company, then still in office, who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board; provided that in no event shall the first initial public offering of the
Company's equity securities pursuant to an effective registration statement
under the Securities Act of 1933 be deemed to constitute a Change of Control.
Notwithstanding the foregoing, a "Change of Control" shall not include (i) any
acquisition of voting securities or assets of the Company by Societe
Industrielle Materiaux Avance ("SIMA"), LWH Holding S.A.,
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 5
Advanced Materials Investments Holding S.A. or any of their respective
affiliates or stockholders, or (ii) the acquisition of SIMA by the Eramet Group.
9. Termination.
9.1 By the Company. The Company may terminate your
employment with the Company:
(a) at any time upon ninety (90) days advance
written notice for any reason other than for "cause" (as defined below) or for
no reason ("Termination Without Cause"), subject to the requirement that the
Company pay to you the amounts set forth in Subsection 9.3 hereof;
(b) at any time without notice for "cause" (as
defined below);
(c) upon your death;
(d) in the event of your disability preventing
you from rendering services to the Company consistent with your duties hereunder
for a period of six (6) consecutive months; or
(e) by not extending the Employment Period.
9.2 By the Employee. You may terminate your employment with
the Company:
(a) at any lime upon ninety (90) days advance
written notice;
(b) if there is a Change in Control of the
Company, and, as a result, there is a material change in your authority or job
responsibilities which results in lower salary or less responsibility than your
assignment as Executive Vice President; or
(c) for "Good Reason," upon ninety (90) days
advance written notice and the Company's failure to cure the "Good Reason"
within the ninety (90) day period. "Good Reason" is defined as (i) any material
breach of this Agreement by the Company; (ii) any material reduction in your
authority or job responsibilities which results in lower salary or less
responsibility than your assignment as Executive Vice President; (iii) any
required relocation of your position from Huntington, West Virginia without your
consent; or (iv) the creation by the Company of intolerable working conditions.
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 6
9.3 Payments upon Termination.
(a) Upon termination of this Agreement by the
Company during the Employment Period, pursuant to Subsection 9.1 (a) and 9.2(c)
hereof, the Company shall provide you with:
(A) severance pay at your base salary
in effect as of the date of such termination, payable in accordance
with the Company's normal payroll cycle until the end of the
Employment Period or for one year after the date of termination,
whichever is longer;
(B) incentive compensation, profit
sharing payments and stock options shall be subject to accelerated
vesting, but payable after the date of such termination, subject to
the terms of the Company's incentive compensation and profit sharing
and stock option plans, provided, however, that you shall be entitled
to only so much of the Restricted Shares of incentive compensation
for which your performance objectives are achieved, and further
provided, however, that your right to exercise vested options shall
be extended for a period of one (1) year following the termination,
notwithstanding any contrary language in the plan documents; and
(C) continued employee fringe benefits
as in effect immediately prior to such termination subject to the
terms of the Company's employee fringe benefits plans, pension plan
and the supplement to the pension plan referred to in Section 5 of
this Agreement until the end of the Employment Period, or for one
year after the date of termination, whichever is longer.
(b) The payments specified in the preceding
paragraph (a) of this Subsection 9.3 shall be in full satisfaction of any and
all claims that you may have against the Company or any subsidiary or affiliate
thereof and, as a condition to the making of such payments by the Company, you
and the Company shall be required to execute mutual releases of claims arising
from events or occurrences prior to the date of such Termination without Cause
or Change of Control or termination by you for Good Reason if there is no
disagreement about the payments that you are owed, provided, however, that any
disagreement about the payments will be subject to arbitration as set forth in
paragraph 14.6 of this Agreement.
(c) Upon termination of this Agreement by the
Company pursuant to clauses (c), (d) or (e) of Subsection 9.1 hereof, or by you
pursuant to Subsection 9.2(b) hereof, you or your estate, as the case may be,
shall not be entitled to any compensation, severance, or any other benefits
and/or payments hereunder, except for base salary, bonus and profit sharing,
stock options and pension benefits
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 7
earned and vested as of the date of such termination, and the proceeds of all
applicable life and disability insurance policies.
(d) Upon termination of this Agreement by the
Company for cause, pursuant to Subsection 9.1(b), or by you for any reason,
pursuant to Subsection 9.2(a), you shall not be entitled to any compensation,
severance, or any other benefits and/or payments hereunder, except for base
salary, bonus, profit sharing, stock options and pension benefits earned and
vested as of the date of such termination.
(e) A termination for "cause" is defined as: (i)
your willful neglect of your duties hereunder; (ii) conviction for, or entry of
a pleading of guilty or nolo contendre by you with respect to a felony; (iii)
material, knowing and intentional failure to comply with applicable laws with
respect to the execution of the Company's business operations; (iv) theft,
fraud, embezzlement, dishonesty or similar conduct which has resulted or is
likely to result in material economic damage to the Company or any of its
affiliates or subsidiaries; (v) repeated failure to perform the directives of
the Chief Executive Officer and/or the Company's Board of Directors, or (vi)
dependence or addiction to alcohol or use of drugs (except those legally
prescribed by and administered pursuant to the directions of a practitioner
licensed to do so under the laws of the state or county of licensure) which in
the opinion of the Chief Executive Officer and Company's Board of Directors
interferes with your ability to perform your assigned duties and
responsibilities. If you are terminated for cause under subparagraphs (i),
(iii), (iv), (v) or (vi), you will be entitled to thirty (30) days prior written
notice and the opportunity to cure, and if, in the Company's sole discretion,
you have not cured the cause for your termination within that time, the Company
shall have the right to declare your employment terminated.
10. Relocation. You agree to move to Huntington, West Virginia as
soon as practical, and you shall be entitled to the Company's relocation policy.
11. Non-Disclosure; Non-Competition; Non-Solicitation.
11.1 Proprietary Information.
(a) You agree, that all information and know-how,
whether or not in writing, of a private, secret or confidential nature
concerning the business or financial affairs of the Company, or any subsidiary
or affiliate of the Company, (collectively, "Proprietary Information") is and
will be the exclusive property of the Company, or such subsidiary or affiliate,
as the case may be. By way of illustration, but not limitation, Proprietary
Information includes manufacturing methods, processes or techniques; inventions;
products; projects; developments; compositions; plans; research data; financial
data; trade secrets; patents; personnel data; computer
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 8
programs; designs; and client and supplier lists, whether or not copyrightable,
trademarkable or licensable. You shall not disclose any Proprietary Information
to others outside the Group (as defined below) or use the Proprietary
Information for any unauthorized purposes without written approval by an officer
of the Company, either during or after your employment, unless and until such
Proprietary Information has become public knowledge without your fault. For
purposes hereof, the "Group" shall mean the Company, any subsidiary or
affiliate.
(b) You agree that all files, letters, memoranda,
reports, records, data, sketches, drawings, notebooks, notes, specifications,
computer programs, listings, or other written, photographic, or other tangible
material containing Proprietary Information, whether created by you or others,
which comes into your custody or possession, is the exclusive property of the
Group, to be used by you only in the performance of your duties for the Company
and will remain in the custody of the Company if for any reason you leave your
employment with the Company and it will not be available to you after
termination of your employment.
(c) You agree that your obligation not to
disclose or use information, know-how and records of the types set forth in
paragraphs (a) and (b) above also extends to such types of information,
know-how, records and tangible property of customers of the Company or suppliers
to the Company or other third parties who may have disclosed or entrusted the
same to the Company or to you in the course of the Company's business.
11.2 Developments.
(a) You will make full and prompt disclosure to
the Company of all patents, inventions, improvements, ideas, concepts,
approaches, discoveries, methods, developments, software, and works of
authorship, whether or not copyrightable, patentable, trademarkable or
licensable, which are created, made, conceived or reduced to practice by you or
under your direction or jointly with others in connection with your employment
by the Company and relating to clients or prospective clients of the Company,
whether or not during normal working hours or on the premises of the Company
(all of which are collectively referred to in this Agreement as "Developments").
(b) You agree to cooperate fully with the
Company, both during and after your employment with the Company, with respect to
the procurement, maintenance and enforcement of patents, copyrights, licenses
and trademarks (both in the United States and foreign countries) relating to
Developments. To the extent that such cooperation requires the expenditure of
any money, the Company will be responsible for the payment of any such money. If
pursuant to this Section 11.2 you assist the Company subsequent to the
termination of your
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 9
employment with the Company, the Company will compensate you for your time at a
rate to be mutually agreed upon. You will sign all papers, including, without
limitation, copyright applications, trademark applications, patent applications,
license applications, declarations, oaths, formal assignments, assignments of
priority rights and powers of attorney, which the Company may deem necessary or
desirable in order to protect its rights and interest in any Developments.
11.3 Non-Competition.
(a) During your Employment Period with the
Company and for an additional period equal to eighteen (18) months after the end
of the Employment Period or until the end of Payments upon Termination set forth
in Subsection 9.3 hereof, whichever is longer, and regardless of the reason for
the termination of your employment, you will not, without the Company's prior
written approval, directly or indirectly:
(i) hire any employee of the Group or
recruit, solicit or induce, or attempt to induce, any employee or
consultant of the Group to terminate his employment or consulting
relationship with, or otherwise cease his relationship with, the
Group; or
(ii) solicit, divert or take away, or
attempt to divert or to take away, the business or patronage of any
of the clients, customers or accounts, or prospective clients,
customers or accounts, of the Group which were contacted, solicited
or served by the Group at any time during or prior to the term of
this Agreement; or
(iii) engage (whether for compensation
or without compensation), directly or indirectly, as an individual
proprietor, partner, stockholder, officer, employee, member, agent,
independent contractor, consultant, director, joint venturer,
investor, lender, or in any other capacity whatsoever (other than as
the holder of not more than one percent (1%) of the total outstanding
stock of a publicly-held company), in the business of developing,
producing, marketing or selling products or services in the high
performance nickel alloy and superalloy industry throughout the world
(a "Competitive Business'). You acknowledge and agree that your
engagement (whether for compensation or without compensation),
directly or indirectly, as an individual proprietor, partner,
stockholder, officer, employee, member, agent, independent
contractor, consultant, director, joint venturer, investor, lender,
or in any other capacity whatsoever (other than as the holder of not
more than one percent (1%) of the total outstanding stock of a
publicly-held company), with or for any Competitive Business shall be
deemed to constitute engagement in a Competitive Business. You
acknowledge and agree that your
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 10
duties for the Company require you to conduct business worldwide and
that the Group's business, clients, customers, accounts or
prospective business, customers or accounts are and/or could be
worldwide.
(b) If any restriction set forth in this
Subsection 11.3 is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time or over too great
a range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic areas to which it may be enforceable.
(c) The restrictions contained in this Subsection
11.3 are necessary for the protection of the business and goodwill of the Group
and are considered by you to be reasonable for this purpose, and you acknowledge
that but for your agreement to comply with such restrictions the Company would
not have entered into this Agreement. You agree that for purposes of this
paragraph the services to be provided by you hereunder are special, unique
and/or extraordinary and that any breach of this Subsection 11.3 will cause the
Group substantial and irreparable damage and, therefore, in the event of any
such breach, in addition to such other remedies which at law or in equity may be
available, the Group will have the right to seek specific performance,
injunctive relief and attorneys' fees, costs and disbursements to enforce its
rights hereunder and without the necessity of posting any bond. The period of
time during which the restrictions contained in Subsection 11.3 shall be in
effect shall be extended by the length of time during which you are in breach of
any such restrictions, as determined by any court of competent jurisdiction.
11.4 Survival of Obligations. The obligations of the
Employee under Subsections 11.1, 11.2 and 11.3 will survive the termination of
this Agreement.
12. Notices.
All notices under this Agreement must be in writing and must be
delivered by hand or by facsimile transmission or mailed by certified or
registered mail, postage prepaid, return receipt requested, to the parties as
follows:
If to the Company:
Special Metals Corporation
4317 Middle Settlement Road
New Hartford, NY 13413-5392
Attention: Donald R. Muzyka
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 11
with a copy to (which shall not constitute notice):
David S. Poppick, Esq.
Epstein Becker & Green, P.C.
One Landmark Square
Stamford, CT 06901-2704
Facsimile: 203-324-9291
If to you: To the address set forth on the first page of this
Agreement; with a copy to (which shall not constitute notice):
Robert M. Goldich
Wolf, Block, Schorr and Solis-Cohen,
LLP 111 South 15th Street
Philadelphia, PA 19102-2678 Facsimile:
215-977-2334
or to such other address as is specified in a notice complying with this Section
12. Any such notice is deemed given on the date delivered by hand or facsimile
transmission or three days after the date of mailing.
13. Other Agreements.
You hereby represent that you are not bound by the terms of any
agreement with any previous employer or other party to refrain from competing,
directly or indirectly, with the business of such previous employer or any other
party, except as disclosed to the Company. You further represent that your
performance of all the terms of this Agreement and as an employee of the Company
does not and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by you in confidence or in trust prior
to your employment with the Company.
14. Miscellaneous.
14.1 Modification. This Agreement constitutes the entire
Agreement between the parties with regard to the subject matter hereof,
superseding all prior understandings and agreements, whether written or oral.
None of the Company's employee handbooks, manuals, or policy statements shall
explicitly or implicitly create any additional rights or obligations with
respect to your employment except as otherwise explicitly provided herein. This
Agreement may not be amended, modified or revised except by a writing signed by
the parties.
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 12
14.2 Successors and Assigns. This Agreement is binding upon
and inures to the benefit of both parties and their respective heirs, executors,
trustees, administrators, successors and assigns, including any corporation with
which or into which the Company may be merged or which may succeed to its assets
or business, although your obligations are personal and may be performed only by
you.
14.3 Captions. Captions have been inserted in this
Agreement solely for convenience of reference, and in no way define, limit or
affect the scope or substance of any provision of this Agreement.
14.4 Severability. The provisions of this Agreement are
severable, and invalidity of any provision does not affect the validity of any
other provision. In the event that any court of competent jurisdiction
determines that any provision of this Agreement or the application thereof is
unenforceable because of its duration or scope, the parties agree that the court
in making such determination will have the power to reduce the duration and
scope of such provision to the extent necessary to make it enforceable, and that
the Agreement in its reduced form is valid and enforceable to the full extent
permitted by law.
14.5 Delays or Omissions. No delay or omission by the
Company in exercising any right under this Agreement (including without
limitation, any failure to strictly enforce any provision hereof) shall operate
as a waiver of that or any other right. A waiver or consent given by the Company
on any one occasion shall be effective only in that instance and shall not be
construed as a bar or waiver of any right on any other occasion.
14.6 Submission to Jurisdiction. Each party to this
Agreement hereby irrevocably and unconditionally:
(a) (i) agrees that any suit, action or
proceeding asserting a breach of this Agreement shall be instituted only with
the American Arbitration Association ("AAA") located in the State of New York,
(ii) consents and submits to the jurisdiction of such suit, action or proceeding
instituted by the other, (iii) agrees that the parties will share equally all
fees and expenses of the AAA (not including each party's own attorneys' fees and
costs), subject to the right of the AAA to award such fees and costs to the
prevailing party as part of any arbitration award; and (iv) the arbitration
award shall be final and binding subject to enforcement in any other
jurisdictions by suit on the judgment or in any other manner provided by law;
and
(b) (i) waives any objection which it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement brought as specified in Subsection 14.6(a),
(ii) waives any claim
<PAGE>
Dr. T. Grant John
April 15, 1999
Page 13
that any such suit, action or proceeding has been brought in an inconvenient
forum, and (iii) agrees not to plead or claim either of the foregoing.
14.7 Acknowledgment. You hereby acknowledge that you have
read this Agreement carefully; you have been afforded sufficient time to
understand the terms and effects of this Agreement; you have been given the
opportunity to consult with counsel and in fact have been advised by counsel as
to all terms and effects of this Agreement prior to executing this Agreement, or
have knowingly, freely and voluntarily declined to do so; any ambiguity that
might be alleged to exist herein shall not be construed against or in favor of
any party hereto; you are voluntarily entering into and executing this
Agreement; neither the Company nor its agents or representatives have made any
representations inconsistent with the terms and effects of this Agreement; no
promise, inducement, or agreement not expressed herein has been made to you; and
you fully understand and voluntarily accept the terms and conditions of this
Agreement.
14.8 Governing Law. This Agreement is to be interpreted and
construed under and governed by the laws of State of New York.
If the foregoing is acceptable to you, please execute the duplicate
original of this letter in the space provided below and return one fully
executed original to me.
Very truly yours,
SPECIAL METALS CORPORATION
By: _______________________________
Donald R. Muzyka
President and Chief Executive Officer
ACCEPTED AND AGREED to this
_______ day of April, 1999
- -------------------------------
T. Grant John
SPECIAL METALS CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT (the "Agreement"), is made, effective as of the 16th day
of April, 1999 (hereinafter the "date of grant"), between SPECIAL METALS
CORPORATION, a Delaware corporation (hereinafter called the "Company"), and T.
Grant John (hereinafter called the "Participant").
R E C I T A L S:
WHEREAS, the Company has adopted the Special Metals Corporation 1997
Long-Term Stock Incentive Plan (the "Plan"), which Plan is incorporated herein
by reference and made a part of this Agreement. Capitalized terms not otherwise
defined herein shall have the same meanings as in the Plan; and
WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the restricted stock
award provided for herein (the "Restricted Stock Award") to the Participant
pursuant to the Plan and the terms set forth herein.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
1. Grant of the Restricted Shares. Subject to the terms and conditions
of the Plan and the additional terms and conditions set forth in this Agreement,
the Company hereby grants to the Participant a Restricted Stock Award consisting
of twenty thousand four hundred sixty five (20,465) Shares (representing 40% of
$275,000 (the Participant's base salary) divided by $5.375, the share value as
of the date of grant) (hereinafter called the "Restricted Shares"). The
Restricted Shares shall vest and become nonforfeitable in accordance with
Section 2 hereof.
