-----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, OLoEbGWKh7fCoqpn1ZPUGeDVgYROGTF1nl54NQggagDFQMs/uTp9CfmjFU4Wxq8w gh5BXf+eURSXUAkN6hMTcg== 0000950144-99-003769.txt : 19990402 0000950144-99-003769.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003769 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 333-53791 FILM NUMBER: 99581995 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-K405 1 SIMCALA, INC. 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K -------------- (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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ COMMISSION FILE NUMBER 0-29204 ---------------- SIMCALA, INC. (Exact name of registrant as specified in its charter) DELAWARE 34-1780941 (State or other (I.R.S. Employer jurisdiction of incorporation) Identification No.) OHIO FERRO ALLOYS ROAD MT. MEIGS, ALABAMA 36057 (Address of principal executive offices) (334) 215-7560 (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: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X___ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The number of shares of the registrant's Common Stock outstanding at March 1, 1999 was 10,889. There is no public trading market for shares of the registrant's Common Stock. ================================================================================ 2 SIMCALA, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER PART I 1. BUSINESS 1 2. PROPERTIES 7 3. LEGAL PROCEEDINGS 7 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7 PART II 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8 6. SELECTED FINANCIAL DATA 9 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 22 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 23 11. EXECUTIVE COMPENSATION 24 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 27 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 30
SIGNATURES 36 FINANCIAL STATEMENTS F-1 3 SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters discussed in this document, particularly regarding anticipating future financial performance, business prospects, growth and operating strategies, the effects of the Transactions (as defined below) on SIMCALA, Inc. ("SIMCALA" or 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 variations thereof may constitute "forward-looking statements" for purposes of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, 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. A variety of factors, including without limitation those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 hereof, may affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements. PART I. ITEM 1. BUSINESS. GENERAL The Company is a leading domestic manufacturer of silicon metal which is used in the chemical and aluminum industries. Silicon metal is an essential raw material used by the chemical industry to produce silicones and polysilicon and by the aluminum industry primarily as an alloying agent. The Company produces and sells higher margin chemical grade and specialty aluminum grade silicon metal, both of which contain the highest concentrations of silicon and the lowest levels of impurities when compared to lower grades of silicon metal. Silicones are the basic ingredient used in numerous consumer products, including lubricants, cosmetics, shampoos, gaskets, building sealants, automotive hoses, water repellent fluids and high temperature paints and varnishes. Polysilicon is an essential raw material used in the manufacture of silicon wafers for semi-conductor chips and solar cells. Aluminum containing silicon metal as an alloy can be found in a variety of automobile components, including engine pistons, housing and cast aluminum wheels. Management believes that there are no commercially feasible substitutes for silicon metal in either the chemical or aluminum industries. In addition to silicon metal, the Company produces microsilica, a co-product of the silicon metal smelting process. Microsilica is a strengthening and filler agent which has applications in the refractory, concrete, fibercement, oil exploration and minerals industries. In 1998, the Company's production volume was approximately 36,515 metric tons, with net sales of $55.7 million. The Company estimates that it is one of the three largest manufacturers, in terms of volume, of silicon metal in the United States, and that its facility, located in Mt. Meigs, Alabama (the "Facility"), is the nation's second largest in terms of capacity. The Company is incorporated under the laws of the state of Delaware. The Company's principal executive offices are located at Ohio Ferro Alloys Road, Mt. Meigs, Alabama 36057, and its telephone number is (334) 215-7560. On March 31, 1998 (the "Acquisition Date"), SAC Acquisition Corp., a Georgia corporation ("SAC") and then wholly owned subsidiary of SIMCALA Holdings, Inc., a Georgia corporation ("Holdings"), acquired all of the outstanding capital stock of the Company (the "Acquisition") from its stockholders for a cash payment of approximately $65.3 million. The aggregate purchase price paid by SAC for the Acquisition was financed with the net proceeds of the offering (the "Offering") of the Company's 9 5/8% Senior Notes due 2006 in the amount of $75,000,000 (the "Notes") and the initial capital contribution by CGW Southeast Partners III, L.P. ("CGW") and C. Edward Boardwine, Dwight L. Goff and R. Myles Cowan, II (each, a "Senior Manager" and collectively, the "Senior Management") of $22.0 million to Holdings (the "Equity Contribution"), which was then contributed by Holdings to SAC. Immediately following the Acquisition, SAC merged with and into the Company, with the Company being the surviving corporation (the "Merger"). As a result of the Merger, the Company became the obligor of the Notes and a wholly owned direct subsidiary of Holdings. Holdings has no business other than holding the capital stock of the Company, which is the sole source of Holding's financial resources. Holdings is controlled by CGW, which beneficially owns shares representing 79.8% of the voting power of Holdings (on a fully diluted basis). Accordingly, CGW, through its -1- 4 control of Holdings, controls the Company and has the power to elect all of its directors, appoint new management, and approve any action requiring the approval of the holders of the Company's common stock. In connection with the Acquisition, the Company (i) repaid approximately $9.2 million of term loan indebtedness (including accrued interest thereon and fees) outstanding under its prior bank credit facility (the "Old Credit Facility") with a portion of the net proceeds of the Offering and (ii) replaced the Old Credit Facility and a related letter of credit reimbursement agreement (the "Old Reimbursement Agreement") with a new credit facility (the "New Credit Facility"). The New Credit Facility consists of a $15.0 million revolving credit facility which provides availability for borrowings and letters of credit. As part of the Company's industrial revenue bond financing (the "IRB Financing"), an approximately $6.1 million letter of credit was issued under the New Credit Facility to replace the letter of credit issued under the Old Reimbursement Agreement. The Acquisition, the Merger, the replacement of the Old Credit Facility and the Old Reimbursement Agreement with the New Credit Facility and the Equity Contribution, the Offering and the application of the net proceeds therefrom are referred to in this report as the "Transactions." PRODUCTS AND MARKETS Silicon Metal The silicon metal industry consists of two general markets: the chemical industry market and the aluminum industry market. The chemical industry market is subdivided into the silicones market and the polysilicon market, both of which require the highest grade of silicon metal. The aluminum industry market is subdivided into the primary aluminum market (producing aluminum from ore) and the secondary aluminum market (producing aluminum from scrap). The Company defines the primary aluminum market and the higher-end of the secondary aluminum market as the "specialty aluminum" market because the aluminum produced for those markets requires higher quality silicon metal. The chemical industry uses silicon metal as a raw material in the manufacture of silicones and polysilicon. Silicones are the basic ingredient used in numerous consumer products, including lubricants, cosmetics, shampoos, gaskets, building sealants, automotive hoses, water repellent fluids and high temperature paints and varnishes. Silicones are readily adaptable to a variety of uses because they possess several desirable qualities, including electrical resistance, resistance to extreme temperatures, resistance to deterioration from aging, water repellency, lubricating characteristics, relative chemical and physiological inertness and resistance to ultraviolet radiation. Polysilicon is the essential raw material used by the chemical industry in the manufacture of silicon wafers for semi-conductor chips and solar cells. The aluminum industry uses silicon metal in the production of aluminum alloys, both in primary and secondary aluminum production. Aluminum containing silicon metal as an alloy can be found in a variety of automobile components including engine pistons, housing and cast aluminum wheels. The addition of silicon metal to aluminum in the casting process improves castability and minimizes shrinkage and cracking. In the finished aluminum product, silicon metal increases corrosion resistance, hardness, tensile strength and wear resistance. In 1998 the Company produced approximately 17,000 metric tons of chemical grade silicon metal and approximately 13,000 tons of specialty aluminum grade silicon metal, representing approximately 49% and approximately 37% of its total silicon metal output, respectively. -2- 5 Microsilica (Silica Fume) During the silicon metal production process the offtake gases are drawn from the smelting furnaces by large fans and are collected in baghouses. As the material cools it oxidizes to amorphous silicon dioxide (SiO(2)) and condenses in the form of spheres consisting of non-crystalline silicon dioxide. These extremely fine particles (less than one micron in size) are referred to as microsilica (silica fume). Microsilica is widely used in the refractory, concrete, fibercement, oil exploration and minerals industry. Because there are more than 50,000 particles of microsilica for each grain of cement, microsilica is used in cement-based products to fill the microscopic voids between cement particles. In concrete applications microsilica increases the strength, durability and reduces permeability in applications such as parking garages, bridge decks and marine structures. SIMCALA collects approximately 14,000 metric tons of microsilica annually. In 1998, the Company sold approximately 11,500 metric tons of microsilica. MANUFACTURING OPERATIONS Overview Silicon metal is produced by smelting quartz (SiO(2)) with carbon substances (typically low ash coal and/or charcoal) and wood chips. Wood chips provide porosity to the raw material mix. At the Facility, an automated weighing system accurately measures the mixture of quartz, coal, charcoal and wood chips. The mixture is fed into the top of a submerged-arc electric furnace by automatic conveyors. SIMCALA's furnaces measure 28 feet in diameter and nine feet in depth. Electric power is delivered to the furnaces by pre-baked amorphous carbon electrodes. The electrodes act as conductors of electricity in each furnace, generating heat in excess of 3,000(0)C. At this temperature, the mix of raw materials reaches a molten state. The carbon, acting as a reducing agent, combines with the oxygen in the silicate to form the silicon metal. The molten silicon metal is intermittently tapped out of the furnaces into ladles, where it is refined by injecting oxygen to meet specific customer requirements. After the refining process, the silicon metal is cast into iron chills (molds) for cooling. When the casts have cooled, they are weighed and crushed to the desired size. The finished silicon metal is then shipped to the customer in bulk, pallet boxes or bags by railcars or trucks. The emissions from the electric arc furnaces are collected by dust collecting hoods and passed through a dust collection and bagging system. The resulting co-product is microsilica. Technology The carbothermic smelting process used in the production of silicon metal is well established. In recent years, the Company has made significant technological advances in key areas. The batch weighing system for raw materials is computer controlled to adjust weights for incoming batches based on feedback from prior batches. Computers monitor key operational variables in the smelting process for increased production controls. The Company employs the most advanced furnace electrodes produced by UCAR International Inc., the world leader in electrode technology. The Company has also installed an advanced oxygen-air system that enables refining of the molten silicon metal in order to consistently meet the quality requirements for chemical grade and specialty aluminum grade silicon metal. Product Quality SIMCALA is committed to being a leading manufacturer of high grade silicon metal. To achieve this goal, SIMCALA is dedicated to a total quality assurance program which is tied to complying with ISO 9000 standards, including the use of statistical techniques to improve process capability, audits by trained and qualified personnel and a documented system for disposing of nonconforming materials. The Company warrants to its customers that its products will meet their specifications and provides a Certificate of Analysis with each shipment. Customers are permitted to return products that do not meet their specifications. The certified analysis is based on samples taken during the process at key control points with real time analysis provided by the Company's in-house X-ray fluorescent analytical instruments. -3- 6 Employee Training The Company believes that it has one of the most experienced and efficient management teams in the silicon metal business. This management team is supported by a productive and experienced workforce equipped with skills in metallurgical operations, maintenance, quality control and marketing. Employees participate in SIMCALA's training program which has been jointly developed by the Alabama State Department of Education and the John M. Patterson State Technical College. The program is designed to provide each employee with the skills required to evaluate, control and continuously improve production and support service processes. In 1998, employee productivity was approximately 292 metric tons of silicon metal per hourly employee. RAW MATERIALS The Facility is located in close proximity to abundant sources of high-quality and competitively priced raw materials and electricity. Where strategically important, the Company may enter into long-term contracts to secure a stable supply of raw materials at favorable prices, although it currently has only a long-term contract for the supply of electricity. The Company believes that the quality of its raw materials is among the highest available and that supplies are adequate to satisfy its long-term requirements. Because the Company believes there are sufficient alternative sources of quality raw materials available to it, it is not expected that the loss of any one of its suppliers would have a material adverse effect on the Company. The principal cost components in the production of silicon metal are electricity, carbon electrodes, quartz, coal, charcoal and wood chips. Electricity is the largest cost component, comprising 25% of cost of goods sold in 1998. The balance of raw materials, consisting of electrodes, quartz, coal/charcoal and wood chips, represented 14%, 4%, 13% and 8% of cost of goods sold, respectively, in 1998. In addition, labor comprised 7% of cost of goods sold in 1998. Electrical power used in the smelting process is supplied by Alabama Power Company ("APCo") through a dedicated 110,000 volt line into SIMCALA's high voltage main substation. The Company has a five-year contract with APCo through February 2000. Although the Company does not expect any rate increases through the contract period, the current rate schedule could be revised during the contract term pursuant to regulation by the Alabama Public Service Commission. If, however, electric rates did increase significantly, such increases would have an adverse effect on the Company's operating performance and the Company may not be able to pass the additional cost on to its customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Dependence on Supply of Electrical Power." The Company purchases two sizes of quartz from a local supplier. The low level of iron and titanium impurities found in local Alabama quartz is ideally suited to produce chemical grade silicon metal. High grade metallurgical coal is supplied by one supplier located in Alabama and two in Kentucky. Metallurgical grade charcoal is purchased from one supplier in Kentucky and one in Missouri. Hardwood logs are purchased and processed into metallurgical wood chips on-site by an independent contractor. The logs are harvested in close proximity to the Facility. CUSTOMERS The Company is a supplier to two of the largest producers of silicones in the United States, G.E. Silicones, a division of General Electric Company ("G.E. Silicones"), and Dow Corning Corporation ("Dow Corning"). G.E. Silicones' production facility, which is located in Waterford, New York, consumes over 50,000 metric tons of silicon metal per year. The facility produces feedstock for silicones, electronic and fumed silica applications. In 1998, G.E. Silicones accounted for approximately 11% of the Company's net sales. At December 31, 1998, G.E. Silicones accounted for approximately 8% of the Company's outstanding accounts receivable. Dow Corning's production facilities are located in Carrollton, Kentucky and Midland, Michigan. Dow Corning consumes over 100,000 metric tons of silicon metal per year with the Carrollton facility being the dominant consumer. The Midland facility primarily produces feedstock for polysilicon applications in electronics while Carrollton produces siloxane for silicones applications. In 1998, Dow Corning accounted for approximately 40% of the Company's net sales. At December 31, 1998, Dow Corning accounted for approximately 54% of the Company's outstanding accounts receivable. -4- 7 SIMCALA also supplies many of the leading companies in the specialty aluminum industry. The Company's three largest customers in the specialty aluminum industry are Wabash Alloys, L.L.C. ("Wabash Alloys"), Alcan Ingot & Recycling ("Alcan") and Bohn Aluminum Corp. ("Bohn"), which in 1998 collectively accounted for approximately 19%, 8% and 3%, respectively, of the Company's net sales. At December 31, 1998, Wabash Alloys, Alcan and Bohn accounted for approximately 10%, 8% and 3%, respectively, of the Company's outstanding accounts receivable. In 1998, the Company's five largest customers accounted for approximately 81% of net sales. The Company does not generally have long-term contracts with its major customers and the loss of any major customer, or a significant reduction of the Company's business with any of them, would have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Importance of Key Customers." The Company does, however, currently have contracts for the supply of silicon metal with three of its major customers. The Company has a three-year agreement with Wabash Alloys (the "Wabash Agreement"), which is scheduled to expire on December 31, 2001. Either party may cancel the Wabash Agreement prior to expiration with six months' advance written notice. The Company also has entered into a supply agreement with Alcan (the "Alcan Agreement"). The initial three-year term of the Alcan Agreement will expire on December 31, 1999, but the Alcan Agreement will continue year to year thereafter unless cancelled by either party. Either party may cancel the Alcan Agreement upon 180 days written notice prior to the expiration of the initial term or any renewal term. The Alcan Agreement also provides that, if for any reason beyond the control of the parties, economic circumstances change in such a way as to cause undue hardship to either party or unduly favor one party to the detriment of the other party, and the parties are unable to find a mutually acceptable solution within ninety days, the Alcan Agreement can be canceled. In addition, the Company has entered into a supply agreement with Dow Corning (the "Dow Agreement") with an initial term commencing January 1, 1998 and ending on December 31, 2004. The Dow Agreement will automatically continue thereafter until either party terminates with 24 months prior written notice. Most of the Company's customers require their suppliers to pass a rigorous qualification process. Although each customer has established its own testing requirements, qualification processes are generally designed to test for (i) low variability of critical chemical elements and (ii) reliable and predictable chemical reactivity. The process can take anywhere from two to three years depending upon the customer's testing requirements and the manufacturer's ability to comply with such requirements. The Company views the qualification process as a competitive barrier to entry in its business. COMPETITION The Company competes in the silicon metal market primarily on the basis of product quality (particularly in the production of chemical grade silicon metal), service and price. In the chemical and specialty aluminum markets, the Company considers itself in competition only with other domestic producers. Management believes that foreign manufacturers are not reliable alternative sources of high-grade silicon metal, primarily due to quality issues and high freight costs. The Company, however, does compete with a number of domestic companies, including Globe Metallurgical Inc. and Elkem Metals Company ("Elkem Metals"). SIMCALA is strongly positioned in the chemical and specialty aluminum markets. In 1998, the Company estimates that it held a market share of approximately 13% of the total United States chemical market and approximately 13% of the total United States aluminum market, based on metric tons of silicon metal sold. EMPLOYEES As of December 31, 1998, the Company employed 170 people, of which 125 people were paid on an hourly basis. Approximately 80% of the employees paid on an hourly basis are represented by the United Steelworkers of America, Local 8538 (the "Union"). On August 8, 1995, the Company and the Union entered into a five-year collective bargaining contract. Although wages remain fixed over the life of the Union contract, the Company agreed in the contract to discuss wages with the Union beginning in February 1998. In mid-February 1998, management held meetings with Union and non-Union employees to discuss various matters, including wage levels. There has been no increase in wages as a result of such -5- 8 meetings. The Company does not believe that this provision in the Union contract requires the renegotiation of wage levels. The Company believes that its relations with all its employees are good. ENVIRONMENTAL AND REGULATORY MATTERS Environmental The Company is subject to extensive federal, state and local environmental laws and regulations governing the discharge, emission, storage, handling and disposal of a variety of substances and wastes used in or resulting from the Company's operations. Although the Company believes that it is currently in material compliance with those laws and regulations, it has historically, and expects to continue to, incur costs related to environmental remediation. However, the Company is not aware of any material remediation contingencies associated with any of its real estate or facilities. The Company estimates that approximately $1.0 million of