-----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, KPfV0OJ0cU9BFJRrOboWaQWMck1oB2JN/dIRuHkG11A141+XJ/50oCV/oIIwWgL1 sKHh766FdlvJj6nITp0iGA== 0000950144-00-004273.txt : 20000331 0000950144-00-004273.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004273 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588098 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ COMMISSION FILE NUMBER 333-53791 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.) 1940 OHIO FERRO 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, 2000 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, 1999 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 8 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 8 6. Selected Financial Data 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 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 anticipated future financial performance, business prospects, growth and operating strategies, 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 SIMCALA, Inc. ("SIMCALA" or 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 and housings and cast aluminum wheels. Management believes that currently 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 1999, the Company's production volume was approximately 36,800 metric tons, with net sales of $55.2 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 1350 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 a $75,000,000 offering (the "Offering") of the Company's 9 5/8% Senior Notes due 2006 (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 control of Holdings, controls the Company and has the power to elect all of its directors, appoint new -1- 4 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 and housings 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 1999 the Company produced approximately 25,900 metric tons of chemical grade silicon metal and approximately 8,500 tons of specialty aluminum grade silicon metal, representing approximately 70% and approximately 23% 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 1999, the Company sold approximately 13,800 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 1999, employee productivity was approximately 307 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 23% of cost of goods sold in 1999. The balance of raw materials, consisting of electrodes, quartz, coal/charcoal and wood chips, represented 13%, 3%, 11% and 7% of cost of goods sold, respectively, in 1999. In addition, labor comprised 7% of cost of goods sold in 1999. 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 previously had a five-year contract with APCo, which expired in February 2000. The Company is currently negotiating another multi-year agreement with APCo and, in the interim, is purchasing electrical power from APCo on substantially similar terms to those contained in the expired agreement. Although the Company did not expect any rate increases through the contract period, the current rate schedule was revised pursuant to regulation by the Alabama Public Service Commission in December 1999. The increase in the Energy Cost Recovery (ECR) factor was applied to all customers of APCo. The increase is expected to remain in effect for one year or until APCo recovers excess cost paid for power purchased to meet the extraordinary demand caused by the extreme heat during July and August of 1999. This increase will have an adverse effect on the Company's operating performance as the Company cannot 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 two suppliers located in Kentucky. Metallurgical grade charcoal is purchased from two suppliers in Missouri. Hardwood logs are purchased from local suppliers 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 1999, G.E. Silicones accounted for approximately 5% of the Company's net sales. At December 31, 1999, G.E. Silicones accounted for less than 1% of the Company's outstanding accounts receivable. -4- 7 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 1999, Dow Corning accounted for approximately 41% of the Company's net sales. At December 31, 1999, Dow Corning accounted for approximately 43% of the Company's outstanding accounts receivable. 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 1999 collectively accounted for approximately 31%, 10% and 3%, respectively, of the Company's net sales. At December 31, 1999, Wabash Alloys, Alcan and Bohn accounted for approximately 27%, 5% and 5%, respectively, of the Company's outstanding accounts receivable. In 1999, the Company's five largest customers accounted for approximately 88% 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 expired on December 31, 1999, but the Alcan Agreement will continue year to year thereafter unless re-negotiated or 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 the other five 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 1999, the Company estimates that it held a market share of approximately 12% of the total United States chemical market and approximately 18% of the total United States aluminum market, based on metric tons of silicon metal sold. -5- 8 EMPLOYEES As of December 31, 1999, the Company employed 176 people, of which 124 people were paid on an hourly basis. At December 31, 1999, approximately 68% of all hourly workers chose to be members of the United Steelworkers of America, Local 8538 (the "Union"). Because Alabama is a right-to-work state, 100% of the employees paid on an hourly basis are represented by 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 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. Contract negotiations are currently underway with the Union, and management believes the parties will reach a satisfactory result. In the event the collective bargaining agreement is not renewed, the Company believes that no significant disruptions in the Company's operations would result and that there would be no material adverse affect upon the Company's business, financial condition or results of operations. 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 2000 and 2001 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 -6- 9 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." In early February of 2000, the International Trade Commission decided to conduct a full, rather than an expedited, review of the antidumping orders pertaining to US imports of silicon from Argentina, Brazil and China. As a result, management believes that a decision on whether to lift the duties under the five-year "sunset" review may not be made until 2001. 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 have been successful in protecting the industry from dumped imports from the countries covered by the orders, one or more of such anti-dumping orders may be revoked or effective duty rates may not 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, once begun, can be completed within 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. -7- 10 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 31,1999. 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 exempt the sale of this stock from the registration requirements of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA. The selected financial information as of December 31, 1999, and for the twelve months then ended and December 31, 1998, and for the nine months there ended has been derived from the financial statements of the Company which have been audited by Deloitte & Touche LLP, ("D&T") independent auditors, 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 has been derived from the unaudited financial statements of SiMETCO, -8- 11 Inc. ("SiMETCO"), a predecessor of the Company. 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.
