-----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, GWB8/k5TdY/VkWHlv1JI17s+2p2pcqzFKa53guzpC13PjbWs9OovfdR+f089J0Ti ya7TNddoylZrvcteyP+h9A== 0000950144-01-004647.txt : 20010409 0000950144-01-004647.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950144-01-004647 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 1591266 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 g68095e10-k405.txt SIMCALA, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (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, 2000 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) Registrant's telephone number, including area code (334) 215-7560 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, 2001 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, 2000 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 10 7(A). Quantitative and Qualitative Disclosures About Market Risk 19 8. Financial Statements and Supplementary Data 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III 10. Directors and Executive Officers of the Registrant 19 11. Executive Compensation 20 12. Security Ownership of Certain Beneficial Owners and Management 22 13. Certain Relationships and Related Transactions 22 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 24 SIGNATURES 30 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 (the "Exchange Act"). For those statements, Simcala, Inc. 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. 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 2000, the Company's production volume was approximately 39,300 metric tons, with net sales of $47.1 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 1940 Ohio Ferro 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). 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. 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 -1- 4 reimbursement agreement (the "Old Reimbursement Agreement") with a new credit facility (the "Bank of America Credit Facility"). The Bank of America Credit Facility consisted of a $15.0 million revolving credit facility which provided 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 Bank of America 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 Bank of America 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." The Company has recently replaced the Bank of America Credit Facility with a reimbursement agreement (the "Reimbursement Agreement") effective as of January 12, 2001 governing the $6.1 million letter of credit, and is negotiating with CIT Business Credit ("CIT") for a new credit facility. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - - Credit Agreements." Simcala's facility, located in Mt. Meigs, Alabama, presently 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. Until recently, Simcala intended to construct a fourth smelting furnace. Due to declining market prices and improved production efficiencies for the Company's existing three furnaces, management believes that the construction of the fourth furnace is not in the best interest of the Company at this time. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." PRODUCTS AND MARKETS Silicon Metal The silicon metal industry consists of two general markets: the chemical industry and the aluminum industry. 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 2000 the Company produced approximately 25,600 metric tons of chemical grade silicon metal and approximately 11,400 tons of specialty aluminum grade silicon metal, representing approximately 65% and approximately 29% of its total silicon metal output, respectively. 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 a strengthening and filler agent that is widely used in the refractory, concrete, fibercement, oil exploration and minerals industry. Because there are more than 50,000 particles of microsilica for -2- 5 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 and durability and reduces permeability in applications such as parking garages, bridge decks and marine structures. SIMCALA collects approximately 16,000 metric tons of microsilica annually. In 2000, the Company sold approximately 14,400 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. 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 -3- 6 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 2000, quantifiable employee productivity reached approximately 327 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. If strategically important, the Company enters into long-term contracts to secure stable supplies of raw materials at favorable prices, although it currently has only one long-term contract relating to the supply of carbon electrodes. 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, the Company does not expect 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 30% of cost of goods sold in 2000. The balance of raw materials, consisting of electrodes, quartz, coal/charcoal and wood chips, represented 12%, 45%, 14% and 8% of cost of goods sold, respectively, in 2000. In addition, labor comprised 9% of cost of goods sold in 2000. 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 and again in December 2000. The increase in the Energy Cost Recovery (ECR) factor was applied to all customers of APCo. These increases are expected to remain in effect until APCo recovers excess cost paid for power purchased to meet the extraordinary demand caused by the extreme heat during the summers of 1999 and 2000. 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 Item 7, "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 one of the largest producers of silicones in the United States, Dow Corning Corporation ("Dow Corning"). 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 its 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 2000, Dow Corning accounted for approximately 49% of the Company's net sales. At December 31, 2000, Dow Corning accounted for approximately 32% of the Company's outstanding accounts receivable. SIMCALA is also a supplier to 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 2000 collectively accounted for approximately 31%, 9% and 2%, respectively, of the Company's net sales. At December 31, 2000, Wabash Alloys, Alcan and Bohn accounted for approximately 34%, 12% and 3%, respectively, of the Company's outstanding accounts receivable. -4- 7 In 2000, the Company's five largest customers accounted for approximately 89% of its net sales. The Company does not have long-term contracts with all of 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 Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Importance of Key Customers." The Company does, however, 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 original Alcan Agreement, which expired on December 31, 1999, has been renewed for an additional four years through December 31, 2003. 