2. Vesting.
(a) Except as otherwise provided in this Section 2 or in Section 4,
one-half (1/2) of the Restricted Shares (the "Time-Vesting Restricted Shares")
shall vest and become nonforfeitable, subject to the Participant's continued
employment with the Company, in one-third (1/3) increments as of each of April
16, 2000, 2001, and 2002. The remaining half of the Restricted Shares (the
"Performance-Vesting Restricted Shares") shall vest and become nonforfeitable
within twelve (12) months of
<PAGE>
the date of grant (or at such later time as is mutually agreed to by the
Participant and the Chief Executive Officer as provided in the April 16, 1999
employment agreement between the Participant and the Company (the "Employment
Agreement") based on the Participant's achievement of performance objectives as
negotiated with the Chief Executive Officer of the Company and set within ninety
(90) days of this Agreement. Such performance objectives will be annexed hereto
and incorporated into this Agreement when mutually agreed to in writing as
contemplated by the Employment Agreement.
(b) If the Participant's employment is terminated by the Company at any
time upon ninety (90) days advance written notice for any reason other than for
"Cause" or for no reason or by the Participant for "Good Reason" as provided in
Sections 9.1(a) and 9.2(c), respectively, of the Employment Agreement, the Time-
Vesting Restricted Shares shall, to the extent not then vested, become fully
vested and with respect to the Performance-Vesting Restricted Shares, the
Participant shall only be entitled to vesting the Restricted Shares for which
performance objectives have been achieved on the date of termination. Except as
otherwise set forth above, all Restricted Shares which have not vested as of the
date of termination of employment shall be immediately forfeited.
(c) Any vested Restricted Shares will be transferred to the
Participant twenty-four (24) months after the vesting date or at a later date
elected by the Participant (such election to be made at least 24 months before
the scheduled transfer date, unless the Company consents to a shorter election
period).
(d) For purposes of this Agreement:
"Cause" shall mean "Cause" as defined in the Employment Agreement or, if
not then in effect, any other employment agreement then in effect between the
Participant and the Company or if not defined therein or, if there shall be no
such agreement, (i) Participant's engagement in misconduct which is materially
injurious to the Company or its affiliates, (ii) Participant's continued failure
to substantially perform his duties to the Company, (iii) Participant's repeated
dishonesty in the performance of his duties to the Company, (iv) Participant's
commission of an act or acts constituting any (x) fraud against, or
misappropriation or embezzlement from the Company or any of its affiliates, (y)
crime involving moral turpitude, or (z) offense that could result in a jail
sentence of at least 30 days or (v) Participant's material breach of any
confidentiality or non-competition covenant entered into between the Participant
and the Company. The determination of the existence of Cause shall be made by
the Committee in good faith, which determination shall be conclusive for
purposes of this Agreement;
(e) Notwithstanding any other provision of this Agreement to the
contrary, in the event of a Change of Control (as defined in the Plan) the
Restricted
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<PAGE>
Shares shall, to the extent not then vested, immediately become fully vested as
contemplated by Section 13 of the Plan and as more fully described in the
Employment Agreement.
3. Certificates. Certificates evidencing the Restricted Shares shall be
issued by the Company and shall be registered in the Participant's name on the
stock transfer books of the Company promptly after the date hereof, but shall
remain in the physical custody of the Company or its designee at all times prior
to the vesting of such Restricted Shares pursuant to Section 2. As a condition
to the receipt of this Restricted Stock Award, the Participant shall deliver to
the Company a stock power, duly endorsed in blank, relating to the Restricted
Shares. No certificates shall be issued for fractional Shares.
4. Cancellation of Award. Notwithstanding any other provision of the
Plan or this Agreement to the contrary, any unvested portion of the Restricted
Shares shall be forfeited by the Participant at any time if the Committee
determines that the Participant is not in compliance with the following
conditions and any vested Restricted Shares shall be subject to forfeiture to
the extent and under the circumstances described in Section 4(e), below:
(a) Participant shall not render services for any organization or engage
directly or indirectly in any business which, in the judgment of the Committee,
is or becomes competitive with the Company, or which organization or business,
or the rendering of services to such organization or business, is or becomes
otherwise prejudicial to or in conflict with the interests of the Company (such
organization is referred to herein as a "competing organization"). For a
Participant whose employment has terminated, the judgment of the Committee shall
be based on the Participant's position and responsibilities while employed by
the Company, the Participant's post-employment responsibilities and position
with the competing organization or business, the extent of past, current and
potential competition or conflict between the Company and the competing
organization or business, the effect on the Company's customers, suppliers and
competitors of the Participant's assuming the post-employment position, the
guidelines established in any then current employment policies of the Company
and such other considerations as are deemed relevant given the applicable facts
and circumstances. A Participant shall be free, however, to (i) purchase as an
investment or otherwise, stock or other securities of such competing
organization or business so long as they are listed upon a recognized securities
exchange or traded over-the-counter, and such investment does not represent a
substantial investment to the Participant or a greater than 5 percent equity
interest in the competing organization or business and (ii) serve as a director
of such competing organization if such service is approved by the Committee.
(b) Participant shall not, without prior written authorization from the
Company, disclose to anyone outside the Company, or use in other than the
3
<PAGE>
Company's business, any confidential information or material relating to the
business of the Company, acquired by the Participant either during or after
employment with the Company.
(c) Participant shall disclose promptly and assign to the Company all
right, title, and interest in any invention or idea, patentable or not, made or
conceived by the Participant during employment by the Company, relating in any
manner to the actual or anticipated business, research or development work of
the Company and shall do anything reasonably necessary to enable the Company to
secure a patent where appropriate in the United States and in other countries.
(d) Participant shall comply with the terms and conditions of any other
written agreement between the Company and the Participant relating to non-
competition, confidentiality, intellectual property and non-solicitation.
(e) Prior to the delivery of certificates representing any portion of
the Restricted Shares pursuant to this Agreement, the Participant shall certify
on a form acceptable to the Committee that he is in compliance with the terms
and conditions of this Agreement and the Plan. Failure to so certify as to
compliance or failure to otherwise comply with the provisions of paragraph (a),
(b), (c) or (d) above shall cause such Restricted Shares and all remaining
unvested Restricted Shares to be forfeited without consideration.
5. Rights as a Stockholder. The Participant shall be the record owner of
the Restricted Shares until or unless such Shares are forfeited pursuant to
Section 2 or Section 4 hereof, and as record owner shall be entitled to all
rights of a common stockholder of the Company, including, without limitation,
voting rights with respect to the Restricted Shares; provided that (i) any cash
or in-kind dividends paid with respect to the Restricted Shares which have not
previously vested shall be withheld by the Company and shall be paid to the
Participant only when, and if, such Restricted Shares shall become fully vested
pursuant to Section 2 and (ii) the Restricted Shares shall be subject to the
limitations on transfer and encumbrance set forth in Section 8. As soon as
practicable following the vesting of any Restricted Shares pursuant to Section
2, certificates for the Restricted Shares which shall have vested shall be
delivered to the Participant or to the Participant's legal guardian or
representative along with the stock powers relating thereto.
6. Legend on Certificates. The certificates representing the
vested Restricted Shares delivered to the Participant as contemplated by Section
3 above shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the Plan or the rules, regulations, and
other requirements of the Securities and Exchange Commission, any stock exchange
upon which such Shares are listed, and any applicable Federal or state laws, and
the Committee may cause a
4
<PAGE>
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
7. No Right to Continued Employment. Neither the Plan nor this Agreement
shall be construed as giving the Participant the right to be retained in the
employ of, or in any consulting relationship to, the Company or any Affiliate.
Further, the Company or an Affiliate may at any time dismiss the Participant or
discontinue any consulting relationship, free from any liability or any claim
under the Plan or this Agreement, except as otherwise expressly provided herein.
8. Transferability.
(a) The Restricted Shares may not, at any time prior to becoming vested
pursuant to Section 2, be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by the Participant and any such purported
assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall
be void and unenforceable against the Company or any Affiliate; provided that
the designation of a beneficiary shall not constitute an assignment, alienation,
pledge, attachment, sale, transfer or encumbrance.
(b) Neither the Participant nor any transferee of the Participant
(including any beneficiary, executor or administrator) shall sell or otherwise
transfer any Restricted Shares upon or subsequent to their vesting, except in
accordance with the following procedure. The Participant shall deliver to the
Secretary of the Company a notice of sale (the "Notice of Sale") stating the
Participant's name and the number of Restricted Shares he desires to sell. Upon
receipt of a Notice of Sale, the Company shall have the right and option, for a
period ending at 3:30 P.M., Eastern time, on the next business day following
receipt of the Notice of Sale, to purchase all or a portion of the Restricted
Shares referred to in the Notice of Sale at the Fair Market Value of the Shares
on the day that the Notice of Sale is received by the Company. In the event that
the Company exercises its right to purchase any or all of the Restricted Shares
referred to in the Notice of Sale, such purchase shall be made at the offices of
the Company on the third business day following the day on which the Company
notifies Participant of the exercise of its right hereunder or on another
mutually satisfactory business day, provided that Participant has received all
necessary consents and other approvals and is able to transfer good title to the
Restricted Shares to be purchased by the Company. Delivery of certificates or
other instruments evidencing such Restricted Shares, duly endorsed for transfer,
shall be made on such date against payment of the purchase price therefor due at
the closing. In the event that the Company does not exercise its right to
purchase all or a portion of the Restricted Shares referred to in the Notice of
Sale, Participant shall be free to sell or otherwise transfer such Restricted
Shares at any time within 10 business days after the date on which the Notice of
Sale was given. If all of the Restricted Shares referred to in the Notice of
Sale are not sold within such 10 day period, then the right of the
5
<PAGE>
Participant to sell such Restricted Shares without providing a further Notice of
Sale shall expire and the obligations of this Section 8(b) shall be reinstated.
9. Withholding. The Participant agrees to make appropriate arrangements
with the Company for satisfaction of any applicable federal, state or local
income tax, withholding requirements or like requirements, including the payment
to the Company upon the vesting of the Restricted Shares (or such later date as
may be applicable under Section 83 of the Code), or other settlement in respect
of, the Restricted Shares of all such taxes and requirements and the Company
shall be authorized to take such action as may be necessary in the opinion of
the Company's counsel (including, without limitation, withholding vested Shares
otherwise deliverable to Participant hereunder and/or withholding amounts from
any compensation or other amount owing from the Company to the Participant ) to
satisfy all obligations for the payment of such taxes.
10. Securities Laws. Upon the vesting of any Restricted Shares, the
Participant will make or enter into such written representations, warranties and
agreements as the Committee may reasonably request in order to comply with
applicable securities laws or with this Agreement.
11. Notices. Any notice necessary under this Agreement shall be
addressed to the Company in care of its Secretary at the principal executive
office of the Company and to the Participant at the address appearing in the
personnel records of the Company for such Participant or to either party at such
other address as either party hereto may hereafter designate in writing to the
other. Any such notice shall be deemed effective upon receipt thereof by the
addressee.
12. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
13. Restricted Stock Award Subject to Plan. By entering into
this Agreement the Participant agrees and acknowledges that the Participant has
received and read a copy of the Plan. The Restricted Stock Award is subject to
the Plan. The terms and provisions of the Plan as it may be amended from time to
time are hereby incorporated herein by reference. In the event of a conflict
between any term or provision contained herein and a term or provision of the
Plan, the applicable terms and provisions of the Plan will govern and prevail.
14. Signature in Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
SPECIAL METALS CORPORATION
/s/ Robert D. Halverstadt
-------------------------
By: Robert D. Halverstadt
Title: Chairman
/s/ T. Grant John
-----------------
T. Grant John
7
SPECIAL METALS CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT (the "Agreement"), is made effective as of the 16th day
April, 1999, (hereinafter called the "Date of Grant"), between Special Metals
Corporation, a Delaware corporation (hereinafter called the "Company"), and Dr.
T. Grant John (hereinafter called the "Optionee"):
R E C I T A L S:
WHEREAS, the Company has adopted the Special Metals Corporation 1997
Long Term Stock Incentive Plan (the "Plan"), which Plan is incorporated herein
by reference and made a part of this Agreement. Capitalized terms not otherwise
defined herein shall have the same meanings as in the Plan; and
WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the option provided for
herein (the "Option") to the Optionee pursuant to the Plan and the terms set
forth herein.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
1. Grant of the Option. The Company hereby grants to the Optionee the
right and option (the "Option") to purchase, on the terms and conditions
hereinafter set forth, all or any part of an aggregate of 40,000 Shares, subject
to adjustment as set forth in the Plan. The purchase price of the Shares subject
to the Option shall be $5.375 per Share (the "Exercise Price"). The Option is
intended to be a non-qualified stock option, and is not intended to be treated
as an option that complies with Section 422 of the Internal Revenue Code of
1986, as amended.
2. Vesting.
(a) Except as otherwise provided in this Section 2 or in Section 4, the
Option shall vest and become exercisable (i) with respect to one third (1/3) of
the aggregate number of Shares initially covered by the Option on the first
anniversary of the Date of Grant; (ii) with respect to one third (1/3) of the
aggregate number of Shares initially covered by the Option on the second
anniversary of the Date of Grant; and (iii) with respect to the remaining one
third (1/3) of the aggregate number of Shares initially covered by the Option on
the third anniversary of the Date of Grant.
<PAGE>
(b) At any given time, the portion of the Option which has become vested
and exercisable as described above (or pursuant to Section 2(d), 2(e) or 2(f)
below) is hereinafter referred to as the "Vested Portion."
(c) If, prior to the third anniversary of the Date of Grant, the
Optionee's employment with the Company is terminated for any of the following
reasons including:
(i) the Optionee is terminated as a result of his death or
"Disability";
(ii) the Optionee is terminated by the Company for "Cause";
(iii) the Company does not extend the Optionee's employment
period;
(iv) the Optionee terminates his employment with the Company
upon a Change of Control (as defined in the employment agreement dated
April 15, 1999) of the Company, and, as a result, there is a material
change in the Optionee's authority or job responsibilities which
results in lower salary or less responsibility than Optionee's
assignment as Executive Vice President;
(v) the Optionee is terminated for any reason other than as
described in subsections 2(d) or (e) below;
the Option shall to the extent not then vested, be canceled by the Company
without consideration and the Vested Portion of the Option shall remain
exercisable for the period set forth in Section 3(a).
(d) If at any time prior to the third anniversary of the Date of Grant:
(i) the Optionee is terminated by the Company upon ninety
(90) days advance written notice for any reason other than for reasons
listed in clauses 2(c)(i-v), above or is terminated by the Company for
no reason;
(ii) the Optionee's employment is terminated by the Optionee
upon ninety (90) days advance written notice for "Good Reason" (and
the Company's failure to cure the "Good Reason" within the ninety (90)
day period);
the Option shall, to the extent not then vested, immediately become fully vested
and exercisable and shall remain exercisable for the period set forth in Section
3(a).
2
<PAGE>
(e) If the Optionee's employment with the Company is terminated because
of the Optionee's Retirement or Early Retirement prior to the third anniversary
of the Date of Grant, the Option shall, to the extent not then vested, continue
to vest in accordance with the schedule set forth in Section 2(a) and, once
vested, shall remain exercisable for the period set forth in Section 3(a).
(f) Notwithstanding any other provision of this Agreement to the
contrary, in the event of a Change of Control (as defined in the employment
agreement between the Optionee and the Company dated April 16, 1999) the Option
shall, to the extent then outstanding but not then vested, immediately become
fully vested and exercisable.
3. Exercise of Option.
(a) Period of Exercise. Subject to the provisions of the Plan, the
Optionee may exercise all or any part of the Vested Portion of the Option at any
time only prior to the earliest to occur of:
(i) one year following the date of the Optionee's
termination of employment due to death;
(ii) one year following the date of the Optionee's
termination of employment due to Disability;
(iii) the date of the Optionee's termination of employment
by the Company for Cause;
(iv) one year following the date of the Optionee's
termination of employment by the Company without Cause or the
Optionee's resignation of employment by the Optionee for any reason
other than Retirement or Early Retirement; and
(v) the tenth anniversary of the Date of Grant in all other
cases.
For purposes of this agreement:
"Cause" shall mean "Cause" as defined in the employment agreement
between the Optionee and the Company dated April 16, 1999 (the "Employment
Agreement") or if not then in effect, any employment agreement then in effect
between the Optionee and the Company or if not defined therein or, if there
shall be no such agreement, (i) Optionee's engagement in misconduct which is
materially injurious to the Company or its affiliates, (ii) Optionee's continued
failure to substantially perform his or her duties to the Company, (iii)
Optionee's repeated dishonesty in the performance of his or her duties to the
Company, (iv) Optionee's commission of an act or acts constituting (x) a fraud
against, or misappropriation or
3
<PAGE>
embezzlement from, the Company or any of its affiliates, (y) a crime involving
moral turpitude, or (z) an offense that could result in a jail sentence of at
least 30 days or (v) Optionee's material breach of any confidentiality or
non-competition covenant entered into between the Optionee and the Company. The
determination of the existence of Cause shall be made by the Committee in good
faith, which determination shall be conclusive for purposes of this Agreement;
"Disability" shall mean "disability" as defined in the Employment
Agreement or, if not then in effect, any employment agreement then in effect
between the Optionee and the Company or if not defined therein or if there shall
be no such agreement, as defined in the Company's long-term disability plan as
in effect from time to time, or if there shall be no plan or if not defined
therein, the Optionee's becoming physically or mentally incapacitated and
consequent inability for a period of six (6) months in any twelve (12)
consecutive month period to perform his or her duties to the Company;
"Good Reason" shall mean "Good Reason" as defined in the Employment
Agreement; and
"Retirement" and "Early Retirement" shall mean "retirement" and "early
retirement" as respectively defined under the Company's pension plan for
salaried employees, as amended from time to time, or if there shall be no such
plan or if not defined therein, as provided for in any successor plan or
employee policy of the Company.