budgeted capital expenditures in each of 1999 and 2000 will relate to air abatement equipment. Taxes As an economic incentive to facilitate the rehabilitation of the Facility, the State Industrial Development Authority, a public corporation organized under the laws of the State of Alabama (the "SIDA"), granted SIMCALA significant tax credits against corporate income tax and the collection of state income tax withholding from employees under Alabama Act No. 93-851, also known as the "Mercedes Act." Subject to certain requirements, these benefits allow the Company to (i) apply state employee withholding tax, otherwise payable to the Alabama Department of Revenue, toward the payment of the Company's debt obligation under the bond loan agreement associated with the IRB Financing (the "Bond Loan Agreement") and (ii) take a corporate income tax credit equal to the amount paid pursuant to the Bond Loan Agreement. The Mercedes Act has been repealed in favor of a new incentives package for projects subsequent to January 1995. In addition, because legal title to substantially all of the real and personal property used in the Company's operations is held by the Montgomery Industrial Development Board (the "Montgomery IDB") in connection with the IRB Financing, the Company receives, and expects to continue to receive, an exemption from property tax through May 31, 2010. Furthermore, the Company expects that the property tax exemptions will apply to the fourth smelting furnace the Company intends to construct. See "Properties." Anti-Dumping Duties on Foreign Competitors' Products In 1990 and 1991, domestic producers of silicon metal successfully prosecuted anti-dumping actions against unfairly traded imports of silicon metal from the People's Republic of China (the "PRC"), Brazil and Argentina. These actions were brought under the antidumping provisions of the Tariff Act of 1930, as amended. Under that statute, an anti-dumping duty order may be issued if a domestic industry establishes in proceedings before the United States Department of Commerce and the United States International Trade Commission that imports from the country (or countries) covered by the action(s) are being sold at less than normal value and are causing material injury or threat of such injury to the domestic industry. An anti-dumping order requires special duties to be imposed in the amount of the margin of dumping (i.e., the percentage difference between the United States price for the goods received by the foreign producer or exporter and the normal value of the merchandise). Once an order is in place, each year foreign producers, importers, domestic producers and other interested parties may request a new investigation (or "administrative review") to determine the margin of dumping during the immediately preceding year. The rates calculated in these administrative reviews (or the existing rates if no review is requested) are used to assess anti-dumping duties on imports during the review period and to collect cash deposits on future imports. An administrative review covering five Brazilian producers and a review covering two PRC exporters are now in progress. The rates established in these reviews and in future reviews will depend upon the prices and costs during the periods covered by the reviews, the methodologies applied and other factors. Anti-dumping orders remain in effect until they are revoked. In order for an individual producer or exporter to qualify for revocation of an anti-dumping order, the United States Department of Commerce must conclude that the producer or exporter has sold the merchandise at not less than normal value for a period of at least three consecutive years and is not likely to sell the merchandise at less than normal value in the future. Anti-dumping orders may also be revoked as a result of periodic "sunset reviews." The domestic silicon metal industry has aggressively sought to maintain effective relief under the antidumping orders by actively participating in administrative reviews, appeals and circumvention proceedings. Although these efforts -6- 9 have been successful in protecting the industry from dumped imports from the countries covered by the orders, no assurance can be given that one or more of such anti-dumping orders will not be revoked or that effective duty rates will continue to be imposed. ITEM 2. PROPERTIES. The Facility consists of a silicon metal production plant and administrative offices, which are located on 129 acres in Mt. Meigs, Alabama, approximately 15 miles from Montgomery. The Facility is the newest "greenfield" silicon metal manufacturing facility in the United States. A "greenfield" silicon metal manufacturing facility is a facility that is newly constructed to manufacture silicon metal, whereas a "brownfield" facility is an addition to or expansion of an existing silicon metal manufacturing facility. The Facility contains three identical 20 megawatt submerged-arc electric furnaces with an annual capacity of 36,000 metric tons of silicon metal and 16,000 metric tons of microsilica. SIMCALA intends to expand the Facility by constructing a fourth smelting furnace and the Company believes that after this expansion the Facility will be the second largest silicon metal production facility in the world. Upon completion of the fourth furnace, the Company's production capacity will increase by approximately 12,000 metric tons to approximately 48,000 metric tons per year. Management estimates that construction of the fourth furnace can be completed within the next 20 months at a total cost of approximately $25.0 million. As a consequence of the IRB Financing, substantially all of the real and personal property used in SIMCALA's operations (including the Facility) is owned by the Montgomery IDB and leased to SIMCALA. The lease expires on June 1, 2010. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in routine litigation from time to time in the regular course of its business. There are no material legal proceedings pending or known to be contemplated to which the Company is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year ended December 31,1998. -7- 10 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. COMMON STOCK The Company's common stock is not publicly traded. The Company is a wholly owned subsidiary of Holdings, which, in turn, is substantially owned by CGW. Holdings has no business other than holding the stock of the Company, which is the sole source of Holdings' financial resources. Holdings is controlled by CGW, which beneficially owns shares representing 90.9% of the voting interest in Holdings (79.8% on a fully diluted basis). Accordingly, CGW, through its control of Holdings, controls the Company and has the power to elect all of its directors, appoint new management and approve any action requiring the approval of the holders of the Company's common stock. RECENT SALES OF UNREGISTERED SECURITIES On March 31, 1998, the Company issued and sold to NationsBanc Montgomery Securities LLC (the "Initial Purchaser") $75.0 million aggregate principal amount of 9 5/8% Senior Notes due 2006, Series A. These sales were exempt from registration under Section 4(2) of the Securities Act. The Initial Purchaser offered those securities for resale in transactions not requiring registration under the Securities Act to persons they reasonably believed to be "Qualified Institutional Buyers" as defined in Rule 144A under the Securities Act or institutional "Accredited Investors" as defined in subparagraph (a)(1), (2), (3) or (7) of Commission Rule 501 under the Securities Act. The aggregate price to investors for those securities was $75.0 million and the Initial Purchaser received $2.25 million in discounts and commissions. On March 31, 1998, the Company also issued and sold pursuant to the exercise of stock options, an aggregate of 889 shares of common stock to C. Edward Boardwine, its President and Chief Executive Officer, Dwight L. Goff, its Vice President, and R. Myles Cowan, II, its Vice President -- Finance. The exercise price for each share subject to an option was $100. The Company relied upon Section 4(2) and Regulation D to issue the securities. -8- 11 ITEM 6. SELECTED FINANCIAL DATA. The selected financial information as of and for the nine months ended December 31, 1998 has been derived from the financial statements of the Company which have been audited by Deloitte & Touche LLP, independent auditors ("D&T"), and are included elsewhere in this report. The selected financial information for the three months ended March 31, 1998 has been derived from the statements of income and cash flows of the Company prior to the Acquisition (the "Predecessor") which have been audited by D&T and are included elsewhere in this report. The selected financial information for the year ended December 31, 1997 and as of such date has been derived from the financial statements of the Predecessor which have been audited by D&T and are included elsewhere in this report. The selected financial information for the year ended December 31, 1996 and as of such date has been derived from the financial statements of the Predecessor which have been audited by Crowe, Chizek and Company LLP, independent auditors, and are included elsewhere in this report. The selected financial information for the period from February 10, 1995 (date of inception) to December 31, 1995 and as of December 31, 1995 has been derived from the audited financial statements of the Predecessor which are not included in this report. The selected financial information for the period from January 1, 1995 to February 10, 1995, the year ended December 31, 1994 and as of December 31, 1994 has been derived from the unaudited financial statements of SiMETCO, Inc. ("SiMETCO"), a predecessor of the Company. In the opinion of management, the unaudited statements of operations and cash flows included herein reflect all normal recurring accruals necessary for a fair statement of the results of the periods reflected. The selected financial information below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and the notes thereto appearing elsewhere herein. -9- 12
SIMETCO, INC.(1) PREDECESSOR COMPANY ------------------------- -------------------------------------------------------- ---------------- PERIOD PERIOD FROM FROM FEB. 10, JAN. 1, 1995 (DATE OF YEAR ENDED THREE MONTHS NINE MONTHS YEAR ENDED 1995 TO OF INCEPTION) DECEMBER 31, ENDED ENDED DECEMBER 31, FEB. 10, TO DEC. 31, ------------------------ MARCH 31, DECEMBER 31, 1994 1995 1995(1) 1996 1997 1998 1998 ------------ ----------- ------------ ----------- ----------- ------------- ---------------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA) INCOME STATEMENT DATA: Net sales.......... $31,127 $3,742 $ 31,523 $52,407 $62,184 $ 14,854 $ 40,803 Cost of goods sold............. 30,310 3,314 32,391 42,798 47,972 11,679 36,906 ------- ------ -------- ------- ------- ------------- ------------- Gross profit (loss)........... 817 428 (868) 9,609 14,212 3,175 3,897 Selling and administrative expenses......... 1,749 66 1,599 1,923 2,846 3,824 1,848 ------- ------ -------- ------- ------- ------------- -------------- Operating income (loss)........... (932) 362 (2,467) 7,686 11,366 (649) 2,049 Interest expense.......... 800 72 1,111 1,511 1,710 314 5,777 Other (expense) income, net...... (211) -- 359 444 228 282 1,014 ------- ------ -------- ------- ------- ------------- -------------- Earnings (loss) before provision for income taxes............ (1,943) 290 (3,219) 6,619 9,884 (681) (2,714) Provision (benefit) for income taxes. -- -- -- 1,169 3,513 (100) (492) ------- ------ -------- ------- ------- ------------- --------------- Net income (loss)........... $(1,943) $ 290 $ (3,219) $ 5,450 $ 6,371 $ (581) $ (2,222) ======= ====== ======== ======= ======= ============= ================ OPERATING DATA: (UNAUDITED) Silicon metal Production (in metric tons)..... 23,987 2,395 25,669 33,373 37,852 9,110 27,405 Average sales price per metric ton.............. $ 1,366 $1,410 $ 1,436 $ 1,641 $ 1,719 $ 1,661 $ 1,614 Average cost per metric ton....... $ 1,415 $1,481 $ 1,529 $ 1,358 $ 1,278 $ 1,279 $ 1,290
-10- 13
SIMETCO, INC.(1) PREDECESSOR COMPANY ----------- ------------------------------------ ----------- AS OF AS OF DECEMBER 31, AS OF DECEMBER 31, ------------------------------------ DECEMBER 31, 1994 1995 1996 1997 1998 ------------ -------- -------- -------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working Capital (deficit).......... $ (4,069) $ (2,926) $ (3,347) $ 885 $ 12,287 Total assets....................... 12,342 24,217 30,581 33,663 115,526 Long-term debt, less current portion 2,219 12,014 13,207 12,763 12,763 Mandatorily redeemable preferred stock -- 3,000 -- -- --
- ---------- (1) On February 10, 1995, the Predecessor acquired the Facility from SiMETCO. At such time, SiMETCO was operating the Facility as a debtor-in-possession under Chapter 11 of the Bankruptcy Code. In connection with the acquisition of the Facility, the Predecessor (i) paid a purchase price of approximately $2.8 million to the estate of SiMETCO, (ii) assumed approximately $7.9 million of vendor indebtedness, accrued expenses and other indebtedness, (iii) incurred $6.0 million of additional indebtedness and (iv) issued $3.0 million of its Series A Preferred Stock to the estate of SiMETCO. In June 1996, the Series A Preferred Stock was converted into a non-interest bearing note, which the Predecessor has repaid in full. -11- 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL On March 31, 1998, Holdings, through its wholly owned subsidiary, SAC, purchased all of the outstanding shares of common stock of SIMCALA. On such date, SAC was merged into SIMCALA. SIMCALA, as the surviving corporation in the Merger, became a wholly owned subsidiary of Holdings. The following is a discussion of the Company's results of operations. The discussion is based upon the nine-month period ended December 31, 1998 plus the three-month period ended March 31, 1998, in comparison to the year ended December 31, 1997 and the year ended December 31, 1997 in comparison to the year ended December 31, 1996. The 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 financial statements as of December 31, 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. 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 December 31, 1998 and will result in such increases in future years. The table below sets forth certain statement of operations information as a percentage of net sales during the years ended December 31, 1998, 1997 and 1996:
Year Ended December 31, ------------------------------ 1998 (a) 1997 1996 Net sales 100.0% 100.0% 100.0% Cost of goods sold 87.3 77.1 81.7 ----- ----- ----- Gross profit 12.7 22.9 18.3 Selling, general and administrative expenses 10.2 4.6 3.7 ----- ----- ----- Operating income 2.5 18.3 14.6 Interest expense 10.9 2.7 2.9 Other income, net 2.3 0.4 0.8 ----- ----- ----- Earnings (loss) before income taxes (6.1) 16.0 12.5 Income tax (benefit) provision (1.1) 5.7 2.2 ----- ----- ----- Net income (loss) (5.0)% 10.3% 10.3% ===== ===== =====
(a) The statement of operations of the Predecessor for the period from January 1, 1998 to March 31, 1998 is combined with the statement operations of the Company for the period April 1, 1998 to December 31, 1998. The combined presentation is not in conformity with generally accepted accounting principals but is included for comparative purposes. -12- 15 COMBINED TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO PREDECESSOR YEAR ENDED DECEMBER 31, 1997 The Company is comparing the Predecessor's actual historical results of operations for the year ended December 31, 1997 to a Predecessor period of January 1, 1998 to March 31, 1998 combined with a Company period of April 1, 1998 to December 31, 1998. This combined presentation is not in conformity with generally accepted accounting principles but is included for comparative purposes only. Net Sales Net sales decreased by $6.5 million in 1998, or 10.5%, to $55.7 million from $62.2 million in 1997. This decline was due principally to decreased selling prices in the secondary aluminum silicon metal markets coupled with a decrease in tons sold. Production of silicon metal in 1998 was 36,515 metric tons, compared with 37,852 metric tons produced in 1997. Production was lower in 1998 due to an extended shutdown for planned furnace maintenance coupled with smelting inefficiencies in one of the Company's furnaces during the third quarter of 1998. Gross Profit Gross profit decreased by $7.1 million, or 50.2%, to $7.1 million in 1998 as compared to $14.2 million in 1997. The gross profit margin decreased to 12.7% in 1998 from 22.9% in 1997. These decreases were principally due to the sales and production impacts discussed above coupled with higher depreciation costs associated with the Acquisition. Average selling price per metric ton decreased to $1,627 in 1998 from $1,719 in 1997 due to excess supply in the secondary aluminum market. Average production cost per metric ton increased to $1,282 in 1998 from $1,279 in 1997. This increase resulted primarily from decreased production which allowed for less absorption of fixed costs. Selling and Administrative Expenses Selling and administrative expenses increased $2.8 million, or 99.3%, to $5.7 million in 1998 as compared to $2.8 million in 1997. The increase was primarily due to recognition of expenses related to the Acquisition in 1998. These expenses included a management bonus and option compensation expense, and the write-off of certain intangibles. Operating Income Income from operations decreased $10.0 million to $1.4 million in 1998 from $11.4 million in 1997, while the operating margin decreased to 2.5% from 18.3% for the same period. The decrease was primarily due to decreased sales due to the extended plant shutdown, increased depreciation expense and increased expenses associated with the Acquisition. Interest Expense Interest expense increased $4.4 million, or 256.2%, to $6.1 million in 1998 from $1.7 million in 1997. The significant change in interest expense resulted from the increased debt associated with the Transactions. Other Income - Net Other income - net increased $1.1 million, or 465.9%, to $1.3 million in 1998 from $0.2 million in 1997. The increase in other income was primarily due to increased interest income as the result of excess cash received in connection with the Transactions. -13- 16 Provision for Income Taxes The provision for income taxes decreased to a benefit of $0.6 million in 1998 from a provision of $3.5 million in 1997. This decrease was primarily due to the decrease in taxable income from $9.9 million in 1997 to a loss of $3.4 million in 1998. Net Income (Loss) As a result of the above factors, the net loss for 1998 was $2.8 million compared to net income of $6.4 million for 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Sales Net sales increased 18.7%, to $62.2 million in 1997 from $52.4 million in 1996. The increase was principally due to increased production from furnaces which were refurbished in the third and fourth quarters of 1996 and, as a result, operated at or near full capacity during 1997. Production increased 13.4%, to 37,852 metric tons in 1997 from 33,373 metric tons in 1996. Increased sales of higher priced chemical grade silicon metal, as well as increased sales of microsilica, also contributed to this increase. Gross Profit Gross profit increased 47.9%, to $14.2 million in 1997 from $9.6 million in 1996. Gross margin increased to 22.9% in 1997 from 18.3% in 1996 primarily as a result of increased sales of higher margin chemical grade silicon metal and continuation of improved operating efficiencies. In this regard, the fixed components of cost of goods sold remained relatively unchanged from 1996 to 1997. However, variable components did increase as a result of higher production volumes. Average selling price per metric ton increased to $1,719 in 1997 from $1,641 in 1996 due to increased demand in the secondary aluminum market. The Company chose to sell more product in this market to take advantage of the higher price. Average production cost per metric ton decreased to $1,278 in 1997 from $1,358 in 1996. This decrease resulted primarily from increased production which allowed broader absorption of fixed costs coupled with more efficient use of raw materials. Selling and Administrative Expenses Selling and administrative expenses increased 48.0%, to $2.8 million in 1997 from $1.9 million in 1996. This increase was principally due to professional fees incurred in 1997 in connection with the Company's consideration of various strategic business alternatives, offset in part by a decrease in bad debt expense. The Company maintains credit insurance which reduces the risk of loss related to bad debts. In addition, selling and administrative expenses increased in 1997 primarily due to compensation expense recorded in connection with the Company's variable stock option plan. Operating Income As a result of the above factors, operating income increased $3.7 million, to $11.4 million in 1997 from $7.7 -14- 17 million in 1996. As a percentage of net sales, operating income increased to 18.3% in 1997 from 14.6% in 1996. Interest Expense Interest expense increased 13.1%, to $1.7 million in 1997 from $1.5 million in 1996. This increase was primarily the result of interest costs associated with the repayment of certain noninterest-bearing indebtedness of the Company in 1997, offset by decreased average levels of indebtedness used to fund the Company's operations. Other Income, Net Other income, net decreased 48.5%, to $229,000 in 1997 from $445,000 in 1996 primarily as a result of the Company's receipt of approximately $200,000 of insurance proceeds for losses resulting from hurricane damage in 1996. Provision for Income Taxes Provision for income taxes increased to $3.5 million in 1997 from $1.2 million in 1996. The Company's effective tax rate was 35.5% in 1997 compared to 17.7% in 1996. This increase in the effective tax rate resulted primarily from the Company's reduction of its deferred tax valuation allowance by approximately $1.1 million in 1996. Net Income As a result of the above factors, net income increased $0.9 million, to $6.4 million in 1997 from $5.5 million in 1996. As a percentage of net sales, net income remained unchanged. 