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. The Company has also 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. As of January 1, 2001 the Dow Agreement was amended to extend the initial term by one year to December 31, 2005 and to eliminate the requirement that the Company build a fourth smelting furnace. The terms of 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 industry. 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's domestic competitors include Globe Metallurgical Inc. and Elkem Metals Company ("Elkem Metals"). SIMCALA is strongly positioned in the chemical and specialty aluminum markets. In 2000, the Company estimates that it held a market share of approximately 11% of the total United States chemical market and approximately 13% of the total U.S. aluminum market, based on metric tons of silicon metal sold. EMPLOYEES At December 31, 2000, the Company employed 173 people, 120 of which were paid on an hourly basis. Approximately 68% of all hourly workers are members of the United Steelworkers of America, Local 8538 (the "USWA"). Because Alabama is a right-to-work state, all of the employees paid on an hourly basis are represented by the USWA. On August 7, 2000, the 1995-2000 Basic Labor Agreement and Seniority Rules and Regulations dated August 8, 1995, between the United Steelworkers of America (AFL-CIO) and the Company expired after more than two months of negotiations over a new labor agreement. The USWA leadership called for a strike commencing at 12:00 p.m. on August 8, 2000. Substantially all of the 120 employees represented by the USWA decided to strike, and the strike has continued through the date of this report. Simcala is unable to predict how long the strike will last. The Company is mitigating the effects of the strike by using managers, supervisors, and temporary contract employees to replace the striking employees for the duration of the strike. In addition, the Company is encouraging the USWA employees to continue to work despite the absence of a new labor agreement, under the same general conditions as to wages and benefits only. Approximately 40 of the USWA employees have returned to work under these conditions. -5- 8 The Company believes its current financial resources are adequate to support the Company's operations during the strike. To date, operating time and production levels have exceeded the levels achieved prior to the strike. Expenses, which were higher than anticipated during the early weeks of the strike, have returned to levels achieved prior to the strike. The Company does not expect that revenues will be adversely affected by the strike or that the Company will lose customers because of the strike. Nonetheless, the Company cannot predict the exact financial impact of the strike, which will depend in part upon its duration. Additionally, if the Company and the USWA reach a new labor agreement, it is possible that certain terms of the labor agreement will result in employee expenses that are higher than those that existed before the strike. Management believes that the strike will not have a material adverse effect on the Company's financial position 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 2001 and 2002 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. 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 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 a 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 duty order requires that special duties be imposed on an imported product in the amount of the margin of dumping (i.e., the percentage difference between the U.S. price for the goods received by the foreign producer or exporter and the normal value of the merchandise). Once such an order is in place, each year the foreign 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 -6- 9 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 ("ITC") decided to conduct a full, rather than an expedited, review of the antidumping orders pertaining to U.S. imports of silicon from Argentina, Brazil and the PRC. The full review was completed in December 2000. As a result of the review, the ITC's commissioners voted to keep the anti-dumping duty orders on imports from Brazil and the PRC. The commissioners voted to lift the anti-dumping duty orders on imports from Argentina. The Company does not believe that imports to the United States from Argentina will have a material impact on the U.S. market. As a result, management believes that the decision to lift those duties under the five-year "sunset" review will not have a significant impact on the Company. 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 duty orders may be revoked or effective duty rates may cease to be imposed. Another sunset review will not happen for another five years. 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. 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 had originally planned to expand the Facility by constructing a fourth smelting furnace. Based on process improvements that have increased the Company's production capacity and a continuation of depressed price conditions resulting from oversupply in the silicon industry, the Company has indefinitely postponed the construction of the fourth furnace. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, on or about December 30, 2000, the Company shut down one of its three existing furnaces for extended maintenance. The Company typically takes each furnace offline for approximately 10 days each year for maintenance. The Company currently anticipates that each of the three furnaces will be offline for longer periods this year, although the length of the shutdown may vary for each of the furnaces. The extended shutdowns are necessary to balance the Company's existing inventories in light of the increased operating efficiencies and the softening market conditions referred to above. The extended shutdowns of the furnaces should not affect the Company's ability to meet market demand for its products. 