-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dj844uueOPPSZUdQW5kqgdZ1XKpTNkMbYvJl5SGmZTSYyTbsXy4rbSSrDtgzCCQt V9stDkanTYPsBVaChdl2mA== 0000950144-98-012730.txt : 19981118 0000950144-98-012730.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950144-98-012730 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMCALA INC CENTRAL INDEX KEY: 0000941174 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 341780941 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-53791 FILM NUMBER: 98749732 BUSINESS ADDRESS: STREET 1: OHIO FERRO ALLOYS ROAD STREET 2: P O BOX 68 CITY: MT MEIGS STATE: AL ZIP: 36057 BUSINESS PHONE: 3342157560 MAIL ADDRESS: STREET 1: OHIO FERRO ALLOYS ROAD STREET 2: P O BOX 68 CITY: MT MEIGS STATE: AL ZIP: 36057 10-Q 1 SIMCALA, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-29204 SIMCALA, INC. (Exact name of Registrant as specified in its charter) (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
(Address of principal executive offices and zip code) (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) and has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 5, 1998, there were 4,980,703 outstanding shares of the Registrant's Common Stock, par value $.0001 per share. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. FINANCIAL INFORMATION* * As used in this Form 10-Q, unless the context otherwise requires, "SAC" refers to SAC Acquisition Corp. "Predecessor" refers to SIMCALA, Inc. in respect of periods prior to the Acquisition (as defined herein), the "Company" refers to the registrant, SIMCALA, Inc. 3 SIMCALA, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) On March 31, 1998, SAC acquired all of the outstanding capital stock of the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. The allocation of the purchase price and acquisition costs to the assets acquired and liabilities assumed is preliminary and is subject to change pending finalization of expenses associated with the transaction. As a result of purchase accounting, the accompanying financial statements of the Predecessor and the Company are not comparable in all material respects since the financial statements report financial position, results of operations, and cash flows of these two separate entities. The Condensed Balance Sheet as of December 31, 1997 was derived from audited financial statements as of such date.
COMPANY PREDECESSOR SEPTEMBER 30, DECEMBER 31, 1998 1997 (UNAUDITED) ASSETS Current Assets Cash and cash equivalents $ 18,967 $ 635 Accounts receivable, net of allowance for doubtful accounts of $0 at September 30, 1998 and $77 at 6,167 5,830 December 31, 1997 Inventories 2,769 2,664 Deferred income taxes 2,876 1,288 Other current assets 259 128 --------- ------- Total Current Assets 31,038 10,545 Property, Plant and Equipment, net of accumulated depreciation of $1,945 and $4,045, at September 30, 1998 and December 31, 1997, respectively 53,445 22,448 Intangible Assets, net of accumulated amortization of $1,080 and $540, at September 30, 1998 and December 31, 1997, respectively 37,466 670 --------- ------- Total Assets $ 121,949 $33,663 ========= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable and accrued expenses $ 10,413 $ 6,125 Current maturities of long-term debt 79 2,341 Income taxes payable 1,194 --------- ------- Total Current Liabilities 10,492 9,660 Long Term Debt - Net of Current Portion 81,051 12,763 Deferred Income Taxes 13,339 2,964 --------- ------- Total Liabilities 104,882 25,387 Commitments and Contingencies Stockholder's Equity Common Stock, 20,000 shares authorized - 22,000 and 10,000 shares issued and outstanding, at September 30, 1998 and December 31, 1997, respectively, par value $.01 per share in 1997 and no par in 1998 -- -- Additional Paid-in Capital 18,807 2,250 Retained Earnings (1,740) 6,026 --------- ------- Total Stockholder's Equity 17,067 8,276 --------- ------- Total Liabilities and Stockholder's Equity $ 121,949 $33,663 ========= =======
See Notes to Condensed Financial Statements. -1- 4 SIMCALA, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS) (UNAUDITED) On March 31, 1998, SAC acquired all of the outstanding capital stock of the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. The allocation of the purchase price and acquisition costs to the assets acquired and liabilities assumed is preliminary and is subject to change pending finalization of expenses associated with the transaction. As a result of purchase accounting, the accompanying financial statements of the Predecessor and the Company are not comparable in all material respects since the financial statements report financial position, results of operations, and cash flows of these two separate entities.