SIMETCO, PREDECESSOR COMPANY ---------- -------------------------------------------------- -------------------------- INC.(1) PERIOD PERIOD FROM FROM FEB. 10, JAN. 1, 1995 (DATE OF YEAR ENDED THREE MONTHS NINE MONTHS YEAR ENDED 1995 TO INCEPTION) DECEMBER 31, ENDED ENDED DECEMBER 31, FEB. 10, TO DEC. 31, ------------------- MARCH 31, DECEMBER 31, ------------ 1995 1995(1) 1996 1997 1998 1998 1999 ---------- -------- ------- ------- ----------- -------- ------------ (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA) INCOME STATEMENT DATA: Net sales ............. $3,742 $ 31,523 $52,407 $62,184 $ 14,854 $ 40,803 $ 55,230 Cost of goods sold ................ 3,314 32,391 42,798 47,972 11,679 36,906 51,745 ------ -------- ------- ------- -------- -------- -------- Gross profit (loss) .............. 428 (868) 9,609 14,212 3,175 3,897 3,484 Selling and administrative expenses ............ 66 1,599 1,923 2,846 3,824 1,848 2,027 ------ -------- ------- ------- -------- -------- -------- Operating income (loss) .............. 362 (2,467) 7,686 11,366 (649) 2,049 1,457 Interest expense ............. 72 1,111 1,511 1,710 314 5,777 7,587 Other (expense) income, net ......... -- 359 444 228 282 1,014 915 ------ -------- ------- ------- -------- -------- -------- Earnings (loss) before provision for income taxes ............... 290 (3,219) 6,619 9,884 (681) (2,714) (5,215) Provision (benefit) for income taxes .... -- -- 1,169 3,513 (100) (492) (1,363) -------- ------- ------- -------- -------- -------- Net income (loss) .............. $ 290 $ (3,219) $ 5,450 $ 6,371 $ (581) $ (2,222 $ (3,853) ====== ======== ======= ======= ======== ======== ======== OPERATING DATA: (UNAUDITED) Silicon metal Production (in metric tons) ........ 2,395 25,669 33,373 37,852 9,110 27,405 36,800 Average sales price per metric ton ................. $1,410 $ 1,436 $ 1,641 $ 1,719 $ 1,661 $ 1,614 $ 1,461 Average cost per metric ton .......... $1,481 $ 1,529 $ 1,358 $ 1,278 $ 1,279 $ 1,290 $ 1,209
-9- 12
SIMETCO, INC. (1) PREDECESSOR COMPANY ---------- -------------------------- ----------------- AS OF AS OF DECEMBER 31, AS OF DECEMBER 31, -------------------------- DECEMBER 31, 1994 1995 1996 1997 1998 1999 ------------- ----- ------ ----- ------------------- (IN THOUSANDS) BALANCE SHEET DATA: Working Capital (deficit) ................... $ (4,069) $ (2,926) $ (3,347) $ 885 $ 18,377 $ 17,519 Total assets ................................ 12,342 24,217 30,581 33,663 115,526 111,210 Long-term debt, less current portion ........ 2,219 12,014 13,207 12,763 81,034 81,020 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. 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 year ended December 31, 1999, in comparison to the nine-month period ended December 31, 1998, plus the three-month period ended March 31, 1998, and 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. 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 year ended December 31, 1999, and 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, 1999, 1998 and 1997: -10- 13
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 (A) 1997 Net sales 100.0% 100.0% 100.0% Cost of goods sold 93.7 87.3 77.1 ----- ----- ----- Gross profit 6.3 12.7 22.9 Selling, general and administrative expenses 3.7 10.2 4.6 ----- ----- ----- Operating income 2.6 2.5 18.3 Interest expense 13.7 10.9 2.7 Other income, net 1.7 2.3 0.4 ----- ----- ----- Earnings (loss) before income taxes (9.4) (6.1) 16.0 Income tax (benefit) provision (2.5) (1.1) 5.7 ----- ----- ----- Net income (loss) (6.9)% (5.0)% 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 principles but is included for comparative purposes. YEAR ENDED DECEMBER 31, 1999 COMPARED TO COMBINED TWELVE MONTHS ENDED DECEMBER 31, 1998 The Company is comparing results of operations for the year ended December 31, 1999 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 $0.4 million in 1999, or 0.8%, to $55.2 million from $55.6 million in 1998. This decline was due principally to a significant decrease in selling prices in the aluminum silicon metal markets. Much of the decline was offset by an increase in tons sold. Production of silicon metal in 1999 was 36,800 metric tons, compared with 36,515 metric tons produced in 1998. Production increased in 1999 due to improved smelting inefficiencies in all of the Company's furnaces during the year. Gross Profit Gross profit decreased by $3.6 million, or 50.7%, to $3.5 million in 1999 as compared to $7.1 million in 1998. The gross profit margin decreased to 6.3% in 1999 from 12.7% in 1998. These decreases were principally due to decreased sales coupled with higher depreciation costs associated with the Acquisition. Lower unit production costs partially offset the declines in gross margin attributable to lower sales prices. -11- 14 Average selling price per metric ton decreased to $1,461 in 1999 from $1,627 in 1998 due to excess supply in the aluminum market. Average production cost per metric ton decreased to $1,209 in 1999 from $1,282 in 1998. This decrease resulted from improved production efficiencies and lower raw material costs. Selling and Administrative Expenses Selling and administrative expenses decreased $3.6 million, or 64.3%, to $2.0 million in 1999 as compared to $5.7 million in 1998. The decrease was primarily due to recognition of expenses related to the Acquisition in 1998 which did not recur in 1999. These expenses included a management bonus and stock option compensation expenses. Operating Income Income from operations increased $0.1 million to $1.5 million in 1999 from $1.4 million in 1998, while the operating margin increased to 2.6% from 2.5% for the same period. The increase results from the combined effect of decreased sales due to lower prices coupled with increased depreciation and amortization expense offset by improved production cost and lower administrative expenses. Interest Expense Interest expense increased $1.6 million, or 24.5%, to $7.6 million in 1999 from $6.1 million in 1998. The change in interest expense resulted from the timing of the Transactions whereby 1999 included the higher interest expense for a full year. Other Income - Net Other income - net decreased $0.4 million, or 29.4%, to $0.9 million in 1999 from $1.3 million in 1998. The decrease in other income was due to miscellaneous income associated with the Transactions, which did not recur in 1999. Provision for Income Taxes The provision for income taxes increased to a benefit of $1.4 million in 1999 from a benefit of $0.6 million in 1998. This decrease was primarily due to the increase in the loss from $3.4 million in 1998 to a $5.2 million in 1999. Net Income (Loss) As a result of the above factors, the net loss for 1999 was $3.9 million compared to a net loss of $2.9 million for 1998. COMBINED TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO PREDECESSOR YEAR ENDED DECEMBER 31, 1997 The Company is comparing a Predecessor period of January 1, 1998 to March 31, 1998 combined with a Company period of April 1, 1998 to December 31, 1998 to the Predecessor's actual historical results of operations for the year ended December 31, 1997. This combined presentation is not in conformity with generally accepted accounting principles but is included for comparative purposes only. -12- 15 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. 