(b) Method of Exercise.
(i) Subject to Section 3(a) and Section 8, the Vested Portion of the
Option may be exercised by delivering to the Company at its principal office
written notice of intent to so exercise; provided that, the Option may be
exercised with respect to whole Shares only. Such notice shall specify the
number of Shares for which the Option is being exercised and shall be
accompanied by payment in full of the Exercise Price. The payment of the
Exercise Price shall be made in cash or its equivalent, or (i) by exchanging
Shares owned by the Optionee (which are not the subject of any pledge or other
security interest and which have been owned by the Optionee for at least 6
months), or (ii) through delivery to the Company of irrevocable instructions to
a broker to sell the securities issued upon exercise of the Option and to
deliver promptly to the Company an amount equal to the aggregate exercise price
upon the sale of such securities, subject to such limitations and prohibitions
as the Committee may adopt from time to time, or by a combination of the
foregoing, provided that the combined value of all cash and cash equivalents and
the Fair Market Value of any such Shares so tendered to the Company as of the
date of such tender is at least equal to the aggregate Exercise Price.
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<PAGE>
(ii) Notwithstanding any other provision of the Plan or this Agreement
to the contrary, the Option may not be exercised prior to the completion of any
registration or qualification of the Option or the Shares under applicable state
and federal securities or other laws, or under any ruling or regulation of any
governmental body or national securities exchange that the Committee shall in
its sole discretion determine to be necessary or advisable.
(iii) Upon the Company's determination that the Option has been validly
exercised as to any of the Shares, the Company shall issue certificates in the
Optionee's name for such Shares. However, the Company shall not be liable to the
Optionee for damages relating to any delays in issuing the certificates to him
or her, any loss of the certificates, or any mistakes or errors in the issuance
of the certificates or in the certificates themselves.
(iv) In the event of the Optionee's death, the Vested Portion of the
Option shall remain exercisable by the Optionee's executor or administrator, or
the person or persons to whom the Optionee's rights under this Agreement shall
pass by will or by the laws of descent and distribution as the case may be, to
the extent set forth in Section 3(a). Any heir or legatee of the Optionee shall
take rights herein granted subject to the terms and conditions hereof.
4. Cancellation of Option. Notwithstanding any other provision of the
Plan or this Agreement to the contrary, the Committee may cancel any unexercised
portion of the Option (whether or not vested) at any time if the Optionee is not
in compliance with the following conditions:
(a) Optionee shall not render services for any organization or engage
directly or indirectly in any business which, in the judgment of the Committee,
is or becomes competitive with the Company, or which organization or business,
or the rendering of services to such organization or business, is or becomes
otherwise prejudicial to or in conflict with the interests of the Company (such
organization is referred to herein as a "competing organization"). For an
Optionee whose employment has terminated, the judgment of the Committee shall be
based on the Optionee's position and responsibilities while employed by the
Company, the Optionee's post-employment responsibilities and position with the
competing organization or business, the extent of past, current and potential
competition or conflict between the Company and the competing organization or
business, the effect on the Company's customers, suppliers and competitors of
the Optionee's assuming the post-employment position, the guidelines established
in any then current employment policies of the Company and such other
considerations as are deemed relevant given the applicable facts and
circumstances. An Optionee shall be free, however, to (i) purchase as an
investment or otherwise, stock or other securities of such competing
organization or business so long as they are listed upon a recognized securities
exchange or traded over-the-counter, and such investment does not represent a
substantial investment to the Optionee or a greater than 5 percent equity
interest in
5
<PAGE>
the competing organization or business and (ii) serve as a director of such
competing organization if such service is approved by the Committee.
(b) Optionee shall not, without prior written authorization from the
Company, disclose to anyone outside the Company, or use in other than the
Company's business, any confidential information or material relating to the
business of the Company, acquired by the Optionee either during or after
employment with the Company.
(c) Optionee shall disclose promptly and assign to the Company all
right, title, and interest in any invention or idea, patentable or not, made or
conceived by the Optionee during employment by the Company, relating in any
manner to the actual or anticipated business, research or development work of
the Company and shall do anything reasonably necessary to enable the Company to
secure a patent where appropriate in the United States and in other countries.
(d) Optionee shall comply with the terms and conditions of any
other written agreement between the Company and the Optionee relating to non-
competition, confidentiality, intellectual property and non-solicitation.
(e) Upon exercise or other settlement of all or any portion of the
Option pursuant to this Agreement, the Optionee shall certify on a form
acceptable to the Committee that he or she is in compliance with the terms and
conditions of this Agreement and the Plan. Failure to comply with the provisions
of paragraph (a), (b), (c) or (d) above prior to, or during the six months
after, any exercise or other settlement of the Option shall cause such exercise
or other settlement to be rescinded. The Company shall notify the Optionee in
writing of any such rescission within two years after such exercise or other
settlement. Within 90 days after receiving such a notice from the Company, the
Optionee shall pay to the Company the amount of any gain realized or payment
received as a result of the rescinded exercise or other settlement. Such payment
shall be made either in cash or by returning to the Company the number of Shares
or other consideration that the Optionee received in connection with the
rescinded exercise or other settlement.
5. No Right to Continued Employment. Neither the Plan nor this Agreement
shall be construed as giving the Optionee the right to be retained in the employ
of, or in any consulting relationship to, the Company or any Affiliate. Further,
the Company or an Affiliate may at any time dismiss the Optionee or remove the
Optionee as a director, free from any liability or any claim under the Plan or
this Agreement, except as otherwise expressly provided herein.
6. Transferability of Option. The Option may not be assigned, alienated,
pledged, attached, sold or otherwise transferred or encumbered by the Optionee
otherwise than by will or by the laws of descent and distribution, and any such
purported assignment, alienation, pledge, attachment, sale, transfer or
encumbrance
6
<PAGE>
shall be void and unenforceable against the Company or any Affiliate; provided
that the designation of a beneficiary shall not constitute an assignment,
alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted
transfer of the Option to heirs or legatees of the Optionee shall be effective
to bind the Company unless the Committee shall have been furnished with written
notice thereof and a copy of such evidence as the Committee may deem necessary
to establish the validity of the transfer and the acceptance by the transferee
or transferees of the terms and conditions hereof. During the Optionee's
lifetime, the Option is exercisable only by the Optionee, or if permissible
under applicable law, by the Participant's legal guardian or representative.
7. Transferability of Option Shares. Neither the Optionee nor any
transferee of the Optionee (including any beneficiary, executor or
administrator) shall sell or otherwise transfer any Shares received upon
exercise of the Option, except in accordance with the following procedure. The
Optionee shall deliver to the Secretary of the Company a notice of sale (the
"Notice of Sale") stating the Optionee's name and the number of Shares he or she
desires to sell. Upon receipt of a Notice of Sale, the Company shall have the
right and option, for a period ending at 3:30 P.M., Eastern time, on the next
business day following receipt of the Notice of Sale, to purchase all or a
portion of the Shares referred to in the Notice of Sale at the Fair Market Value
of the Shares on the day that the Notice of Sale is received by the Company. In
the event that the Company exercises its right to purchase any or all of the
Shares referred to in the Notice of Sale, such purchase shall be made at the
offices of the Company on the third business day following the day on which the
Company notifies Optionee of the exercise of its right hereunder or on another
mutually satisfactory business day, provided that Optionee has received all
necessary consents and other approvals and is able to transfer good title to the
Shares to be purchased by the Company. Delivery of certificates or other
instruments evidencing such Shares, duly endorsed for transfer, shall be made on
such date against payment of the purchase price therefor due at the closing. In
the event that the Company does not exercise its right to purchase all or a
portion of the Shares referred to in the Notice of Sale, Optionee shall be free
to sell or otherwise transfer such Shares at any time within 10 business days
after the date on which the Notice of Sale was given. If all of the Shares
referred to in the Notice of Sale are not sold within such 10 day period, then
the right of the Optionee to sell such Shares without providing a further Notice
of Sale shall expire and the obligations of this Section 7 shall be reinstated.
8. Withholding. The Optionee agrees as a condition to the exercise of
the Option to make appropriate arrangements with the Company for satisfaction of
any applicable federal, state or local income tax, withholding requirements or
like requirements, including the payment to the Company at the time of exercise
of, or other settlement in respect of, the Option of all such taxes and
requirements and the Company shall be authorized to take such action as may be
necessary in the opinion of the Company's counsel (including, without
limitation, withholding Shares otherwise deliverable to the Optionee hereunder
and/or withholding amounts from any
7
<PAGE>
compensation or other amount owing from the Company to the Optionee) to satisfy
all obligations for the payment of such taxes.
9. Securities Laws. Upon the acquisition of any Shares pursuant to the
exercise of the Option, Optionee will make or enter into such written
representations, warranties and agreements as the Committee may reasonably
request in order to comply with applicable securities laws or with this
Agreement.
10. Legend on Certificates. The certificates representing the Shares
purchased by exercise of the Option shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under this
Agreement, the Plan or the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which such Shares
are listed, and any applicable Federal or state laws, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
11. Notices. Any notice necessary under this Agreement shall be
addressed to the Company in care of its Secretary at the principal executive
office of the Company and to the Optionee at the address appearing in the
personnel records of the Company for such Optionee or to either party at such
other address as either party hereto may hereafter designate in writing to the
other. Any such notice shall be deemed effective upon receipt thereof by the
addressee.
12. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
13. Option Subject to Plan. By entering into this Agreement the Optionee
agrees and acknowledges that the Optionee has received and read a copy of the
Plan. The Option is subject to the Plan. The terms and provisions of the Plan as
it may be amended from time to time are hereby incorporated herein by reference.
In the event of a conflict between any term or provision contained herein and a
term or provision of the Plan, the applicable terms and provisions of the Plan
will govern and prevail.
14. Signature in Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
SPECIAL METALS CORPORATION
By:_________________________________
/s/ Dr. T. Grant John
---------------------
Dr. T. Grant John
9
SECOND AMENDMENT TO
CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated
as of June 8, 1999 and entered into by and among SPECIAL METALS CORPORATION, a
Delaware corporation (the "Borrower"), the banks and other financial
institutions parties to the Credit Agreement referred to below (the "Lenders")
and CREDIT LYONNAIS NEW YORK BRANCH, as agent (the "Agent") and as Issuing Bank.
Whereas, the Borrower, the Lenders, the Issuing Bank and the Agent have
entered into that certain Credit Agreement dated as of October 28, 1998, as
amended by the First Amendment to Credit Agreement and Limited Waiver dated as
of March 31, 1999 (as so amended, 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 to amend the
Credit Agreement to permit the Borrower to enter into two joint venture
transactions; and
Whereas, the Lenders are willing to agree to such amendment, all on the
terms and subject to the conditions set forth herein;
Now, Therefore, in consideration of the premises and the mutual set
forth herein, the Borrower, the Lenders, the Issuing Bank and the Agent agree as
follows:
1. AMENDMENT TO CREDIT AGREEMENT. Subject to the conditions and upon
the terms set forth in this Amendment, Section 9.9 of the Credit Agreement is
hereby amended to delete paragraph (e) and to replace it with the following:
"(e) Investments by the Borrower of up to $750,000 in a
limited liability company joint venture with Minitubes, and of up to $250,000
in a limited liability company joint venture with DMG Chemisch-Pharmazeutische
Fabrik GmbH and certain of its affiliates; and"
2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce
the Lenders to enter into this Amendment, the Borrower represents and warrants
to each Lender, the Issuing Bank and the Agent that the following statements are
true, correct and complete:
2.1 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, this Amendment and the Credit Agreement as
amended hereby.
2.2 The execution and delivery of this Amendment, the Consent and the
performance 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.
2.3 The execution and delivery of this Amendment and the Consent and
the performance 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, (b) any Requirement of
Law, (c) any order, judgment or decree of any court or other governmental agency
binding on any Loan Party, (d) any indenture, agreement or instrument to which
the Borrower or any of its Subsidiaries is a party or by which it is bound, or
require any consent or approval of any Person.
2.4 This Amendment and the Consent and the Credit Agreement as amended
hereby 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.
2.5 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..
2.6 Each of the representations and warranties contained in the Credit
Agreement 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.
3. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall
only be effective 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 when each of the following conditions shall have
been satisfied:
4.1 Each of the Guarantors shall have executed and delivered to the
Agent the Consent.
4.2 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. Borrower's execution of
this Amendment shall be deemed a representation and warranty that the foregoing
is correct.
4. 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.
5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAW OF THE STATE OF NEW YORK,
WITHOUT REGARD TO CONFLICTS OF LAWS PROVISIONS THEREOF.
6. COUNTERPARTS. This Amendment may be executed by one or moe of the
parties to thisAmendment on any number of separate counterparts (including by
telecopy) all of which taken together shall constitute but one and the same
instrument.
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:________________________________
Name:______________________________
Title:_____________________________
CREDIT LYONNAIS NEW YORK BRANCH,
as Agent, as a Lender and as Issuing Bank
By:________________________________
Name:______________________________
Title:_____________________________
MANUFACTURERS & TRADERS TRUST COMPANY,
as Documentation Agent and as a Lender
By:________________________________
Name:______________________________
Title:_____________________________
MELLON BANK, N.A.,
as Syndication Agent and as a Lender
By:________________________________
Name:______________________________
Title:_____________________________
THE BANK OF NOVA SCOTIA,
as Co-Agent and as a Lender
By:________________________________
Name:______________________________
Title:_____________________________
KEYBANK NATIONAL ASSOCIATION,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
BANK UNITED,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
BANQUE NATIONALE DE PARIS,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
SOCIETE GENERALE, NEW YORK BRANCH,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
FLEET NATIONAL BANK,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
NATIONAL BANK OF CANADA,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
CREDIT AGRICOLE - INDOSUEZ,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
NATEXIS BANQUE,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
FIRSTAR BANK, N.A.,
as Lender
By:________________________________
Name:______________________________
Title:_____________________________
<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 8th day of June, 1999.
SPECIAL METALS DOMESTIC SALES CORPORATION
By:________________________________
Name:______________________________
Title:_____________________________
INCO ALLOYS INTERNATIONAL, INC.
By:________________________________
Name:______________________________
Title:_____________________________
A-1 WIRE TECH, INC.
By:________________________________
Name:______________________________
Title:_____________________________
COUNTROLLED PRODUCTS GROUP INTERNATIONAL, INC.
By:________________________________
Name:______________________________
Title:_____________________________
THIRD AMENDMENT TO
CREDIT AGREEMENT AND LIMITED WAIVER
This THIRD AMENDMENT TO CREDIT AGREEMENT AND LIMITED WAIVER (this
"Amendment") is dated as of December 29, 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 (as
amended by First Amendment to Credit Agreement and Limited Waiver dated as of
March 31, 1999 and Second Amendment to Credit Agreement dated as of June 8,
1999, 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 certain Events of Default that
occurred at September 30, 1999 under subsection 9.1 of the Credit Agreement (the
"Specified Defaults"); and
Whereas, the Borrower desires to reduce the Revolving Credit
Commitments;
Whereas, Societe Industrielle de Materiaux Avances ("SIMA"), a major
shareholder of Borrower, has agreed to provide up to $50,000,000 in subordinated
loans to the Borrower; and
Whereas, the Lenders are willing to agree to amend to the Credit
Agreement, on the terms described herein, and to waive the Specified Defaults,
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 Indebtedness. The definition of "Indebtedness" contained in
subsection 1.1 of the Credit Agreement is amended by inserting therein,
immediately at the end thereof:
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<PAGE>
For purposes of determining compliance with the covenants in
this Agreement, the Subordinated Term Loans (including any Additional
Advances, any Subordinated Revolving Loans converted into Subordinated
Term Loans and all interest added to the principal amount of the
Subordinated Term Loans) and Subordinated Revolving Loans shall be added
to the stockholders' equity of the Borrower and subtracted from
Indebtedness.
1.2 Excess Cash Flow. The definition of "Excess Cash Flow" contained in
subsection 1.1 of the Credit Agreement is amended by deleting clauses (b)(vii)
and (c) thereof.
1.3 Net Proceeds. The definition of "Net Proceeds" contained in
subsection 1.1 of the Credit Agreement is amended by deleting clauses
(d) and (e) thereof and replacing such clauses with:
(d) 100% of the cash proceeds of any issuance of equity
securities of the Borrower after the Closing Date (other than
any proceeds of any issuance of common stock or preferred stock
of the Borrower to SIMA that are applied to the substantially
concurrent payment of Capital Expenditures or cash dividends on
the Preferred Stock), net of reasonable attorneys' and
accounting fees, investment banking or underwriting fees or
discounts and other customary expenses actually incurred in
connection therewith; and (e) 100% of the cash proceeds of any
issuance of debt securities by the Borrower or any of its
Subsidiaries after the Closing Date (other than Indebtedness
permitted by subsection 9.2 and any proceeds of the Subordinated
Loans), net of reasonable attorneys' fees and other customary
expenses actually incurred in connection therewith.
1.4 Transaction Documents. The definition of "Transaction Documents"
contained in subsection 1.1 of the Credit Agreement is amended by inserting the
following after "Preferred Stock Documents":
the Subordinated Debt Documents,
1.5 Additional Definitions. Subsection 1.1 of the Credit Agreement is
amended by adding the following additional definitions in the proper
alphabetical sequence:
"Additional Advance": any additional advance of the
Subordinated Term Loans (other than any interest added to the
principal amount thereof or Subordinated Revolving Loans
converted into Subordinated Term Loans) the proceeds which are
used substantially concurrently to make Capital Expenditures or
to pay cash dividends on the Preferred Stock.
"Debt Subordination Agreement": that certain Debt
Subordination Agreement dated as of the date of the Third
Amendment among SIMA, the Borrower and the Agent in the form
attached as Exhibit A to the Third Amendment.