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. The Company's principal uses of liquidity are to fund operations, meet debt service requirements 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 by the developing nature of the markets for this product. Cash and cash equivalents were $14.7 million, $0.6 million, and $0.2 million at December 31, 1998, 1997, and 1996, respectively. All of the significant increase in 1998 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. Depreciation and amortization for 1998 totaled $5.0 million, compared to $2.2 million for 1997 and $1.6 million for 1996. The increase in 1998 primarily resulted from a significant increase in depreciation related to the step-up of assets associated with the Acquisition. In addition, amortization expense increased significantly in 1998 due to the amortization of the goodwill recorded as a result of the Acquisition as well as debt issuance costs related to the Transactions. In 1998, 1997, and 1996, net cash provided by operating activities was $0.5 million, $10.0 million and $9.2 million, respectively. The decrease in 1998 resulted primarily from the decrease in net income. In 1998, 1997, and 1996, -15- 18 net cash used in investing activities was $3.9 million, $2.1 million, and $6.9 million, respectively. The changes primarily reflect different levels of capital spending during the three years. In 1998, 1997, and 1996, net cash used in financing activities was approximately $28,000, $7.5 million, and $2.1 million, respectively. The increase in 1997 was principally a result of (i) the net repayment of $3.2 million of indebtedness outstanding under the Company's revolving line of credit, (ii) the repayment of $12.8 million of other indebtedness, (iii) the redemption of the Company's Series B Preferred Stock, par value $1.00 per share, for $1.5 million, (iv) a payment to stockholders of $2.3 million, and (v) the payment of a $270,000 preferred stock dividend, all of which was offset by the Company's borrowing of $13.0 million of term loan indebtedness under the Old Credit Facility. In 1998, there was no significant financing activity subsequent to the Transactions. In 1996, the Company refurbished two of its smelting furnaces. Consequently, the Company spent almost $4.0 million more on capital items in 1996 than it had budgeted. While all spending was done with internally generated funds, this capital program exceeded the limits on permitted capital expenditures in the Company's loan agreement. In addition, the calculation of fixed charge coverage fell to .99 from 1.0, where a requirement of 1.0 to 1.0 was required. The Company's lender provided all required waivers. In 1997, the Company began a project to replace a gantry crane in its raw material loading operation. As a result, capital spending exceeded the limits on permitted capital expenditures set out in the Company's loan agreement. The Company's lender provided all required waivers. In connection with the Acquisition, the Company replaced the Old Credit Facility with the New 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 IRB Financing. Revolving loans bear interest at a variable rate equal, at the option of the Company, to (i) a LIBOR-based rate plus a margin of up to 2.25% per annum, or (ii) the base rate (defined to mean the higher of (a) the publicly announced "prime rate" of the agent thereunder, and (b) a rate tied to the rates on overnight federal funds transactions with members of the Federal Reserve System) plus a margin of up to 1.25% per annum. In addition, a $6.1 million replacement letter of credit was issued under the New Credit Facility for the account of the Company as credit support for the Company's industrial revenue bonds (the "IRB's"). Drawings under the letters of credit which are not promptly reimbursed by the Company accrue interest at a variable rate equal to the base rate plus a margin of up to 3.25% per annum. As of December 31, 1998, no drawings were outstanding under the New Credit Facility. Ongoing interest payments on 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 semiannual interest payments of approximately $3.6 million over the life of the Notes. In connection with the Company's IRB Financing, the Company has agreed to pay the principal of, premium, if any, and interest on, the IRBs, which mature on December 1, 2019. Interest on the IRBs, which is payable monthly, currently accrues at a rate which is reset every seven days as determined by Merchant Capital, L.L.C., the remarketing agent for the IRB Financing, based on its evaluation of certain factors, including, among others, market interest rates for comparable securities, other financial market rates and indices, general financial market conditions, the credit standing of SIMCALA and the bank issuing the letter of credit which provides credit support for the IRBs, and other relevant facts regarding the Facility. However, interest borne by the IRBs cannot exceed the lower of 15% per annum and the maximum rate per annum specified in any letter of credit which provides credit support for the IRBs. As of December 31, 1998, interest on the IRBs accrued at a rate equal to approximately 5.3% per annum. With respect to ongoing capital spending, the Company expects to spend approximately $2.5 million to $3.0 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 or borrowed cash. The Company estimates that construction of the furnace will cost a total of approximately $25.0 million. The agreement governing the New 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 -16- 19 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 Agreement 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 Indenture governing the Notes also impose restrictions on the operation of the Company's business. During 1998, the Company reached agreement with NationsBank, N.A. to amend all financial covenants in the Credit Agreement and to provide cash collateral for the letter of credit backing the IRBs until certain leverage tests are met subsequent to December 31, 1999. At December 31, 1998, the Company was in compliance with all covenants, as amended. The Indenture contains a limitation on the incurrence of indebtedness by the Company and its subsidiaries which is tied, in part, to the Company's "Fixed Charge Coverage Ratio." For any period, the Fixed Charge Coverage Ratio generally consists of the ratio of (x) the Company's consolidated net income during such period (subject to certain adjustments), to (y) certain fixed charges (generally determined on a consolidated basis) during such period. The Indenture provides that the Company will not, and will not permit its subsidiaries to, incur "Indebtedness" or issue "Disqualified Stock," subject to the following exceptions. The Company may incur any amount of Indebtedness or issue any amount of Disqualified Stock if, during its most recently ended four fiscal quarters for which internal financial statements are available immediately prior to such incurrence or issuance, the Company's Fixed Charge Coverage Ratio would have been at least (A) 2.0 to 1 on or prior to April 15, 2000, and (B) 2.25 to 1 after April 15, 2000 (determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness or Disqualified Stock had been incurred or issued, as the case may be, at the beginning of such four-quarter period). If the Company's Fixed Charge Coverage Ratio does not meet these levels (i.e., the ratio is less than 2.0 to 1 and 2.25 to 1 for the periods indicated, respectively), the Company and its subsidiaries may only incur certain types of indebtedness. As of December 31, 1998, the Fixed Charge Coverage Ratio for the most recently ended four fiscal quarter period would have been less than 2.0 to 1, on a pro forma basis. The Credit Agreement, as amended, contains covenants requiring the maintenance of certain "Interest Coverage Ratio," "Net Leverage Ratio" and "Consolidated EBITDA." The "Interest Coverage Ratio" as of the last day of each fiscal quarter of the Company must be greater than or equal to:
------------------ ----------------- ------------------ ------------------ ------------------- Fiscal Year March 31 June 30 September 30 December 31 ------------------ ----------------- ------------------ ------------------ ------------------- 1998 na 1.50 1.50 1.50 ------------------ ----------------- ------------------ ------------------ ------------------- 1999 1.15 1.05 1.05 1.05 ------------------ ----------------- ------------------ ------------------ ------------------- 2000 1.00 1.00 1.00 1.00 ------------------ ----------------- ------------------ ------------------ ------------------- 2001 1.25 1.25 1.50 1.75 ------------------ ----------------- ------------------ ------------------ ------------------- 2002 1.75 1.75 1.75 2.00 ------------------ ----------------- ------------------ ------------------ ------------------- thereafter 2.00 na na na ------------------ ----------------- ------------------ ------------------ -------------------
Interest Coverage Ratio is defined to generally mean the ratio of the Company's consolidated EBITDA to its consolidated interest expense for the twelve-month period ending on the last day of any fiscal quarter of the Company. The "Net Leverage Ratio" as of the last day of each fiscal quarter of the Company must be less than or equal to:
------------------ ----------------- ------------------ ------------------ ------------------- Fiscal Year March 31 June 30 September 30 December 31 ------------------ ----------------- ------------------ ------------------ ------------------- 1998 na 5.50 5.50 7.00 ------------------ ----------------- ------------------ ------------------ ------------------- 1999 7.25 8.25 8.50 9.25 ------------------ ----------------- ------------------ ------------------ ------------------- 2000 9.75 10.00 11.25 11.50 ------------------ ----------------- ------------------ ------------------ ------------------- 2001 8.75 7.50 6.50 5.50 ------------------ ----------------- ------------------ ------------------ ------------------- 2002 5.50 5.50 5.50 5.00 ------------------ ----------------- ------------------ ------------------ ------------------- thereafter 5.00 na na na ------------------ ----------------- ------------------ ------------------ -------------------
-17- 20 Net Leverage Ratio is defined to generally mean the ratio of the Company's funded indebtedness (less cash and cash equivalents) to its consolidated EBITDA for the twelve-month period ending on the last day of any fiscal quarter of the Company. The Company must at all times maintain a "Consolidated EBITDA," as of the last day of each fiscal quarter of the Company, greater than or equal to:
------------------ ----------------- ------------------ ------------------ ------------------- Fiscal Year March 31 June 30 September 30 December 31 ------------------ ----------------- ------------------ ------------------ ------------------- 1998 na na na $9,500,000 ------------------ ----------------- ------------------ ------------------ ------------------- 1999 $9,000,000 $8,100,000 $8,100,000 $7,800,000 ------------------ ----------------- ------------------ ------------------ ------------------- 2000 $7,800,000 $7,800,000 $7,800,000 $7,800,000 ------------------ ----------------- ------------------ ------------------ ------------------- 2001 $10,200,000 $12,100,000 $13,700,000 $18,100,000 ------------------ ----------------- ------------------ ------------------ ------------------- 2002 $16,100,000 $16,100,000 $16,100,000 $17,200,000 ------------------ ----------------- ------------------ ------------------ ------------------- thereafter $17,200,000 na na na ------------------ ----------------- ------------------ ------------------ -------------------
As of December 31, 1998, the Interest Coverage Ratio and the Net Leverage Ratio were 1.71 to 1 and 6.26 to 1, respectively. As of December 31, 1998, the Company's Consolidated EBITDA was approximately $10.6 million. 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. 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 the replacement of the Company's sales order system by July 1, 1999 and perpetual inventory system by June 1, 1999. 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 not made any significant Year 2000 expenditures through the end of March 1999. The Company is reviewing 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 affected. Except for the systems controlling the Company's sales order and perpetual inventory processes, which can be manually operated in the event of a systems failure, management is not aware of any systems or operations of the Company that will be adversely affected as a result of the Year 2000 problem. If, however, any other system or operation of the Company is adversely affected by the Year 2000 problem, the Company's business, results of operations and financial condition could be materially adversely affected. 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK All financial instruments and positions held by the Company are held for purposes other than trading. The fair value of the Company's long-term debt and capital leases is affected by changes in interest rates. The carrying value of the Company's long-term debt and capital leases was established on March 31, 1998. The following presents the sensitivity of the fair value of the Company's long-term debt and capital leases to a hypothetical 10% decrease in interest rates as of December 31, 1998.
HYPOTHETICAL CARRYING FAIR INCREASE IN VALUE VALUE (A) FAIR VALUE (B) Long-term debt and capital leases, including current portion $ 81,106,845 $ 70,081,845 $ 76,081,846 ============ ============ ============
(a) Based on quoted market prices for these or similar items. (b) Calculated based on the change in discounted cash flow. -18- 21 RISK FACTORS Significant Leverage and Debt Service The Company has significant outstanding indebtedness and is significantly leveraged. As of December 31, 1998, the Company had approximately $82.7 million of indebtedness outstanding and approximately $15.0 million of secured indebtedness available to be incurred under the New Credit Facility, which availability is reduced by an approximately $6.1 million letter of credit issued thereunder. The degree to which the Company is leveraged as a result of the Transactions could have important consequences to the Company, including, but not limited to, (i) increasing the Company's vulnerability to adverse general economic and industry conditions, (ii) limiting the Company's ability to obtain additional financing for future capital expenditures, general corporate or other purposes, (iii) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, indebtedness, thereby reducing the funds available for operations and future business opportunities, (iv) limiting the Company's flexibility in reacting to changes in its business and the industry and (v) placing the Company at a competitive disadvantage vis-a-vis less leveraged competitors. In addition, the Indenture and the New Credit Facility contain financial and other restrictive covenants that limit the ability of the Company to, among other things, borrow additional funds. Failure by the Company to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. In addition, the degree to which the Company is leveraged could prevent it from repurchasing all of the Notes tendered to it upon the occurrence of a change of control. There can be no assurance that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available under the New Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs, including the construction of a fourth smelting furnace. In addition, the Company may need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Restrictive Covenants The New Credit Facility and the Indenture contain numerous restrictive covenants which limit, among other things, the ability of the Company to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make other restricted payments, to make investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of its assets to, or merge or consolidate with, another entity. The New Credit Facility also contains a number of financial covenants that require the Company to meet certain financial ratios and tests and provides that a "change of control" constitutes an event of default thereunder. A failure to comply with the obligations contained in the New Credit Facility or the Indenture, if not cured or waived, could permit acceleration of the related indebtedness and the acceleration of indebtedness under other instruments of the Company that contain cross-acceleration or cross-default provisions. Upon the occurrence of an event of default under the New Credit Facility, the lenders thereunder would be entitled to exercise the remedies available to a secured creditor under applicable law. If the Company were obligated to repay all or a significant portion of its indebtedness, there can be no assurance that it would have sufficient cash to do so or that it could successfully refinance such indebtedness. In addition, other indebtedness that the Company may incur in the future may contain financial or other covenants more restrictive than those contained in the New Credit Facility or the Indenture. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." -19- 22 Importance of Key Customers Certain of the Company's customers are material to its business and operations. In 1998, Dow Corning accounted for approximately $22.7 million, or approximately 40%, of net sales; G.E. Silicones accounted for approximately $6.3 million, or approximately 11%, of net sales; Wabash Alloys accounted for approximately $11.1 million, or approximately 19%, of net sales; and Alcan accounted for approximately $4.5 million, or approximately 8%, of net sales. In 1998, the Company's five largest customers accounted for approximately $46.3 million, or approximately 81%, of net sales. Dow Corning is currently operating as a debtor-in-possession under Chapter 11 of the Bankruptcy Code. The Company's prospects depend on the success of its customers, as well as its customers' retention of the Company as a significant supplier of silicon metal. A significant part of the Company's business strategy is directed toward strengthening its relationships with its major customers that purchase chemical grade silicon metal, such as G.E. Silicones and Dow Corning. The Company does not generally have long-term contracts with its major customers and the loss of any major customer, or a significant reduction of the Company's business with any of them, would have a material adverse effect on the Company. See "-- Competition." Dependence on Supply of Electrical Power The production of silicon metal is heavily dependent upon a reliable supply of electrical power. The Company's electrical power is supplied by APCo through a dedicated 110,000 volt line. The Facility operates twenty four hours a day, seven days per week. Any interruption in the supply of electrical power to the Facility would adversely effect production levels and a sustained interruption in the power supply would have a material adverse effect on the Company. Competition The silicon metal manufacturing industry is highly competitive. A number of the Company's competitors are significantly larger and have greater financial resources than the Company. In addition, certain of the Company's major customers have in the past manufactured silicon metal for their own use, thereby reducing their need to purchase silicon metal from suppliers such as the Company. The resumption of silicon metal manufacturing by one or more of these major customers would thus reduce the quantity of silicon metal purchased from the Company and could have a material adverse effect on the Company. There can be no assurance that the Company will be able to continue to compete successfully in silicon metal manufacturing or that the Company will maintain or increase its sales of chemical grade and specialty aluminum grade silicon metal. See "Business -- Competition." Anti-Dumping Duties on Foreign Competitors' Products In 1990 and 1991, domestic producers of silicon metal successfully prosecuted anti-dumping actions against unfairly traded imports of silicon metal from the PRC, Brazil and Argentina. These actions were brought under the anti-dumping provisions of the Tariff Act of 1930, as amended. Under that statute, an anti-dumping duty order may be issued if a domestic industry establishes in proceedings before the United States Department of Commerce and the United States International Trade Commission that imports from the country (or countries) covered by the action(s) are being sold at less than normal value and are causing material injury or threat of such injury to the domestic industry. An anti-dumping order requires special duties to be imposed in the amount of the margin of dumping (i.e., the percentage difference between the United States price for the goods received by the foreign producer or exporter and the normal value of the merchandise). Once an order is in place, each year foreign producers, importers, domestic producers and other interested parties may request a new investigation (or "administrative review") to determine the margin of dumping during the immediately preceding year. The rates calculated in these administrative reviews (or the existing rates if no review is requested) are used to assess anti-dumping duties on imports during the review period and to collect cash deposits on future imports. An administrative review covering five Brazilian producers and a review covering two PRC exporters are now in progress. The rates established in these reviews and in future reviews will depend upon the prices and costs during the periods covered by -20- 23 the reviews, the methodologies applied and other factors. Anti-dumping orders remain in effect until they are revoked. In order for an individual foreign producer or exporter to qualify for revocation of an anti-dumping order, the United States Department of Commerce must conclude that the producer or exporter has sold the merchandise at not less than normal value for a period of at least three consecutive years and is not likely to sell the merchandise at less than normal value in the future. Anti-dumping orders may also be revoked as a result of periodic "sunset reviews." No assurance can be given that one or more of such anti-dumping orders will not be revoked or that effective duty rates will continue to be imposed. Any such revocation or the imposition of ineffective duty rates could have a material adverse effect on the Company. See "Business -- Environmental and Regulatory Matters -- Anti-Dumping Duties on Foreign Competitors' Products." Environmental Laws and Regulations The Company is subject to extensive federal, state and local environmental laws and regulations governing the discharge, emission, storage, handling and disposal of a variety of substances and wastes used in or resulting from the Company's operations. There can be no assurance that environmental laws or regulations (or the interpretation of existing laws or regulations) will not become more stringent in the future, that the Company will not incur substantial costs in the future to comply with such requirements or that the Company will not discover currently unknown environmental problems or conditions. Any such event could have a material adverse effect on the Company. See "Business -- Environmental and Regulatory Matters -- Environmental." Dependence on Key Personnel The Company's operations are dependent, to a significant extent, on the continued employment of each Senior Manager, with whom it has entered into employment agreements containing non-compete provisions. If these employees of the Company become unable to continue in their respective roles, or if the Company is unable to attract and retain other skilled employees, the Company's results of operations and financial condition could be adversely effected. Control by Investors As a result of the Acquisition and the Merger, 100% of the outstanding shares of the Company's common stock is directly owned by Holdings. Holdings has no business other than holding the capital stock of the Company, which is the sole source of Holdings' financial resources. Holdings is controlled by CGW, which beneficially owns shares representing 79.8% of the voting power of Holdings (on a fully diluted basis) and has the power to elect all of the directors of Holdings. Accordingly, CGW, through its control of Holdings, controls the Company and has the power to elect all of its directors, appoint new management and approve any action requiring the approval of the holders of the Company's common stock, including adopting amendments to the Company's Certificate of Incorporation and approving mergers or sales of substantially all of the Company's assets. The directors elected by Holdings have the authority to make decisions affecting the capital structure of the Company, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends. See "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Owners and Management." -21- 24 ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures about Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and financial statement schedules in Part IV, Item 14(a)(1) and (2) of this report are incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. -22- 25 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND OFFICERS OF THE COMPANY Set forth below are the names and positions of the directors, officers and significant employees of the Company.