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. -13- 16 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. 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 and other domestic market forces. Historically, the Company's silicon metal business has experienced price fluctuations principally due to the competitive nature of two of its markets, the primary and secondary aluminum markets. In 1998, additional domestic production capacity was added by two competitors at a time when demand was not growing at historical rates. This addition capacity helped to create an over-supply condition in the domestic silicon metal markets. This over-supply has brought about significant price decreases in all aluminum markets in which the Company competes. Historically, the Company's microsilica business has been affected by the developing nature of the markets for this product. Cash and cash equivalents were $9.8 million, $14.7 million, and $0.6 million at December 31, 1999, 1998, and 1997, respectively. The decrease in cash in 1999 is solely the result of the classification of $6.4 million as restricted cash on the Company's balance sheet. This classification results from a January 2000 amendment to the Company's loan agreement with BankAmerica wherein the bank required the Company to post cash collateral for a letter of credit issued by the bank. This letter of credit was issued by the bank to support $6.0 million of Industrial Revenue Bonds ("IRB's") issued by the Company in 1995. All of the significant increase in cash 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 1999 totaled $6.4 million, compared to $5.0 million for 1998 and $2.2 million for 1997. The increase in 1999 resulted from the timing of the Transactions in 1998. 1999 included a full year of depreciation and amortization related to the Transactions. 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 1999, net cash provided by operating activities was $3.5 million, while in 1998, and 1997, net cash provided by operating activities was $0.5 million and $10.0 million, respectively. The decrease in 1998 resulted primarily from the decrease in net income. In 1999, 1998, and 1997, net cash used in investing activities was $2.0 million, $3.9 million, and $2.1 million, respectively. The changes primarily reflect different levels of capital spending during the three years. In 1999, 1998, and 1997, net cash used in financing activities was approximately $6.4 million, $28,000, and $7.5 million, respectively. The decrease from 1997 to 1998 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 occurred in 1997 and was offset by the Company's borrowing of $13.0 million of term loan indebtedness under the Old Credit Facility. In 1999 and 1998, there was no significant financing activity subsequent to the Transactions. In 1999, the increase was due to the restriction of $6.4 million in cash. -14- 17 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 3.00% 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 2.00% 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, 1999, 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 resets every seven days as determined by Merchant Capital, L.L.C., the remarketing agent for the IRB Financing. Merchant Capital evaluates 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, 1999, interest on the IRBs accrued at a rate equal to approximately 6.0% 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 the total cost to construct the furnace will be 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 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, 1999, the Company was in material compliance with all covenants, as amended. If the prices for the aluminum products that the Company sells continue to decline, the Company will likely experience lower earnings from the sale of these products. Such reduced profitability would likely cause the Company to violate the interest coverage and net leverage covenants under the New Credit Facility. If that were to occur, it would constitute an Event of Default and Bank of America would be entitled to the remedies set out in the New Credit Facility. With no amounts currently outstanding under the facility and cash collateral backing the letter of credit supporting the IRB's, the Company believes that any such actions taken by the Bank would be minimal and most likely limited to a request for payment of fees to induce the Bank to amend or waive the non-compliance. As an alternative, the Company is currently negotiating a new credit facility with Bank of America that would contain interest coverage and net leverage covenants that are less strict. -15- 18 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, 1999, 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
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: -16- 19
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, 1999, the Interest Coverage Ratio and the Net Leverage Ratio were 1.12 to 1 and 7.67 to 1, respectively. As of December 31, 1999, the Company's Consolidated EBITDA was approximately $8.6 million. YEAR 2000 Due to its remediation efforts, the Company has not experienced any disruptions in its business because of Year 2000 related computer issues, including leap year related failures. Further, the Company has not experienced any disruptions in its business because of disruptions related to these issues experienced by its suppliers, distributors, contractors or service providers. The total cost of the Company's Year 2000 remediation effort was approximately $50,000 and was not material to the Company's financial condition or results of operations. These costs were primarily in the form of replacing sales order, accounts receivable, and perpetual inventory systems. While the Company has not experienced any problems with these new systems related to the Year 2000 issue, many of the features expected to be available to the Company are not yet functional due to failure by the software vendor to meet contractual obligations regarding performance of the new software. All key aspects of the sales order, invoicing and accounts receivable functions are being performed in a timely manner. Management believes that the Company will not be adversely affected by these software issues. Discussions regarding resolution of these software issues are ongoing with the vendor. The Company is also considering other software options. 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, 1999 and 1998.