COMPANY PREDECESSOR ----------------------------- -------------------------------------------- Three Months Six Months Three Months Three Months Nine Months Ended Ended Ended Ended Ended September 30, September 30, March 31, September 30, September 30, 1998 1998 1998 1997 1997 Net Sales $ 12,618 $ 27,536 $ 14,854 $ 15,920 $ 46,718 Cost of Goods Sold 12,211 25,233 11,679 12,270 36,897 -------- -------- -------- -------- -------- Gross Profit 407 2,303 3,175 3,650 9,821 Selling, General and Administrative Expenses 613 1,439 3,824 746 2,112 -------- -------- -------- -------- -------- Operating (Loss) Income (206) 864 (649) 2,904 7,709 Interest Expense 1,941 3,840 314 473 1,335 Other Income, Net 271 615 282 76 139 -------- -------- -------- -------- -------- Earnings (Loss) before Income Taxes (1,876) (2,361) (681) 2,507 6,513 Income Tax (Benefit) Provision (575) (621) (100) 1,031 2,393 -------- -------- -------- -------- -------- Net Income (Loss) $ (1,301) $ (1,740) $ (581) $ 1,476 $ 4,120 ======== ======== ======== ======== ========
See Notes to Condensed Financial Statements. -2- 5 SIMCALA, INC. CONDENSED STATEMENTS OF CASH FLOW (IN THOUSANDS OF DOLLARS) (UNAUDITED) On March 31, 1998, SAC acquired all of the outstanding capital stock of the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. The allocation of the purchase price and acquisition costs to the assets acquired and liabilities assumed is preliminary and is subject to change pending finalization of expenses associated with the transaction. As a result of purchase accounting, the accompanying financial statements of the Predecessor and the Company are not comparable in all material respects since the financial statements report financial position, results of operations, and cash flows of these two separate entities.
COMPANY PREDECESSOR ----------------------------- -------------------------------------------- Three Months Six Months Three Months Three Months Nine Months Ended Ended Ended Ended Ended September 30, September 30, March 31, September 30, September 30, 1998 1998 1998 1997 1997 - ---------------------------------------------------------------------------------- ------------ -------------- ------------ Cash Flows from Operating Activities: Net income (loss) $ (1,301) $ (1,740) $ (581) $ 1,476 $ 4,120 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,528 2,962 533 454 1,311 (Increase) decrease in deferred income taxes (630) 800 71 Noncash stock option compensation 904 87 87 Change in assets and liabilities: (Increase) decrease in accounts receivable 631 656 21 (224) (1,090) (Increase) decrease in other receivables 1,800 (2,807) (Increase) decrease in inventories (369) 102 (207) (190) (285) Decrease (increase) in other assets (184) (435) 140 (380) (2,327) Decrease (increase) in accounts payable and other accrued expenses (273) 541 2,365 (95) 1,647 -------- -------- ------- ------- ------- Net cash provided by operating activities 32 3,256 1,168 1,128 3,534 -------- -------- ------- ------- ------- Cash Flows used in Investing Activities: Purchase of property, plant and equipment (1,079) (2,314) (1,184) (311) (1,504) -------- -------- ------- ------- ------- Cash Flows from Financing Activities: Redemption of preferred stock (1,770) Repayment under line of credit, net (500) (3,244) Net borrowings (repayment) of long-term debt (16) (32) 39 (607) 2,976 -------- -------- ------- ------- ------- Net cash provided by (used in) financing activities (16) (32) 39 (1,107) (2,038) -------- -------- ------- ------- ------- Increase (Decrease) in Cash and Equivalents (1,063) 910 23 (290) (8) Cash and Equivalents: Beginning of Period 20,030 18,057 635 468 186 -------- -------- ------- ------- ------- End of Period $ 18,967 $ 18,967 $ 658 $ 178 $ 178 ======== ======== ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 86 $ 225 $ 161 $ 497 $ 1,073 ======== ======== ======= ======= ======= Income taxes $ 75 $ 75 $ 112 $ -- $ 184 ======== ======== ======= ======= =======