NAME AGE POSITION ---------------------- --- --------------------------------------------- C. Edward Boardwine... 52 President, Chief Executive Officer and Director Dwight L. Goff........ 44 Vice President R. Myles Cowan, II.... 47 Vice President of Finance Howard L. McHenry..... 55 Senior Metallurgist Roger Hall............ 57 Superintendent of Engineering and Maintenance Edwin A. Wahlen, Jr... 51 Director William A. Davies..... 53 Director James A. O'Donnell.... 46 Director
C. EDWARD BOARDWINE has been the President and Chief Executive Officer of the Company since February 1995. Prior to joining the Company, he was Vice President -- Silicon Metal Division of Elkem ASA, a ferroalloy and silicon metal manufacturer based in Oslo, Norway, since July 1990. Mr. Boardwine became a director of the Company on the Acquisition Date. DWIGHT L. GOFF has been the Vice President of the Company since February 1995. Prior to joining the Company, he was President of Elkem Materials, Inc., a microsilica marketing company, since November 1989. In addition, from June 1989 until February 1995, Mr. Goff was the Division Controller for the Silicon Metal Division of Elkem Metals, a ferroalloy manufacturer. R. MYLES COWAN, II has been the Vice President -- Finance of the Company since October 1995. Prior to joining the Company, he was employed by the Thermal Components Group, a division of Insilco Corporation, a diversified manufacturing company, since October 1990, where he had most recently been Director of Business Planning. Mr. Cowan filed a voluntary petition under Chapter 7 of the Bankruptcy Code in December 1995, and the case resulting therefrom was discharged in April 1996. HOWARD L. MCHENRY has been the Senior Metallurgist of the Company since July 1995. Prior thereto, he was employed by Elkem Metals since July 1981, where he had most recently been the Senior Metallurgist. ROGER HALL has been the Superintendent of Engineering and Maintenance of the Company since February 1995. Prior thereto, he was employed in a similar capacity by SiMETCO at the Facility since May 1988. EDWIN A. WAHLEN, JR. is a member of CGW Southeast III, L.L.C., the general partner of CGW (the "General Partner") and is jointly responsible for all major decisions of the General Partner. Mr. Wahlen is also a member of CGW Southeast Management III, L.L.C. (the "Management Company"), an affiliate of CGW. Mr. Wahlen has been a member of the General Partner, the Management Company or affiliated entities for more than five years. He is a director of AMRESCO, Inc., Cameron Ashley Building Products, Inc. and several private companies. Mr. Wahlen became a director of the Company on the Acquisition Date. WILLIAM A. DAVIES is a member of the General Partner, and is responsible for sourcing, structuring and negotiating transactions, participating in strategic planning with members of management of various CGW portfolio companies to increase value and manage exit strategies. Mr. Davies has been a member of the General Partner or an employee of affiliates of the General Partner for more than five years. He is a director of Gorges/Quik-to-Fix Foods, Inc. and several private companies. Mr. Davies became a director of the Company on the Acquisition Date. -23- 26 JAMES A. O'DONNELL has been a member of the General Partner since 1995, and is responsible for sourcing, structuring and negotiating transactions, participating in strategic planning with members of management of various CGW portfolio companies to increase value and manage exit strategies. Mr. O'Donnell has been a general partner of Sherry Lane Partners, a private equity investment firm based in Dallas, Texas since 1992. Also, Mr. O'Donnell has been a general partner of O'Donnell & Masur, a private equity investment firm based in Dallas, Texas, since 1989. He is a director of Bestway Rental, Inc., Gorges/Quik-to-Fix Foods, Inc. and several private companies. Mr. O'Donnell became a director of the Company on the Acquisition Date. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth the compensation earned during the years ended December 31, 1998 and 1997 by the Chief Executive Officer of the Company and each other executive officer of the Company who served as such at December 31, 1998 and whose total salary and bonus exceeded $100,000 (collectively, the "Named Executive Officers"). The Company did not grant any stock appreciation rights or make any long-term incentive plan payouts during the periods shown. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------- ---------------------- AWARDS ------ SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION($) - -------------------------------- ---- --------- -------- --------------------- --------------- C. Edward Boardwine, 1998 197,310 75,768 109 1,186,769(1) President and Chief Executive 1997 189,545 123,545 -- 11,185(2) Officer Dwight L. Goff, 1998 97,423 33,776 -- 196,250(3) Vice President 1997 95,206 54,000 -- -- R. Myles Cowan, II, 1998 88,196 29,527 -- 196,250(3) Vice President-- Finance 1997 83,000 49,800 -- --
- ---------- (1) Includes $9,274 for premiums paid by the Company with respect to a split dollar life insurance policy for Mr. Boardwine and $1,177,495 with respect to a one-time bonus paid in connection with the Acquisition. (2) Includes $8,567 for premiums paid by the Company with respect to a split dollar life insurance policy for Mr. Boardwine and $2,618 for payments made by the Company to Mr. Boardwine with respect to a mortgage interest differential. The mortgage interest differential was paid to Mr. Boardwine in connection with his relocation to Mt. Meigs, Alabama from Pennsylvania and represents the difference that he must pay due to the greater interest rate under his current home mortgage as compared to his prior mortgage in Pennsylvania. (3) Reflects a one-time bonus paid in connection with the Acquisition. -24- 27 OPTION GRANTS The following table sets forth information regarding options to acquire shares of the common stock of the Company that were granted during the year ended December 31, 1998. See "-- Stock Incentive Plan" for information regarding options for shares of the capital stock of Holdings. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------------------------------------------------- NUMBER OF PERCENT OF GRANT DATE SECURITIES TOTAL OPTIONS VALUE UNDERLYING GRANTED TO MARKET PRICE ------------- OPTIONS EMPLOYEES IN EXERCISE ON DATE OF EXPIRATION GRANT DATE GRANTED FISCAL YEAR OR BASE PRICE GRANT DATE PRESENT VALUE ---------- ------------- ------------- ------------ ----------- -------------- NAME C. Edward Boardwine 109 100% $100 $6,126(1) 3/31/08 $656,834(2) Dwight L. Goff 0 -- -- -- -- -- R. Myles Cowan, II 0 -- -- -- -- --
(1) The options to acquire 109 shares of the common stock of SIMCALA were granted to Mr. Boardwine on March 31, 1998 and immediately exercised, and the shares were then sold by Mr. Boardwine in connection with the Acquisition. The market price on date of grant is based on the price per share paid by SAC in connection with the Acquisition. (2) The grant date present value is based on the difference between the option exercise price of $100 and the fair market value of $6,126 per share at March 31, 1998 multiplied by the number of shares underlying the options. -25- 28 OPTION EXERCISES The following table sets forth information regarding options to acquire shares of the common stock of the Company that were exercised during the year ended December 31, 1998. No unexercised options for shares of the common stock of the Company were held by the Named Executive Officers at December 31, 1998. See "-- Stock Incentive Plan" for information regarding options for shares of the capital stock of Holdings. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
SHARES ACQUIRED ON NAME EXERCISE VALUE REALIZED(1) - ---- ----------- ---------------- C. Edward Boardwine 671 $4,110,443 Dwight L. Goff 109 667,717 R. Myles Cowan, II 109 667,717
- -------------- (1) Each of the Named Executive Officers exercised all of their options on March 31, 1998 and immediately sold their shares in connection with the Acquisition. The value realized is based on the price per share paid by SAC in the Acquisition, which was approximately $6,126. In accordance with the terms of the Acquisition, no exercise price was payable by the Named Executive Officers with respect to their options. -26- 29 EMPLOYMENT AGREEMENTS SIMCALA has an employment agreement (collectively, the "Employment Agreements") with each Senior Manager (previously defined herein as Messrs. Boardwine, Goff and Cowan) for a term expiring on the fifth anniversary of the Acquisition Date. The Company has the right to terminate the Employment Agreements at any time prior to their scheduled expiration upon thirty (30) days written notice. However, if a Senior Manager is terminated other than for cause, whether pursuant to such Senior Manager's Employment Agreement or following the termination or expiration of the term of such Employment Agreement, such Senior Manager will receive, in addition to earned salary and bonus, a severance payment equal to 12 months' base salary. If a Senior Manager is terminated for cause, death or disability, or upon the voluntary termination by such Senior Manager of his employment under such Senior Manager's Employment Agreement, such Senior Manager will receive only earned salary and, in the case of termination due to death or disability, bonus due as of the date of termination. The Employment Agreements also contain non-competition, non-solicitation and confidentiality provisions. Mr. Boardwine's Employment Agreement provides for a base salary of $205,000, Mr. Goff's Employment Agreement provides for a base salary of $100,000, and Mr. Cowan's Employment Agreement provides for a base salary of $90,000. Mr. Boardwine is eligible to receive a bonus of up to 75% of his base salary, while Messrs. Goff and Cowan are eligible to receive a bonus of up to 65% of their respective base salaries. Half of the bonus available to the Senior Managers is awarded based upon earnings of the Company (subject to certain adjustments) if certain performance targets of the Company are reached. The other half of the bonus is awarded to each Senior Manager and paid at the discretion of the Company's Board of Directors. The amount of any discretionary bonus awarded is based primarily on the performance of the Company and whether and to what extent it achieves or exceeds its annual budget. STOCK INCENTIVE PLAN Holdings has adopted a Stock Incentive Plan (the "Plan") pursuant to which options (the "Options") to purchase up to 8,000 shares of the capital stock of Holdings (the "Holdings Stock") may be granted to the Senior Management or other employees selected for participation in the Plan by the Compensation Committee of the Company's Board of Directors. At the time of the Acquisition Closing, Messrs. Boardwine, Goff and Cowan were issued Options to acquire 2,046, 512 and 512 shares, respectively, of Holdings Stock. The Options are subject to a five-year vesting period and the Options issued on the Acquisition Date are exercisable at an initial price per share of $1,000. The Options will immediately and fully vest in the event of a merger or consolidation of Holdings with, or the sale of substantially all of the assets or stock of Holdings to, any person other than CGW or a CGW affiliate. The term of the Options expires ten years from the date of grant. The Plan also provides for other equity-based forms of incentive compensation in addition to the Options. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Holdings owns 100% of the issued and outstanding capital stock of the Company. The issued and outstanding Holdings Stock is owned 90.9% by CGW and 9.1% by the Senior Management. Affiliated entities of each of Edwin A. Wahlen, Jr., William A. Davies and James A. O'Donnell are limited partners of CGW. See "Directors and Executive Officers of the Registrant" and "Certain Relationships and Related Transactions." The following table sets forth, as of March 1, 1999, certain additional information regarding the ownership of the Holdings Stock by: (i) each director of the Company; (ii) each executive officer of the Company; (iii) all directors and executive officers of the Company as a group; and (iv) each person known to the Company to be the beneficial owner of more than 5% of the Holdings Stock. -27- 30
PERCENT OF ALL NUMBER OF SHARES HOLDINGS STOCK NAME OF STOCKHOLDER BENEFICIALLY OWNED(1) OUTSTANDING -------------------------------------------- --------------------- --------------- CGW Southeast Partners III, L.P.(2)........ 20,000 90.9% Edwin A. Wahlen, Jr. William A. Davies James A. O'Donnell C. Edward Boardwine(3)..................... 1,655 7.5% Dwight L. Goff............................. 195 0.9% R. Myles Cowan, II......................... 150 0.7% All directors and executive officers as a group (6 persons)(2)...................... 22,000 100%
- ---------- (1) Excludes 2,046, 512, and 512 shares of Holdings Stock which may be acquired upon the exercise of Options granted to Messrs. Boardwine, Goff and Cowan, respectively, on the Acquisition Date. None of these Options will begin to vest until March 31, 1999. (2) Messrs. Wahlen, Davies and O'Donnell may be deemed to beneficially own the shares of Holdings Stock held of record by CGW because they are members of the General Partner and may therefore be deemed to share voting and investment power with respect to such shares. The business address of CGW and Messrs. Wahlen, Davies and O'Donnell is 12 Piedmont Center, Suite 210, Atlanta, Georgia 30305. (3) The business address of Mr. Boardwine is SIMCALA, Inc., Ohio Ferro Alloys Road, Mt. Meigs, Alabama 36057. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. SHAREHOLDERS AGREEMENT On the Acquisition Date, CGW and the Senior Management, as the shareholders of Holdings, entered into a Shareholders Agreement (the "Shareholders Agreement"). All future purchasers of Holdings Stock will be required to enter into the Shareholders Agreement. The Shareholders Agreement contains restrictions on the transferability of the Holdings Stock and other rights and obligations of Holdings, CGW and the Senior Management with respect to the Holdings Stock. In addition, the Shareholders Agreement grants to the Senior Managers pre-emptive rights, exercisable pro rata in accordance with their respective ownership of Holdings Stock, to purchase shares or equity securities of Holdings (other than shares of capital stock issued upon exercise of options, rights, awards or grants pursuant to the Plan). The Shareholders Agreement also provides for certain co-sale rights of the Senior Managers in the event CGW elects to sell all or a portion of its shares of Holdings Stock and co-sale obligations of the Senior Managers in the event of a sale of Holdings or its subsidiaries (including SIMCALA). Holdings has a right of first refusal in connection with any proposed sale by any Senior Manager of his investment in Holdings. The Shareholders Agreement further provides that if a Senior Manager's employment is terminated for any reason other than for cause, such Senior Manager will have the right to sell to Holdings any shares of Holdings Stock owned by such Senior Manager at the greater of cost or fair value. Such right is exercisable within one month (six months in the event of the death or disability of the Senior Manager) following such termination of employment of the Senior Manager. If a Senior Manager's employment is terminated for cause, Holdings will have the right, exercisable within 120 days following such termination, to repurchase any shares of Holdings Stock owned by such Senior Manager at the lesser of cost or fair value. Fair value of the repurchased shares will be determined by agreement between Holdings and the Senior Manager whose shares are being repurchased or, failing such agreement, by an independent appraiser. -28- 31 If Holdings is unable to, or elects not to, exercise any right to purchase such shares of capital stock from a Senior Manager or his transferee, Holdings may assign such right to CGW, which may then exercise such right with respect to the purchase of such shares of capital stock as to which such right is assigned. TRANSACTIONS WITH CGW, ITS AFFILIATES AND CERTAIN STOCKHOLDERS On the Acquisition Date, the General Partner entered into a consulting agreement (the "Consulting Agreement") with the Company whereby the Company pays the General Partner a monthly retainer fee of $15,000 for financial and management consulting services. The General Partner may also receive additional compensation if approved by the Board of Directors of the Company at the end of each fiscal year of the Company, based upon the overall performance of the Company. The Company paid the General Partner additional compensation in the amount of $22,000 in 1998. The Consulting Agreement expires five years from the Acquisition Date. On the Acquisition Date, the General Partner delegated its rights and obligations under the Consulting Agreement to the Management Company, an affiliate of CGW. On the Acquisition Date, the Company also paid to the Management Company an investment banking fee of $1.35 million for its services in assisting the Company in structuring and negotiating the Transactions. Messrs. Wahlen, Davies and O'Donnell are each a director of the Company and a member of the General Partner. Mr. Wahlen is also a member of the Management Company. In June 1997, Mr. Cowan received a loan of $75,000 from a third-party lender, which was guaranteed by the Company. This guarantee was terminated on the Acquisition Date. In connection with the exercise of certain stock options by members of Senior Management immediately prior to the Acquisition Date, the Company was responsible to certain tax authorities for payment of $1,799,863 of withholding taxes (the "Tax Obligation") by June 15, 1998. Upon the payment by the Company of the Tax Obligation, each of the members of Senior Management reimbursed the Company for his pro rata portion of the Tax Obligation. C. Edward Boardwine, Dwight L. Goff and R. Myles Cowan, II reimbursed the Company $1,358,501, $220,681 and $220,681, respectively. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Certificate of Incorporation of the Company contains a provision eliminating, to the full extent permitted by Delaware law or any other applicable law, the personal liability of directors to the Company or its stockholders with respect to any acts or omissions in the performance of a director's duties as a director of the Company. The Certificate of Incorporation of the Company also provides that directors and officers of the Company will be indemnified by the Company to the full extent permitted by Delaware law or any other applicable law, but the Company may enter into agreements providing for greater or different indemnification. The Articles of Incorporation of Holdings contains a provision eliminating the personal liability of directors to Holdings or its shareholders for monetary damages for breaches of their duty of care or other duty as a director, except in certain prescribed circumstances. The Bylaws of Holdings provide that directors and officers of Holdings will be indemnified by Holdings to the extent allowed by Georgia law, against all expenses, judgments, fines and amounts paid in settlement that are actually and reasonably incurred in connection with service for or on behalf of Holdings. The Bylaws of Holdings further provide that Holdings may purchase and maintain insurance on behalf of its directors and officers whether or not Holdings would have the power to indemnify such directors and officers against any liability under Georgia law. -29- 32 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) 1. FINANCIAL STATEMENTS The following financial statements of SIMCALA, Inc., incorporated by reference into Item 8, are attached hereto: Independent Auditors' Reports Balance Sheets as of December 31, 1998 and December 31, 1997 Statements of Operations for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and December 31, 1996 Statements of Changes in Shareholders' Equity for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and December 31, 1996 Statements of Cash Flows for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and December 31, 1996 Notes to Financial Statements 2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedule of SIMCALA, Inc. is attached hereto: Schedule II -- Valuation and Qualifying Account of SIMCALA, Inc. for the years ended December 31, 1996 and 1997, the three months ended March 31, 1998 and the nine months ended December 31, 1998 All other schedules have been omitted, as they are not required under the related instructions or are inapplicable, or because the information required is included in the consolidated financial statements. 3. EXHIBITS The exhibits indicated below are either included or incorporated by reference herein, as indicated. -30- 33 EXHIBIT NUMBER DESCRIPTION ------- ------------------------------------------------------------- [S] [C] 2.1 Stock Purchase Agreement dated as of February 10, 1998, as amended by the amendment thereto dated as of March 4, 1998, among SIMCALA, Inc., SAC Acquisition Corp. and the selling stockholders party thereto (incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 2.2 Purchase Agreement dated March 24, 1998 between SAC Acquisition Corp. and NationsBanc Montgomery Securities LLC (incorporated by reference from Exhibit 2.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 2.3 Purchase Agreement Supplement dated as of March 31, 1998 between SIMCALA, Inc. and NationsBanc Montgomery Securities LLC (incorporated by reference from Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 2.4 Agreement and Plan of Merger dated as of March 31, 1998 between SAC Acquisition Corp. and SIMCALA, Inc. (incorporated by reference from Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 3.1 Certificate of Incorporation of the Company, as amended (incorporated by reference from Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 3.2 Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 4.1 Indenture dated as of March 31, 1998 between SAC Acquisition Corp. and IBJ Schroder Bank & Trust Company, as trustee (incorporated by reference from Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 4.2 Supplemental Indenture dated as of March 31, 1998 between SIMCALA, Inc. and IBJ Schroder Bank & Trust Company, as trustee (incorporated by reference from Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 4.3 Registration Rights Agreement dated as of March 31, 1998 between SAC Acquisition Corp. and NationsBanc Montgomery Securities LLC (incorporated by reference from Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 4.4 Registration Rights Agreement Supplement dated as of March 31, 1998 between SIMCALA, Inc. and NationsBanc Montgomery Securities LLC (incorporated by reference from Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 4.5 Form of 9 5/8% Senior Notes due 2006, Series A (included in Exhibit 4.1 as exhibit A-1 thereto). -31- 34 10.1 Agreement for Investment Banking Services dated March 31, 1998 between SIMCALA, Inc. and CGW Southeast Management III, L.L.C. (incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.2 Agreement for Consulting Services dated March 31, 1998 between SIMCALA, Inc. and CGW Southeast III, L.L.C. (incorporated by reference from Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.3 Credit Agreement dated as of March 31, 1998 among SIMCALA, Inc., as borrower, SIMCALA Holdings, Inc., as guarantor, the lenders party thereto, and NationsBank, N.A., as agent (incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.4 Pledge Agreement dated as of March 31, 1998 among SIMCALA Holdings, Inc., SIMCALA, Inc. and NationsBank, N.A., as agent (incorporated by reference from Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.5 Security Agreement dated as of March 31, 1998 among SIMCALA Holdings, Inc., SIMCALA, Inc. and NationsBank, N.A., as agent (incorporated by reference from Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.6 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement given as of March 31, 1998 by SIMCALA, Inc. and The Industrial Development Board of the City of Montgomery in favor of NationsBank, N.A. (incorporated by reference from Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.7 Consolidated, Amended, and Restated Lease Agreement dated as of January 1, 1995 between the Industrial Development Board of the City of Montgomery, as lessor, and SIMCALA, Inc., as lessee (incorporated by reference from Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). -32- 35 10.8 Loan Agreement dated as of January 1, 1995 between the State Industrial Development Authority, as lender, and SIMCALA, Inc. and the Industrial Development Board of the City of Montgomery, as borrowers (incorporated by reference from Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.9 Contract for Electric Power dated February 8, 1995 between Alabama Power Company and SIMCALA, Inc., as amended by the amendment thereto dated July 8, 1997 (incorporated by reference from Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998).* 10.10 Supply Agreement dated August 3, 1997 between Alcan Ingot & Recycling and SIMCALA, Inc. (incorporated by reference from Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998).* 10.11 Silicon Metal Purchase Agreement dated December 30, 1998 between Wabash Alloys, L.L.C. and SIMCALA, Inc.**,*** 10.12 Supply Agreement dated as of January 1, 1998 between SIMCALA, Inc. and Dow Corning Corporation.**,*** 10.13 Employment and Confidentiality Agreement dated February 10, 1998 between SAC Acquisition Corp. and Dwight L. Goff (incorporated by reference from Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.14 Employment and Confidentiality Agreement dated February 10, 1998 between SAC Acquisition Corp. and R. Myles Cowan (incorporated by reference from Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.15 Employment and Confidentiality Agreement dated February 10, 1998 between SAC Acquisition Corp. and C. Edward Boardwine (incorporated by reference from Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.16 1995-2000 Basic Labor Agreement and Seniority Rules and Regulations dated August 8, 1995 between United Steelworkers of America (AFL-CIO) and SIMCALA, Inc. (incorporated by reference from Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). -33- 36 10.17 Escrow Agreement dated as of March 31, 1998 between (i) the selling stockholders party to the Stock Purchase Agreement dated as of February 10, 1998 among SIMCALA, Inc., SAC Acquisition Corp. and such selling stockholders and (ii) SIMCALA, Inc. (incorporated by reference from Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.18 Shareholders Agreement dated as of March 31, 1998 among SIMCALA Holdings, Inc., CGW Southeast Partners III, L.P., Carl Edward Boardwine, Dwight L. Goff and R. Myles Cowan (incorporated by reference from Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 10.19 Letter Amendment to Credit Agreement dated November 9, 1998 among SIMCALA, Inc., SIMCALA Holdings, Inc. and NationsBank, N.A.*** 10.20 Second Amendment to Credit Agreement dated as of January 25, 1999 among SIMCALA, Inc., SIMCALA Holdings, Inc. and NationsBank, N.A.*** 27.1 Financial Data Schedule (for SEC use only).*** 99.1 Form of Non-Qualified Stock Option Agreement of SIMCALA Holdings, Inc. (incorporated by reference from Exhibit 99.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). 99.2 SIMCALA Holdings, Inc. 1998 Stock Incentive Plan (incorporated by reference from Exhibit 99.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-53791), and amendments thereto, originally filed on May 28, 1998). - ---------- * Confidential treatment has been granted by the Securities and Exchange Commission (the ""Commission") for certain portions of this Exhibit pursuant to Rule 406 under the Securities Act. ** Certain portions of this Exhibit have been deleted and confidentially filed with the Commission pursuant to a confidential treatment request under Rule 406 under the Securities Act. *** Filed Herewith -34- 37 (B) REPORTS ON FORM 8-K None (C) EXHIBITS See Item 14(a)(3) above. (D) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. -35- 38 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 30, 1999. SIMCALA, INC. BY: /s/ William A. Davies ------------------------------------ William A. Davies Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 30, 1999.