HYPOTHETICAL CARRYING FAIR INCREASE IN VALUE VALUE (A) FAIR VALUE (B) --------- --------- --------------- 1999 Long-term debt and capital leases, including current portion $ 81,061,644 $ 64,801,644 $ 71,334,144 ============= ============= ============ 1998 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. -17- 20 (b) Calculated based on the change in discounted cash flow. RISK FACTORS Significant Leverage and Debt Service The Company has significant outstanding indebtedness and is significantly leveraged. As of December 31, 1999, the Company had approximately $82.6 million of indebtedness outstanding and approximately $15.0 million of secured indebtedness available to be incurred under the New Credit Facility. This availability is further 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 proposed 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." Importance of Key Customers -18- 21 Certain of the Company's customers are material to its business and operations. In 1999, Dow Corning accounted for approximately $22.8 million, or approximately 40%, of net sales; G.E. Silicones accounted for approximately $2.7 million, or approximately 5%, of net sales; Wabash Alloys accounted for approximately $17.3 million, or approximately 31%, of net sales; and Alcan accounted for approximately $5.5 million, or approximately 10%, of net sales. In 1999, the Company's five largest customers accounted for approximately $50.1 million, or approximately 91%, 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 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 China, 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 Chinese 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 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." In early -19- 22 February of 2000, the International Trade Commission decided to conduct a full, rather than an expedited, review of the antidumping orders pertaining to US imports of silicon from Argentina, Brazil and China. As a result, management believes that a decision on whether to lift the duties under the five-year "sunset" review may not be made until 2001. 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." 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." -20- 23 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. 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...... 53 President, Chief Executive Officer and Director Dwight L. Goff........... 45 Vice President R. Myles Cowan, II....... 48 Chief Financial Officer Howard L. McHenry........ 56 Senior Metallurgist Roger Hall............... 58 Superintendent of Engineering and Maintenance Mark V. Lough............ 41 Operations Manager Linda L. Kelley.......... 50 Controller Edwin A. Wahlen, Jr...... 52 Director William A. Davies........ 54 Director James A. O'Donnell....... 47 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 has been a director of the Company since March 31, 1998. 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 Chief Financial Officer of the Company since the acquisition. Prior to that time, he was 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. MARK V. LOUGH has been the Operations Manager of the Company since March 1999. Prior to joining the Company, he was employed as Operations Manager for the Millville, NJ plant of U. S. Silica since March 1997. Prior to -21- 24 that, he was employed as Operations Superintendent / Plant Manger at the Mill Creek, Oklahoma plant of U.S. Silica since May 1990. LINDA L. KELLEY has been the Controller of the Company since June 1997. Prior thereto, she was Assistant Controller of the Company since July 1996. Prior to joining the Company, she served as Corporate Controller for ITEC, Inc., an electronics manufacturer, where she had been employed since 1979. 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. 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. 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, 1999, 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, 1999 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, 1999 214,120 44,882 -- 10,091(1) President and Chief Executive Officer 1998 197,310 75,768 109 1,186,769(2) 1997 189,545 123,545 -- 11,185(3) Dwight L. Goff, 1999 112,442 18,974 -- -- Vice President 1998 97,423 33,776 -- 196,250(4) 1997 95,206 54,000 -- -- R. Myles Cowan, II, 1999 99,614 17,077 -- -- Chief Financial Officer 1998 88,196 29,527 -- 196,250(4) 1997 83,000 49,800 -- --
-22- 25 - ---------- (1) Includes $8,786 for premiums paid by the Company with respect to a split dollar life insurance policy for Mr. Boardwine and $1,305 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. (2) 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. (3) 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. (4) Reflects a one-time bonus paid in connection with the Acquisition. 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, -23- 26 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, 2000, 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.
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 22,000 100% persons)(2)........................................
- ---------- (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. Twenty percent of these Options vested on 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., 1350 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 -24- 27 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. 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. -25- 28 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. 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, 1999 and December 31, 1998 Statements of Operations for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997 Statements of Changes in Shareholders' Equity for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997 Statements of Cash Flows for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997 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 year ended December 31, 1997, the three months ended March 31, 1998, the nine months ended December 31, 1998, and the year ended December 31, 1999 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 -26- 29 The exhibits indicated below are either included or incorporated by reference herein, as indicated.
EXHIBIT NUMBER DESCRIPTION - ------- ------------ 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).
-27- 30 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). 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).
-28- 31 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 Silicon Metal Purchase Agreement dated December 30, 1998 between Wabash Alloys, L.L.C. and SIMCALA, Inc.* (incorporated by reference from Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.10 Supply Agreement dated as of January 1, 1998 between SIMCALA, Inc. and Dow Corning Corporation.* (incorporated by reference from Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.11 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). (incorporated by reference from Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.12 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). (incorporated by reference from Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.13 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). (incorporated by reference from Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.14 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). (incorporated by reference from Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998)
-29- 32 10.15 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). (incorporated by reference from Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.16 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). (incorporated by reference from Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.17 Letter Amendment to Credit Agreement dated November 9, 1998 among SIMCALA, Inc., SIMCALA Holdings, Inc. and NationsBank, N.A. (incorporated by reference from Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.18 Second Amendment to Credit Agreement dated as of January 25, 1999 among SIMCALA, Inc., SIMCALA Holdings, Inc. and NationsBank, N.A. (incorporated by reference from Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.19 Supply Agreement, dated January 1, 2000, between UCAR Carbon Company, Inc. and SIMCALA, Inc. **,*** 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 -30- 33 (B) REPORTS ON FORM 8-K Current Report on Form 8-K: Year-end earnings press release, dated March 31, 1999. (C) EXHIBITS See Item 14(a)(3) above. (D) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. -31- 34 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, 2000. 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, 2000.
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 Chief Financial Officer (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
-32- 35 SIMCALA, INC. VALUATION AND QUALIFYING ACCOUNT ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTHS ENDED MARCH 31, 1998, THE NINE MONTHS ENDED DECEMBER 31, 1998, AND THE YEAR ENDED DECEMBER 31, 1999 - -------------------------------------------------------------------------------
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, 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 $ -- $ -- Year ended December 31, 1999 $ -- $ --
36 SIMCALA, Inc. Index to Financial Statements
PAGE Independent Auditors' Report........................................................................ F-1 Balance Sheets as of December 31, 1999 and December 31, 1998........................................ F-2 Statements of Operations for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997................................................................................... F-3 Statements of Changes in Shareholders' Equity for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997................................................................................... F-4 Statements of Cash Flows for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997............................................................................. F-5 Notes to Financial Statements....................................................................... F-7
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. 37 INDEPENDENT AUDITORS' REPORT Board of Directors SIMCALA, Inc. Mt. Meigs, Alabama We have audited the accompanying balance sheets of SIMCALA, Inc. (the "Company") as of December 31, 1999 and 1998, and the related statements of operations, changes in shareholders' equity, and cash flows for the year ended December 31, 1999 and for the nine months in the period ended December 31, 1998. We have also audited the accompanying statements of operations, changes in shareholders' equity, and cash flows of the Predecessor (Note 1) for the for the three months ended March 31, 1998 and the year ended December 31, 1997. Our audits also included the financial statement schedule 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 the 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 consolidated financial statements present fairly, in all material respects, the financial position of SIMCALA, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended December 31, 1999 (Company), 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 25, 2000 38 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 results of operations and cash flows of these two separate entities.