See Notes to Condensed Financial Statements. -3- 6 SIMCALA, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND OPERATIONS On March 31, 1998, SAC Acquisition Corp. ("SAC"), a subsidiary of SIMCALA Holdings, Inc. ("Holdings") purchased all of the outstanding common stock of SIMCALA, Inc. ("SIMCALA" or the "Company") (the "Acquisition"). On such date, SAC was merged into SIMCALA. Holdings and SAC conducted no significant business other than in connection with the Acquisition. The Company is a producer of silicon metal for sale to the aluminum and silicone industries. The Company sells to customers in the metal industry who are located primarily throughout the United States. Credit is extended based on an evaluation of the customer's financial condition. During 1997, three customers accounted for 29%, 24%, and 16% of net sales. During the three months ended September 30, 1998, three customers accounted for 46.3%, 22.5%, and 8.8% of net sales. At September 30, 1998 and December 31, 1997, three customers accounted for 58.8%, 10.5%, and 7.5% and 31%, 26% and 12%, respectively, of outstanding receivables. The Company maintains credit insurance for all customer accounts receivable. The Acquisition of the Predecessor for approximately $65.5 million in cash, including approximately $5 million for fees and other costs directly associated with the Acquisition, has been accounted for as a purchase. The Acquisition was financed through the issuance of senior notes in the amount of $75,000,000 (see Note 4 to the Condensed Financial Statements) and equity contributed of $22,000,000. Accordingly, purchase price has been allocated to the identifiable assets and liabilities based on fair values at the acquisition date. The allocation of the purchase price and acquisition costs to the assets acquired and liabilities assumed is preliminary at September 30, 1998, and is subject to change pending the finalization of expenses related to the Acquisition. Management does not expect such adjustments to be material. The excess of the purchase price over the fair value of the identifiable net assets in the amount of $35.0 million has been classified as goodwill. Additionally, the effect of the carryover basis of senior management of $3.2 million has been considered in the allocation of the purchase price. The carryover basis adjustment results from the application of Emerging Issues Task Force ("EITF") Consensus No. 88-16, "Basis in Leveraged Buyout Transactions," and is allocated to property, plant and equipment and goodwill based upon the March 31, 1998 balances. The condensed financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that the Predecessor interim condensed financial statements be read in conjunction with the Predecessor's most recent audited financial statements and notes thereto. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The condensed financial statements included herein for the periods prior to March 31, 1998, represent the Predecessor's results of operations and cash flows prior to the Acquisition and consequently, are stated on the Predecessor's historical cost basis. -4- 7 The condensed financial statements as of September 30, 1998, and for the six months then ended, reflect the adjustments which were made to record the Acquisition. Accordingly, the financial statements of the Predecessor for the periods prior to March 31, 1998 are not comparable in all material respects with the financial statements subsequent to the Acquisition date. The most significant differences relate to amounts recorded for property, plant and equipment, goodwill, and debt which resulted in increased cost of sales, amortization, depreciation and interest expense in the six months ended September 30, 1998 and in future periods. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES For a summary of the Company's and the Predecessor's accounting policies, please refer to the Company's Registration Statement No. 333-53791 filed on July 27, 1998 with the Securities and Exchange Commission on Form S-1. New Accounting Pronouncements - In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for the reporting and displaying of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 131 establishes standards for the way the public business enterprises report information about operating segments in interim financial reports issued to shareholders. The Company adopted SFAS 130 and SFAS 131 effective January 1, 1998. The adoption of these standards did not have an effect on its financial statements. Comprehensive income equals net income for the three months ended September 30, 1998, the six months ended September 30,1998, the three months ended March 31, 1998 and the six and nine months ended September 30, 1997. The Company did not have accumulated other comprehensive income as of September 30, 1998 or December 31, 1997. 3. INVENTORIES Inventories consist of the following (in thousands of dollars):