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<PAGE>
"SIMA Letter of Credit": one or more standby letter(s)
of credit issued in the aggregate face amount of $30,000,000 and
delivered to the Agent on or prior to the Third Amendment
Effective Date, which shall have terms satisfactory to the Agent
and the Required Lenders.
"Subordinated Debt Documents": the Subordinated Loan
Agreement dated as of December 17, 1999 between the Borrower and
SIMA, the promissory notes issued thereunder and the Debt
Subordination Agreement..
"Subordinated Loans": collectively, the Subordinated
Term Loans (including any increase therein as a result of adding
accrued interest to the principal balance thereof, conversion of
Subordinated Revolving Loans, and Additional Advances) and the
Subordinated Revolving Loans.
"Subordinated Revolving Loans": the unsecured
subordinated revolving loans to be made to the Borrower by SIMA
on and after the Third Amendment Effective Date and until August
15, 2001 in an aggregate principal amount of up to $30,000,000,
which mature on July 28, 2006, accrue interest at a rate equal
to LIBOR plus 1% but provide that interest is only payable in
kind, by addition of such interest to the outstanding balance of
the Subordinated Term Loans, and otherwise on terms (including
subordination provisions) satisfactory to the Agent and the
Required Lenders.
"Subordinated Term Loans": the unsecured subordinated
term loans to be made to the Borrower by SIMA on or before the
Third Amendment Effective Date in the original aggregate
principal amount of $20,000,000 (subject to increase as
permitted hereby), which matures on July 28, 2006, accrues
interest at a rate equal to LIBOR plus 1% but provides that
interest is only payable in kind, and otherwise on terms
(including subordination provisions) satisfactory to the Agent
and the Required Lenders.
"Third Amendment": the Third Amendment to Credit
Agreement and Limited Waiver among the Borrower, the Lenders,
the Issuing Bank and the Agent.
"Third Amendment Effective Date": the date on which
Third Amendment becomes effective in accordance with its terms.
1.6 Additional Conditions for Revolving Credit Loans and Letters of
Credit. Subsection 7.2 of the Credit Agreement is amended to add the following
subsections (d) and (e):
(d) Subordinated Term Loans. The Subordinated Term Loans
shall have been, and shall remain, fully funded in an aggregate
amount equal to $20,000,000 plus the amount of all interest
accrued on the Subordinated Loans and added to the principal of
the Subordinated Term Loans, plus all Subordinated Revolving
Loans converted into Subordinated Term Loans, plus all
Additional Advances.
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<PAGE>
(e) Limit on Revolving Credit Loans and Letters of
Credit Outstanding. After giving effect to any Revolving Credit
Loan to be made or Letters of Credit to be issued on such date,
the aggregate outstanding Revolving Credit Loans and Letter of
Credit Outstanding shall not exceed $76,000,000 unless
Subordinated Revolving Loans (including for this purpose
Subordinated Revolving Loans converted into Subordinated Term
Loans) are outstanding in a principal amount of at least
$30,000,000.
1.7 SIMA Letter of Credit. A new subsection 8.16 is added to the Credit
Agreement to read as follows:
8.16 SIMA Letter of Credit. If SIMA fails to make a
Subordinated Revolving Loan within 10 days after the Borrower's
request, the Borrower shall promptly notify the Agent and the
Lenders in writing of such failure, and deliver to the Agent
written instructions to make a drawing on the SIMA Letter of
Credit in the amount of the Subordinated Revolving Loans
requested by the Borrower and not funded by SIMA. The Agent
shall be irrevocably authorized and empowered to make a drawing
under the SIMA Letter of Credit within 5 days after receipt of
the Borrower's written instructions by an officer of the Agent
responsible for administering this Agreement. Notwithstanding
the foregoing, in the event that (i) the Borrower fails to make
such request for Subordinated Revolving Loans or (ii) SIMA fails
to make such Subordinated Revolving Loans in accordance with the
Subordinated Debt Documents, and in either instance such failure
continues for more than ten (10) days after the date the
Borrower delivers or is required to deliver its financial
statements (either quarterly or annual) for such period to the
Agent pursuant to subsection 8.1, the Borrower shall be deemed
to have automatically and irrevocably instructed the Agent under
this subsection 8.16 to make a drawing under the SIMA Letter of
Credit to fund Subordinated Revolving Loans in an amount
required to be made by the Borrower pursuant to the last
sentence of Section 8.17. All funds received as a result of any
such drawing shall be promptly remitted to the Borrower and
shall constitute Subordinated Revolving Loans. The Agent shall
have no obligation with respect to the SIMA Letter of Credit
except to make a drawing thereon if and to the extent set forth
in this subsection 8.16, and to consent to amendments to such
Letter of Credit to reduce the face amount thereof by an amount
equal to all Subordinated Revolving Loans converted to
Subordinated Term Loans.
1.8 Conversion of Subordinated Revolving Loans to Subordinated Term
Loans. A new subsection 8.17 is added to the Credit Agreement to read as
follows:
8.17 Conversion of Subordinated Revolving Loans to
Subordinated Term Loans. Convert a portion of the outstanding
principal balance of the Subordinated Revolving Loans
(calculated as set forth below) into the Subordinated Term
Loans, effective as of the last day of a fiscal quarter, if at
the end of any such fiscal quarter ending on or prior to March
31, 2001, the Consolidated EBITDA for the Borrower and its
consolidated Subsidiaries for the four quarters then ending is
less than the amount required under subsection 9.1(e). Such
conversion shall be automatic and be effected by adding the
applicable amount to the outstanding principal balance of the
Subordinated Term Loan.
4
<PAGE>
The amount to be converted for each fiscal quarter shall be the
difference between the Projected EBITDA for the Borrower and its
Subsidiaries for such 12 month period shown in the following
schedule:
Projected
Quarter EBITDA
------- ------
12/31/99 $30,190,000
3/31/00 30,570,000
6/30/00 30,240,000
9/30/00 39,940,000
12/31/00 54,930,000
3/31/01 67,980,000
and the actual Consolidated EBITDA for the Borrower and its
consolidated Subsidiaries for such 12 month period. If the amount to be
converted exceeds the outstanding principal balance of the Subordinated
Revolving Loans, the Borrower shall borrow additional Subordinated
Revolving Loans to the extent necessary to fund the converted amount,
until SIMA's entire $30,000,000 commitment to make Subordinated
Revolving Loans has been funded.
1.9 Financial Condition Covenants. Subsection 9.1 of the Credit
Agreement is amended (a) to provide that the financial covenants set forth in
subsections (a) through (d) of subsection 9.1 will not be in effect or tested on
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000, December
31, 2000 or March 31, 2001, and (b) to add the following subsection (e):
(e) EBITDA Maintenance. Permit the sum of (i)
Consolidated EBITDA of the Borrower and its consolidated
Subsidiaries for any period of four consecutive fiscal quarters
ending on a date specified below plus (ii) the principal amount
of all Subordinated Revolving Loans which are converted into
Subordinated Term Loans in respect of such period in accordance
with subsection 8.17 hereof to be less than the amount set forth
opposite such period below:
5
<PAGE>
Period Ending Consolidated EBITDA
------------- -------------------
12/31/99 $25,000,000
3/31/2000 25,000,000
6/30/2000 25,000,000
9/30/2000 32,000,000
12/31/2000 45,000,000
3/31/2001 55,000,000
1.10 Preferred Stock Dividends. Subsection 9.7 of the Credit Agreement
is amended by deleting subsection (a) in its entirety and replacing such text
with:
(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 if
such payments are funded solely from the cash proceeds of a
substantially concurrent issuance and sale of common or
preferred stock of the Borrower to SIMA or a substantially
concurrent Additional Advance;
1.11 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) $15,000,000 in the fiscal years 1999 and 2000;
(c) $7,500,000 in the period from January 1, 2001 to
June 30, 2001;
(d) in each fiscal year after 2000, if the EBITDA
Threshold was met for the immediately preceding fiscal year, the
amount set forth below:
6
<PAGE>
Fiscal Year Amount
----------- ------
2001 $36,800,000
2002 37,500,000
2003 39,100,000
2004 41,100,000
2005 and thereafter 38,000,000
(e) in each fiscal year after 2000, 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 (d) above for the applicable fiscal year
less the difference (if a positive number) between (i) the
EBITDA Threshold for the immediately preceding fiscal year and
(ii) Consolidated EBITDA of the Borrower and its consolidated
Subsidiaries for the immediately preceding fiscal year;
(f) for the purposes of paragraphs (d) and (e) 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
----------- ------
2000 $ 96,500,000
2001 130,000,000
2002 145,000,000
2003 and thereafter 150,000,000
(g) The amount of Capital Expenditures permitted under
clauses (d) and (e) in any fiscal year after 2000 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 (g), and (ii) the aggregate
Capital Expenditures made in the preceding fiscal year by the
Borrower and its consolidated Subsidiaries; and
(h) The amount of Capital Expenditures permitted in
1999, 2000 and the first six months of 2001 shall be increased
by the amount of cash proceeds of a substantially concurrent
issuance and sale of common stock or preferred stock of the
Borrower to SIMA or a substantially concurrent Additional
Advance, which proceeds are used to make such Capital
Expenditures.
1.12 Limitation on Optional Payments and Modification of Debt
Instruments and Capital Stock. Subsection 9.10 of the Credit Agreement is
amended to add in the parenthetical in clause (a):
and other than payments of Subordinated Loans permitted by
subsection 9.20.
7
<PAGE>
1.13 Limitation on Transactions with Affiliates. Subsection 9.11 of the
Credit Agreement is amended to add a clause (iv) at the end thereof:
or (iv) the transactions contemplated by the Subordinated Debt
Documents.
1.14 Limitation on Issuance of Capital Stock. Subsection 9.18 of the
Credit Agreement is amended to add in the parenthetical in line two thereof:
and other than issuance of preferred stock to SIMA the
proceeds of which are used substantially concurrently for
Capital Expenditures or dividends on the Preferred Stock.
1.15 Payments on Subordinated Loans. A new subsection 9.20 is added to
the Credit Agreement to read as follows:
9.20 Payments on the Subordinated Loans. Make any
payments on or with respect to the Subordinated Loans except
strictly in accordance with Sections 3 and 4 of the Debt
Subordination Agreement
2. REDUCTION OF REVOLVING CREDIT COMMITMENTS. On the Third Amendment
Effective Date, the Revolving Credit Commitments shall be reduced to
$100,000,000 pursuant to subsection 3.5 of the Credit Agreement. Schedule I to
the Credit Agreement is deleted in its entirety and replaced with Schedule I
attached hereto.
3. WAIVER. 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 Lenders hereby waive (a) compliance
with subsections 9.1(a) and 9.1(b) as of September 30, 1999 and for the period
then ended and (b) if the Third Amendment Effective date occurs after December
31, 1999, compliance with subsections 9.1(a), 9.1(b), 9.1(c) and 9.1(d) as of
December 31, 1999 and for the period then ended. This waiver is limited solely
to the matters set forth 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.
4. CONSENT. The Lenders consent to the dissolution of Special Metals
Foreign Sales Corp. and the distribution of its assets to Inco Alloys
International, Inc.
5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce
the Lenders, the Agent and the 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:
5.1 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
8
<PAGE>
amended hereby. Each of the Borrower and SIMA has all corporate power and
authority to enter into the Subordinated Debt Documents and to perform its
obligations thereunder.
5.2 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. The execution and delivery of the Subordinated Debt Documents
and the performance of the obligations of the Borrower and SIMA thereunder have
been duly authorized by all necessary corporate action on the part of the
Borrower and SIMA.
5.3 No Conflict or Violation or Required Consent or Approval. The
execution and delivery of this Amendment, the Consent and the Subordinated Debt
Documents and the performance of the obligations of each Loan Party under or in
respect of this Amendment and the Credit Agreement as amended hereby and the
Subordinated Debt Documents 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.
5.4 Execution, Delivery and Enforceability. This Amendment, the Consent
and the Credit Agreement as amended hereby and each other Loan Document have
been duly executed and delivered by each Loan 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
of creditors' rights generally or by general equitable principles. The
Subordinated Debt Documents have been duly executed and delivered by the
Borrower and SIMA and are the legal, valid and binding obligations of the
Borrower and SIMA, as applicable, enforceable in accordance with their terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally or by general equitable principles.
5.5 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.
5.6 Financial Projections. The projected financial statements for the
Borrower and its Subsidiaries dated November 4, 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 of the best information available at that time and
on the assumptions stated therein, which assumptions the Borrower believes to be
reasonable.
9
<PAGE>
5.7 No Material Adverse Effect. No event has occurred (other than events
reflected in the projected financial statements referred to in Section 5.6 )
that has resulted, or could reasonably be expected to result, in a Material
Adverse Effect.
5.8 Senior Debt. All Obligations of the Borrower, whether now
outstanding or hereafter created or incurred, constitute "Senior Debt" under the
terms of the Subordinated Debt Documents, and the subordination of the
Subordinated Loans to the Obligations is enforceable against SIMA and each
successor holder of any Subordinated Loan.
5.9 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.
6. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment
(including the waivers set forth in Section 3 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
Revolving Lenders, the Required Tranche A Lenders and the Required Tranche B
Lenders and only if and when each of the following conditions is satisfied:
6.1 Consent of Guarantors. Each of the Guarantors shall have executed
and delivered to the Agent the Consent.
6.2 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 herein and 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.
6.3 Subordinated Debt. The Borrower and SIMA shall have executed and
delivered the Subordinated Debt Documents, which shall be on terms and
conditions satisfactory to the Agent and the Required Lenders, and shall have
delivered a certified copy thereof to the Agent. The Borrower and SIMA shall
have executed and delivered to the Agent the Debt Subordination Agreement and
SIMA shall have delivered the SIMA Letter of Credit, each on terms and
conditions satisfactory to the Agent and the Required Lenders.
6.4 Funding of Subordinated Term Loan. The Borrower shall have received
$20,000,000 in proceeds of the Subordinated Term Loans, and the Agent shall have
received evidence satisfactory to it of such funding.
10
<PAGE>
6.5 Supporting Documents and Opinions of Counsel. The Borrower shall
have delivered to the Agent copies of resolutions of each of the Loan Parties
approving and authorizing this Amendment, the Consent and the Subordinated Debt
Documents, together with an incumbency certificate for the persons executing
this Amendment or the Consent or the Subordinated Debt Documents and an opinion
of Bond, Schoeneck & King, LLP, counsel to the Borrower, as to the matters set
forth in Sections 5.1, 5.2, 5.3 and 5.4 hereof with respect to the Loan Parties
and such other matters as the Agent or Required Lenders may reasonably request.
6.6 Amendment Fee. The Borrower shall have paid to the Agent an
amendment fee equal to 0.375% applied to the aggregate outstanding Loans and
unused Commitments of each Lender (taking into account the reduction of the
Revolving Loan Commitments effected hereby and any repayment of Loans on or
before December 31, 1999) that delivers to the Agent, by hand delivery or
telefax no later than 5:00 p.m. on December 28, 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.
6.7 Expense Reimbursements. The Borrower shall have paid all expense
reimbursements due to the Agent pursuant to Section 12.5 of the Credit
Agreement.
6.8 Mortgage Modifications. The Borrower shall have executed and
delivered to the Agent such modifications to the Mortgages as are reasonably
required by the Agent.
7. 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.
8. APPLICABLE LAW. This Amendment shall be governed by, and construed
and interpreted in accordance with, the laws of the State of New York.
9. 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.
10. 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>
[remainder of page intentionally left blank]
12
<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:_______________________________________
Name:__________________________________
Title:_________________________________
CREDIT LYONNAIS NEW YORK BRANCH,
as Agent, as a Lender and as Issuing Bank
By:_______________________________________
Name:__________________________________
Title:_________________________________
MANUFACTURERS & TRADERS TRUST COMPANY,
as Documentation Agent and as a Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
MELLON BANK, N.A.,
as Syndication Agent and as a Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
[signatures continue]
13
<PAGE>
THE BANK OF NOVA SCOTIA,
as Co-Agent and as a Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
KEYBANK NATIONAL ASSOCIATION,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
BANK UNITED,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
BANQUE NATIONALE DE PARIS,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
[signatures continue]
14
<PAGE>
SOCIETE GENERALE, NEW YORK BRANCH,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
FLEET NATIONAL BANK,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
NATIONAL BANK OF CANADA,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
CREDIT AGRICOLE - INDOSUEZ,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
[signatures continue]
15
<PAGE>
NATEXIS BANQUE,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
FIRSTAR BANK, N.A.,
as Lender
By:_______________________________________
Name:__________________________________
Title:_________________________________
16
<PAGE>
Annex A
CONSENTS AND APPROVALS
None
17
<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 29th day of December, 1999.
SPECIAL METALS DOMESTIC SALES CORPORATION
By:_______________________________________
Name:__________________________________
Title:_________________________________
INCO ALLOYS INTERNATIONAL, INC.
By:_______________________________________
Name:__________________________________
Title:_________________________________
A-1 WIRE TECH, INC.
By:_______________________________________
Name:__________________________________
Title:_________________________________
18
<PAGE>
CONTROLLED PRODUCTS GROUP INTERNATIONAL, INC.