COMPANY --------------------------- DECEMBER 31, DECEMBER 31, ASSETS 1999 1998 CURRENT ASSETS: Cash and cash equivalents $ 9,819,378 $ 14,652,789 Restricted cash 6,370,775 -- Accounts receivable (less allowance for doubtful accounts of $77,436 in 1998) 5,016,002 6,126,286 Inventories 2,561,105 3,416,277 Other current assets 284,172 272,113 ------------ ------------ Total current assets 24,051,432 24,467,465 PROPERTY, PLANT, AND EQUIPMENT: Land, building, and improvements 1,720,075 1,720,075 Machinery and equipment, furniture and fixtures 55,299,789 53,623,436 Construction in-progress 720,483 436,184 ------------ ------------ 57,740,347 55,779,695 Accumulated depreciation (7,259,635) (2,974,138) ------------ ------------ Property, plant, and equipment, net 50,480,712 52,805,557 INTANGIBLE ASSETS (net of accumulated amortization of $3,583,705 and $1,533,862 in 1999 and 1998, respectively) 36,677,627 38,252,601 ------------ ------------ $111,209,771 $115,525,623 ============ ============
COMPANY -------------------------------- DECEMBER 31, DECEMBER 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 CURRENT LIABILITIES: Accounts payable $ 4,195,134 $ 3,330,469 Accrued expenses 729,198 1,048,578 Accrued interest payable 1,566,331 1,638,560 Current maturities of interest-bearing, long-term debt, capital leases, and notes payable 41,689 72,747 ----------- ------------ Total current liabilities 6,532,352 6,090,354 LONG-TERM DEBT AND CAPITAL LEASES - Net of current portion 81,019,955 81,034,098 DEFERRED INCOME TAXES 10,925,499 11,816,575 ------------ ------------ Total liabilities 98,477,806 98,941,027 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 shares issued and outstanding, respectively, par value $.01 109 109 Additional paid-in capital 18,806,891 18,806,891 Retained deficit (6,075,035) (2,222,404) ------------ ------------ Total shareholders' equity 12,731,965 16,584,596 ------------ ------------ $111,209,771 $115,525,623 ============ ============
See notes to financial statements. -2- 39 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 results of operations and cash flows of these two separate entities.
Company Predecessor ---------------------------- ---------------------------- Year Nine Months Three Months Ended Ended Ended Year Ended December 31, December 31, March 31, December 31, 1999 1998 1998 1997 ------------ ------------ ------------ ------------ NET SALES $ 55,229,558 $ 40,802,907 $ 14,853,920 $ 62,184,345 COST OF GOODS SOLD 51,745,416 36,906,111 11,678,879 47,972,065 ------------ ------------ ------------ ------------ Gross profit 3,484,142 3,896,796 3,175,041 14,212,280 SELLING AND ADMINISTRATIVE EXPENSE 2,027,469 1,848,388 3,824,493 2,845,842 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) 1,456,673 2,048,408 (649,452) 11,366,438 INTEREST EXPENSE 7,586,637 5,776,761 313,946 1,709,586 OTHER INCOME, NET 914,738 1,013,611 282,272 228,461 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (5,215,226) (2,714,742) (681,126) 9,885,313 PROVISION (BENEFIT) FOR INCOME TAXES (1,362,595) (492,338) (100,198) 3,514,000 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (3,852,631) $ (2,222,404) $ (580,928) $ 6,371,313 ============ ============ ============ ============
See notes to financial statements. -3- 40 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 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, 1997 $ 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 Net loss (3,852,631) (3,852,631) ------ ------------ ------------ ------------ BALANCE - December 31, 1999 $ 109 $ 18,806,891 $ (6,075,035) $ 12,731,965 ====== ============ ============ ============
See notes to financial statements. -4- 41 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 results of operations and cash flows of these two separate entities.
COMPANY PREDECESSOR --------------------------- --------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, March 31, December 31, --------------------------- ------------ ------------ 1999 1998 1998 1997 OPERATING ACTIVITIES: Net income (loss) $(3,852,631) $(2,222,404) $ (580,928) $ 6,371,313 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 4,285,496 2,974,138 447,674 1,766,377 Amortization of intangible assets 2,049,843 1,533,761 9,229 401,200 Debt discount 14,000 89,349 Increase (decrease) in net deferred income tax liability (1,365,945) (492,338) 800,000 1,267,000 Noncash stock option compensation 903,680 346,723 Change in assets and liabilities: Decrease (increase) in accounts receivable 1,110,284 2,497,277 20,824 (784,808) Increase in other receivables (2,806,751) Decrease (increase) in inventories 855,172 (545,377) (206,968) (702,590) Decrease (increase) in other assets (12,059) (355,508) 202,831 100,807 Increase (decrease) in accounts payable and accrued expenses 473,056 (4,036,645) 2,364,754 1,139,968 ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 3,543,216 (647,096) 1,168,345 9,995,339 INVESTING ACTIVITIES - Purchase of property, plant, and equipment (1,960,651) (2,690,822) (1,184,422) (2,074,521)
(Continued) 42 SIMCALA, INC. STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------
COMPANY PREDECESSOR ---------------------------- ---------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, March 31, December 31, ---------------------------- ------------ ------------ 1999 1998 1998 1997 FINANCING ACTIVITIES: Increase in restricted cash (6,370,775) Borrowings (repayments) of long-term debt, net (76,094) (66,625) 39,085 (7,221,940) Additional long-term borrowings 30,893 13,000,000 Payments on noninterest-bearing debt (5,597,197) Repayments under line of credit, net (3,243,692) 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 (6,415,976) (66,625) 39,085 (7,472,232) ------------ ------------ -------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,833,411) (3,404,543) 23,008 448,586 CASH AND CASH EQUIVALENTS: Beginning of period 14,652,789 18,057,332 634,877 186,291 ------------ ------------ -------- ----------- End of period $ 9,819,378 $ 14,652,789 $657,885 $ 634,877 ============ ============ ======== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 7,658,866 $ 4,203,730 $161,000 $ 1,559,742 ============ ============ ======== =========== Income taxes $ 0 $ 125,000 $112,000 $ 770,000 ============ ============ ======== =========== Noncash transactions: Equipment acquired under capital lease $ 70,000 ===========