COMPANY PREDECESSOR ------------- ------------- September 30, December 31, 1998 1997 ------------- ------------ Raw Materials $ 959 $ 948 Finished Goods 1,514 1,420 Supplies 296 296 --------- ------- $ 2,769 $ 2,664 ========= =======
-5- 8 4. LONG-TERM DEBT As of September 30, 1998, long-term debt consists of the following (in thousands of dollars): Senior Notes which bear interest at 9 5/8% and are due April 2006 $75,000 Industrial development bonds which bear interest at a variable rate. At September 30, 1998, the interest rate was 5.45%. The bonds mature on December 1, 2019. Bonds and applicable interest are secured by a letter of credit 6,000 Various capital leases payable at interest rates of 9.91% to 10.0% expiring at various dates through 1999. Aggregate monthly payments approximate $6,000 130 ------- 81,130 Less current portion 79 ------- Long-term debt $81,051 =======
The Senior Notes (the "Notes") mature on April 15, 2006, unless previously redeemed. Interest on the Notes is payable semiannually on April 15 and October 15, commencing October 15, 1998. The Notes are redeemable at the option of the Company, in whole or in part, on or after April 15, 2002, at the redemption price, plus accrued interest and liquidated damages, as defined, if any. The Notes are generally unsecured obligations of the Company and rank senior to all existing and future subordinated indebtedness of the Company. In connection with the Acquisition, the Company entered into a credit facility which provides availability for revolving borrowings and letters of credit in an aggregate amount of up to $15,000,000 (the "Revolving Credit Facility"). The Revolving Credit Facility expires in March 2003. At September 30, 1998, $6.1 million was outstanding under the Revolving Credit Facility. The Notes and the Revolving Credit Facility contain a number of covenants, including, among others, covenants restricting the Company and its subsidiaries with respect to the incurrence of indebtedness (including contingent obligations); the creation of liens; substantially changing the nature of its business; the consummation of certain transactions such as dispositions of substantial assets, mergers or consolidations; the making of certain investments and loans; the making of dividends and other distributions; the prepayment of indebtedness; transactions with affiliates; agreeing to certain restrictions on its actions (including agreeing not to grant liens); and limitations on sale leaseback transactions. In addition, the Revolving Credit Facility contains affirmative covenants including, among others, requirements regarding compliance with laws; preservation of corporate existence; maintenance of insurance; payment of taxes and other obligations; maintenance of properties; environmental compliance; the keeping of the books and records; the maintenance of intellectual property; and the delivery of financial and other information to the agent and the lenders under the Revolving Credit Facility. The Company is required to comply with certain financial tests and maintain certain financial ratios. Certain of these test and ratios include: (i) maintaining a minimum net worth; (ii) maintaining a maximum ratio of indebtedness to EBITDA; and (iii) maintaining a minimum ratio of EBITDA to interest expense. -6- 9 During the quarter ended September 30, 1998, the Company reached agreement with BankAmerica to amend its Minimum Net Worth covenant. As a result of the amendment, the Company is in compliance with all loan covenants as of November 9, 1998. Credit extended under the Revolving Credit Facility is secured by substantially all of the Company's assets and the real and personal property used in the Company's operations. The Company is a party to a capital lease for land and buildings at its manufacturing facility in Mt. Meigs, Alabama (the "Lease"). The Lease is with the Industrial Development Board ("IDB") for the city of Montgomery. Rental payments of $2,000 a year are required and the term of the Lease expires June 1, 2010. The Lease contains a bargain purchase option whereby the property can be purchased from the IDB for $1. 5. PRO FORMA DATA The following unaudited pro forma financial data has been prepared assuming that the Acquisition was consummated on January 1, 1997. This pro forma financial data is presented for informational purposes and is not necessarily indicative of the operating results that would have occurred had the Acquisition been consummated on January 1, 1997, nor is it necessarily indicative of future operations (in thousands of dollars).