By:_______________________________________
Name:__________________________________
Title:_________________________________
19
<PAGE>
SCHEDULE I
LENDERS, NOTICE ADDRESSES, COMMITMENTS, COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
Lenders/Notice Addresses Revolver Term Loan A Term Loan B Total Term A & Revolver Term B
Commitment Commitment Commitment Commitment Percent Percent
- ----------------------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
KeyBank National Association $9,090,909.09 $10,454,545.44 N/A $19,545,454.53 9.09091% N/A
127 Public So.
Cleveland, OH 44126
Attention: Marianne Meil
Fax: (216) 689-4981
Bank United $9,090,909.09 $10,454,545.46 N/A $19,545,454.55 9.09091% N/A
3200 Southwest Freeway
Suite 1900
Houston, TX 77027
Attention: Phil Green
Fax: (713) 543-6651
Banque Nationale de Paris $9,090,909.09 $10,454,545.44 N/A $19,545,454.53 9.09091% N/A
499 Park Avenue
New York, NY 10022
Attention: Nathalie
Herrington
Fax: (212) 415-9606
Societe Generale, $7,272,727.27 $8,363,636.37 N/A $15,636,363.64 7.27273% N/A
New York Branch
1221 Avenue of the Americas
New York, NY 10020
Attention: Cynthia Colucci
Fax: (212) 278-7463
Fleet National Bank $7,272,727.27 $8,363,636.37 N/A $15,636,363.64 7.27273% N/A
1 Clinton Square
Syracuse, NY 13221
Attention: Greg Gilroy
Fax: (315) 426-4364
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Lenders/Notice Addresses Revolver Term Loan A Term Loan B Total Term A & Revolver Term B
Commitment Commitment Commitment Commitment Percent Percent
- ----------------------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
National Bank of Canada $5,454,545.45 $6,272,727.26 N/A $11,727,272.71 5.45455% N/A
350 Main Street Suite 2540
Buffalo, NY 14202
Attention: Michael Brace
Fax: (716) 852-6832
Credit Agricole -- Indosuez $3,636,363.64 $4,181,818.19 N/A $7,818,181.83 3.63636% N/A
520 Madison Avenue
New York, NY 10022
Attention: Rene Leblanc
Fax: (212) 418-2228
Star Bank $3,636,363.64 $4,181,818.20 N/A $7,818,181.84 3.63636% N/A
1350 Euclid Avenue 8th Floor
Cleveland, OH 44115
Attn: David Dannemiller
Fax: (216) 623-9208
Natexis Banque $1,818,181.82 $2,090,909.08 $4,950,000.00 $8,859,090.90 1.81818% 5.00000%
645 Fifth Avenue
New York, NY 10022
Attention: John Rigo
Fax: (212) 872-5045
</TABLE>
22
<PAGE>
EXHIBIT A
DEBT SUBORDINATION AGREEMENT
SUBORDINATED LOAN AGREEMENT
This Subordinated Loan Agreement, dated as of December 17, 1999, is
between SPECIAL METALS CORPORATION, a Delaware corporation ("Borrower") and
SOCIETE INDUSTRIELLE DE MATERIAUX AVANCES, a societe anonyme organized under the
laws of the Republic of France ("SIMA").
RECITALS:
A. Borrower is a party to a Senior Secured Credit Agreement dated as of
October 28, 1998 among Borrower, the Lenders, the Issuing Bank and the Agent (as
those terms are defined therein), which Credit Agreement has been amended by a
First Amendment dated as of March 31, 1999 and a Second Amendment dated as of
June 8, 1999 (as amended, supplemented or otherwise modified from time to time,
herein called the "Credit Agreement") providing for the making of loans by the
Lenders to Borrower, and the issuance of letters of credit by the Issuing Bank
for the account of Borrower, in the amounts, and subject to the terms and
conditions, specified in the Credit Agreement.
B. Borrower has requested that the Lenders waive certain existing
defaults under the Credit Agreement and modify certain of the provisions of the
Credit Agreement. Borrower, Lenders and the Agent are entering into a Third
Amendment to Credit Agreement and Limited Waiver dated as of December 29, 1999
pursuant to which certain provisions of the Credit Agreement will be waived or
amended (the "Third Amendment"). Lenders and the Agent are willing to enter into
the Third Amendment only upon the condition that Borrower arrange for additional
capital in the form of subordinated loans.
C. SIMA is a major shareholder of Borrower and is willing to make
subordinated loans to Borrower upon the terms and conditions set forth in this
Subordinated Loan Agreement.
NOW, THEREFORE, , in consideration of the premises, and in order to
induce the Lenders and the Agent to enter into the Third Amendment to the Credit
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, SIMA and Borrower hereby agree as
follows:
1. Certain Definitions.
(a) Capitalized terms that are not defined herein have the
respective meanings ascribed to them in the Credit Agreement and, in addition,
the following terms have the following meanings:
"Additional Advances" has the meaning specified in Section
2(b) hereof.
"Borrower" has the meaning specified in the preamble hereto.
"Converted Loan" has the meaning specified in Section 4.
<PAGE>
"Credit Agreement" has the meaning specified in Recital A.
"LIBOR" means the three-month London Interbank Offered Rate
published in The Wall Street Journal (or if not so published, as quoted by
Credit Lyonnais New York Branch) on the last Business Day of each calendar
quarter), provided that, until adjusted as herein provided, LIBOR shall mean the
London Interbank Offered Rate published in The Wall Street Journal on the
Business Day immediately preceding the date hereof.
"Maturity Date" means July 28, 2006.
"Revolving Loan" has the meaning specified in Section 3(a).
"Revolving Note" has the meaning specified in Section 3(a).
"Senior Claims" has the meaning specified in the Subordination
Agreement.
"SIMA" has the meaning specified in the preamble hereto.
"SIMA Commitment" has the meaning specified in Section 3.
"SIMA Commitment Period" means the period commencing on the
date hereof and ending on August 15, 2001.
"SIMA Loans" means the Term Loan (including any Additional
Advance and any Converted Loan and any interest added to the principal of the
Term Loan) and the Revolving Loans made hereunder.
"SIMA Notes" means the Revolving Note and the Term Note.
"Subordination Agreement" means the Debt Subordination
Agreement dated as of the date of the Third Amendment among Borrower, SIMA and
the Agent.
"Term Loan" has the meaning specified in Section 2(a).
"Term Note" has the meaning specified in Section 2(a).
"Third Amendment" has the meaning specified in Recital B.
(b) Unless otherwise expressly specified herein, defined terms denoting
the singular number shall, when in the plural form, denote the plural number of
the matter or item to which such defined terms refer, and vice-versa.
(c) Section headings used in this Agreement are for convenience only and
shall not affect the construction or meaning of any provisions of this
Agreement.
2
<PAGE>
(d) Unless otherwise specified, the words "hereof", "herein",
"hereunder" and other similar words refer to this Agreement as a whole and not
just to the Section, subsection, paragraph or clause in which they are used; and
the words "this Agreement" refer to this Subordinated Loan Agreement, as
amended, modified or supplemented from time to time.
(e) Unless otherwise specified, the term "including", whenever used in
this Agreement, shall be deemed to mean "including without limitation".
2. Term Loan.
(a) Subject to the terms and conditions of this Agreement,
SIMA agrees to make a loan (the "Term Loan") to the Borrower on or before
January 14, 2000 in the principal amount of Twenty Million Dollars ($20,000,000
(US)). The Term Loan may be advanced in one or more installments, all of which
shall be evidenced by a single promissory note (the "Term Note") of the Borrower
in substantially the form of Exhibit A hereto, dated the date of the first
advance of the Term Loan, and payable to the order of SIMA.
(b) At the request of Borrower, SIMA may (but shall not be obligated to)
make additional Term Loan advances to Borrower ("Additional Advances") in excess
of $20,000,000. The proceeds of each Additional Advance shall be used solely (i)
to finance Capital Expenditures in excess of amounts permitted under clauses (a)
through (g) of subsection 9.8 of the Credit Agreement or (ii) to pay dividends
on Preferred Stock to the extent permitted under the Credit Agreement. Each
Additional Advance shall be (x) added to the principal of the Term Loan, (y)
subject to all the terms hereof applicable to the Term Loan, and (z) evidenced
by the Term Note.
(c) SIMA shall endorse on the schedule attached to the Term Note the
amount of each advance (including any Additional Advance) made by it hereunder,
the amount of interest added to the principal of the Term Loan and the amount of
any payments or prepayments received by it in respect of principal on the Term
Loan. Any such endorsement shall constitute prima facie evidence of the accuracy
of the information so recorded, absent manifest error. SIMA's failure to make
any such notation shall not affect the obligation of Borrower to repay the
unpaid principal amount of and all accrued interest on the Term Loan.
3. Revolving Loans.
(a) Subject to the terms and conditions of this Agreement, SIMA hereby
irrevocably and unconditionally agrees to make loans (collectively, the
Revolving Loans) to Borrower from time to time during the SIMA Commitment Period
in an aggregate principal amount at any one time outstanding not exceeding
Thirty Million Dollars ($30,000,000 (US)) (the "SIMA Commitment"). Revolving
Loans may be borrowed at any time during the SIMA Commitment Period, but may be
repaid or prepaid only in accordance with the provisions of Section 6 hereof.
The Revolving Loans made by SIMA shall be evidenced by a single promissory note
(the "Revolving Note") in substantially the form of Exhibit B, dated the date
hereof and payable to the order of SIMA. SIMA shall endorse on the schedule
attached to the Revolving Note the amount of each Revolving Loan made by it
hereunder and the amount of any payments or prepayments received by it in
respect of principal or interest on each such
3
<PAGE>
Revolving Loan. Any such endorsement shall constitute prima facie evidence of
the accuracy of the information so recorded, absent manifest error. SIMA's
failure to make any such notation shall not affect the obligation of Borrower to
repay the unpaid principal amount of and all accrued interest on the Revolving
Loans.
(b) SIMA acknowledges and agrees that its obligation to make SIMA Loans
to Borrower pursuant to paragraph (a) of this Section 3 shall be absolute and
unconditional and shall not be affected by any circumstance, including, without
limitation, (i) any setoff, counterclaim, recoupment, defense or other right
which SIMA may have against Borrower or any other Person for any reason
whatsoever; (ii) the occurrence or continuance of an Event of Default hereunder
(other than an Event of Default under Section 10(c) hereof) or under the Credit
Agreement; (iii) any adverse change in the condition (financial or otherwise) of
Borrower or any of its Subsidiaries; (iv) any breach of this Agreement by
Borrower; or (v) any other circumstance, happening or event whatsoever, whether
or not similar to any of the foregoing.
(c) At the request of Borrower, SIMA may (but shall have no obligation
to) make Revolving Loans to Borrower in excess of the SIMA Commitment. Each such
Revolving Loan in excess of the SIMA Commitment shall be subject to all of the
terms hereof applicable to the Revolving Loans and shall be evidenced by the
Revolving Note.
(d) Each Revolving Loan shall be made within five Business Days after
SIMA receives a request therefor from Borrower, specifying the amount and
borrowing date of such loan. SIMA shall make the proceeds of each Revolving Loan
available to Borrower on the requested borrowing date for such Loan, by a wire
transfer in U.S. dollars to the account designated by Borrower.
(e) During the SIMA Commitment Period, neither SIMA nor Borrower shall
have the right to cancel or reduce the SIMA Commitment (except as provided
herein) or to reduce the SIMA Commitment Period without the prior written
approval of the Required Lenders, and any such attempted cancellation or
reduction without such consent shall be null and void.
4. Conversion of Revolving Loans. If in any quarter through the first
quarter of 2001 Borrower's Consolidated EBITDA is less than the minimum amount
required under the Credit Agreement (after giving effect to the Third
Amendment), then a portion of the outstanding Revolving Loans automatically will
be converted into, and added to the principal of, the Term Loan effective as of
the last day of such quarter (the principal balance of the amount so converted
hereafter referred to as a "Converted Loan"). The amount to be converted for
each quarter will be equal to the difference between (i) Borrower's projected
EBITDA for the 12-month period ending on the last day of that quarter, as set
forth below:
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Projected
Quarter EBITDA
------- ------
Fourth 1999 $30,190,000
First 2000 30,570,000
Second 2000 30,240,000
Third 2000 39,940,000
Fourth 2000 54,930,000
First 2001 67,980,000
and (ii) Borrower's actual Consolidated EBITDA for the same 12-month period. If
the outstanding balance of the Revolving Loans is less than the amount to be
converted, Borrower shall borrow, and SIMA shall lend, additional Revolving
Loans until the full amount required to be converted has been converted or the
SIMA Commitment from SIMA been fully funded and remains outstanding. SIMA shall
endorse on the schedule attached to the Term Note the amount of each Converted
Loan made by it hereunder and the amount of any payments or prepayments received
by it in respect of principal or interest on each such Converted Loan. Any such
endorsement shall constitute conclusive evidence of the accuracy of the
information so recorded, absent manifest error. SIMA's failure to make any such
notation shall not affect the obligation of Borrower to repay the unpaid
principal amount of and all accrued interest on the Converted Loans. The SIMA
Commitment shall be permanently reduced by the principal amount of each
Converted Loan added to the principal of the Term Loan.
5. Interest.
(a) The unpaid principal amount of the Term Loan (including any
Additional Advance and any Converted Loan) and each Revolving Loan will accrue
interest for the period from (and including) the borrowing date for such Loan or
Additional Advance to the date such Loan shall be paid in full, at a rate per
annum equal to LIBOR plus 1.00%. The interest rate on each Loan will adjust as
of the first day of each January, April, July and October based upon LIBOR as of
the immediately preceding Business Day.
(b) Accrued interest on each SIMA Loan will be paid in kind by addition
to the principal of the Term Loan on the last day of each calendar quarter. All
amounts so added to principal of the Term Loan shall begin to accrue interest at
the rate provided for herein as of the date so added to principal.
6. Repayment and Prepayment of SIMA Loans.
(a) The Term Loan shall be payable in full on the Maturity Date. Except
as permitted by subparagraph (c) below, Borrower shall not make any payment or
prepayment in respect of the principal amount of the Term Loan prior to the
Maturity Date.
(b) The Revolving Loans will be due on the Maturity Date. Prior to the
Maturity Date, Borrower may pay principal of the Revolving Loans, at such times
and in such amounts as Borrower may elect, but only if and to the extent such
payments are
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<PAGE>
permitted under the Subordination Agreement. All amounts repaid under this
subparagraph (b) may be reborrowed at any time prior to the end of the SIMA
Commitment Period.
(c) Notwithstanding anything herein to the contrary, Borrower may prepay
the SIMA Loans, in whole or in part, at any time the Senior Claims have been
indefeasibly paid in full in cash and none of the holders of Senior Claims are
obligated to extend credit to Borrower or any subsidiary of Borrower.
(d) All payments due to SIMA under or pursuant to this Agreement and the
SIMA Notes and permitted to be paid under the Subordination Agreement shall be
made by Borrower when due in U.S. Dollars and in immediately available funds at
such address as SIMA may designate in writing from time to time.
7. Letter of Credit. Pursuant to the Third Amendment, SIMA has agreed to
deliver to the Agent a standby letter of credit in the face amount of
$30,000,000 (the "Letter of Credit") in order to secure the performance of
SIMA's obligations to make Revolving Loans under this Agreement. If SIMA fails
to make available to the Borrower a Revolving Loan requested by Borrower
(whether requested pursuant to Section 3 or Section 4 hereof) within ten days of
such request, SIMA acknowledges and agrees that the Agent, upon notification
thereof by Borrower, is required to make a drawing under the Letter of Credit in
the amount of the Revolving Loan which Borrower had requested and is obligated
to remit the proceeds of such drawing to Borrower. Borrower and SIMA acknowledge
that all funds received by the Agent upon any drawing under the Letter of Credit
and remitted to Borrower shall be deemed to be a Revolving Loan made by SIMA
under this Agreement and shall be subject to all the terms of this Agreement
applicable to Revolving Loans.
8. Representations and Warranties of Borrower. Borrower hereby
represents and warrants to SIMA that:
(a) Borrower has full power and authority to execute and deliver this
Agreement and the SIMA Notes, to borrow hereunder and to incur and perform the
obligations provided for herein or therein.
(b) The execution, delivery and performance of this Agreement and the
SIMA Notes by Borrower, the borrowings by it hereunder, and the incurrence and
performance of the obligations provided for herein or therein (i) have been duly
authorized by all requisite corporate action of Borrower, (ii) do not require
the approval of the stockholders of Borrower, and (iii) will not (a) violate any
law or regulation or the certificate of incorporation or by-laws of Borrower,
(b) violate or constitute (with due notice or lapse of time or both) a default
under any provision of any indenture, agreement, license or other instrument to
which Borrower is a party or by which it or any of its properties may be bound
or affected, (c) violate any order of any court, tribunal or governmental agency
binding upon Borrower or any of its properties, or (d) result in the creation or
imposition of any lien or encumbrance of any nature whatsoever upon any assets
or revenues of Borrower.
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<PAGE>
(c) No authorizations, approvals and consents of, and no filings and
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by Borrower of this
Agreement or the SIMA Notes or for the validity or enforceability hereof or
thereof.
(d) This Agreement and the SIMA Notes constitute the legal, valid and
binding obligations of Borrower, enforceable against Borrower in accordance with
their respective terms.
9. Representations and Warranties of SIMA. SIMA hereby represents and
warrants to Borrower that:
(a) SIMA is a societe anonyme duly organized, validly existing and in
good standing under the laws of the Republic of France. SIMA has full power and
authority to execute and deliver this Agreement and to incur and perform the
obligations provided for herein.
(b) The execution, delivery and performance of this Agreement by SIMA
and the incurrence and performance by it of the obligations provided for herein,
including its extensions of credit to Borrower (i) have been duly authorized by
all requisite corporate action of SIMA, (ii) do not require the approval of the
stockholders of SIMA, and (iii) will not (a) violate any law or regulation or
the organizational documents of SIMA, (b) violate or constitute (with due notice
or lapse of time or both) a default under any provision of any indenture,
agreement, license or other instrument to which SIMA is a party or by which it
or any of its properties may be bound or affected, (c) violate any order of any
court, tribunal or governmental agency binding upon SIMA or any of its
properties, or (d) result in the creation or imposition of any lien or
encumbrance of any nature whatsoever upon any assets or revenues of SIMA.
(c) No authorizations, approvals and consents of, and no filings and
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by SIMA of this Agreement
or for the validity or enforceability hereof.