SIGNATURE TITLE --------- ----- /s/ William A. Davies Chairman of the Board - --------------------------------- William A. Davies /s/ C. Edward Boardwine President, Chief Executive Officer and Director - --------------------------------- C. Edward Boardwine /s/ Dwight L. Goff Vice President - --------------------------------- Dwight L. Goff /s/ R. Myles Cowan, II Vice President of Finance (Principal Accounting and - --------------------------------- Financial Officer) R. Myles Cowan, II /s/ Edwin A. Wahlen, Jr. Director - --------------------------------- Edwin A. Wahlen, Jr. /s/ James A. O'Donnell Director - --------------------------------- James A. O'Donnell
-36- 39 SCHEDULE II SIMCALA, INC. VALUATION AND QUALIFYING ACCOUNT ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997, THE THREE MONTHS ENDED MARCH 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS ------------------------------ RECOVERY DEDUCTIONS- BALANCE AT OF AMOUNTS AMOUNTS BEGINNING CHARGED TO FROM WRITTEN OFF BALANCE AT OF COSTS AND INSURANCE AS END DESCRIPTION PERIOD EXPENSES POLICY UNCOLLECTIBLE OF PERIOD Year ended December 31, 1996 $ 101,644 $ 90,000 $ 84,372 $ 107,272 Year ended December 31, 1997 107,272 $ 8,846 38,682 77,436 Three months ended March 31, 1998 77,436 77,436 ==================================================================================================================================== Nine months ended December 31, 1998 $ - $ -
40 SIMCALA, Inc. Index to Financial Statements
PAGE ----- Independent Auditors' Report................................................................. F-1 Independent Auditors' Report................................................................. F-2 Balance Sheets as of December 31, 1998 and December 31, 1997................................. F-3 Statements of Operations for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and December 31, 1996......................................................................................... F-4 Statements of Changes in Shareholders' Equity for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and December 31, 1996 .................................................................................... F-5 Statements of Cash Flows for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and December 31, 1996.................. F-6 Notes to Financial Statements................................................................ F-8
All other schedules have been omitted, as they are not required under the related instructions, are inapplicable, or because the information required is included in the financial statements. 41 INDEPENDENT AUDITORS' REPORT Board of Directors Simcala, Inc. We have audited the accompanying balance sheet of SIMCALA, Inc. (the "Company") as of December 31, 1998 and the related statements of operations, changes in shareholders' equity, and cash flows for the nine months in the period then ended. We have also audited the accompanying balance sheet of the Predecessor (Note 1) as of December 31, 1997 and the related statements of operations, changes in shareholders' equity and cash flows for the year then ended and for the three months ended March 31, 1998. Our audits also included the financial statement schedule for the nine-month period ended December 31, 1998, the three-month period ended March 31, 1998 and the year ended December 31, 1997, listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and of the Predecessor as of December 31, 1997 and the results of their operations and their cash flows for the nine months ended December 31, 1998 (Company), for the year ended December 31, 1997 (Predecessor), and for the three months ended March 31, 1998 (Predecessor) in conformity with generally accepted accounting principles. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Atlanta, Georgia February 26, 1999 F-1 42 REPORT OF INDEPENDENT AUDITORS Board of Directors, Inc. SIMCALA, Inc. We have audited the accompanying statements of operations, changes in shareholders' equity, and cash flows of SIMCALA, Inc. for the year ended December 31, 1996. Our audit also includes the financial statement schedule for the year ended December 31, 1996, listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the operations and cash flows of SIMCALA, Inc. for the year ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic statements taken as a whole, presents fairly in all material respects the information set forth therein. Crowe, Chizek and Company LLP Oak Brook, Illinois January 17, 1997 F-2 43 SIMCALA, INC. BALANCE SHEETS On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the outstanding capital stock of the Company and on such date SAC was merged into the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. As a result of purchase accounting, the accompanying financial statements of the Company and the Predecessor 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 DECEMBER 31, | DECEMBER 31, ASSETS 1998 | 1997 | | CURRENT ASSETS: | Cash and cash equivalents $ 14,652,789 | $ 634,877 Accounts receivable (less allowance for | doubtful accounts of $77,436 in 1997) 6,126,286 | 5,830,386 Inventories 3,416,277 | 2,663,941 Deferred income taxes | 1,288,000 | Other current assets 272,113 | 127,628 ------------- | ------------ | Total current assets 24,467,465 | 10,544,832 | PROPERTY, PLANT, AND EQUIPMENT: | Land, building, and improvements 1,720,075 | 1,294,032 Machinery and equipment, furniture and fixtures 53,623,436 | 24,917,520 Construction in-progress 436,184 | 281,876 ------------- | ------------ | 55,779,695 | 26,493,428 | Accumulated depreciation (2,974,138) | (4,045,499) ------------- | ------------ | Property, plant, and equipment, net 52,805,557 | 22,447,929 | INTANGIBLE ASSETS (net of accumulated amortization | of $1,533,862 and $540,297 in 1998 and 1997, respectively) 38,252,601 | 669,778 ------------- | ------------ | | | $ 115,525,623 | $ 33,662,539 ============= | ============ | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | CURRENT LIABILITIES: | Accounts payable $ 3,330,469 | $ 5,327,055 Accrued expenses 1,048,578 | 651,272 Accrued interest payable 1,638,560 | 146,618 Current maturities of interest-bearing, long-term debt and capital leases 72,747 | 2,340,752 Income taxes payable | 1,194,000 ------------- | ------------ | | Total current liabilities 6,090,354 | 9,659,697 INTEREST-BEARING, LONG-TERM DEBT AND CAPITAL LEASES - | Net of current portion 81,034,098 | 12,763,170 | | DEFERRED INCOME TAXES 11,816,575 | 2,964,000 ------------- | ------------ | | Total liabilities 98,941,027 | 25,386,867 | COMMITMENTS AND CONTINGENCIES (Note 12) | | | SHAREHOLDERS' EQUITY: | Preferred stock (Series B preferred stock, 3,000 shares authorized, none | issued and outstanding, $1.00 par value - Note 11) | Common stock, 20,000 shares authorized - 10,899 and 10,000 shares | issued and outstanding, respectively, par value $.01 109 | 100 Additional paid-in capital 18,806,891 | 2,250,189 Retained earnings (deficit) (2,222,404) | 6,025,383 ------------- | ------------ | Total shareholders' equity 16,584,596 | 8,275,672 ------------- | ------------ | | | | $ 115,525,623 | $ 33,662,539 ============= | ============
See notes to financial statements. F-3 44 SIMCALA, INC. STATEMENTS OF OPERATIONS On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the outstanding capital stock of the Company and on such date SAC merged into the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. As a result of purchase accounting, the accompanying financial statements of the Company and the Predecessor 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 ------------ | ----------------------------------------------------------- NINE MONTHS | ENDED | THREE MONTHS YEAR ENDED DECEMBER 31, | ENDED MARCH 31, DECEMBER 31, ------------ | ----------------------------------------------------------- 1998 | 1998 1997 1996 | | | NET SALES $ 40,802,907 | $ 14,853,920 $ 62,184,345 $ 52,407,269 | COST OF GOODS SOLD 36,906,111 | 11,678,879 47,972,065 42,797,540 ------------ | ------------ ------------ ------------ | Gross profit 3,896,796 | 3,175,041 14,212,280 9,609,729 | SELLING AND ADMINISTRATIVE EXPENSE 1,848,388 | 3,824,493 2,845,842 1,923,466 ------------ | ------------ ------------ ------------ | OPERATING INCOME (LOSS) 2,048,408 | (649,452) 11,366,438 7,686,263 | INTEREST EXPENSE 5,776,761 | 313,946 1,709,586 1,511,596 | OTHER INCOME, NET 1,013,611 | 282,272 228,461 444,451 ------------ | ------------ ------------ ------------ | INCOME (LOSS) BEFORE PROVISION | FOR INCOME TAXES (2,714,742) | (681,126) 9,885,313 6,619,118 | PROVISION (BENEFIT) FOR INCOME TAXES (492,338) | (100,198) 3,514,000 1,169,000 ------------ | ------------ ------------ ------------ | NET INCOME (LOSS) $ (2,222,404) | $ (580,928) $ 6,371,313 $ 5,450,118 ============ | ============ ============ ============
See notes to financial statements. F-4 45 SIMCALA, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the outstanding capital stock of the Company and on such date SAC was merged into the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. As a result of purchase accounting, the accompanying financial statements of the Company and the Predecessor 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.
SERIES B ADDITIONAL RETAINED PREFERRED COMMON PAID-IN EARNINGS STOCK STOCK CAPITAL (DEFICIT) TOTAL BALANCE - January 1, 1996 $ 1,500,000 $ 100 $ 999,900 $ (3,218,342) $ (718,342) Conversion of preferred stock 903,566 903,566 Net income 5,450,118 5,450,118 ----------- ----- ------------ ------------ ------------ BALANCE - December 31, 1996 1,500,000 100 1,903,466 2,231,776 5,635,342 Redemption of preferred stock (1,500,000) (1,500,000) Preferred stock dividend (270,000) (270,000) Payment to shareholders in conjunction with extinguishment of debt (2,307,706) (2,307,706) Compensation expense - stock options 346,723 346,723 Net income 6,371,313 6,371,313 ----------- ----- ------------ ------------ ------------ BALANCE - December 31, 1997 100 2,250,189 6,025,383 8,275,672 Net loss (580,928) (580,928) Tax benefit of exercise of stock options 1,460,000 1,460,000 Issuance of stock for exercise of options 9 903,651 903,660 ----------- ----- ------------ ------------ ------------ BALANCE - March 31, 1998 $ -- $ 109 $ 4,613,840 $ 5,444,455 $ 10,058,404 =========== ===== ============ ============ ============ - -------------------------------------------------------------------------------------------------------------------------------- Issuance of stock $ 109 $ 21,999,891 $ 22,000,000 Carryover basis adjustment (3,193,000) (3,193,000) Net loss $(2,222,404) (2,222,404) ----- ------------ ------------ ------------ BALANCE - December 31, 1998 $ 109 $ 18,806,891 $ (2,222,404) $ 16,584,596 ===== ============ ============ ============
See notes to financial statements. F-5 46 SIMCALA, INC. STATEMENTS OF CASH FLOWS On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the outstanding capital stock of the Company and on such date SAC was merged into the Company. The purchase method of accounting was used to record assets acquired and liabilities assumed. As a result of purchase accounting, the accompanying financial statements of the Company and the Predecessor 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.