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS Ended Ended Ended Ended March 31, 1998 September 30, 1998 September 30, 1997 September 30, 1997 Net Sales $ 14,854 $ 42,390 $15,920 $ 46,718 Net Income (Loss) $ (2,378) $ (7,988) $ 72 $ (1,248)
6. RELATED PARTY TRANSACTIONS In connection with the Acquisition, the Company entered into a consulting agreement with CGW Southeast Management III, L.L.C. ("CGW Management") whereby the Company pays a monthly retainer fee of $15,000 for financial and management consulting services. In addition, the Company pays a fee to CGW Management at the end of each year which is based on the profits generated by the Company during the year. The consulting agreement expires in 2003. -7- 10 7. SUPPLEMENTAL CASH FLOW INFORMATION Following are the sources and uses of cash associated with the Acquisition (in thousands of dollars): Sources of Funds Received for the Acquisition: Notes sold in the offering $ 75,000 Equity contribution 22,000 -------- $ 97,000 ======== Uses of Funds for the Acquisition: The Acquisition $ 65,533 Repayment of indebtedness 9,159 Transaction fees and expenses 4,886 General corporate purposes 17,422 -------- $ 97,000 ========
-8- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On March 31, 1998, SIMCALA Holdings, Inc. ("Holdings"), through its wholly-owned subsidiary, SAC Acquisition Corp. ("SAC"), acquired all of the outstanding shares of common stock of SIMCALA, Inc. ("SIMCALA" or the "Company"). On such date, SAC was merged into SIMCALA (the "Acquisition"). SIMCALA, as the surviving corporation in the Acquisition, became a wholly-owned subsidiary of Holdings. The following is a discussion of the Company's results of operations. The discussion is based upon (a) the three month period ended September 30, 1998 in comparison to the three month period ended September 30, 1997 and (b) the six month period ended September 30, 1998 plus the three month period ended March 31, 1998, in comparison to the nine month period ended September 30, 1997. RESULTS OF OPERATIONS The table below sets forth certain income and expense items and the percentage that such items increased or decreased in 1998 when compared to the corresponding period in 1997. (IN THOUSANDS OF DOLLARS, EXCEPT PERCENTAGES)
%INCREASE QUARTER ENDED (DECREASE) SEPTEMBER 30, FROM ------------------------------ PRIOR 1998 1997 PERIOD Net sales $ 12,618 $ 15,920 (20.7)% Cost of goods sold 12,211 12,270 (0.6)% -------- -------- Gross profit 407 3,650 (88.8)% Selling, general and administrative expenses 613 746 (17.8)% -------- -------- Operating income (loss) (206) 2,904 (107.1)% Interest expense 1,941 473 310.4 % Other income, net 271 76 256.6 % -------- -------- Earnings (loss) before income taxes (1,876) 2,507 (174.8)% Income tax (benefit) provision (575) 1,031 (155.8)% -------- -------- Net income (loss) $ (1,301) $ 1,476 (188.1)% ======== ========
-9- 12 The table below sets forth certain of the Company's statement of operations information as a percentage of net sales during the three months ended September 30, 1998 and 1997:
QUARTER ENDED SEPTEMBER 30, ------------------------------ 1998 1997 Net sales 100.0% 100.0% Cost of goods sold 96.8% 77.1% --------- ------- Gross profit margin 3.2% 22.9% Selling, general and administrative expenses 4.9% 4.7% --------- ------- Operating income (loss) (1.7)% 18.2% Interest expense 15.4% 3.0% Other income, net 2.1% 0.5% --------- ------- Earnings (loss) before income taxes (15.0)% 15.7% Income tax (benefit) provision (4.6)% 6.5% --------- ------- Net income (loss) (10.4)% 9.2% ========= =======
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 NET SALES Net sales decreased by $3.3 million in the third quarter of 1998, or 20.7 percent, to $12.6 million from $15.9 million in the third quarter of 1997. This decline was due principally to decreased selling prices in the secondary aluminum silicon metal markets coupled with a decrease in tons sold in the quarter. Production of silicon metal in the third quarter of 1998 was 8,554 metric tons, compared with 9,866 metric tons produced in the same period in 1997. Production was lower due to a shutdown for planned furnace maintenance coupled with smelting inefficiencies in one of the Company's furnaces. GROSS PROFIT Gross profit decreased by $3.2 million, or 88.8 percent, to $.4 million in the third quarter of 1998 as compared to $3.6 million in the third quarter of 1997. The gross profit margin, defined as gross profit as a percentage of net sales, decreased to 3.2 percent in the third quarter of 1998 from 22.9 percent in the third quarter of 1997. These decreases were principally due to decreased selling prices in secondary aluminum silicon metal markets coupled with higher depreciation and amortization expenses resulting from the Acquisition. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses decreased $.1 million, to $.6 million in the third quarter of 1998 as compared to $.7 million in the third quarter of 1997. The decrease is primarily due to recognition of stock option compensation expense in 1997 which was not recognized in 1998. -10- 13 OPERATING INCOME As a result of the decrease in net sales as discussed above, income from operations decreased $3.1 million to $(.2) million in the third quarter of 1998 from $2.9 million in the third quarter of 1997, while the operating margin, defined as operating income (loss) as a percentage of net sales, decreased to (1.7) percent from 18.2 percent for the same periods. INTEREST EXPENSE Interest expense increased $1.4 million to $1.9 million in the third quarter of 1998 from $.5 million in the third quarter of 1997. The significant change in interest expense resulted from the increased debt associated with the Acquisition. OTHER INCOME - NET Other income - net increased $.2 million to $.3 million in the third quarter of 1998 from $76,000 in the third quarter of 1997. The increase in income is primarily due to increased interest income as the result of excess cash received from the Acquisition. INCOME TAX (BENEFIT) PROVISION The provision for income taxes decreased to a benefit of $.6 million in the third quarter of 1998 from a provision of $1.0 million in the second quarter of 1996. This decrease is primarily due to the decrease in taxable income from $2.5 million in 1997 to a loss of $1.9 million in the third quarter of 1998. NET INCOME (LOSS) Net loss for the third quarter of 1998 was $1.3 million compared to net income of $1.5 million for the third quarter of 1997. This decrease was primarily due to the decrease in net sales as discussed above as well as increased depreciation and amortization expenses resulting from the Acquisition. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 GENERAL The condensed financial statements included herein for the periods prior to March 31, 1998, represent the Predecessor's results of operations and cash flows prior to the Acquisition and consequently, are stated on the Predecessor's historical cost basis. The condensed financial statements as of September 30, 1998, and for the nine months then ended, reflect the adjustments which were made to record the Acquisition. Accordingly, the financial statements of the Predecessor for the periods prior to March 31, 1998 are not comparable in all material respects with the financial statements subsequent to the Acquisition date. The most significant differences relate to amounts recorded for property, plant and equipment, goodwill, and debt which resulted in increased cost of sales, amortization, depreciation and interest expense in the nine months ended September 30, 1998 and will result in such increases in future periods. NET SALES Net sales decreased by approximately $4.3 million in the first nine months of 1998, or 9.3 percent, to $42.4 million from $46.7 million in the first nine months of 1997. This decrease is due principally to a decrease in selling prices in aluminum silicon metal markets coupled with lower sales volume. The -11- 14 lower sales volume resulted from lower production volume. Production in the first nine months of 1998 was 27.134 metric tons, compared with 28.238 metric tons produced in the same period in 1997. GROSS PROFIT Gross profit decreased by $4.3 million, or 44.2 percent, to $5.5 million in the first nine months of 1998 as compared to $9.8 million in the first nine months of 1997. At the same time, the gross profit margin decreased to 12.9 percent from 21.0 percent. These decreases were principally due to decreased selling prices in secondary aluminum silicon metal markets coupled with higher depreciation and amortization expenses resulting from the Acquisition. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $3.2 million to $5.3 million in the first nine months of 1998 as compared to $2.1 million in the first nine months of 1997. The increase is due to a bonus paid to management related to the exercise of options of $1.5 million during the quarter ended March 31, 1998. In addition, the Company recognized compensation expense of $.9 million related to the exercise of stock options in the first quarter of 1998. The difference was further impacted by increases in management fees and compensation expense related to the Acquisition. OPERATING INCOME As a result of the above comments, income from operations decreased $7.5 million to $.2 million in the first nine months of 1998 from $7.7 million in the first nine months of 1997. At the same time, the operating margin decreased to .5 percent from 16.5 percent for the same period last year. Excluding the bonus costs discussed above recorded in the first quarter of 1998, income from operations decreased $6.0 million, or 77.9 percent, to $1.7 million in the first nine months of 1998 from $7.7 million in the first nine months of 1997, while the operating margin decreased to 4 percent from 16.5 percent for the same period last year. INTEREST EXPENSE Interest expense increased $2.9 million to $4.2 million for the first nine months of 1998 from $1.3 in the first nine months of 1997. The increase resulted form substantially higher debt levels beginning in the second quarter of 1998 associated with the Acquisition. OTHER INCOME - NET Other income - net increased $.8 million to $.9 million in the first nine months of 1998 from $.1 million in the first nine months of 1997 due to increased benefits associated with the state of Alabama's Mercedes Act which allows the Company to recognize the state taxes withheld from employees as income coupled with higher interest income. The interest was earned on excess cash balances resulting from the Acquisition. This increased benefit resulted from state tax withholdings recognized in the period for compensation related to stock options exercised by certain managers in connection with the Acquisition. -12- 15 INCOME TAX (BENEFIT) PROVISION The provision for income taxes decreased to a benefit of $.7 million in the first nine months of 1998 from a provision of $2.4 million in the first nine months of 1997. This decrease was primarily due to the decrease in taxable income from $6.5 million in 1997 to a loss of $3.0 million in 1998. NET INCOME (LOSS) Net loss for the first nine months of 1998 was $3.1 million compared to net income of $4.1 million for the first nine months of 1997. This decrease was primarily due to the decrease in net sales as discussed above as well as increased depreciation and amortization expenses resulting from the Acquisition. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flow from operations, borrowings under its secured credit facility and a portion of the net proceeds from the offering of its 9 5/8% Senior Notes due 2006 (the "Notes"). The Company's principal uses of liquidity are to fund operations, meet debt service retirements and finance the Company's planned capital expenditures, including the construction of a fourth smelting furnace. The Company's cash flows from its operations are influenced by selling prices of its products and raw materials costs, and are subject to moderate fluctuation due to market supply factors driven by imports. The Company's silicon metal business experiences price fluctuations principally due to the competitive nature of one of its markets, the secondary aluminum market. Historically, the Company's microsilica business has been affected the developing nature of the markets for this product. Average transaction selling prices for the Company's microsilica in the third quarter of 1998 were slightly below the average transaction selling princes at the end of the third quarter of 1997. Cash and cash equivalents at September 30, 1998 increased significantly from December 31, 1997, to $19.0 million from $0.6 million. Approximately $17.0 million of this increase is related to excess borrowings as of the Acquisition date. These funds will be used by the Company to fund part of the construction cost of a fourth smelting furnace. The remaining increase in cash results from normal operations of the Company coupled with the timing of payment of a recurring liability of the Company. Depreciation and amortization for the third quarter of 1998 totaled $1.5 million compared to $.5 million in the same quarter last year. The increase primarily results from a significant increase in depreciation which relates to the step-up of assets associated with the Acquisition. In addition, amortization expense increased significantly due to the amortization of the goodwill recorded as a result of the Acquisition as well as debt issuance costs also related to the Acquisition. For the nine months ended September 30, 1998 and September 30, 1997, net cash provided by operating activities was $4.4 million and $3.5 million, respectively. This increase resulted primarily from an increase in noncash expenses and collection of a large receivable offset by reduced net income. Net cash used in investing activities increased to $3.5 million for the nine months ended September 30, 1998 from $1.5 million for the nine months ended September 30, 1997. This increase was the result of higher capital spending. Net cash provided by financing activities was $7,000 for the nine months ended September 30, 1998 as compared to net cash used in financing activities of $2.0 million for the nine months ended September 30, 1997. This change was principally a result of no significant financing activity in 1998. -13- 16 For the three months ended September 30, 1998 and September 30, 1997, net cash provided by operating activities was $32,000 and $1.2 million, respectively. This decrease resulted primarily from a significant decrease in net income. Net cash used in investing activities increased to $1.1 million for the three months ended September 30, 1998 from $.3 million for the three months ended September 30, 1997. This increase was the result of higher capital spending. Net cash used in financing activities was $16,000 for the three months ended September 30, 1998 as compared to $1.1 million for the three months ended September 30, 1997. This change was principally a result of no required principal payments during the quarter ended September 30, 1998. In connection with the Acquisition, the Company replaced its existing credit facility with a new credit facility (the "Credit Facility") providing availability for revolving borrowings and letters of credit in an aggregate principal amount of up to $15.0 million (of which $6.1 million is reserved for support of a letter of credit issued in connection with the industrial revenue bond financing of the Company). As of September 30, 1998, the Company had $15.0 million of availability under the Credit Facility (as such availability is reduced by the $6.1 million letter of credit thereunder). Ongoing interest payments on the 9 5/8% Senior Notes due 2006 (the "Notes") represent significant liquidity requirements for the Company. With respect to the $75.0 million borrowed under the Notes, the Company will be required to make semi-annual interest payments of approximately $3.6 million over the life of the Notes. With respect to ongoing capital spending, the Company expects to spend approximately $3.0 million to $4.0 million annually to properly maintain its furnaces and other production facilities. In addition, the Company intends to add a fourth smelting furnace over the next two years from proceeds of the Notes together with internally generated cash flow. The Company estimates that construction of the furnace will cost a total of approximately $25.0 million. Moreover, the agreement governing the Credit Facility (the " Credit Agreement") imposes restrictions on the Company's ability to make capital