(d) This Agreement constitutes the legal, valid and binding obligation
of SIMA, enforceable against SIMA in accordance with its terms.
10. Events of Default. The occurrence of any of the following events
shall constitute an event of default hereunder:
(a) At any time after the Maturity Date, Borrower shall fail to make
payment of any amounts owing under this Agreement or the SIMA Notes within ten
(10) days following the due date thereof;
(b) An Event of Default shall have occurred under the Credit
Agreement and the Lenders shall have declared amounts due thereunder to be due
and payable; or
(c) (i) Borrower shall commence any case, proceeding or other action (A)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors seeking
to have an order for relief entered with
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<PAGE>
respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or (B) seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its assets, or Borrower shall make a
general assignment for the benefit of its creditors; or (ii) there shall be
commenced against Borrower any case, proceeding or other action of a nature
referred to in clause (i) above which (A) results in the entry of an order for
relief for any such adjudication or appointment or (B) remains undismissed,
undischarged or unbonded for period of sixty (60) days; or (iii) there shall be
commenced against Borrower any case, proceeding or other action seeking issuance
of a warrant of attachment, execution, distraint or similar process against all
or any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) days from the entry thereof, or (iv)
Borrower shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clause (i), (ii)
or (iii) above; or (v) Borrower shall generally not, or shall be unable to, or
shall admit in writing its inability to, pay its debts as they become due.
Upon the occurrence of one of the events specified above, all amounts
due under this Agreement and the SIMA Notes shall automatically be accelerated
and become payable in full, subject to the terms of the Subordination Agreement,
and SIMA's obligation to make further Revolving Loans hereunder shall be
terminated.
11. Confirmation of Subordination. Borrower and SIMA hereby acknowledge
and agree that all of the obligations of Borrower hereunder and under the SIMA
Notes, the indebtedness evidenced by the SIMA Notes and all claims SIMA may now
or at any time hereafter have against Borrower or any of its assets arising out
of or relating to this Agreement are subordinated to the Senior Claims as
provided in the Subordination Agreement and that payment of such obligations and
indebtedness is subject to the restrictions set forth in the Subordination
Agreement.
12. Waivers and Amendments.
(a) No failure on the part of SIMA to exercise, and no delay in
exercising, and no course of dealing with respect to, any right, power or remedy
hereunder shall operate as a waiver thereof or of any default hereunder, nor
shall any single or partial exercise by SIMA of any right, power or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. No amendment, modification or waiver of any
provision of this Agreement, nor any consent to any departure herefrom, shall in
any event be effective unless the same shall be in writing, signed by all the
parties hereto and consented to in writing by the Agent with the approval of the
Required Lenders under the Credit Agreement, and then such amendment,
modification, waiver or consent shall be effective only in the specific instance
and for the purpose for which given.
(b) Borrower hereby waives presentment, protest, demand, notice of
dishonor or default, and notice of any kind except as herein required with
respect to this Agreement, the SIMA Notes or the performance of its obligations
under this Agreement or the SIMA Notes.
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<PAGE>
13. Governing Law. This Agreement and the rights and obligations of the
parties hereto shall be governed by, and shall be construed and interpreted in
accordance with, the laws of the State of New York, without reference to its
principles of conflict of laws.
14. Submission to Jurisdiction.
(a) Each of SIMA and Borrower hereby expressly submits to the exclusive
jurisdiction of all federal and state courts sitting in New York County, State
of New York, in any action or proceeding arising out of or relating to this
Agreement or the SIMA Notes or their respective obligations hereunder or
thereunder and each of them agrees that any process or notice of motion or other
application to any of said courts or a judge thereof may be served upon it
within or without such court's jurisdiction by registered or certified mail
(return receipt requested) or by personal service, at the address of such party
specified next to its signature hereto (or at such other address as such party
shall specify by a prior notice in writing to the other parties hereto).
(b) Each of SIMA and Borrower hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the SIMA Notes
brought in any federal or state court sitting in New York County, State of New
York, and hereby further irrevocably waives any claim that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
forum.
15. Waiver of Jury Trial. Each party hereto hereby waives any right it
may have to a trial by jury of any dispute arising under or relating to this
Agreement or the SIMA Notes and agrees that any such dispute shall be tried
before a judge sitting without a jury.
16. Expenses. Borrower agrees to pay all costs and expenses of SIMA
(including the reasonable fees and disbursements of counsel) in connection with
the enforcement of any rights of SIMA hereunder or under the SIMA Notes
17. Termination; Amendment. This Agreement is a continuing agreement and
shall remain in full force and effect so long as Borrower may borrow hereunder
or under the Credit Agreement or request the issuance of letters of credit under
the Credit Agreement and until the indefeasible payment in full of the Senior
Claims and of all obligations of Borrower to SIMA hereunder. This Agreement may
not be amended, modified or terminated without the prior written consent of (a)
SIMA and Borrower and (b) the Agent (acting upon instructions of the Required
Lenders under the Credit Agreement); provided that the consent of the Agent
shall not be required after the Senior Claims has been indefeasibly paid in full
and the Commitments under the Credit Agreement have expired.
18. Assignments. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that neither Borrower nor SIMA shall transfer, sell or
otherwise dispose of any of its obligations hereunder or, in the case of SIMA,
any portion of the loans made by it to Borrower hereunder,
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<PAGE>
without the prior written consent of the Agent (acting upon instructions of the
Required Lenders under the Credit Agreement).
19. Addresses for Notices, Etc. All notices, requests, demands,
instructions, directions and other communications provided for hereunder shall
be in writing (which term shall include telecopied communications) and shall be
sent by overnight courier, telecopied or delivered to the applicable party at
the address or telecopier number specified for such party opposite its signature
line below or, as to any party, to such other address or telecopier number as
such party shall specify by a notice in writing to the other parties hereto.
Each notice, request, demand, instruction, direction or other communication
provided for hereunder shall be deemed delivered (i) if by overnight courier,
one Business Day (or, in the case of any party hereto that has indicated an
address for notices that is located outside the United States, two Business
Days) after being delivered to the overnight courier, addressed to the
applicable party at its address set forth above, (ii) if by hand, when delivered
to the applicable party at such address, and (iii) if by telecopy, when sent to
the applicable party at such telecopier number.
20. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render such provision unenforceable in any
other jurisdiction.
21. Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, all of
which when taken together shall constitute but one and the same agreement.
Delivery of an executed signature page to this Agreement by facsimile shall be
as effective as delivery of a manually signed counterpart.
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IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute this Agreement as of the date first above written.
Address: SPECIAL METALS CORPORATION
4317 Middle Settlement Road
New Hartford, New York 13413 By _____________________________________
Attention: Donald C. Darling Name: ___________________________________
Telecopier: (315)798-2001 Title: __________________________________
Address: SOCIETE INDUSTRIELLE DE MATERIAUX
41 Rue de Villiers AVANCES
92200 Neuilly Sur Seine
Cedex, France
By: _____________________________________
Attention: Francois Lefebvre Name: ___________________________________
Telecopier: 01133140882180 Title: __________________________________
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EXHIBIT A
EXHIBIT A
FORM OF TERM NOTE
The indebtedness and all obligations evidenced or represented
hereby, and certain other Subordinated Claims, are postponed,
subordinated and junior in right of payment to Senior Claims,
as such capitalized terms are defined in a Debt Subordination
Agreement dated December 29, 1999, executed and delivered for
the benefit of the holders of such Senior Claims by the maker
hereof and by Societe Industrielle de Materiaux Advances, a
societe anonyme organized under the laws of the Republic of
France. The provisions of said Debt Subordination Agreement
are hereby incorporated herein, as if set forth at length
herein.
New Hartford, New York
December ___, 1999
For value received, SPECIAL METALS CORPORATION, a Delaware corporation
(the "Borrower,"), promises to pay to the order of SOCIETE INDUSTRIELLE DE
MATERIAUX AVANCES, a societe anonyme organized under the laws of the Republic of
France ("SIMA"), on the Maturity Date, the principal amount of Twenty Million
Dollars ($20,000,000 (US)) plus the principal amount of all Additional Advances
and Converted Loans, if any, made by SIMA to the Borrower pursuant to the
Subordinated Loan Agreement referred to below that are then outstanding. The
unpaid principal amount of this Note shall accrue interest from the date of each
advance hereunder is made until it is repaid in full, at the rate specified in
the Subordinated Loan Agreement. Accrued interest on this Note and the Revolving
Note (as defined in the Subordinated Loan Agreement) will be paid in kind by
addition to the principal of the Term Loan on the last day of each calendar
quarter. All amounts so added to principal shall begin to accrue interest at the
rate provided in the Subordinated Loan Agreement as of the date so added to
principal.
All such payments under this Note shall be made in lawful money of the
United States of America and in immediately available funds in accordance with
the terms of the Subordinated Loan Agreement at the office of SIMA specified in
the Subordinated Loan or in accordance with wiring instructions specified by
SIMA.
All Additional Advances and all Converted Loans made by SIMA and all
payments of the principal thereof shall be recorded by SIMA on the schedule
attached hereto or any continuation thereof. Any such recordation shall
constitute prima facie evidence of the existence and amounts of the obligations
of the Borrower so recorded; provided, however, that the failure of SIMA to make
any such recordation shall not affect the obligations of the Borrower hereunder
or under the Subordinated Loan Agreement.
This Note is the Term Note referred to in the Subordinated Loan
Agreement dated as of December 17, 1999, between the Borrower and SIMA (as the
same may be amended, restated, supplemented or otherwise modified from time to
time with the approval of the Agent, the
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<PAGE>
"Subordinated Loan Agreement") and is entitled to the benefits thereof. Terms
defined in the Subordinated Loan Agreement are used herein with the same
meanings. Reference is made to the Subordinated Loan Agreement for provisions
for the prepayment hereof and the acceleration of the maturity hereof. The
Borrower hereby waives presentment, demand, protest and all other notices of any
kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICT
OF LAWS.
SPECIAL METALS CORPORATION
By: ______________________________________
Name:
Title:
13
<PAGE>
SCHEDULE TO PROMISSORY NOTE
Date of Principal Amount Outstanding Notation
Loan Amount Repaid Balance By
- ---- ------ ------ ------- --
14
<PAGE>
EXHIBIT B
EXHIBIT A
FORM OF REVOLVING NOTE
The indebtedness and all obligations evidenced or represented
hereby, and certain other Subordinated Claims, are postponed,
subordinated and junior in right of payment to Senior Claims,
as such capitalized terms are defined in a Debt Subordination
Agreement dated December 29, 1999, executed and delivered for
the benefit of the holders of such Senior Claims by the maker
hereof and by Societe Industrielle de Materiaux Advances, a
societe anonyme organized under the laws of the Republic of
France. The provisions of said Debt Subordination Agreement
are hereby incorporated herein, as if set forth at length
herein.
New Hartford, New York
December ___, 1999
For value received, SPECIAL METALS CORPORATION, a Delaware corporation
(the "Borrower,"), promises to pay to the order of SOCIETE INDUSTRIELLE DE
MATERIAUX AVANCES, a societe anonyme organized under the laws of the Republic of
France ("SIMA"), on the Maturity Date, the principal amount of all Revolving
Loans made by SIMA to the Borrower pursuant to the Subordinated Loan Agreement
referred to below. The unpaid principal amount of each such Revolving Loan shall
accrue interest from the date such Revolving Loan is made until it is repaid in
full, at the rate specified in the Subordinated Loan Agreement. Accrued interest
will be paid in kind by addition to the principal of the Term Loan (as defined
in the Subordinated Loan Agreement) on the last day of each calendar quarter.
All amounts so added to principal of the Term Loan shall begin to accrue
interest thereunder at the rate provided in the Subordinated Loan Agreement as
of the date so added to principal.
All such payments under this Note shall be made in lawful money of the
United States of America and in immediately available funds in accordance with
the terms of the Subordinated Loan Agreement at the office of SIMA specified in
the Subordinated Loan or in accordance with wiring instructions specified by
SIMA.
All Revolving Loans made by SIMA and all payments of the principal
thereof shall be recorded by SIMA on the schedule attached hereto or any
continuation thereof. Any such recordation shall constitute prima facie evidence
of the existence and amounts of the obligations of the Borrower so recorded;
provided, however, that the failure of SIMA to make any such recordation shall
not affect the obligations of the Borrower hereunder or under the Subordinated
Loan Agreement.
This Note is the Revolving Note referred to in the Subordinated Loan
Agreement dated as of December 17, 1999, between the Borrower and SIMA (as the
same may be amended, restated, supplemented or otherwise modified from time to
time with the approval of the Agent, the "Subordinated Loan Agreement") and is
entitled to the benefits thereof. Terms defined in the Subordinated Loan
Agreement are used herein with the same meanings. Reference is made to the
Subordinated Loan Agreement for provisions for the prepayment hereof and the
acceleration
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<PAGE>
of the maturity hereof. The Borrower hereby waives presentment, demand, protest
and all other notices of any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICT
OF LAWS.
SPECIAL METALS CORPORATION
By: ______________________________________
Name:
Title:
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SCHEDULE TO PROMISSORY NOTE
Date of Principal Amount Outstanding Notation
Loan Amount Repaid Balance By
- ---- ------ ------ ------- --
17
DEBT SUBORDINATION AGREEMENT
This Agreement is entered into as of December 29, 1999, by Societe
Industrielle de Materiaux Avances, a societe anonyme organized under the laws of
the Republic of France (the "Subordinated Lender") and Special Metals
Corporation, a Delaware corporation (the "Company"), for the benefit of (i)
Credit Lyonnais New York Branch ("Credit Lyonnais"), (ii) the Lenders from time
to time party to the Credit Lyonnais Credit Agreement described below and each
party (other than the Company) to each other Senior Credit Facility described
below (collectively, including Credit Lyonnais and such Lenders, the "Senior
Lenders") and (iii) each other present and future holder of Senior Claims (as
defined herein) from time to time outstanding.
Recitals
A. The Company and the Subordinated Lender have entered into a
Subordinated Loan Agreement, dated as of December 17, 1999 (as in effect on the
date hereof and from time to time amended with the prior written consent of the
Required Senior Lenders, the "Subordinated Credit Agreement"), relating to
subordinated unsecured revolving and term credit facilities of up to
$50,000,000.
B. The Company, the Lenders party thereto and Credit Lyonnais, as Agent,
are parties to a Senior Secured Credit Agreement, dated as of October 28, 1998,
as amended by First Amendment to Credit Agreement and Limited Waiver, dated as
of March 31, 1999, Second Amendment to Credit Agreement, dated as of June 8,
1999, and Third Amendment to Credit Agreement and Limited Waiver, dated as of
December 29, 1999 (together with the Loan Documents (as defined therein)
thereunder and all other instruments and agreements at any time entered into
between the Company or any Subsidiary pursuant thereto or in connection
therewith, as the same may be modified, supplemented, extended, renewed,
replaced or otherwise changed from time to time by agreement of the signatory
parties thereto, the "Credit Lyonnais Credit Agreement").
C. To induce the Senior Lenders to consent to the Borrower's entering
into the Subordinated Credit Agreement, the Company and the Subordinated Lender
have agreed to enter into this Agreement.
Now Therefore, in consideration of the premises and in consideration of
the execution and delivery of the Third Amendment to Credit Agreement and
Limited Waiver, dated as of December 29, 1999, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Subordinated Lender, for themselves and for each other present
and future holder of any Subordinated Claim, hereby agree
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for the direct and legally enforceable benefit of Credit Lyonnais, each other
Senior Lender and each other present and future holder of any Senior Claim as
follows:
Section 1. Definitions. As used herein, the following terms (whether in
singular or plural usage) shall have the following meanings:
"Bankruptcy Code" means Title 11 of the United States Code.
"Bankruptcy, Insolvency or Liquidation Proceeding" means (a) any case
commenced by or against the Company or any Subsidiary under any chapter of the
Bankruptcy Code, any other proceeding for the reorganization, recapitalization
or adjustment or marshalling of the assets or liabilities of the Company or any
Subsidiary, any receivership or assignment for the benefit of creditors relating
to the Company or any Subsidiary or any similar case or proceeding relative to
the Company or any Subsidiary or the creditors of any of them, as such, in each
case whether or not voluntary, (b) any liquidation, dissolution, marshalling of
assets or liabilities or other winding up of or relating to the Company or any
Subsidiary, in each case whether or not voluntary and whether or not involving
bankruptcy or insolvency, or (c) any other proceeding of any type or nature in
which Claims against the Company or any Subsidiary are determined, proven or
paid.
"Claim" is used as defined in the Bankruptcy Code, whether or not, in
the context in which it appears, a case under the Bankruptcy Code is pending.
"Company" is defined in the preamble to this Agreement.
"Credit Lyonnais" is defined in the preamble to this Agreement.
"Credit Lyonnais Credit Agreement" is defined in paragraph B of the
Recitals.
"Discharge of the Credit Lyonnais Financing" means that all commitments
for any extension of credit or incurrence of indebtedness under the Credit
Lyonnais Credit Agreement have been terminated, all letters of credit at any
time issued, guaranteed or provided under the Credit Lyonnais Credit Agreement
have expired or been discharged and all reimbursement obligations in respect
thereof and all loans and advances made and other credit extended and
indebtedness incurred under the Credit Lyonnais Credit Agreement have been paid
in full in cash and all other indebtedness and obligations for principal,
interest, prepayment premium, fees, taxes, expense reimbursements, indemnities
and other amounts outstanding under the Credit Lyonnais Credit Agreement and all
other Senior Claims at any time outstanding under or in respect of the Credit
Lyonnais Credit Agreement (except indemnification obligations which are then
contingent and as to which no payment is then due and no claim or demand has
then been made) have been paid in full and in cash.
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"holder" includes, in respect of any Claim, each person or entity which owns, is
entitled to enforce, is entitled to the benefit of or otherwise holds or owns
such Claim and includes all persons and entities at any time receiving any
transfer of any interest in any Claim or otherwise succeeding to any interest in
any Claim.