PREDECESSOR COMPANY | --------------------------------------------- NINE MONTHS | THREE MONTHS ENDED | ENDED YEAR ENDED DECEMBER 31, | MARCH 31, DECEMBER 31, ------------ | --------------------------------------------- 1998 | 1998 1997 1996 | | OPERATING ACTIVITIES: | Net income (loss) $ (2,222,404) | $ (580,928) $ 6,371,313 $ 5,450,118 Adjustments to reconcile net income (loss) to net cash | provided by (used in) operating activities: | Depreciation 2,974,138 | 447,674 1,766,377 1,350,782 Amortization of intangible assets 1,533,761 | 9,229 401,200 242,519 Debt discount | 14,000 89,349 332,396 Increase (decrease) in net deferred income tax liability (492,338) | 800,000 1,267,000 409,000 Noncash stock option compensation | 903,680 346,723 Other | 91,644 Change in assets and liabilities: | Decrease (increase) in accounts receivable 2,497,277 | 20,824 (784,808) (758,012) Increase in other receivables | (2,806,751) Decrease (increase) in inventory (545,377) | (206,968) (702,590) 524,124 Decrease (increase) in prepaid income taxes (125,000) | 110,000 (110,000) Decrease (increase) in other assets (230,508) | 202,831 (9,193) (183,550) Increase (decrease) in accounts payable and other | accrued expenses (4,036,645) | 2,364,754 1,139,968 1,885,802 ------------ | ----------- ----------- ----------- | Net cash provided by (used in) operating activities (647,096) | 1,168,345 9,995,339 9,234,823 | INVESTING ACTIVITIES - Purchase of property, | plant, and equipment (2,690,822) | (1,184,422) (2,074,521) (6,913,146) | FINANCING ACTIVITIES: | Payments on noninterest-bearing debt | (5,597,197) Repayments under line of credit, net | (3,243,692) (1,816,196) Borrowings (repayments) of long-term debt, net (66,625) | 39,085 (7,221,940) (341,941) Additional long-term borrowings | 13,000,000 14,392 Redemption of preferred stock | (1,500,000) Preferred stock dividend | (270,000) Payment to shareholders | (2,307,706) Debt issuance cost | (331,697) ------------ | ----------- ----------- ----------- | Net cash provided by (used in) financing activities (66,625) | 39,085 (7,472,232) (2,143,745) ------------ | ----------- ----------- ----------- | INCREASE (DECREASE) IN | CASH AND CASH EQUIVALENTS (3,404,543) | 23,008 448,586 177,932 | CASH AND CASH EQUIVALENTS: | Beginning of period 18,057,332 | 634,877 186,291 8,359 ------------ | ----------- ----------- ----------- | End of period $ 14,652,789 | $ 657,885 $ 634,877 $ 186,291 ============ | =========== =========== ===========
(Continued) F-6 47 SIMCALA, INC. STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY | ----------------------------------------------- NINE MONTHS | THREE MONTHS ENDED | ENDED YEAR ENDED DECEMBER 31, | MARCH 31, DECEMBER 31, ----------- | ------------ ----------------------------- 1998 | 1998 1997 1996 | | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | Cash paid for: | Interest $ 4,203,730 | $ 161,000 $ 1,559,742 $ 1,237,845 =========== | =========== =========== =========== | Income taxes $ 125,000 | $ 112,000 $ 770,000 $ 870,000 =========== | =========== =========== =========== Noncash transactions: Conversion of preferred stock into debt $ -- $ 3,000,000 =========== =========== Equipment acquired under capital lease $ 70,000 $ 150,250 =========== ===========
See notes to financial statements. (Concluded) F-7 48 SIMCALA, INC. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997, FOR THE NINE MONTHS ENDED DECEMBER 31, 1998, THE THREE MONTHS ENDED MARCH 31, 1998, AND THE TWO YEARS ENDED DECEMBER 31, 1997 1. ORGANIZATION AND OPERATIONS On March 31, 1998, SIMCALA Holdings, Inc. ("Holdings"), through its wholly owned subsidiary, SAC Acquisition Corp. ("SAC") purchased all of the outstanding common stock of SIMCALA, Inc. ("SIMCALA" or the "Company"). On such date, SAC was merged into SIMCALA (the "Acquisition"). Holdings and SAC conducted no significant business other than in connection with the Acquisition. The term "Predecessor" refers to the Company prior to the Acquisition. The Company is a producer of silicon metal for sale to the aluminum and silicones 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 the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended 1997 and 1996, three customers accounted for 40%, 15%, and 14%; 40%, 21%, and 10%; 29%, 24%, and 16%; and 27%, 24%, and 12% of net sales, respectively. At December 31, 1998 and 1997, three customers accounted for 54%, 10%, and 8% 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 $65.3 million in cash, including $6.1 million in expenses directly related to the Acquisition and assumption of approximately $22 million in liabilities, 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 financial statements) and equity contributed of $22,000,000. The uses of cash associated with the Acquisition were as follows (in thousands of dollars): The Acquisition $ 65,291 Repayment of indebtedness 9,159 Transaction fees and expenses 6,051 General corporate purposes 16,499 -------- $ 97,000 ========
Accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on fair values at the acquisition date. The excess of the purchase price over the fair value of the identifiable net assets in the amount of $34.5 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. F-8 49 The Acquisition was financed through the issuance of senior notes in the amount of $75,000,000 (see Note 4) and equity contributed of $22,000,000. Senior Management had an 8% ownership interest in the Predecessor, and as a result of the Acquisition, has a 9% ownership interest in the Company. The sale of the Predecessor's stock of which 92% was not owned by Senior Management, constitutes a change in control of the Company. The 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 financial statements as of December 31, 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. 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 December 31, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents - The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased, to be cash equivalents. Inventories - Inventories are stated using the average cost method which approximates the first-in, first-out (FIFO) inventory cost method. Property, Plant, and Equipment - It is the policy of the Company to capitalize expenditures for major renewals and betterments and to charge to operating expenses the cost of current maintenance and repairs. Interest costs associated with major property additions are capitalized while the projects are in the process of acquisition and construction. The Company evaluates the estimated useful lives and the carrying value of assets on a periodic basis to determine whether events or circumstances warrant revised estimated useful lives or whether any impairment exists. Management believes no impairment existed at December 31, 1998. F-9 50 The Company provides for depreciation over the estimated useful lives of plant and equipment by the straight-line method using the following useful lives (in years):
USEFUL ASSET CATEGORY LIFE Land improvements 20 Buildings 40 Machinery and equipment 14 Mobile equipment and vehicles 6 Furniture and fixtures 10 Computer equipment 7 Computer software 5
The cost and the accumulated depreciation and amortization relating to assets retired or otherwise disposed of, is eliminated from the respective accounts at the time of disposition. Gains or losses from disposition are included in current operating results. Intangible Assets - Intangible assets include the excess of the cash consideration over the estimated fair market value of the net assets acquired in the Acquisition of $34.5 million which is being amortized over twenty-five years. In addition, debt issuance costs of $5.3 million have been recorded and are being amortized over eight years. The Company evaluates the amortization period and the carrying value of intangible assets, including goodwill on a periodic basis, including evaluating the performance of the underlying businesses which gave rise to such amount to determine whether events or circumstances warrant revised estimates of useful lives or whether impairment exists. In performing the review of recoverability, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount, an impairment is recognized, based on the difference between the estimated fair value and the carrying value. Stock-Based Compensation - Stock-based compensation is accounted for in accordance with APB 25, Accounting for Stock Issued to Employees, and related interpretations. Effective January 1, 1996, the Company adopted the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation. See Note 8 to the financial statements. New Accounting Pronouncements - As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards 130, Reporting Comprehensive Income ("SFAS 130"), which establishes new rules for the reporting and display of comprehensive income and its components. As the Company had no other comprehensive income for any of the periods presented herein, the adoption of SFAS 130 had no impact on the Company's financial statements. As of December 31, 1998, the Company adopted Statement of Financial Accounting Standards 131, Disclosures about Segments of An Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas, and major customers. The Company has no separate reportable segments under the criteria of SFAS 131, so the adoption had no impact on the Company's financial statements or disclosures contained herein. However, the Company has adopted F-10 51 the disclosure requirements for transactions with major customers. See Note 1 to the financial statements. In June 1998, Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") was issued. SFAS 133 establishes standards for derivative instruments and hedging activities and 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. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company intends to adopt SFAS 133 in 2000. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 133. The Company is therefore unable to disclose the impact that adopting SFAS 133 will have on its financial position and results of operations when such statement is adopted. 3. INVENTORIES Inventories at December 31, 1998 and 1997 consisted of the following:
COMPANY | PREDECESSOR 1998 | 1997 | | Raw materials $ 908,839 | $ 948,627 Finished goods 2,211,438 | 1,419,668 Supplies 296,000 | 295,646 ----------- | ----------- | $ 3,416,277 | $ 2,663,941 =========== | ===========
F-11 52 4. LONG-TERM DEBT The following is a summary of interest-bearing, long-term debt:
COMPANY | PREDECESSOR 1998 | 1997 | | Senior notes which bear interest at 9 5/8% and are due April 2006 $ 75,000,000 | | Industrial development bonds which bear interest at a variable | rate. At December 31, 1998 and 1997, the interest rate was 5.30% | and 5.90%, respectively. The bonds mature on December 1, 2019 | The bonds and applicable interest are secured by a letter of credit. 6,000,000 | $ 6,000,000 | Term loan with a bank which bears interest at the current Eurodollar advance | rate plus a variable rate dictated by the Company's cash flow leverage ratio | (2.50% at December 31, 1997) | Amount was refinanced in connection with the Acquisition. | 9,000,000 | Various capital leases payable with interest rates ranging from 9.91% | to 10.16% expiring at various dates through 2000. Aggregate | monthly payments approximate $6,000. 106,845 | 103,922 ------------ | ------------ | 81,106,845 | 15,103,922 Less current portion 72,747 | 2,340,752 ------------ | ------------ | Long-term debt $ 81,034,098 | $ 12,763,170 ============ | ============
The future maturities of interest-bearing, long-term debt and capital leases are as follows:
YEAR ENDING DECEMBER 31, 1999 $ 72,747 2000 34,098 2001 -- 2002 -- 2003 -- Thereafter 81,000,000 ------------ $ 81,106,845 ============
The Senior Notes (the "Notes") mature in 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. At any time on or before April 15, 2001, the Company may redeem up to 30% of the original aggregate principal amount F-12 53 of the Notes with the net proceeds of a public offering of common stock of the Company or Holdings, provided that at least 70% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption. 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 "Commitment"). The credit facility expires in March 2003. At March 31, 1998, $6.1 million related to letters of credit was outstanding under the credit facility. The Credit Facility requires that the Commitment be permanently reduced, upon certain non-ordinary course asset sales by Holdings, the Company or any future subsidiary of the Company. Revolving loans will bear interest at a variable rate equal, at the option of the Company, to (i) LIBOR (having interest periods of 1, 2, 3, or 6 months, at the Company's option) plus a margin of up to 3.0% per annum, or (ii) the base rate (defined to mean the higher of (i) publicly announced "prime rate," and (ii) a rate tied to overnight Federal Funds transactions with members of the Federal Reserve System) plus a margin of up to 2.0% per annum. Drawings under letters of credit which are not promptly reimbursed by the Company are expected to accrue interest at a variable rate equal to the base rate plus a margin up to 3.0% per annum. Beginning 36 months after the closing of the Credit Facility, these margins may be reduced based on the financial performance of the Company. The Notes and the 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 Credit Facility contains affirmative covenants including, among other, 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 Credit Facility. The Company is also required to comply with certain financial tests and maintain certain financial ratios. Certain of these test and ratios include: (i) maintaining a minimum earning before interest, taxes, depreciation and amortization ("EBITDA"); (ii) maintaining a maximum ratio of indebtedness to EBITDA; and (iii) maintaining a minimum ratio of EBITDA to interest expense. During 1998, the Company reached agreement with its lender to amend all financial covenants. At December 31, 1998, the Company was in compliance with all covenants, as amended. Credit extended under the Credit Facility is secured by substantially all of the Company's assets and the real and personal property used in the Company's operations. F-13 54 In January 1999, the Company entered into an amendment to the Notes agreement. This amendment required the Company to cash collateralize the $6,000,000 letter of credit backing the industrial development bonds. This cash collateral must remain in place until certain leverage tests are met in the Year 2000. In addition, the amendment changed certain of the Company's financial tests and minimum financial ratios. 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. The Company capitalized $93,094 of interest expense during the nine months ended December 31, 1998. 5. PRO FORMA DATA The following unaudited pro forma financial data has been prepared assuming that the Acquisition was consummated on January 1, 1996. 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, 1996, nor is it necessarily indicative of future operations.
THREE MONTHS YEAR YEAR ENDED ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 Net Sales $ 14,854,000 $ 62,184,000 $ 52,407,000 Net Loss $ (2,377,000) $ (891,000) $ (3,176,000)
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. During the nine months ended December 31, 1998, the Company paid CGW Management $157,000. The consulting agreement expires 2003. At the Acquisition closing, the Company paid to CGW Management an investment banking fee of $1.35 million for its services in assisting the Company in structuring and negotiating the Acquisition. In connection with the exercise of stock options by certain members of management, the Company was owed $1,800,000 by management related to tax withholdings due on such compensation. Such amount was recorded as a receivable as of March 31, 1998 and was paid on June 12, 1998. During October 1996, a partnership formed primarily by the shareholders of the Predecessor purchased various debt instruments of the Predecessor with face amounts aggregating $7,675,000 for $3,130,000, respectively. With the proceeds from a subsequent refinancing, the Company paid the face amount of F-14 55 the obligations due under these debt instruments. Prepayment penalties and other fees of $464,000 were also paid to the Partnership in 1997. The stockholders' portion of the payment amount greater than the recorded carrying value of the notes of $2,307,706 has been recorded as a reduction of stockholders' equity. The Predecessor entered into a Management Agreement with its former majority stockholder to provide management services to the Company. The Company incurred stockholder management fees of $31,250, $250,000 and $250,000 during the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996, respectively. Effective with the Acquisition, the Management Agreement was terminated. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has estimated the fair value of its financial instruments, the carrying value of which differed from fair value, using available market information and appropriate valuation methodologies. Considerable judgment is required in developing the estimates of fair value presented herein and, therefore, the values are not necessarily indicative of the amounts that could be realized in a current market exchange. The carrying amount and the estimated fair value of such financial instruments as of December 31, 1998 and 1997 is as follows:
CARRYING ESTIMATED AMOUNT FAIR VALUE COMPANY December 31, 1998: Long-term debt and capital leases, including current portion $ 81,106,845 $ 70,081,845 ============ ============ PREDECESSOR December 31, 1997: Long-term debt and capital leases, including current portion $ 15,103,922 $ 15,097,497 ============ ============
The estimated fair value of the long-term debt as of December 31, 1998 is based upon current market values of $75,000,000 in publicly traded debt and carrying value of $6,106,845 in industrial development bonds and capital leases. The estimated fair value of the long-term debt as of December 31, 1997 is based upon interest rates that currently were available for issuance of a $9,000,000 term loan with similar terms and remaining maturity and carrying value of $6,103,992 in industrial development bonds and capital leases. 8. SHAREHOLDERS' EQUITY AND STOCK OPTIONS On March 31, 1998, Holdings adopted the SIMCALA Holdings, Inc. 1998 Stock Incentive Plan (the "1998 Plan") under which stock options, stock appreciation rights, restricted stock, or other stock-based awards for 8,000 shares of common stock or restricted common stock could be granted, provided that no more than 10% of the reserved shares may be granted as restricted stock or other unrestricted stock awards. Certain members of the Company's management were granted options totaling 3,070 for an F-15 56 exercise price of $1,000 per share, which approximated fair value on March 31, 1998. As of December 31, 1998, no other awards had been granted under the 1998 Plan. The options have a ten-year expiration and vest ratably over five years; however, the 1998 Plan contains a provision for accelerating vesting if certain events occur. No options were exercisable at December 31, 1998. In 1995, the Predecessor established the SIMCALA, Inc. 1995 Stock Option Plan (the "Plan") under which stock options for 889 shares of common stock could be granted. In connection with this Plan, the Company granted options to purchase 780 shares at an exercise price of $100 per share prior to December 31, 1997. On March 31, 1998, the Company granted additional options to acquire 109 shares at $100 per share. All options were vested and exercised as of March 31, 1998. In accordance with the Stock Purchase Agreement, no exercise price was payable to the Predecessor with respect to the options. As such, compensation expense was recognized for the waiver of the exercise price. Of the total options, 211 options vested based on performance criteria. Compensation expense of $903,680 and $346,723 associated with such options was recognized in the three months ended March 31, 1998 and the year ended December 31, 1997, respectively. As of December 31, 1997, 415 options were exercisable; however, none had been exercised. The Company applies APB 25 in accounting for its stock-based compensation plans. Effective January 1, 1996, the Company adopted the disclosure-only provisions of SFAS 123. Had compensation costs for the Company's stock-based compensation plans been determined based on the fair value at the grant date consistent with the method set forth in SFAS 123, the Company's net income (loss) for the nine months ended December 31, 1998 and years ended 1997 and 1996 would have been ($2,379,217), $6,366,324 and $5,445,220, respectively. The fair value of the options granted under the 1998 Plan was estimated at $171.98 per share, using the Black-Scholes Option Pricing Model and the following weighted-average assumptions: risk-free interest rate of 5.64%; dividend yield, expected volatility, and assumed forfeiture rate of 0%; and expected life of 3.4 years. The fair value of the options granted under the Plan during 1995 was estimated at $29.74 per share using the Black-Scholes Option Pricing Model and the following weighted average assumptions: risk-free interest rate of 7.1%; dividend yield, expected volatility, and assumed forfeiture rate of 0%; and an expected life of five years. The fair value of options granted under the Plan during 1998 was estimated at $28.11 per share using the Black-Scholes Option Pricing Model and the following weighted average assumptions: risk-free interest rate of 6.6%; dividend yield, expected volatility, and assumed forfeiture rate of 0%; and an expected life of five years. 9. RETIREMENT PLAN The Company sponsors a qualified 401(k) savings plan covering all employees who have completed six months of employment. If a participating employee decides to contribute, a portion of the contribution is matched by the Company. Total retirement plan expense for the nine months ended December 31, 1998, the three months ended March 31 1998, and the years ended 1997 and 1996, was $73,142, $27,512, $97,217, and $81,846, respectively. F-16 57 10. INCOME TAXES The provision for income taxes for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended 1997 and 1996, consisted of the following:
COMPANY PREDECESSOR ---------------------------- NINE MONTHS | THREE MONTHS ENDED | ENDED PREDECESSOR DECEMBER 31, | MARCH 31, ---------------------------- 1998 | 1998 1997 1996 | | Current $ -- | $(900,198) $ 2,247,000 $ 760,000 Deferred (492,338) | 800,000 1,267,000 1,490,753 Change in valuation allowance | (1,081,753) ----------- | --------- ----------- ----------- | Provision for income taxes $ (492,338) | $(100,198) $ 3,514,000 $ 1,169,000 =========== | ========= =========== ===========
The difference between the effective tax rate and the statutory rate is reconciled below (amounts in thousands):
COMPANY PREDECESSOR ----------------- ------------------ PREDECESSOR NINE MONTHS ENDED THREE MONTHS ENDED ----------------------------------------- DECEMBER 31, 1998 MARCH 31, 1998 1997 1996 ----------------------------------------- ----------------------------------------- DOLLARS PERCENTAGE| DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE | | Statutory rate $(923) (34.0)% | $(232) (34.0)% $3,361 34.0% $ 2,250 34.0% State income tax, net | of federal benefit (59) (2.2) | Nondeductible goodwill 350 12.9 | Other permanent items 140 5.2 | 132 19.4 153 1.5 Valuation allowance | (1,081) (16.3) ----- ---- | ----- ----- ------ ---- ------- ---- Recorded tax expense $(492) 18.1% | $(100) (14.6)% $3,514 35.5% $ 1,169 17.7 % ===== ==== | ===== ===== ====== ==== ======= ====
The Company paid no Alabama state income taxes for the nine months ended December 31, 1998, three months ended March 31, 1998, and the years ended December 31, 1997 and 1996 due to benefits granted by the State of Alabama under the Mercedes Act. F-17 58 Significant components of the deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
COMPANY | PREDECESSOR 1998 | 1997 | | Deferred tax liabilities: | Accelerated tax depreciation $ 14,671,200 | $ 2,918,000 Other liabilities 111,124 | 8,000 ------------ | ----------- 14,782,324 | 2,926,000 | Deferred tax assets: | AMT credit carryforwards 746,049 | 1,090,000 Net operating loss carryforwards 1,987,615 | Other assets 232,085 | 160,000 ------------ | ----------- 2,965,749 | 1,250,000 ------------ | ----------- | Net deferred tax liability $(11,816,575) | $(1,676,000) ============ | ===========
Based on management's assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings. At December 31, 1998, the Company had a tax net operating loss carryforward of $5,845,000, which expires December 31, 2018. Additionally, the Company has AMT credit carryforwards at December 31, 1998 of $2,194,000, which expire December 31, 2013. 11. PREFERRED STOCK In connection with the acquisition of the Company in 1995, 1,500 shares of Series B cumulative 8% preferred stock were issued. In 1997, the preferred stock was redeemed at the redemption value of $1,000 per share plus $270,000 of accrued dividends. 12. COMMITMENTS AND CONTINGENCIES At December 31, 1998, the Company had approximately 170 employees, approximately 100 of which are covered by provisions of a collective bargaining agreement. The collective bargaining agreement expires in 2000. Total rental expense for property and equipment was $266,783, $109,370, $219,087, and $229,273 for the nine months ended December 31, 1998, the three months ended March 31, 1998, and the years ended December 31, 1997 and 1996, respectively. Minimum annual rentals under noncancelable operating leases are $153,791, $137,426, $78,947, and $79, for the years ended 1999, 2000, 2001, 2000, respectively. F-18 59 13. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS):
NET INCOME COMPANY'S QUARTER ENDED NET SALES GROSS PROFIT (LOSS) --------- ------------ ---------- December 31, 1998 $ 13,267 $ 1,594 $ (482) September 30, 1998 12,618 407 (1,301) June 30, 1998 14,918 1,896 (439) --------------------------------------------------------------------------------------------------------- PREDECESSOR'S QUARTER ENDED March 31, 1998 $ 14,854 $ 3,175 $ (581) December 31, 1997 15,466 4,392 2,242 September 30, 1997 15,920 3,650 1,476 June 30, 1997 15,143 2,740 1,083 March 31, 1997 15,655 3,430 1,570
F-19 EX-10.11 2 SILICON METAL PURCHASE AGREEMENT 1 EXHIBIT 10.11 Certain portions of this exhibit have been deleted and confidentially filed with the Securities and Exchange Commission pursuant to a confidential treatment request under Rule 406 under the Securities Act of 1933, as amended. The confidential portions of the exhibit that have been deleted are indicated by "[***]" inserted in place of such confidential information. SILICON METAL PURCHASE AGREEMENT WABASH ALLOYS, L.L.C. - SIMCALA, INC. ITEM: [********] Grade Silicon Metal Iron: [**********] Calcium: [**********] [********] Grade Silicon Metal Iron: [**********] Calcium: [**********] [********] Grade Silicon Metal Iron: [**********] Calcium: [**********] Size: [******************************************] Shipment in bulk truckload quantities. DURATION: January 1, 1999 through December 31, 2001 QUANTITY: [******] Grade: [**] truckloads/month ([******] tons/year) [******] Grade: [**] truckloads/month ([******] tons/year) [******] Grade: [**] truckloads/month ([******] tons/year) [******] grade may be substituted when [**] grade not available. Additional tonnage as mutually agreed upon (both companies flexible). TERMS: [************************************************] [*********************************************************] Review [****************************] (if necessary). PRICE: The [******] grade price effective January 1, 1999 is [******]/pound. This price will be [*********************************************** ******************************************************************* ******************************************************************* ******************************************************************* ********]. The [******] grade price will be [*********************]. The [******] grade price will be [*********************]. The [******] grade price will be [************************************************* ********************************************************************** ********************************************]. CANCEL: Must be written with six (6) month's advance notice.