See notes to financial statements. (Concluded) -6- 43 SIMCALA, INC. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998, FOR THE YEAR ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED DECEMBER 31, 1998, THE THREE MONTHS ENDED MARCH 31, 1998, AND THE YEAR 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 and operates in one operating segment. 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 year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended 1997, three customers accounted for 40%, 31%, and 10%; 40%, 15%, and 14%; 40%, 21%, and 10%; 29%, 24%, and 16%; of net sales, respectively. At December 31, 1999 and 1998, three customers accounted for 43%, 27%, and 5% and 54%, 10%, and 8%, 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 -7- 44 Transactions, and is allocated to property, plant and equipment, and goodwill based upon the March 31, 1998 balances. 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, 1999 and the year then ended and 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 year ended December 31, 1999 and 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. Restricted Cash - In January 1999, the Company entered into an amendment to the Credit Agreement whereby the Company was required to provide cash collateral to the $6,147,946 letter of credit backing the industrial revenue bonds. This cash, plus interest accrued thereon, is reflected as restricted cash on the Company's balance sheet. 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, 1999. -8- 45 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):
ASSET CATEGORY USEFUL LIFE Land improvements 20 Buildings 40 Building improvements 10 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 25 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 Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations. The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). See Note 8 to the financial statements. New Accounting Standard - 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 the Company beginning January 1, 2001. 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, 1999 and 1998 consisted of the following: -9- 46
COMPANY ----------------------------- 1999 1998 Raw materials $ 1,143,075 $ 908,839 Finished goods 1,122,030 2,211,438 Supplies 296,000 296,000 ------------ ------------ $ 2,561,105 $ 3,416,277 ============ ============
4. LONG-TERM DEBT The following is a summary of long-term debt:
COMPANY 1999 1998 Senior notes which bear interest at 9 5/8% and are due April 2006 $75,000,000 $75,000,000 Industrial development bonds which bear interest at a variable rate. At December 31, 1999 and 1998, the interest rate was 6.00% and 5.30%, 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 Various capital leases and notes payable with interest rates ranging from .9% to 10.16% expiring at various dates through 2002. Aggregate monthly payments approximate $3,700 61,644 106,845 ----------- ----------- 81,061,644 81,106,845 Less current portion 41,689 72,747 ----------- ----------- Long-term debt $81,019,955 $81,034,098 =========== ===========
The future maturities of long-term debt, capital leases, and notes payable are as follows:
YEAR ENDING DECEMBER 31, 2000 $ 41,689 2001 13,018 2002 6,937 2003 -- 2004 -- Thereafter 81,000,000 ----------- $81,061,644 ===========
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 -10- 47 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 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 that 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 nonordinary 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 others, requirements regarding compliance with laws; preservation of corporate existence; maintenance of insurance; payment of taxes and other obligations; maintenance of properties; environmental compliance; the keeping of the books and records; the maintenance of intellectual property; and the delivery of financial and other information to the agent and the lenders under the 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 earnings before interest, taxes, depreciation, and amortization ("EBITDA"); (ii) maintaining a maximum ratio of indebtedness to EBITDA ("Net Leverage"); and (iii) maintaining a minimum ratio of EBITDA to interest expense ("Interest Coverage"). During 1998, the Company reached agreement with its lender to amend all financial covenants. At December 31, 1999, the Company was in compliance with all covenants, as amended. The Company projects it will violate the Interest Coverage and Net Leverage covenants during 2000. If that were to occur, it would constitute an Event of Default under the Credit Facility. Since no amounts are outstanding under the Credit Facility and the Company maintains cash collateral backing the letter of credit supporting the IDB's management believes that any actions -11- 48 taken by the lender would not have a significant impact on the Company's financial statements. Management is currently in discussion with the lender to renegotiate the terms of the Credit Facility. 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. In January 1999, the Company entered into an amendment to the Credit Facility. 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 $105,240 and $93,094 of interest expense during the year ended December 31, 1999 and the nine months ended December 31, 1998, respectively. 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 ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 Net Sales $ 14,854,000 $ 62,184,000 Net Loss $ (2,377,000) $ (891,000)
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 year ended December 31, 1999 and the nine months ended December 31, 1998, the Company paid CGW Management $180,000 and $157,000, respectively. The consulting agreement expires in 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. -12- 49 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 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 and $250,000 during the three months ended March 31, 1998 and the year ended December 31, 1997, 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, 1999 and 1998 is as follows:
CARRYING ESTIMATED AMOUNT FAIR VALUE December 31, 1999: Long-term debt, capital leases, and notes payable including current portion $ 81,061,644 $ 64,261,644 ============ ============ December 31, 1998: Long-term debt and capital leases, including current portion $ 81,106,845 $ 70,081,845 ============ ============
The estimated fair value of the long-term debt as of December 31, 1999 is based upon current market values of the $75,000,000 in publicly traded debt and carrying value of $6,061,644 in 1999 in industrial development bonds, capital leases, and notes payable, respectively. The estimated fair value of the long-term debt as of December 31, 1998 is based upon current market values of the $75,000,000 in publicly traded debt and carrying value $6,106,845 in 1998 in industrial development bonds, and capital leases, respectively. -13- 50 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 exercise price of $1,000 per share, which approximated fair value on March 31, 1998. As of December 31, 1999, 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, 1999 or 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. 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 year ended December 31, 1999, for the nine months ended December 31, 1998, and year ended 1997 would have been ($3,904,278), ($2,379,217), and $6,366,324, respectively. For 1999, the fair value of the options granted under the 1998 Plan was estimated at $28.04 per share, using the Black-Scholes Option Pricing Model and the following weighted-average assumptions: risk-free interest rate of 6.30%; dividend yield, expected volatility and assumed forfeiture rate of 0%, and expected life of 3.8 years. For 1998, 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. -14- 51 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 year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997 was $94,204; $73,142; $27,512; and $97,217, respectively. 10. INCOME TAXES The provision for income taxes for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997, consisted of the following:
COMPANY PREDECESSOR COMPANY --------------------------------- PREDECESSOR ------------- NINE MONTHS THREE MONTHS ------------- YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1999 1998 1998 1997 Current $ 3,350 $ -- $ (900,198) $ 2,247,000 Deferred (1,365,945) (492,338) 800,000 1,267,000 ------------ ------------ ---------- ----------- Provision (benefit) for income taxes $ (1,362,595) $ (492,338) $ (100,198) $ 3,514,000 ============ ============ ========== ===========
The difference between the effective tax rate and the statutory rate is reconciled below (amounts in thousands):
COMPANY COMPANY PREDECESSOR PREDECESSOR ------------------------------------------------- ----------------------------------------------- Year Ended Nine Months Ended Three Months Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1999 ------------------------ ---------------------- ----------------------- --------------------- Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Statutory rate $ (1,773) (34.0) $ (923) (34.0) $ (232) (34.0)% $ 3,361 34.0% State income tax, net of federal benefit (135) (2.6) (59) (2.2) Nondeductible goodwill 480 9.2 350 12.9 Other permanent items 65 1.3 140 5.2 132 19.4 153 1.5 ---------- ----- ------ ----- ------ ----- ------- ---- Recorded tax provision (benefit) $ (1,363) (26.1) $ (492) (18.1) $ (100) (14.6)% $ 3,514 35.5% ========== ====== ====== ===== ====== ===== ======= ====
-15- 52 Significant components of the deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows:
COMPANY --------------------------------- 1999 1998 Deferred tax liabilities: Accelerated tax depreciation $ 14,379,119 $ 14,671,200 Other liabilities 264,726 111,124 ------------ ------------ 14,643,845 14,782,324 ------------ ------------ Deferred tax assets: AMT credit carryforwards 956,624 746,049 Net operating loss carryforwards 2,676,851 1,987,615 Other assets 84,871 232,085 ------------ ------------ 3,718,346 2,965,749 ------------ ------------ Net deferred tax liability $(10,925,499) $(11,816,575) ============ ============
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, 1999, the Company had a federal tax operating loss carryforward of $6,567,297 and state tax operating loss carryforward of $8,879,402, which expire December 31, 2018. Additionally, the Company has AMT credit carryforwards at December 31, 1999 of $956,624, 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, 1999, the Company had approximately 175 employees, approximately 120 of which are covered by provisions of a collective bargaining agreement. The collective bargaining agreement expires in August 2000. Contract negotiations are currently underway regarding the collective bargaining agreement and management believes that a satisfactory result will be reached. In the event that the collective bargaining agreement is not renewed, the Company believes that no significant disruptions in the Company's operations would result and that there would be no material adverse effect upon the Company's financial condition or results of operations. Total rental expense for property and equipment was $284,044, $266,783, $109,370, and $219,087 for the year ended December 31, 1999, the nine months ended December 31, 1998, the three months ended March 31, 1998, and the year ended December 31, 1997, respectively. Minimum annual rentals under noncancelable operating leases are $136,048, $84,997, and $395 for the years ended 2000, 2001, and 2002, respectively. -16- 53 13. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS):
NET GROSS NET COMPANY'S QUARTER ENDED SALES PROFIT (LOSS) December 31, 1999 $ 13,738 $ 1,189 $ (703) September 30, 1999 13,271 603 (860) June 30, 1999 13,309 134 (1,541) March 31, 1999 14,911 1,558 (749) COMPANY'S QUARTER ENDED 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)
-17- EX-10.19 2 SUPPLY AGREEMENT, DATED JANUARY 1, 2000 1 EXHIBIT 10.19 Certain portions of this exhibit have been deleted and confidentiality 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 THIS AGREEMENT, made and entered into as of the 1 day of January, 2000, by and between UCAR CARBON COMPANY INC., a Delaware corporation with offices at Highway 7, Santa Fe Pike, Columbia, Tennessee 38401 ("Seller") and SIMCALA INC., P.O. Box 68, Ohio Ferro-Alloys Road, Mt. Meigs, Alabama 36057 ("Buyer"). WHEREAS, Buyer operates a silicon metal plant in Mt. Meigs, Alabama ("Mt. Meigs") where it uses carbon electrodes ("electrodes"); and WHEREAS, Buyer has purchased some of its electrodes in the past from Seller; and WHEREAS, Buyer desires to enter into a long term Supply Agreement with the Seller for all of the electrodes which Buyer uses at its Mt. Meigs Plant, and Seller is willing to supply Buyer with its requirements for electrodes, all as set forth herein below. W I T N E S S E T H: 1) Electrodes: Seller hereby agrees to sell and deliver to Buyer, and Buyer hereby agrees to purchase and accept from Seller, during the term of this Agreement, [***]% of Buyer's annual requirements of electrodes and connecting pins. The electrode and connecting pin specifications are described in Exhibit A. 2) Price: The price of electrodes for the duration of this agreement, is set forth in Exhibit B. 3) Weights: All electrodes shipped under this Agreement shall be weighed by certified truck or railroad scales, or with the consent of the other party, by either Buyer's or Seller's certified scales. 4) Term: The term of this Agreement is set forth in Exhibit B. 5) Delivery: Seller shall deliver all electrodes sold hereunder to Buyer FOB Buyer's Mt. Meigs facility, with title and risk of loss passing Buyer at that point. Seller shall pay all freight charges for electrodes. 6) Payment: Payment in U.S. dollars for electrodes hereunder is due thirty (30) days from date of receipt of invoice for each shipment. 