"including" is used illustratively, and not exhaustively or by way of
limitation, and means "including but not limited to."
"Post-Petition Interest/Expense Claims" means any Claim for interest on
any Senior Claim accrued or computed for or as to any period of time at any time
after the commencement of any Bankruptcy, Insolvency or Liquidation Proceeding
at the rate (including any applicable post-default rate) set forth in or
applicable under any instrument or agreement evidencing or governing any Senior
Claim or for fees, expense reimbursements, indemnification or other similar
obligations accrued or determined for or as to any such period of time in
accordance with the provisions of such instrument or agreement, whether or not
such Claim is allowed, allowable or enforceable in such Bankruptcy, Insolvency
or Liquidation Proceeding and even if such Claim is not allowed or enforced
therein.
"Required Senior Lenders" means, at any time as to any act relating to
any Senior Credit Facility then in effect, such number of the holders of Senior
Claims for loans and other extensions of credit or indebtedness outstanding or
committed under such Senior Credit Facility as may, under the terms of the
agreement governing such Senior Credit Facility, have the power to bind all such
holders in respect of such act.
"Senior Agent" means Credit Lyonnais or any successor to Credit Lyonnais
as Agent under the Credit Lyonnais Credit Agreement, until Discharge of the
Credit Lyonnais Financing, and thereafter means any Senior Lender acting as
Agent under any Senior Credit Facility or, if there is no Agent so acting, the
Required Senior Lenders under such Senior Credit Facility.
"Senior Claim Collateral" means any and all of the property of every
type and description, whether real, personal or mixed, whether tangible or
intangible, and whether now owned or hereafter acquired by the Company or any
Subsidiary, upon which any security interest or lien is granted as security for
any Senior Claim.
"Senior Claims" means (a) all present and future Claims against the
Company or any Subsidiary on account or in respect of the principal of and
interest and prepayment premium (if any) on any and all loans and letter of
credit liabilities and other extensions of credit or indebtedness at any time
incurred under any Senior Credit Facility, including any guaranty thereof, (b)
all present and future Claims at any time arising or secured, or purported to be
secured, under
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any instrument, conveyance or agreement delivered by the Company or any
Subsidiary governing, securing or relating in any respect to any Senior Credit
Facility, and (c) all present and future Claims in any manner based thereon,
arising therefrom or related thereto, in each case whether now outstanding or at
any time hereafter arising, and specifically includes (without limitation) all
Claims for fees, taxes, expense reimbursements, indemnities and other amounts
payable by the Company or any Subsidiary under the Credit Lyonnais Credit
Agreement or any other such instrument, conveyance or agreement and all
Post-Petition Interest/Expense Claims in any Bankruptcy, Insolvency or
Liquidation Proceeding.
"Senior Credit Facility" means (a) all loans, letter of credit
liabilities and other extensions of credit and indebtedness from time to time
outstanding or committed to be made available under the Credit Lyonnais Credit
Agreement, whether or not in any respect subordinated to any other loans,
extensions of credit or indebtedness, and (b) after Discharge of the Credit
Lyonnais Financing, in each case if and to the extent the Company agrees in
writing that the same shall be a Senior Credit Facility for the purposes of this
Agreement, (i) all loans, letter of credit liabilities or other extensions of
credit or indebtedness at any time incurred by or committed to be made available
to the Company or any Subsidiary for the purpose of repaying, retiring,
refinancing or replacing the Credit Lyonnais Credit Agreement and (ii) all other
indebtedness at any time incurred by or committed to the Company or any
Subsidiary for money borrower or credit extended or under any note or other debt
security.
"Senior Credit Facility Default" means (a) the failure to pay when due
any payment on any Senior Claim or (b) any event that does or, with the giving
of any notice or the lapse of any period of time (or both), would constitute a
Default or an Event of Default under (and as defined in) any Senior Credit
Facility.
"Senior Lenders" is defined in the preamble to this Agreement.
"SIMA Letter of Credit" means one or more standby letter(s) of credit
issued in the aggregate face amount of $30,000,000 and delivered to the Senior
Agent on or prior to the date hereof, in form and substance satisfactory to the
Senior Agent and the Required Senior Lenders under the Credit Lyonnais Credit
Agreement.
"Subordinated Claims" means (a) all present and future Claims against
the Company or any Subsidiary on account or in respect of the principal of and
interest and prepayment premium (if any) on the Subordinated Loans and any and
all other extensions of credit or indebtedness at any time incurred or arising
under the Subordinated Credit Agreement, (b) any and all Claims arising under
any of the Subordinated Loan Documents, and (c) any and all Claims in any manner
based thereon, arising therefrom or related thereto, in each case whether now
outstanding or at any time hereafter arising and whether based on contract or
quasi-contract or founded in tort or arising by law or otherwise, and
specifically includes (without limitation) all
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Claims against the Company or any Subsidiary for fees, taxes, expense
reimbursements, indemnities and other amounts, obligations or liabilities under
the Subordinated Loan Documents.
"Subordinated Credit Agreement" is defined in paragraph A of the
Recitals.
"Subordinated Lender" is defined in the preamble to this Agreement.
"Subordinated Loan Documents" means the Subordinated Credit Agreement,
the Subordinated Notes and all other instruments and agreements of every type
and description at any time delivered by the Company or any Subsidiary
evidencing, governing, securing, assuring, or otherwise relating to the
Subordinated Credit Agreement or any other Subordinated Claim.
"Subordinated Loan Maturity Date" means July 28, 2006.
"Subordinated Loans" means the Subordinated Revolving Loan and the
Subordinated Term Loan.
"Subordinated Notes" means each and all of the promissory notes
evidencing the loans made pursuant to the Subordinated Credit Agreement.
"Subordinated Revolving Loan" means each and all of the Revolving Loans
(as defined in the Subordinated Credit Agreement) funded under the Subordinated
Credit Agreement, except any such Subordinated Revolving Loans converted into
Subordinated Term Loans in accordance with the Credit Lyonnais Credit Agreement.
"Subordinated Term Loan" means each and all of the Term Loans (as
defined in the Subordinated Credit Agreement) funded under the Subordinated
Credit Agreement, together with (i) all Subordinated Revolving Loans converted
into Subordinated Term Loans in accordance with the Credit Lyonnais Credit
Agreement, (ii) all additional advances added to the Term Loans and (iii) all
interest at any time accrued on the Subordinated Loans.
"subsidiary" means, with respect to any person or entity at any time,
any corporation, limited liability company, partnership, association or other
entity of which equity securities or other ownership interests representing more
than 50% of the equity or profit interests or more than 50% of the ordinary
voting power or, in the case of a partnership, more than 50% of the general
partnership interests are, as of such date, owned, controlled or held by, or
that is otherwise controlled by, the parent or one or more subsidiaries of the
parent or by the parent and one or more of its subsidiaries.
"Subsidiary" means any subsidiary of the Company.
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References in this Agreement to a "Section," when not further identified
by reference to any document, are references to the Sections of this Agreement.
Section 2. Subordination. The Company and the Subordinated Lender, on
behalf of all present and future holders of Subordinated Claims, hereby covenant
and agree that the Subordinated Claims are and shall be postponed, subordinated
and junior in right of payment to the prior payment in full in cash of all
Senior Claims, on the terms and conditions herein set forth.
Section 3. Payment of Subordinated Claims. For as long as any holder of
Senior Claims may be obligated to extend credit to the Company or any Subsidiary
under any Senior Credit Facility, and thereafter until all Senior Claims have
been paid in full in cash and discharged, the Company will not make or permit
any Subsidiary to make, and no Subordinated Lender or other holder of
Subordinated Claims will demand, accept, receive or retain, any payment or
distribution of any kind or character, whether in cash, property, securities or
otherwise, on account or in respect of any Subordinated Claim, except that:
(a) Principal of the Subordinated Term Loan may be paid if (and
only if) at the time of such payment no commitments to extend credit
under any Senior Credit Facility are outstanding and all Senior Claims
have been paid in full in cash;
(b) Principal of the Subordinated Revolving Loan may be paid if
(and only if) at the time of such payment and after giving effect
thereto (i) no Senior Credit Facility Default has occurred and is
continuing or would result therefrom and (ii) the aggregate amount of
revolving credit loans and letters of credit obligations outstanding
under the Credit Lyonnais Credit Agreement is not greater than
$76,000,000; provided, nevertheless, that:
(1) if prior to the time of such payment any advance
under the Subordinated Revolving Loan was funded by a payment
demand under the SIMA Letter of Credit, the SIMA Letter of
Credit must have been amended (by an amendment acceptable to the
Senior Agent) to increase the amount available for payment under
the SIMA Letter of Credit by an amount of such advances funded
under the SIMA Letter of Credit;
(2) no such payment may be made at any time during the
period commencing on March 31, 2001 and ending on August 31,
2001 unless the Consolidated EBITDA (as defined in the Credit
Lyonnais Credit Agreement) of the Company and its consolidated
Subsidiaries for the 12-month period ending on March 31, 2001
was $55,000,000 or more; and
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(3) no such payment may be made at any time when any
Bankruptcy, Insolvency or Liquidation Proceeding is pending.
(c) Interest on the Subordinated Loans may be added to the
principal of the Subordinated Term Loan pursuant to the terms and
conditions of the Credit Lyonnais Credit Agreement and the Subordinated
Credit Agreement. Interest on the Subordinated Loans may be paid only if
at the time of such payment the Company is permitted to pay the
principal of the Subordinated Term Loan pursuant to Section 3(a).
Section 4. Bankruptcy, Insolvency or Liquidation Proceedings. In any
Bankruptcy, Insolvency or Liquidation Proceeding:
(a) All Senior Claims (including all Post-Petition
Interest/Expense Claims) shall be paid in full in cash before any
Subordinated Lender or any other holder of any Subordinated Claim shall
be entitled to receive any payment or distribution of any kind or
character, whether in cash, property, securities or otherwise, on
account or in respect of any Subordinated Claim in such Bankruptcy,
Insolvency or Liquidation Proceeding.
(b) The holders of Senior Claims arising under or in respect of
the Credit Lyonnais Credit Agreement and, after Discharge of the Credit
Lyonnais Financing, each other holder of Senior Claims shall be entitled
to receive each payment and distribution of any kind or character,
whether in cash, property, securities or otherwise (including any such
payment or distribution which may become payable or deliverable by
reason of any other Claim being subordinated to any Subordinated Claim),
that may become payable or deliverable on account or in respect of any
Subordinated Claim, for application to the payment of Senior Claims of
such holders (including all Post-Petition Interest/Expense Claims),
until all holders of Senior Claims have received payment in full in cash
of all Senior Claims (including all Post-Petition Interest/Expense
Claims). All such payments and distributions shall be delivered by the
debtor, trustee, receiver, disbursing agent or other person making such
payment or distribution in such Bankruptcy, Insolvency or Liquidation
Proceeding directly to the Senior Agent for the benefit of such holders
of Senior Claims.
(c) Except as otherwise agreed in writing by the Required Senior
Lenders, no payment or distribution consisting of any property or
securities other than cash shall be deemed applied to the payment of
Senior Claims at any adjudicated or imputed value. No discharge of the
liability of the debtor in such Bankruptcy, Insolvency or Liquidation
Proceeding shall, as against the holders of Subordinated Claims,
constitute payment of the Senior Claims or shall in any respect affect
or impair the right of the holders of Senior Claims to receive each
payment or distribution on account or in respect of Subordinated Claims
and to apply such payment or distribution to pay the Senior Claims
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(including all Post-Petition Interest/Expense Claims accrued or incurred
through the date on which cash proceeds have been received by the
holders of Senior Claims in an amount sufficient to pay all Senior
Claims in full), until cash proceeds have been received and applied to
the payment of Senior Claims in an amount sufficient to pay, in full and
in cash, all Senior Claims (including all Post-Petition Interest/Expense
Claims accrued or incurred through the date on which cash proceeds in
such amount are received).
(d) No holder of Subordinated Claims shall, in such Bankruptcy,
Insolvency or Liquidation Proceeding, (i) assert, or request relief
predicated on the assertion that, or join with any creditor or the
debtor or any trustee or representative in asserting or requesting
relief predicated on the assertion that, any of the Senior Claims is not
enforceable, should be equitably subordinated, is subject to avoidance
on any ground or is not secured by lawfully granted, continuously
perfected and nonavoidable security interests in the Senior Claim
Collateral, (ii) oppose or otherwise contest, or join with any creditor
or the debtor or any trustee or representative in opposing or otherwise
contesting any request by any Senior Lender for relief from any
automatic stay or from any other form of order or restraint for the
purpose of permitting such Senior Lender or its agent to foreclose upon
or otherwise enforce any or all of its security interests and liens upon
any Senior Claim Collateral or (iii) seek, or join with any creditor or
the debtor or any trustee or representative in seeking, substantive
consolidation of the estate of the debtor with the assets, liabilities
or estate of its parent company or any of its subsidiaries or any other
person or entity.
(e) Each holder of Subordinated Claims shall file, in
appropriate form, all claims and proofs of claim in respect of such
holder's Subordinated Claims whenever the filing of claims is required
or permitted by law upon any of the Subordinated Claims. If any holder
of Subordinated Claims does not file any such claim or proof of claim
promptly upon the request of any Senior Lender, then the Senior Agent or
the Required Senior Lenders under each Senior Credit Facility, and each
of their respective agents, is hereby irrevocably authorized and
empowered (but shall not be obligated), as attorney-in-fact for such
holder of Subordinated Claims with full power of substitution, either to
file such claim or proof thereof in the name of such holder or, at the
option of such Senior Agent or the Required Senior Lenders, to assign
such claim to the Senior Agent, for the benefit of the holders of Senior
Claims as their interest may appear in accordance with the provisions of
this Agreement, or to their nominee, and cause such claim or proof
thereof to be filed.
Section 5. Turnover. If and in each instance that, notwithstanding the
provisions of Section 3 and Section 4, any holder of any Subordinated Claim
receives any payment or distribution of any kind or character, whether in cash,
property, securities or otherwise (including any such payment or distribution
which may become payable or deliverable by reason of any other Claim being
subordinated to any Subordinated Claim but excluding any
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<PAGE>
payment of principal that is made on any day when payment is expressly permitted
to be made as set forth in Section 3), on account or in respect of any
Subordinated Claim at any time when any Senior Claim or any commitment for any
extension of credit or incurrence of indebtedness under a Senior Credit Facility
is outstanding, then and in each such event:
(a) Such holder shall forthwith pay over, transfer and deliver
such payment or distribution to the Senior Agent, for the benefit of the
holders of Senior Claims arising under or in respect of the Credit
Lyonnais Credit Agreement and, after Discharge of the Credit Lyonnais
Financing, for the benefit of each other holder of Senior Claims, for
application to the payment of Senior Claims, until all Senior Claims
arising under or in respect of the Credit Lyonnais Credit Agreement and,
after Discharge of the Credit Lyonnais Financing, all other Senior
Claims (including, in each case, all Post-Petition Interest/Expense
Claims) have been paid in full in cash; and
(b) Each holder of a Subordinated Claim shall, and hereby agrees
to, hold in trust for the Senior Agent, for the benefit of the holders
of such Senior Claims, in the identical form received (except for any
necessary endorsement to the Senior Agent) and as trustee of an express
trust, all payments and distributions required to be paid over,
transferred and delivered pursuant to this Section 5.
Section 6. Subrogation. In any Bankruptcy, Insolvency or Liquidation
Proceeding, subject to the prior payment in full and in cash of any and all
Senior Claims (including all Post-Petition Interest/Expense Claims), the holders
of Subordinated Claims shall have and may enforce any and all rights of
subrogation accorded by law in respect of any payment or distribution on account
of any Subordinated Claim that is applied to the payment of any Senior Claim
pursuant to the provisions of this Agreement. For such purposes:
(a) No right of subrogation shall be available to or may be
enforced by any holder of any Subordinated Claim, unless and until all
Senior Claims (including all Post-Petition Interest/Expense Claims) have
been paid in full in cash.
(b) No holder of any Senior Claim makes any representation or
warranty, or shall otherwise have any responsibility, as to whether any
such right of subrogation is accorded or available to any holder of any
Subordinated Claim or is enforceable by any holder of any Subordinated
Claim in any particular circumstance.
(c) No holder of any Senior Claim shall have any duty to any
holder of any Subordinated Claim to ensure, perfect, protect, enforce or
maintain any right of subrogation that might otherwise be accorded or
available to or enforceable by any holder of any Subordinated Claim. The
subordination provided herein and the rights of the holders of Senior
Claims hereunder shall remain fully enforceable on the terms set forth
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herein, regardless of any act, omission or circumstance (whether or not
attributable to any holder of any Senior Claim and whether or not
wrongful) which does or might in any manner or in any respect destroy,
limit, reduce, affect or impair any right of subrogation otherwise
accorded or available to or enforceable by any holder of any
Subordinated Claim. Each holder of any Senior Claim shall remain utterly
free to take or fail to take any and all actions in respect of any
Senior Claim or any person or entity liable therefor or any collateral
security therefor (including each and all of the acts, omissions and
matters described in Section 11), without exonerating any holder of a
Subordinated Claim, even if any right of subrogation is destroyed,
limited, reduced, affected or impaired thereby.
(d) The subordination provided herein and the rights of the
holders of Senior Claims hereunder shall be fully enforceable as to all
Senior Claims which are not allowed, allowable or enforceable in such
Bankruptcy, Insolvency or Liquidation Proceeding (including
Post-Petition Interest/Expense Claims), even if and even though no right
of subrogation is available in respect of such Senior Claims.