/s/ 12/30/98 - ---------------------------- -------------------------- Wabash Alloys, L.L.C. Date /s/ C. E. Boardwine 12/30/98 - ---------------------------- -------------------------- SIMCALA, Inc. Date EX-10.12 3 SUPPLY AGREEMENT DATED AS OF JANUARY 1, 1998 1 EXHIBIT 10.12 Certain portions of this exhibit have been deleted and confidentially filed with the Securities and Exchange Commission pursuant to a confidential treatment request under Rule 406 under the Securities Act of 1933, as amended. The confidential portions of the exhibit that have been deleted are indicated by "[***]" inserted in place of such confidential information. In addition, all exhibits to this exhibit have been deleted and confidentially filed with the Securities and Exchange Commission. SUPPLY AGREEMENT BETWEEN SIMCALA, INC. AND DOW CORNING CORPORATION 2 PREAMBLE SIMCALA and Dow Corning Corporation understand the need for continuous "real" cost improvement. SIMCALA understands that Dow Corning Corporation is entering into this contract with the intent to purchase silicon metal between January 1, 1998, and December 31, 2004, with convincing evidence that in so doing, Dow Corning Corporation will have significantly higher value through lower costs, better quality, and consistent reliability of supply for the life of the contract than it would have with short term and/or level volume supplier arrangements. SIMCALA gains a committed long-term customer who intends to provide consistent and dependable long-term growth. SIMCALA and Dow Corning Corporation are committed to working together towards continuous improvement of value in terms of the cost, price, quality, productivity, and service related to the production and use of silicon metal. Both parties agree that the key to the success of this contract is not in mechanics but in mutual trust that these commitments to continuous improvement will be fully implemented. 3 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (hereinafter "Agreement") is made and entered into as of the 1st day of January, 1998 by and between SIMCALA, INC., a Delaware Corporation located in Montgomery, Alabama (hereinafter "Seller") and DOW CORNING CORPORATION, a Michigan Corporation with headquarters in Midland, Michigan (hereinafter "Buyer"). WHEREAS, Seller is a producer of silicon metal at its Montgomery, Alabama plant and is presently producing silicon metal sold to Buyer by Seller; and WHEREAS, Seller and Buyer desire to enter into this Agreement to provide for the sale and purchase of silicon metal and further cooperation between Seller and Buyer to extend the continuous improvement in cost, quality and performance of the product; and WHEREAS, in entering into this Agreement, it is intended that Seller will continue to have a committed long term customer and the opportunity to enjoy consistent long term growth; and WHEREAS, Buyer's aim in entering into this Agreement is to keep its assured long term supply of silicon metal for the life of the Agreement and its ongoing opportunity to lower costs and obtain better quality; and WHEREAS, both Seller and Buyer remain committed to continually working toward continuous improvement in cost, price, quality and service regarding the sale and purchase of silicon metal, and the parties agree that the key to a successful Agreement is still mutual trust and commitment to continuous improvement; and WHEREAS, the sale of silicon metal and the productivity improvement sharing shall be carried out under and subject to the terms and conditions set forth hereinafter and if appropriate in a separate sub-agreement(s) as needed; NOW, THEREFORE, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, silicon metal under and subject to the following terms and conditions: 1. Effective Date. This Agreement shall become effective January 1, 1998. 2. Cooperation and Sharing. Seller and Buyer agree to use their best efforts to work together to generate productivity improvements resulting in cost savings and product performance opportunities. Both Seller and Buyer understand the need for cooperation in order to obtain this goal and agree to take commercially acceptable action, including appointing members to quality technical teams for handling various subjects, in order to pursue the goal. Seller and Buyer agree that the appointed teams will meet at least twice per year and discuss such opportunities. All such opportunities that require a change in specifications must be real and measurable, and the measurements involved must 4 take account of the effect on both Seller and Buyer. Cost savings opportunities shall be shared equitably by Seller and Buyer net of any capital investments required. Seller and Buyer intend to enter into separate written sub-agreements which will set forth their mutual intentions and agreements regarding each such opportunity and necessary capital investments. When cooperation generates productivity improvements, the resultant cost savings shall be reflected in the annual price adjustment provided for under Exhibit A. In addition to the annual price changes pursuant to Exhibit A, the price may be adjusted to reflect cost savings through the Formula Price Adjustment as hereinafter defined in Exhibit B. Mutually developed and approved cost savings opportunities can be implemented at any time during a "Calendar Year" which term, as used in this Supply Agreement, shall mean a twelve (12) month period from January 1 to December 31. The cost savings idea shall be evaluated for a period of not less than six (6) months following its implementation, during which time the real and measurable savings will be verified. Such savings shall be shared equitably between Buyer and Seller. A Formula Price Adjustment can be made to the actual price then in effect following the six (6) month evaluation period. During the six (6) month evaluation period, Buyer and Seller will monitor and review monthly performance of the cost savings idea. Once such a Formula Price Adjustment has been made to the actual price, Buyer and Seller may discontinue all or part of any cost savings practice by mutual agreement set forth in a written termination agreement which shall state the reasons for such discontinuance. If Buyer and Seller agree to discontinue a cost saving practice, the actual price will be readjusted, as appropriate, beginning with the month following that month during which the cost savings practice is discontinued. 3. Quantity. Seller agrees to sell and deliver to Buyer, and Buyer agrees to purchase and receive from Seller, a minimum quantity of silicon metal of [***] metric tonnes during the initial three (3) Calendar Years set forth on Exhibit D hereto (the "3 Year Minimum"). Seller and Buyer agree that the quantity that Buyer is required to purchase from Seller for any single Calendar Year during such initial three year period shall be at least equal, but not limited to, [**********] which comply with the Buyer's specifications as given in Exhibit C of this Agreement. In any case the minimum tonnage in any such Calendar Year supplied by Seller to Buyer shall not be less than [***] metric tons. [********] conforming to the specification in Exhibit C or other specifications as mutually agreed between the parties. During each three (3) Calendar Year period ending December 31 in each of the years 2001 and thereafter during the term hereof, Seller shall sell and deliver to Buyer, and Buyer shall purchase and receive from Seller, a quantity of silicon metal which complies with Buyer's specifications as set forth on Exhibit C that is equal to the amount - 2 - 5 set forth opposite the last year of such three (3) year period on Exhibit D under the caption "Rolling Minimum" (the "3 Year Rolling Minimum"). Seller agrees that it will construct a new brown field furnace, which shall be known as Furnace No. 4 ("Furnace No. 4"), and will use its commercially reasonable best efforts to cause such furnace to be fully constructed and operational prior to January 1, 2001. 4. Incremental Volume. Quantities up to the Total Maximum Purchases as defined in Exhibit D per Calendar Year shall be understood as conventional volume ("Conventional Volume"). Any additional quantity of silicon metal purchased by Buyer from Seller in any Calendar Year from the production tonnages of No. 1, No. 2, No. 3 or No. 4 furnaces over and above the Conventional Volume for that Calendar Year shall be incremental volume ("Incremental Volume"). Any such Incremental Volume will be added to the Conventional Volume provided for in this Agreement by means of a sub-agreement between Seller and Buyer which shall set forth the agreed upon pricing, quantities and other specifications for such Incremental Volume. 5. Quality. All of the silicon metal sold and delivered hereunder by Seller shall meet the specifications which are set forth in Exhibit C attached hereto and made a part hereof, as well as such other specifications which may be agreed upon in writing from time to time between Seller and Buyer, unless waived by Buyer. 6. Pricing. [***********************] - 3 - 6 7. Term. The initial term of this Agreement (the "Term") shall be for seven (7) Calendar Years commencing January 1, 1998 and, if either party issues a "notice of termination" prior to January 1, 2002, ending December 31, 2004, unless sooner terminated as provided below. If neither party issues a "notice of termination," the Term of this Agreement shall automatically continue from year to year after December 31, 2004 and may be terminated under this Section by either party submitting to the other party not less than twenty four (24) months prior written notice of such party's election to terminate this Agreement. 8. Confidentiality. This Supply Agreement and everything set forth herein, all information shared pursuant hereto between Seller and Buyer, and all related agreements and sub-agreements are and shall remain confidential and proprietary to the parties hereto, or to the disclosing party, if appropriate. All information disclosed by a party hereto under this Agreement shall be subject to the same obligations of non-disclosure and limited use by the receiving party in accordance with the terms of the Confidentiality Agreement dated July 17, 1995, between Dow Corning Corporation, Seller and Buyer, or in accordance with any present or future confidentiality agreements which may be applicable between Seller and Buyer. - 4 - 7 9. Third Parties. Seller and Buyer understand and agree that some of the information, gains or improvements resulting from the cooperation and productivity sharing to be carried out hereunder and under any sub-agreement hereto will be applicable to the business of one or both of the parties as that business relates to third parties. Therefore, despite the provision for confidentiality set forth herein above, Seller and Buyer agree to meet and to discuss the desire of either party hereto to use information, gains or improvements in their business with third parties, and both Seller and Buyer agree that all reasonable requests or permission to so share such information, gains or improvements shall be mutually agreed to by both parties hereto and such agreement shall not be unreasonably withheld. 10. Right to Audit. Buyer reserves the right to have Seller's records inspected by a certified public accountant agreed to by both parties at reasonable times during normal business hours to verify increases or decreases in the cost factors set forth in Exhibit A. The certified public accountant will be instructed to only advise Buyer and Seller whether the increases or decreases are correct or incorrect according to the provisions of Exhibit A, and, if incorrect, to advise Buyer and Seller what the correct increase or decrease should be. The certified public accountant shall be advised not to reveal the facts forming the basis of his opinion regarding price increases or decreases to any party whatsoever, including Buyer, without the prior written consent of Seller. 11. Delivery and Acceptance. Delivery of the silicon metal hereunder by Seller to Buyer shall be [******], or other sources mutually approved by both parties hereto, such approval not to be unreasonably withheld. [********] 12. Specifications and Quality Control, Weight, Patents and Disclaimer. A. Product Specification and Quality Control. All of the silicon metal delivered hereunder shall conform to the specifications which are set forth in Exhibit C attached hereto and made a part hereof, unless waived by Buyer. Seller warrants that Buyer shall receive a good title to the silicon metal delivered hereunder. In the event of disqualification of the silicon metal because of failure to conform to the specifications, Buyer may suspend this Agreement at its discretion until the product is requalified by Buyer. Both parties will use their respective - 5 - 8 commercially reasonable best efforts to remedy the problems. Pending resolution of such problems, the minimum quantity of silicon metal that Buyer is obligated to purchase hereunder may at Buyer's option be adjusted downwards accordingly for that period of time. The analysis established by Seller is preliminarily binding. However, if Buyer's own sampling analysis within sixty (60) days after delivery states a deviation from the specification according to Exhibit C, then Buyer in writing immediately will give Seller the opportunity to carry out a joint sample taking. Should the parties fail to reach an agreement as to analysis, they shall jointly appoint an independent expert. The costs for the expert shall be borne by the party whose results deviates the most from the expert's analysis. B. Weight. Seller's certified weight shall govern [****]. However, Buyer reserves the right to submit any delivery to check weighing on a certified weight immediately after receipt of the material. If the value deviates more than [***] from the weight indicated by Seller, then Buyer will inform Seller in writing immediately about the difference, and an appropriate invoicing adjustment will be made. C. Patents. Notwithstanding any other limitations of liability in this Agreement, if any suit is brought against Buyer for infringement of any patents alleging that the silicon metal delivered under this Agreement or that Seller's method of manufacturing it infringes any patents, Seller shall, at its own expense, defend and control the suit against these allegations only, and shall pay any award of damages assessed against Buyer in the suit to the extent only that the damages are awarded in connection specifically with the alleged infringement, provided Buyer gives Seller prompt notice in writing of the institution of the suit and, to the full extent of the Buyer's power to do so, Buyer permits Seller to defend and control the suit against these allegations. The above fully expresses Buyer's exclusive remedy and Seller's sole liability with respect to infringement of any patent by the silicon metal delivered under this Agreement, and Seller expressly disclaims any express or implied warranty against infringement with respect to such silicon metal. In no case will Seller be liable to defend or pay any award of damages assessed against Buyer in any suit or cause of action alleging that the use of the silicon metal delivered under this Agreement infringes any patent. Buyer shall not hold Seller responsible for any claim, loss or expense arising out of Seller's compliance with any specifications furnished by Buyer with respect to the silicon metal. Notwithstanding any other limitations of liability in this Agreement, if any suit is brought against Seller for infringement of any patents alleging that Buyer's use of the silicon metal delivered under this Agreement infringes any patents, Buyer shall, at its own expense, defend and control the suit against these allegations only, and shall pay any award of damages assessed against Seller in the - 6 - 9 suit to the extent only that the damages are awarded in connection specifically with the alleged infringement, provided that Seller gives Buyer prompt notice in writing of the institution of the suit and, to the full extent of the Seller's power to do so, Seller permits Buyer to defend and control the suit against these allegations. The above fully expresses Seller's exclusive remedy and Buyer's sole liability with respect to infringement of any patent by Buyer's use of any silicon metal delivered under this Agreement, and Buyer expressly disclaims any express or implied warranty against infringement with respect to Buyer's use of silicon metal. D. Seller further warrants that it has taken adequate precautions to verify that its computer systems will properly process date calculations through the year 2000 and beyond and that its manufacture and delivery of the Goods will not be delayed or suspended due to the failure of its date calculations. E. DISCLAIMER. EXCEPT AS SPECIFIED HEREINABOVE IN THIS PARAGRAPH 12, THERE ARE NO EXPRESS WARRANTIES BY SELLER AND NO WARRANTIES BY SELLER SHALL BE IMPLIED OR OTHERWISE CREATED UNDER APPLICABLE LAW, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. 13. Payment Terms. For all silicon metal sold, delivered and accepted hereunder, Buyer shall pay Seller, [***] of the receipt of Seller's invoice. 14. Force Majeure. A. Neither party shall be liable for its failure to perform hereunder (other than any failure to pay money) caused by contingencies beyond its reasonable control, including but not limited to acts of God, fire, floods, wars, sabotage, accidents, labor disputes (whether or not such disputes are within the power of the party to settle), serious equipment failure resulting in a full furnace outage in excess of twenty-one (21) days unless caused by a misuse or failure to perform routine maintenance or furnace power reduction in excess of thirty percent (30%) of furnace normal power for a period of twenty-eight (28) days, governmental actions, inability to obtain material, equipment or transportation and any other occurrence beyond its control. The party whose performance is prevented by such contingencies shall have the right not to perform as herein provided during the period of such contingency and the total amount of silicon metal herein provided for shall be reduced accordingly. B. If a force majeure event prohibits Seller from delivering to Buyer the quantities of Silicon Metal provided for hereunder, Seller shall deliver to Buyer that percentage of Seller's production which is equal to the percentage of Seller's production during the previous twelve (12) month period which was represented - 7 - 10 by Buyer's purchases during that time period, at a net unit price which is equal to the unit price which would have been paid by Buyer if its full purchase order had been filled. If the Buyer is required to purchase silicon metal from other sources due to a force majeure condition at the Seller, then the Buyer may reduce the contract minimum by a like amount. C. If Buyer is affected by an event of force majeure, Buyer shall purchase from Seller the quantity of silicon metal which shall be determined on the same basis as set forth in Paragraph B above. 15. Hardship. The intent of the parties is that the results of this Agreement are to be favorable to both parties over the long term, consistent with the attitude put forward in this Agreement. If during the term of this Agreement, one or both of the parties experiences unexpected or excessive hardship related to the performance of this Agreement, then both parties agree to try to resolve the hardship on a reasonable basis through mutual discussions. Hardship includes but is not limited to significant charges in costs greater than 10%, but in no way event shall be related to a change in market conditions, such as supply/demand imbalances or market price changes. 16. Assignment/Successor. This Agreement may not be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld. Notwithstanding the above, Buyer may perform any of the obligations undertaken by it and may exercise any of the rights granted to it under this Agreement through Dow Corning Corporation, or any wholly owned subsidiary thereof; provided, however, that any act or omission of any such company with respect to this Agreement shall be deemed to be the act or omission of the Buyer. For the avoidance of doubt, any purchases by any such company shall be deemed to be purchases by the Buyer and counted towards meeting Buyer's minimum purchase obligations hereunder. In the event of a change in the ownership or control of either party hereto, this Agreement shall remain fully enforceable according to the present terms and conditions; the other party will be notified accordingly by the affected party and should any new owner or controlling body be unacceptable to the other party, that other party may, upon notice to the affected party, terminate this Agreement with twelve (12) months written notice of termination. 17. Governing Law. The validity, interpretation and performance of this Agreement shall be governed under and in accordance with the laws of the State of Michigan. 18. Entire Agreement. As of the effective date 1 January 1998, this Agreement, along with its Exhibits, confidentiality agreement and any sub-agreements, contains the entire agreement of the parties, superseding any previous understandings, commitments or agreements, oral or written, with respect to the subject matter hereof. No modification of this Agreement or waiver of the terms and conditions hereof shall be - 8 - 11 binding upon either party unless approved in writing by an authorized representative of such party. Further, no modification of this Agreement shall be effected by the acknowledgment or acceptance of purchase order forms or releases containing other or different terms or conditions, whether or not signed by an authorized representative of such party. 19. Compliance with Law. Seller and Buyer hereby agree to comply with all provisions of all present and future laws and regulations applicable to this Agreement and its performance. 20. Relationship of the Parties. Seller and Buyer do not intend or contemplate the formation or establishment of any partnership, joint venture, pooling arrangement or other formal business organization of any kind. Nothing in this Agreement is to be construed as constituting the appointment of any party hereto as an employee or agent of the other party. Neither party shall have any right or authority to assume or to create any obligation or responsibility, as expressed or implied, on behalf of or in the name of the other party. Each party is acting hereunder solely as an independent contractor. 