7) Warranty: -1- 2 A. Seller warrants that the electrodes delivered hereunder will conform to the specifications set forth in Exhibit A, as applicable, subject to such other specifications as may be agreed upon, in writing, by and between the parties hereto. B. Seller warrants that the use or sale of each electrode delivered hereunder will not infringe upon any claim of any United States patent covering the electrodes, but Seller does not warrant against infringement by reason of the use of such product in combination with other articles or material or in the practice of any process other than any process for which such product has been expressly designed or sold by Seller hereunder. C. THERE ARE NO EXPRESS WARRANTIES BY SELLER OTHER THAN THOSE SPECIFIED IN THIS PARAGRAPH 7. NO WARRANTIES BY SELLER (OTHER THAN WARRANTY OF TITLE AS PROVIDED BY THE UNIFORM COMMERCIAL CODE) SHALL BE IMPLIED OR OTHERWISE CREATED AT LAW OR IN EQUITY, INCLUDING, BUT NOT LIMITED TO, WARRANTY OF MERCHANTABILITY AND WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. Without limiting the generality of the foregoing, Buyer assumes all risk and liability for the results obtained by the use of any products delivered hereunder in combination with other articles or material or in the practice of any process. D. Seller's liability under the warranties specified in this paragraph 7 shall be limited to the repair or (at Seller's option) the replacement, or refund of the purchase price, of any product delivered hereunder which is in breach of warranty. No claims of any kind with respect to any product covered by this document, whether as to product delivered or for delayed delivery or non-delivery of products and whether or not based on negligence or warranty, shall be greater in aggregate amount than the purchase price of the product in respect of which such claims are made. In no event shall either party be liable for special, indirect or consequential damages, whether or not caused by or resulting from the negligence of such party. 8) Force Majeure: Neither Buyer nor Seller shall be liable for any delay or failure to perform hereunder caused by contingencies beyond their reasonable control, including but not limited to, acts of God, fire, flood, wars, sabotage, accidents, labor disputes (whether or not such disputes are within the power of the party to settle), governmental laws, rules, ordinances and regulations, whether valid or invalid, (including, but not limited to, import or export prohibitions or priorities, requisitions, allocations and price adjustment restrictions), inability to obtain material, equipment, or transportation and any other similar or dissimilar occurrence. In the event any such contingency affects only a part of Seller's capacity to produce and/or deliver electrodes, Seller will allocate production and/or deliveries among the requirements of all its regular customers and Seller's own requirements in such manner as Seller shall deem to be fair and equitable. In no event shall Seller be obligated to purchase raw materials or electrodes from others in order to enable it to deliver electrodes to Buyer hereunder. -2- 3 9) Assignment: Any assignment of this Agreement without the prior written consent of the other party shall be void. 10) Governing Law: The laws of the State of Delaware shall govern the validity, interpretation and performance of this Agreement. 11) Arbitration: Disputes hereunder shall be finally settled by arbitration in Delaware under the Rules of the American Arbitration Association. 12) Notices: All notices or other communications required hereunder shall be deemed given when sent registered or certified mail, postage prepaid, addressed to the other party at the address set forth below, or at such other address as the other party shall have heretofore designated in writing. The Post Office receipt showing the date of mailing shall be prima facie evidence of mailing. If to Seller: UCAR Carbon Company, Inc. Highway 7 Santa Fe Pike Columbia, Tennessee 38401 Attention: J.D. Haworth If to Buyer: SIMCALA, Inc. P.O. Box 68 Ohio Ferro-Alloys Road Mt. Meigs, Alabama 36057 Attention: C.E. Broadwine 13) Amendment: No amendment of or modification to this Agreement shall be effective unless made in writing and signed by both parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. WITNESS: UCAR CARBON COMPANY INC. - -------------------------------- By: /s/ Joseph D. Haworth Title: Director of Specialty Metals Market WITNESS: SIMCALA, INC. - -------------------------------- By: /s/ C.E. Boardwine Title: President and CEO -3- 4 EXHIBIT A CARBON ELECTRODE AND GRAPHITE CONNECTING PIN MATERIAL SPECIFICATION:
- ------------------- ----------------- ----------------- ----------------- ----------------- -------------------- Socket Dimensions Machined with Catalog Diameter Length 2" lead acme Specific Number Dimensions Dimensions thread Bulk Density Resistance - ------------------- ----------------- ----------------- ----------------- ----------------- -------------------- Max: [***]" Max: [***]" Diameter: [***]" [***] g/cc S452330 Min: [***]" Min: [***]" Length: [***]" min [***](mu)(OMEGA)m max - ------------------- ----------------- ----------------- ----------------- ----------------- -------------------- Max: [***]" [***] g/cc P2330C Min: [***]" min [***] (mu)(OMEGA)m max - ------------------- ----------------- ----------------- ----------------- ----------------- --------------------
RECEIVING INSPECTION: Buyer shall verify factory order number and length against tally sheet. INDIVIDUAL AUTHORIZED (As designated by customer) TO APPROVE RECEIPT: PACKAGING: Electrodes secured to truck bed on cradles or pallets. -4- 5 EXHIBIT B CARBON ELECTRODE PRICE: 1. The price beginning January 1, 2000 through June 30, 2000, is [***] ([***]) cents per pound delivered to Buyer's plant. 2. The price in effect beginning July 1, 2000 through December 31, 2000, is [***] ([***]) cents per pound delivered to Buyer's plant. 3. The price beginning January 1, 2001 through December 31, 2001, is [***] ([***]) cents per pound delivered to Buyer's plant. 4. The price in effect beginning January 1, 2002 through December 31, 2002, shall be no more than [***] percent ([***]%) above or below the price delivered to Buyer's plant in previous year. Subject to the foregoing, the electrode price change beginning on January 1, 2002, will be [***] of the percentage change in published average silicon metal prices in the previous twelve (12) months. Buyer and Seller will mutually agree upon published silicon prices for this calculation. AGREEMENT DURATION: The initial term of this Agreement shall be for a period of thirty-six (36) months commencing on January 1, 2000 and terminating on December 31, 2002. By the end of each calendar year, the Buyer and Seller will meet to discuss the possible extension of this supply agreement for another term. -5- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SIMCALA, INC. FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 16,190 0 4,992 0 2,561 24,051 57,740 7,259 111,209 6,532 81,000 0 0 18,807 (6,630) 111,209 55,230 55,230 51,745 51,745 915 0 7,587 (5,215) (1,363) (3,853) 0 0 0 (3,853) 0 0 OF THIS AMOUNT, 6,371 WAS RESTRICTED CASH
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