expenditures and both the Credit Agreement and the indenture governing the Notes ("the Indenture") limit the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company's ability to respond to market conditions, to meet its capital spending program, to provide for unanticipated capital investments or to take advantage of business opportunities. The covenants contained in the Credit Agreements also, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur guarantee obligations, repay the Notes, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in acquisitions or consolidations, make capital expenditures or engage in certain transactions with affiliates, and otherwise restrict corporate activities. The covenants contained in the Indentures governing the Notes also impose restrictions on the operation of the Company's business. During the quarter ended September 30, 1998, the Company reached agreement with BankAmerica to amend its' Minimum Net Worth covenant. As a result of the amendment, the Company is in compliance with all loan covenants as of November 9, 1998. YEAR 2000 The Company uses several application programs written over many years using two-digit year fields to define the applicable year, rather than four-digit year fields. Such programs may recognize a date using "00" as the year 1900 rather than the Year 2000. This misinterpretation of the year could result in an incorrect computation, a computer malfunction, or a computer shutdown. -14- 17 The Company has identified the systems that could be affected by the Year-2000 issue and has developed a plan to resolve the issue. The plan contemplates, among other things, the replacement or modification of certain data processing systems. Management has estimated that the costs associated with the implementation of the plan to be approximately $50,000 although no assurances can be given in this regard. The Company has also begun to review its top suppliers and customers to determine whether they have similar Year-2000 issues and, if so, when they will become Year-2000 compliant. This will allow the Company to determine whether the suppliers' and customers' Year-2000 problems will impede their ability to provide goods and services to the Company. An initial review has indicated that all of the Company's major suppliers and customers appear to be in the progress of resolving their Year-2000 issues and that they do not foresee any material problems. If the Company cannot successfully and timely resolve its Year-2000 issues, its business, results of operations and financial condition could be materially adversely effected. The Company has not developed a contingency plan in the event of a Year-2000 problem. However, based upon the results of the Company's internal review, it does not believe a contingency plan is necessary. The Company will, however, continue to evaluate the need for a contingency plan is necessary. The Company will, however, continue to evaluate the need for a contingency plan. FORWARD LOOKING STATEMENTS Certain of the matters discussed in the preceding pages, particularly regarding anticipating future financial performance, business prospects, growth and operating strategies, the effects of the Acquisition on the Company and similar matters, and those preceded by, followed by or that otherwise include the words "may," "would," "could," "will," "believes," "expects," "anticipates, plans, intends, estimates, or similar expressions or variation thereof constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. The following important facts, in addition to those discussed elsewhere in this document, may affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements: the Company's significant leverage and debt service requirements; restrictive covenants in the Company's debt agreements; the loss of business from a key customer; the Company's dependence on its supply of electrical power; increasing levels of competition in the Company's industry; the maintenance of effective silicon metal anti-dumping legislation; changes in the demand for, and the pricing of, silicon metal; the Company's retention of key personnel; changes in the price of silicon metal; the inability of the Company, or its major customer or suppliers, to resolve the Year-2000 issue in a manner that does not have a material adverse effect on the business, operations or revenues of the Company; changes in accounting policies and practices; and other risks identified from time to time in the Company's SEC reports. -15- 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable ITEM 2. CHANGES IN SECURITIES. Not applicable ITEM 3. DEFAULTS UPON SENIOR NOTES. Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable ITEM 5. OTHER INFORMATION. Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K Not applicable SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIMCALA, Inc. - ---------------------------------------------------------- (Registrant) Date November 13, 1998 /s/ R. Myles Cowan --------------------------- ------------------------------------------- R. Myles Cowan Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)
-16- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 APR-01-1998 SEP-30-1998 18,967 0 6,167 0 2,769 31,038 53,445 1,945 121,949 10,492 81,051 0 0 18,807 (1,740) 121,949 27,536 28,151 25,233 25,233 1,439 0 3,840 (2,361) (620) (1,740) 0 0 0 (1,740) 0 0 CUMULATIVE 9 MONTHS ENDED 9-30-98 INFORMATION IS NOT INCLUDED DUE TO CHANGE IN CONTROL OF COMPANY ON MARCH 31, 1998.
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