21. Representations of Buyer. Buyer represents and warrants to Seller that the purchase of silicon metal, including the purchase of silicon metal in the quantities and on the terms set forth herein, is a part of the regular and ordinary course of the business of Buyer, that this Agreement is made and entered into in the ordinary course of the business of Buyer, that the execution, delivery and performance of this Agreement by Buyer does not violate any law, rule, regulation, judicial order or decree to which Buyer is subject, that no consent or approval of any court, judicial body, governmental agency or third party to the execution, delivery or performance of this Agreement by Buyer is necessary or required, and that this Agreement is the legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. 22. Notices. Any written notice required to be provided to either of the parties hereunder shall be effective when mailed by registered or certified mail, postage prepaid, or when sent by facsimile or courier, in each case addressed to the party intended to receive the same as follows: To Seller: Simcala, Inc. P.O. Box 68 Ohio Ferroalloys Rd. Mt. Meigs, AL 36057 Facsimile: (334) 215-8969 Attention: President and Chief Executive Officer - C.E. Boardwine - 9 - 12 To Buyer: Dow Corning Corporation 3901 S. Saginaw Rd. Midland, MI 48686-0995 Facsimile: (517) 496-1036 Attention: Purchasing Manager - James B. May 23. Arbitration. If a dispute arises under this Supply Agreement which cannot be resolved by the personnel directly involved, either party may give written notice to the other designating an executive officer with appropriate authority to be its representative in negotiations relating to the dispute. Upon receipt of this notice, the other party shall, within five (5) business days, designate an executive officer with similar authority to be its representative. The designated executive officers shall, following whatever investigation each deems appropriate, promptly enter into discussions concerning the dispute. If the dispute is not resolved as a result of such discussions within ninety (90) days, such dispute shall be referred to final and binding arbitration in accordance with the commercial rules of the American Arbitration Association. Unless the parties agree otherwise in writing, such arbitration shall be held in a mutually acceptable location. The expense of arbitration shall be borne one-half (1/2) by Seller and one-half (1/2) by Buyer, unless otherwise specified in the award. Each party shall pay the fees and expenses of its own counsel, unless otherwise specified in the award. 24. Delivery/Scheduling. Seller shall deliver silicon metal to Buyer in approximately equal quarterly quantities starting in the year 1998. Prior to the beginning of each Calendar Year, Buyer shall provide Seller with a non-binding estimate of the quantity of silicon metal that it will purchase hereunder during each quarter of the following Calendar Year, which non-binding estimate shall be updated on a quarterly basis during the year. 25. Purchase Orders. Buyer may issue purchase orders to Seller hereunder for the silicon metal, for Buyer's administrative purposes only, and no terms and conditions contained in such purchase orders which conflict with anything in this Supply Agreement shall be effective as between Buyer and Seller. 26. Packaging. If any change in the herein agreed upon packaging is requested by Buyer, Seller shall package Products in accordance with instructions from Buyer, at Buyer's expense. 27. Counterparts. This Agreement is executed in any number of counterparts, each of which shall be deemed an original for all purposes, and all of which together shall constitute one agreement. - 10 - 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by representatives duly authorized as of the day and year first above written. WITNESS: SIMCALA, INC. By: /s/ C.E. Boardwine -------------------------------------- C.E. Boardwine President and Chief Executive Officer WITNESS: DOW CORNING CORPORATION By: /s/ Robert P. Krasa -------------------------------------- Robert P. Krasa Vice President, General Manager, CPBG - 11 - EX-10.19 4 LETTER AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.19 [NationsBank Letterhead] November 9, 1998 Simcala, Inc. P.O. Box 68 Mt. Meigs, Alabama 36057-0068 Attn: Chief Financial Officers RE: Credit Agreement dated as of March 31, 1998 (the "Credit Agreement") among Simcala, Inc., the other Credit Parties party thereto, the Lenders party thereto and NationsBank, N.A., as Agent Gentlemen: Reference is made to the Credit Agreement described above, the defined terms of which are incorporated herein by reference. You have requested that the Consolidated Net Worth covenant appearing in Section 7.11(c) of the Credit Agreement be amended for the fiscal quarter ending September 30, 1998. Accordingly, on behalf of all of the Lenders, we hereby agree with you to amend and restate Section 7.11(c) of the Credit Agreement in its entirety to read as follows: (c) Consolidated Net Worth. As of the last day of each fiscal quarter of the Credit Parties, the Consolidated Net Worth of the Borrower shall be greater than or equal to $18,000,000, increased on a cumulative basis as of the end of each fiscal quarter of the Credit Parties, commencing with the fiscal quarter ending June 30, 1998 by an amount equal to 50% of Consolidated Net Income (to the extent positive) for the fiscal quarter then ended; provided, however, that Consolidated Net Worth for the fiscal quarter ended September 30, 1998 shall be greater than or equal to $17,300,000. This amendment shall become effective upon execution of this letter by the parties hereto and the payment by the Borrower to the Agent, for the benefit of the Lenders, of an amendment fee in the amount of $10,000. All references in the Credit Agreement and the other Credit Documents to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended hereby. 2 Except as modified hereby, all of the terms and provisions of the Credit Agreement and the other Credit Documents shall remain in full force and effect. This letter agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. This letter agreement may be executed in one or more counterparts, each of which constitute an original, and all of which taken together shall constitute a single document. Sincerely, NATIONSBANK, N.A. By /s/ Curtis D. Lueker ------------------------- Curtis D. Lueker Assistant Vice President ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN: SIMCALA, INC. By /s/ R. Myles Cowan ------------------------------- Title: CFO ACKNOWLEDGED AND CONSENTED TO AS OF THE DATE FIRST ABOVE WRITTEN: SIMCALA HOLDINGS, INC. By /s/ William A. Davies ------------------------------- Title: Director - 2 - EX-10.20 5 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.20 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of January 25, 1999, is entered into by and among SIMCALA, INC. (the "Borrower"), the guarantors identified as such on the signature pages attached hereto (the "Guarantors;" collectively, the Borrower and the Guarantors are referred to as the "Credit Parties"), the lenders identified as such on the signature pages hereto (the "Lenders") and NATIONSBANK, N.A., as Agent (the "Agent") for the Lenders. RECITALS A. The Borrower, the Guarantors, the Lenders and the Agent entered into that certain Credit Agreement dated as of March 31, 1998, as amended by that Amendment Letter dated November 9, 1998 (as so amended, the "Existing Credit Agreement"). B. The Lenders have agreed to execute and deliver this Amendment on the terms and conditions set forth herein. NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: PART I DEFINITIONS SUBPART 1.1 GENERAL DEFINITIONS. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including the preamble and recitals, have the meanings provided in the Existing Credit Agreement. SUBPART 1.2 CERTAIN DEFINITIONS. Unless the context otherwise requires, the following terms used in this Amendment shall have the indicated definitions: "Amended Credit Agreement" means the Existing Credit Agreement as amended hereby. "Amendment No. 2 Effective Date" has the meaning ascribed to such term in Part 4.1 of this Amendment. - 1 - 2 PART II AMENDMENTS TO EXISTING CREDIT AGREEMENT SUBPART 2.1 AMENDMENTS TO SECTION 1.1. (a) The following definitions appearing in Section 1.1 of the Existing Credit Agreement are hereby amended and restated to read as follows: "Applicable Percentage" means, for purposes of calculating the applicable interest rate for any day for any Loan, the applicable rate of the Unused Fee for any day for purposes of Section 3.5(b), the applicable rate of the Standby Letter of Credit Fee for any day for purposes of Section 3.5(c)(i) or the applicable rate of the Trade Letter of Credit Fee for any day for purposes of Section 3.5(c)(ii), the appropriate applicable percentage corresponding to the Total Leverage Ratio in effect as of the most recent Calculation Date:
======================================================================================================================== APPLICABLE APPLICABLE APPLICABLE APPLICABLE TOTAL PERCENTAGE FOR PERCENTAGE FOR PERCENTAGE FOR PERCENTAGE FOR APPLICABLE PRICING LEVERAGE EURODOLLAR BASE RATE STANDBY LETTER TRADE LETTER OF PERCENTAGE FOR LEVEL RATIO LOANS LOANS OF CREDIT FEE CREDIT FEE COMMITMENT FEES ------------------------------------------------------------------------------------------------------------------------ I > 5.00 to 1.0 3.00% 2.00% 3.00% 1.00% .60% ------------------------------------------------------------------------------------------------------------------------ II < 5.00 to 1.0 2.25% 1.25% 2.25% .50% .50% - but > 3.75 to 1.0 ------------------------------------------------------------------------------------------------------------------------ < 3.75 to 1.0 III - 2.00% 1.00% 2.00% .50% .50% but > 2.50 to 1.0 ------------------------------------------------------------------------------------------------------------------------ IV < 2.50 to 1.0 1.75% .75% 1.75% .50% .375% - ========================================================================================================================
The Applicable Percentages shall be determined and adjusted quarterly on the date (each a "Calculation Date") five Business Days after the earlier of (x) the date by which the Borrower is required to provide the officer's certificate in accordance with the provisions of Section 7.1(c) for the most recently ended fiscal quarter of the Credit Parties or (y) the date such officer's certificate is actually delivered to the Agent; provided, however, that (i) the initial Applicable Percentages shall be based on Pricing Level I (as shown above) and shall remain at Pricing Level I until the first Calculation Date subsequent to December 30, 1998, and, thereafter, the Pricing Level shall be determined by the Total Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Credit Parties preceding the applicable Calculation Date, and (ii) if the Borrower fails to provide the officer's certificate to the Agency Services Address as required by Section 7.1(c) for the last day of the most recently ended fiscal quarter of the Credit Parties preceding the applicable Calculation Date, the Applicable Percentage from such Calculation Date shall be based on Pricing Level I until such time as an appropriate officer's certificate is provided, whereupon the Pricing Level shall be determined by the Total Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Credit Parties preceding such Calculation Date. Except as provided above, each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentages shall be applicable to all existing Loans and Letters of Credit as well as any new Loans and Letters of Credit made or issued. The Applicable Percentage for the Standby Letter of Credit Fee - 2 - 3 for any standby Letter of Credit shall be 1.0% so long as such Letter of Credit is cash-collateralized pursuant to Section 2.2(l). "Collateral Documents" means a collective reference to the Security Agreement, the Pledge Agreement, the Mortgage Instruments, the Assignment of Cash Collateral Account and such other documents executed and delivered in connection with the attachment and perfection of the Agent's security interests and liens arising thereunder, including, without limitation, UCC financing statements and patent and trademark filings. (b) A new definition of "Assignment of Cash Collateral Account is hereby added to Section 1.1 of the Existing Credit Agreement in the appropriate alphabetical order to read as follows: "Assignment of Cash Collateral Account" means that Assignment of Cash Collateral Account dated as of January 15, 1999 among the Borrower and the Agent. (c) The definition of "Consolidated Net Worth" appearing in Section 1.1 of the Existing Credit Agreement is hereby deleted. SUBPART 2.2 AMENDMENT TO SECTION 2.2. A new clause (l) is added to Section 2.2 of the Existing Credit Agreement immediately following clause (k), which shall read as follows: (l) Cash Collateral. Until such time as the Interest Coverage Ratio is at least 1.50 to 1.0 for two consecutive fiscal quarters subsequent to December 31, 1999, the Borrower shall pay to the Agent cash, to be held by the Agent, for the benefit of the Lenders, in a cash collateral account pursuant to the Assignment of Cash Collateral Account as additional security for the LOC Obligations in respect of drawings under all outstanding Letters of Credit in an amount equal to the maximum aggregate amount which may be drawn under such Letters of Credit. The Applicable Percentage otherwise in effect for the Standby Letter of Credit Fee with respect to any standby Letter of Credit which is cash-collateralized pursuant to this clause (l) shall be 1.0% for so long as such Letter of Credit is cash-collateralized. SUBPART 2.3 AMENDMENTS TO SECTION 7.1. Section 7.1(m) of the Existing Credit Agreement is hereby renumbered as Section 7.1(n) and a new Section 7.1(m) is added to the Existing Credit Agreement which reads as follows: (m) Monthly Financial Statements. As soon as available, and in any event within 30 days after the end of each fiscal month of the Credit Parties, a consolidated balance sheet and income statement of the Credit Parties as of the end of such fiscal month, together with related consolidated statements of operations and retained earnings and of cash flows for such fiscal month, in each case setting forth in comparative form (i) consolidated figures for the corresponding period of the preceding fiscal year and (ii) consolidated figures for the corresponding period of the budget of the Credit Parties for the current fiscal year, all such financial information described above to be in a form satisfactory to the Agent. - 3 - 4 SUBPART 2.4 AMENDMENTS TO SECTION 7.11. Section 7.11 of the Existing Credit Agreement is hereby amended and restated to read as follows: 7.11 FINANCIAL COVENANTS. (a) Interest Coverage Ratio. The Interest Coverage Ratio, as of the last day of each fiscal quarter of the Credit Parties, shall be greater than or equal to:
- -------------------------------------------------------------------------------------------- Fiscal Year March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------------- 1998 1.50 1.50 1.50 - -------------------------------------------------------------------------------------------- 1999 1.15 1.05 1.05 1.05 - -------------------------------------------------------------------------------------------- 2000 1.00 1.00 1.00 1.00 - -------------------------------------------------------------------------------------------- 2001 1.25 1.25 1.50 1.75 - -------------------------------------------------------------------------------------------- 2002 1.75 1.75 1.75 2.00 - -------------------------------------------------------------------------------------------- thereafter 2.00 - --------------------------------------------------------------------------------------------
(b) Net Leverage Ratio. The Credit Parties shall cause the Net Leverage Ratio, as of the last day of each fiscal quarter of the Credit Parties, to be less than or equal to:
- -------------------------------------------------------------------------------------------- Fiscal Year March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------------- 1998 5.50 5.50 7.00 - -------------------------------------------------------------------------------------------- 1999 7.25 8.25 8.50 9.25 - -------------------------------------------------------------------------------------------- 2000 9.75 10.00 11.25 11.50 - -------------------------------------------------------------------------------------------- 2001 8.75 7.50 6.50 5.50 - -------------------------------------------------------------------------------------------- 2002 5.50 5.50 5.50 5.00 - -------------------------------------------------------------------------------------------- thereafter 5.00 - --------------------------------------------------------------------------------------------
(c) Minimum Consolidated EBITDA. At all times the Consolidated EBITDA, as of the last day of each fiscal quarter of the Credit Parties, shall be greater than or equal to:
- -------------------------------------------------------------------------------------------- Fiscal Year March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------------- 1998 $ 9,500,000 - -------------------------------------------------------------------------------------------- 1999 $ 9,000,000 $ 8,100,000 $ 8,100,000 $ 7,800,000 - -------------------------------------------------------------------------------------------- 2000 $ 7,800,000 $ 7,800,000 $ 7,800,000 $ 7,800,000 - -------------------------------------------------------------------------------------------- 2001 $10,200,000 $12,100,000 $13,700,000 $16,100,000 - -------------------------------------------------------------------------------------------- 2002 $16,100,000 $16,100,000 $16,100,000 $17,200,000 - -------------------------------------------------------------------------------------------- thereafter $17,200,000 - --------------------------------------------------------------------------------------------
- 4 - 5 PART III REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES Each Credit Party hereby represents and warrants to the Agent and to each Lender that: (i) each of the representations and warranties of the Borrower contained in the Amended Credit Agreement or in any other Credit Document is true as of the date hereof (after giving effect to this Amendment); (ii) after giving effect to this Amendment, no Default or Event of Default exists and is continuing under the Amended Credit Agreement; (iii) since the date of the last financial statements of the Borrower delivered to Lenders, no material adverse change has occurred in the business, financial condition, operations or prospects of the Consolidated Parties other than as previously disclosed to the Lenders; and (iv) no consent, approval, authorization or order of , or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Amendment. PART IV CONDITIONS TO EFFECTIVENESS SUBPART 4.1. EFFECTIVE TIME OF AMENDMENT. This Amendment shall be and become effective as of the first Business Day upon which each of the conditions set forth in this Subpart 4.1 shall have been completed to the satisfaction of the Agent and the Required Lenders (the "Amendment No. 2 Effective Date"). SUBPART 4.1. EXECUTION OF AMENDMENT. The Agent shall have received counterparts (or other evidence of execution, including telephonic message, satisfactory to the Agent) of the due execution of this Amendment on behalf of the Credit Parties and the Required Lenders. SUBPART 4.2. AMENDMENT FEES. The Agent shall have received from the Borrower, on the Amendment No. 2 Effective Date, for the account of each Lender, in immediately available funds, an amendment fee of 0.25% of each Lender's Commitment. SUBPART 4.4. ASSIGNMENT OF CASH COLLATERAL ACCOUNT. The Agent shall have received executed counterparts of the Assignment of Cash Collateral Account in form of Exhibit A hereto. SUBPART 4.4. OTHER DOCUMENTS. The Agent shall have received such other documents relating to the transactions contemplated hereby as the Agent or counsel to the Agent may reasonably request of the Borrower in writing on or before the Amendment No. 2 Effective Date. - 5 - 6 SUBPART 4.5. EXPENSES OF AGENT. The Borrower shall have reimbursed the Agent for all reasonable out-of-pocket expenses of the Agent , including without limitation, all reasonable fees and expenses of its attorneys, incurred in connection with the negotiation, preparation or execution of this Amendment. PART V MISCELLANEOUS SUBPART 5.1 FURTHER ASSURANCES. As soon as practicable after receipt of a written request from the Agent, and in any event not later than 30 days from the date such request is received by the Borrower, the Credit Parties shall cause to be delivered to the Agent, in form and content reasonably satisfactory to the Agent, all documents or other instruments incident to the transactions contemplated by this Agreement in the reasonable judgment of the Agent. SUBPART 5.2. REFERENCES. References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this Amendment. As of the Amendment No. 2 Effective Date, all references in the Credit Documents to the "Credit Agreement" shall be deemed to refer to such document as amended by this Amendment. SUBPART 5.3. COUNTERPARTS. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which constitute together one and the same agreement. SUBPART 5.4. GOVERNING LAW. This Amendment shall be deemed to be a contract made under and governed by the internal laws and judicial decisions of the State of North Carolina without giving effect to the conflict of law principles thereof. SUBPART 5.5. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SUBPART 5.6. ENTIRE AGREEMENT. The Amended Credit Agreement, this Amendment, and the other Credit Documents, as amended hereby, constitute the entire contract among the parties relative to the subject matter hereof. SUBPART 5.7. NO OTHER CHANGES. Except as expressly modified and amended in this Agreement, all of the terms, provisions and conditions of the Credit Documents shall remain unchanged. - 6 - 7 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. BORROWER: SIMCALA, INC., a Delaware corporation By: /s/ C. E. Boardwine -------------------------------------- Name: C. E. Boardwine Title: Pres/CEO GUARANTOR: SIMCALA HOLDINGS, INC., a Georgia corporation By: /s/ William A. Davies -------------------------------------- Name: William A. Davies Title: Director LENDERS: NATIONSBANK, N.A., individually as a Lender and in its capacity as Agent By: /s/ Curtis D. Lueker -------------------------------------- Name: Curtis D. Lueker Title: Assistant Vice President - 7 - EX-27.1 6 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 APR-01-1998 DEC-31-1998 14,652,789 0 6,126,286 0 3,416,277 24,467,465 55,779,695 (2,974,138) 115,525,623 6,090,354 81,000,000 0 0 109 16,584,487 115,525,623 40,802,907 40,802,907 36,906,111 36,906,111 1,848,388 0 5,776,761 (2,714,742) (492,338) (2,222,404) 0 0 0 (2,222,404) 0 0
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