(e) For purposes of enforcing any right of subrogation on the
terms set forth in this Section 6, no payment or distribution on account
of any Subordinated Claim applied to the payment of a Senior Claim
shall, as between the Company and the holder of such Subordinated Claim
and to the extent of the payment or distribution so applied, discharge
the liability of the Company for the payment of such Senior Claim and,
to this end, the Company shall remain obligated to pay such Senior Claim
in full despite any such application.
Section 7. Restrictions as to Security for Subordinated Claims.
(a) The Company will not grant or permit to exist, and no holder
of Subordinated Claims will demand, accept, take, seize or retain, any
security interest or lien upon any property now owned or hereafter
acquired by the Company or any Subsidiary as security for any
Subordinated Claim.
(b) The Company will not cause, permit or suffer any Subsidiary
to guarantee or otherwise become or remain liable for the payment of any
Subordinated Claim or to become or remain bound by any covenant or
agreement or any other form of assurance in any respect relating
thereto, and no holder of Subordinated Claims will demand, accept or
retain any such guarantee, liability, covenant, agreement or assurance.
Section 8. Restrictions Relating to Senior Documents. No holder of any
Subordinated Claim will accept or retain the benefit of any agreement in any
respect restricting the right of the Company or any Subsidiary (i) to incur or
repay or secure any Senior Claims in any amount, (ii) to enter into, amend,
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supplement, change, terminate, replace or refinance the Credit Lyonnais Credit
Agreement or any other agreement governing or relating to any Senior Credit
Facility, or (iii) to sell, transfer or otherwise dispose of any or all of the
capital stock of, or partnership or limited liability company interests in, or
other equity interests in, any Subsidiary or to sell, transfer or otherwise
dispose of any or all of the property or assets of the Company or any
Subsidiary, including dispositions by merger or consolidation, except only the
sale, transfer or other disposition of all or substantially all of the assets of
the Company and its Subsidiaries, taken as a whole. To the extent any of the
foregoing is prohibited or restricted in any manner under any provision of the
Subordinated Loan Documents, such provision is hereby forever waived by each
holder of Subordinated Claims.
Section 9. Amendment of Subordinated Loan Documents. No holder of
Subordinated Claims will enter into or accept any agreement to amend,
supplement, terminate or otherwise change any of the Subordinated Loan
Documents, except upon the prior written consent of the Required Senior Lenders.
Section 10. Acceleration and Enforcement of Subordinated Claims. Until
all commitments for any extension of credit under each outstanding Senior Credit
Facility have been discharged and all outstanding Senior Claims have been paid
in full in cash, no holder of Subordinated Claims will (a) demand, accelerate,
bring suit to collect or otherwise exercise or enforce any right or remedy in
respect of any Subordinated Claim or commence or prosecute any action or
proceeding thereon, (b) commence any Bankruptcy, Insolvency or Liquidation
Proceeding or join with any creditor in commencing any Bankruptcy, Insolvency or
Liquidation Proceeding, or appear in any Bankruptcy, Insolvency or Liquidation
Proceeding commenced by any other creditor in support of the commencement or
continuation thereof, or (c) otherwise exercise or enforce any right or remedy
in respect of any Subordinated Claim, including any right or remedy that
otherwise might be available to it in any Bankruptcy, Insolvency or Liquidation
Proceeding, unless:
(a) the Senior Agent has received written notice thereof,
stating the action to be taken and the grounds therefor, and
(b) at least 360 days have elapsed since the date such written
notice was received by the Senior Agent.
Notwithstanding the foregoing, nothing in this Section 10 shall limit
the rights of the Subordinated Lender to (i) refuse to make additional loans or
advances upon commencement of a Bankruptcy, Insolvency or Liquidation Proceeding
or (ii) prove and establish its Subordinated Claims in any such Bankruptcy,
Insolvency or Liquidation Proceeding.
Section 11. Subordination not Prejudiced, Affected or Impaired. No right
of any present or future holder of any Senior Claim to enforce subordination as
provided in this
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Agreement shall at any time in any way be prejudiced, affected or impaired by
any act or failure to act on the part of the Company or any Subsidiary or by any
act or failure to act on the part of any holder of Senior Claims or by any
breach or default by the Company or any Subsidiary in the performance or
observance of any promise, covenant or obligation enforceable by any holder of
Subordinated Claims, regardless of any knowledge thereof that any holder of
Senior Claims may have or otherwise be charged with.
(a) Without in any way limiting the generality of the foregoing,
each holder of any Senior Claim may at any time and from time to time,
without the consent of or notice to any holder of Subordinated Claims,
without incurring any responsibility or liability to any holder of
Subordinated Claims and without in any manner prejudicing, affecting or
impairing the subordination provided herein or the obligations of the
holders of Subordinated Claims under this Agreement:
(1) Make loans and advances to the Company or any
Subsidiary or issue, guaranty or obtain letters of credit for
account of the Company or any Subsidiary or otherwise extend
credit to the Company or any Subsidiary, in any amount and on
any terms, whether pursuant to a commitment or as a
discretionary advance and whether or not any default or event of
default or failure of condition is then continuing;
(2) Change the manner, place or terms of payment or
extend the time of payment of, or renew or alter, compromise,
accelerate, extend or refinance, any Senior Claim or any
agreement, guaranty, lien or obligation of the Company or any
Subsidiary or any other person or entity in any manner related
thereto, or otherwise amend, supplement or change in any manner
any Senior Claim or any such agreement, guaranty, lien or
obligation;
(3) Increase or reduce the amount of any Senior Claim or
the interest, premium, fees or other amounts payable in respect
thereof;
(4) Release or discharge any Senior Claim or any
guaranty thereof or any agreement or obligation of the Company
or any Subsidiary or any other person or entity with respect
thereto;
(5) Take or fail to take any collateral security for any
Senior Claim or take or fail to take any action which may be
necessary or appropriate to ensure that any security interest or
lien upon any property securing any Senior Claim is duly
enforceable or perfected or entitled to priority as against any
other lien or to ensure that any proceeds of any property
subject to any security interest or lien are applied to the
payment of any Senior Claim;
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(6) Release, discharge or permit the lapse of any or all
security interests or liens upon any property at any time
securing any Senior Claim;
(7) Exercise or enforce, in any manner, order or
sequence, or fail to exercise or enforce, any right or remedy
against the Company or any Subsidiary or any collateral security
or any other person, entity or property in respect of any Senior
Claim or any security interest or lien securing any Senior Claim
or any right under this Agreement, and apply any payment or
proceeds of collateral in any order of application; or
(8) Sell, exchange, release, foreclose upon or otherwise
deal with any property that may at any time be subject to any
security interest or lien securing any Senior Claim.
(b) No exercise, delay in exercising or failure to exercise any
right arising under this Agreement, no act or omission of any holder of
Senior Claims in respect of the Company or any Subsidiary or any other
person or entity or any collateral security for any Senior Claim or any
right arising under this Agreement, no change, impairment, or suspension
of any right or remedy of any holder of any Senior Claim, and no other
act, failure to act, circumstance, occurrence or event which, but for
this provision, would or could act as a release or exoneration of the
obligations of the holders of Subordinated Claims hereunder shall in any
way affect, decrease, diminish or impair any of the obligations of any
holder of Subordinated Claims under this Agreement or give any holder of
Subordinated Claims or any other person or entity any recourse or
defense against any holder of Senior Claims in respect of any right
arising under this Agreement.
Section 12. Reinstatement. If any payment or other transfer at any time
applied to the payment or satisfaction of any Senior Claim is thereafter
rescinded, recovered, set aside, avoided or required to be returned, then such
Senior Claim and all rights of the holder of such Senior Claim to enforce
subordination as set forth herein shall be automatically and unconditionally
reinstated, as fully as if such payment or transfer had never been made.
Section 13. Transferees to be Bound.
(a) The Company and each holder of Subordinated Claims
represents, warrants and agrees that the following legend is and shall
at all times remain placed conspicuously upon the face and signatures
pages of each Subordinated Note and each other instrument evidencing any
Subordinated Claim held by such holder:
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The indebtedness and all obligations evidenced or represented
hereby, and certain other Subordinated Claims, are postponed,
subordinated and junior in right of payment to Senior Claims, as
defined in and on the terms set forth in a Debt Subordination
Agreement dated December 29, 1999, executed and delivered for
the benefit of the holders of such Senior Claims by the maker
hereof, and certain Subordinated Lender signatory thereto. The
provisions of said Debt Subordination Agreement are hereby
incorporated herein, as if set forth at length herein.
The Company agrees to issue any promissory note in substitution,
replacement or exchange for any Subordinated Note or any such other
instrument only on the terms set forth in the form of Subordinated Note
attached as Exhibits A and B to the Subordinated Credit Agreement, with
such legend likewise placed thereon.
(b) Prior to making or agreeing to make any transfer of any
Subordinated Note or any other instrument evidencing any Subordinated
Claim or any transfer of any interest in any Subordinated Claim, the
then holder thereof will (i) deliver a copy of this Agreement to the
transferee, (ii) cause the transferee duly to execute and deliver its
agreement to be bound by the provisions hereof, by execution of a
counterpart of the signature page hereto, stating the interest
transferred, and (iii) deliver such counterpart, so executed, to the
Senior Agent, accompanied by, if requested by the Senior Agent, an
opinion of reputable counsel stating that the execution and delivery of
such counterpart is within the power of such transferee and that such
counterpart was duly authorized, executed and delivered by such
transferee and is enforceable against such transferee in accordance with
its terms, subject to laws generally affecting the enforcement of the
rights of creditors and the applicability of general equitable
principles.
Section 14. Specific Enforcement. The Company and the Subordinated
Lender acknowledge and agree that an action for money damages is not an adequate
remedy for enforcement of this Agreement and, accordingly, agree that each and
all of the obligations arising hereunder may, at the option of the Senior Agent
or the Required Senior Lenders, be enforced by an action for specific
performance or other lawful specific or injunctive relief.
Section 15. Powers and Authorities Irrevocable; No Duty. All rights,
powers and authorities herein granted to any Senior Agent or Senior Lender, or
to the Required Senior Lenders, are coupled with an interest and are irrevocable
until Discharge of the Credit Lyonnais Financing and thereafter until all
commitments for any extension of credit or incurrence of indebtedness under each
outstanding Senior Credit Facility have been discharged and all outstanding
Senior Claims have been paid in full in cash. Such rights, powers and
authorities may
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be freely exercised by each Senior Agent or Senior Lender, or by the Required
Senior Lenders, or not exercised by any of them, in each instance as each of
them may see fit given its own individual interest as a holder of Senior Claims,
without any duty of care, duty of loyalty or other duty whatsoever to any holder
of Subordinated Claims.
Section 16. Enforceability. This Agreement (a) shall be binding upon and
enforceable against the Company and its successors and transferees and the
Subordinated Lender and each and all of its successors and transferees, (b) may
be jointly or separately enforced in any lawful manner against any one or more
or all of the persons and entities bound hereby, without any requirement that
other Claims or persons or entities bound hereby be joined (and no single or
partial exercise or enforcement of any right hereunder shall preclude any other
or further exercise or enforcement thereof), and (c) shall inure to the benefit
of and be enforceable by Credit Lyonnais, each Senior Lender and each other
present and future holder of any Senior Claim.
Section 17. Subordinated Lender's Representations and Warranties. The
Subordinated Lender hereby represents and warrants to each present and future
holder of any Senior Claim that (a) the Recital set forth in paragraph A above
is true and correct as of the date hereof, (b) it owns and is the sole holder of
the indebtedness outstanding under the Subordinated Credit Agreement, (c) it has
duly executed and delivered this Agreement, in compliance with all laws and
regulations applicable to it and all agreements binding upon it, with full power
and authority to bind itself and all holders of Subordinated Claims based upon
or arising in respect of such indebtedness, (d) this Agreement is binding upon
and legally enforceable against it and each such holder of Subordinated Claims,
and (e) its execution and delivery of this Agreement, and the performance of its
obligations hereunder and the obligations hereunder of each such holder of
Subordinated Claims, does not violate or conflict with, or constitute a default
under, any law, regulation, agreement or other contractual obligation binding
upon or enforceable against such party.
Section 18. Complete Agreement; Inconsistency; Modification; Waiver.
This Agreement sets forth definitively and exhaustively the complete agreement
of the parties with respect to the subject matter hereof. To the extent any
provision hereof is inconsistent with any provision in any of the Subordinated
Loan Documents, the provisions of this Agreement shall govern. No provision
hereof and no right arising hereunder may be modified or waived by any oral
agreement or shall be deemed to have been modified or waived by any act or
failure to act or shall otherwise be affected or changed, except as and to the
extent expressly set forth in a writing signed by the party to be bound thereby.
Section 19. Notices. Each notice required or permitted under this
Agreement to be given to any holder of Subordinated Claims shall be deemed
sufficiently given if delivered by mail, telecopy, overnight courier, personal
delivery or otherwise in any reasonable manner to the Subordinated Lender at
Societe Industrielle de Materiaux Avances, 41 Rue de Villiers, 922200
15
<PAGE>
Neuilly Sur Seine, Cedex, France, Attention: Francois Lefebvre, telecopy number
011-33-1-40882180.
Section 20. Headings. The paragraph headings herein are inserted solely
for convenience of reference and shall not be used to construe, interpret,
define or limit the provisions hereof.
Section 21. Governing Law; Consent to Jurisdiction. This Agreement shall
be governed by, and construed in accordance with, the laws of the State of New
York. Each of the Company and the Subordinated Lender and all other holders of
Subordinated Claims hereby (a) irrevocably consents to the exclusive
jurisdiction of the courts of the County of New York in the State of New York or
the courts of the United States for the Southern District of New York in respect
of any action or proceeding arising out of or in connection with this Agreement
or for the enforcement of any right hereunder, (b) waives any objection which it
may have at any time to the laying of venue of any such action or proceeding in
any such court, waives any claim that such action or proceeding has been brought
in an inconvenient forum, and further waives the right to object that such court
does not have jurisdiction over such party, and (c) agrees that process in any
such action or proceeding may be served upon it, and shall be sufficiently
served upon it, by mail to its address set out on the signature pages hereof,
without limiting the right of any person or entity to serve process in any other
manner permitted by law.
Section 22. Waiver of Right to Trial by Jury. Each party hereto hereby
waives, absolutely, unconditionally, irrevocably and forever, any right to trial
by jury in any action or proceeding arising out of or in connection with this
Agreement or for the enforcement of any right hereunder.
Section 23. Continuing and Irrevocable Agreement; Acceptance. This
Agreement is a continuing and irrevocable agreement enforceable against each
signatory party hereto by Credit Lyonnais, each Senior Lender and each other
present and future holder of any Senior Claim. Notice of acceptance hereof by
Credit Lyonnais, any Senior Lender or any such holder is hereby waived, and
reliance hereon by each of them is hereby unconditionally and conclusively
acknowledged.
Section 24. Counterparts. This Agreement may be executed in any number
of counterparts and by the parties on one or more counterparts, all of which
taken together shall constitute a single agreement. Delivery of an executed
signature page to this Agreement by facsimile shall be effective as delivery of
a manually signed counterpart.
16
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
as of the day and year first above stated.
SPECIAL METALS CORPORATION
By:________________________________
Name:___________________________
Title:__________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:________________________________
Name:___________________________
Title:__________________________
Societe Industrielle de Materiaux
Avances
By:________________________________
Name:___________________________
Title:__________________________
17
Exhibit 21.1
Subsidiaries of the Registrant
The following table sets forth the subsidiaries of the Registrant and
the respective jurisdictions under which they were organized. Indirect
subsidiaries are included beneath the respective direct subsidiaries through
which they are owned.
Subsidiary Name Jurisdiction
- --------------- ------------
Udimet Special Metals Ltd. United Kingdom
Special Metals Foreign Sales Corporation Barbados
Special Metals Domestic Sales Corporation Delaware
Inco Alloys International, Inc. d.b.a. Huntington Alloys Delaware
Daido Special Metals, Ltd. (1) Japan
Special Metals Pacific Pte. Ltd. Singapore
Inco Alloys Foreign Sales (1991) Corporation Barbados
A-1 Wire Tech, Inc. Illinois
Controlled Products Group International, Inc. Delaware
IAL Holdings Limited United Kingdom
Special Metals Wiggin Limited United Kingdom
Special Metals Services Ltd. United Kingdom
Wiggin Alloy Products Limited United Kingdom
Special Metals Services SpA Italy
Special Metals Wiggin Trustees Ltd. United Kingdom
Special Metals Services BV Netherlands
Special Metals Deutschland Limited United Kingdom
Greengrove Welding Wires Limited United Kingdom
Special Metals Services S.A. France
Incotherm LTD United Kingdom
Special Metals SARL France
Rescal, S.A. France
Huntington Alloys Canada Ltd. Canada
Spectech Alloys Limited Canada
- --------------------------
(1) A joint venture, 50% owned by the Registrant
-72-
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-26067) pertaining to the Special Metals Corporation
1997 Long-Term Stock Incentive Plan of our report dated February 10, 2000, with
respect to the financial statements and schedule of Special Metals Corporation
included in this Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
---------------------
Buffalo, New York
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,064
<SECURITIES> 0
<RECEIVABLES> 123,537
<ALLOWANCES> (2,894)
<INVENTORY> 262,474
<CURRENT-ASSETS> 430,456
<PP&E> 352,757
<DEPRECIATION> (74,254)
<TOTAL-ASSETS> 811,287
<CURRENT-LIABILITIES> 146,734
<BONDS> 259,035
104,494
0
<COMMON> 155
<OTHER-SE> 76,122
<TOTAL-LIABILITY-AND-EQUITY> 811,287
<SALES> 602,249
<TOTAL-REVENUES> 602,249
<CGS> 562,486
<TOTAL-COSTS> 562,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,711
<INCOME-PRETAX> (41,442)
<INCOME-TAX> (16,132)
<INCOME-CONTINUING> (25,310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,310)
<EPS-BASIC> 2.05
<EPS-DILUTED> 2.05
</TABLE>