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. On October 13, 2000, the Circuit Court of Jefferson County in Alabama entered a judgement in the amount of $112,542.00 against the Company in connection with a dispute over a purchase order for coal issued by the Company to one of its suppliers, American Coal Trade. The Company has filed a notice of appeal of the judgment, which is currently before the Supreme Court of Alabama. -7- 10 The Company is involved in routine litigation from time to time in the regular course of its business. There are no other material legal proceedings pending, and the Company is not aware of any other contemplated proceedings that are likely to subject the Company or its property to material exposure. 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, 2000. 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, or 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. ITEM 6. SELECTED FINANCIAL DATA. The selected financial information for the twelve month periods ended December 31, 2000 and December 31, 1999, and for the nine month period ended December 31, 1998, has been derived from the financial statements of the Company which have been audited by Deloitte & Touche LLP, ("D&T") independent auditors. The audited financial statements 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 operations 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. 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. -8- 11
COMPANY PREDECESSOR ---------------------------------- ---------------------------------------------- YEAR ENDED YEAR ENDED NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED ENDED DECEMBER 31, ------------ ------------ ----- ----- ----------------------- DECEMBER 31, MARCH 31, 2000 1999 1998 1998 1997 1996 -------- -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA) INCOME STATEMENT DATA: Net sales .............. $ 47,097 $ 55,230 $ 40,803 $ 14,854 $62,184 $52,407 Cost of goods Sold ................. 43,925 49,696 35,372 11,617 47,972 42,798 -------- -------- -------- -------- ------- ------- Gross profit (loss) ............... 3,172 5,534 5,431 3,237 14,212 9,609 Selling and Administrative Expenses ............. 4,007 3,410 2,882 3,870 2,846 1,923 -------- -------- -------- -------- ------- ------- Operating income (loss) ............... (835) 2,124 2,549 (633) 11,366 7,686 Interest Expense .............. 8,287 8,254 6,277 330 1,710 1,511 Other (expense) Income, net .......... 882 915 1,014 282 228 444 -------- -------- -------- -------- ------- ------- Earnings (loss) Before provision For income Taxes ................ (8,240) (5,215) (2,714) (681) 9,884 6,619 Provision (benefit) .............. (2,472) (1,363) (492) (100) 3,513 1,169 -------- -------- -------- -------- ------- ------- For income taxes ..... Net income (loss) ............... $ (5,767) $ (3,853) $ (2,222) $ (581) $ 6,371 $ 5,450 ======== ======== ======== ======== ======= ======= OPERATING DATA: (UNAUDITED) Silicon metal Production (in Metric tons) ......... 39,300 36,800 27,405 9,110 37,852 33,373 Average sales Price per metric Ton .................. $ 1,389 $ 1,461 $ 1,614 $ 1,661 $ 1,719 $ 1,641 Average cost of Production per ....... $ 1,176 $ 1,209 $ 1,290 $ 1,279 $ 1,278 $ 1,358 Metric ton COMPANY PREDECESSOR --------------------------------------- ------------------------- AS OF AS OF DECEMBER 31, DECEMBER 31, 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working Capital (deficit) ................ $ 7,752 $ 11,148 $ 18,377 $ 885 $ (3,347) Total assets ............................. 103,280 111,210 115,526 33,663 30,581 Long-term debt, less current portion ..... 81,007 81,020 81,034 12,763 13,207 - ----------
-9- 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following is a discussion of the Company's results of operations. The discussion is based upon (i) the year ended December 31, 2000 in comparison to the year ended December 31, 1999 and (ii) 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. 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 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, 2000, 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, 2000, 1999 and 1998:
Year Ended December 31, ------------------------------------------ 2000 1999 1998(a) ------- ------- ------- Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold 96.2 93.7 87.3 ------- ------- ------- Gross profit 3.8 6.3 12.7 Selling, general and administrative expenses 5.5 3.7 10.2 ------- ------- ------- Operating income (1.7) 2.6 2.5 Interest expense 16.2 13.7 10.9 Other income, net 0.5 1.7 2.3 ------- ------- ------- Earnings (loss) before income taxes (17.9) (9.4) (6.1) Income tax (benefit) provision (5.2) (2.5) (1.1) ------- ------- ------- Net income (loss) (12.7)% (6.9)% (5.0)% ======= ======= =======
(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. -10- 13 YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net Sales Net sales decreased by $8.1 million or 14.7% in 2000, to $47.1 million from $55.2 million in 1999. This decline was due principally to a significant decrease in selling prices in the aluminum silicon metal markets coupled with lower volumes of silicon metal sold as a result of an oversupply of silicon metal in the domestic markets. The Company produced 39,300 metric tons of silicon metal in 2000, compared with 36,800 metric tons produced in 1999. The Company's production increased in 2000 due to improved smelting efficiencies and improved operating time for all of the Company's furnaces during the year. Gross Profit Gross profit decreased by $2.3 million, or 41.8%, to $3.7 million in 2000 as compared to $5.5 million in 1999. The gross profit margin decreased to 6.7% in 2000 from 10.0% in 1999. These decreases were principally due to decreased sales prices and volumes coupled with the write-off of costs related to the construction of a fourth smelting furnace, which has now been postponed indefinitely. Lower unit production costs partially offset the declines in gross margin that were attributable to lower sales prices and volumes. Average selling price per metric ton of silicon metal decreased to $1,389 in 2000 from $1,461 in 1999 due to excess supply in the aluminum market and lower prices for all grades of silicon metal. Average production cost per metric ton decreased to $1,176 in 2000 from $1,209 in 1999. This decrease resulted from improved production efficiencies and lower costs of raw materials. Selling and Administrative Expenses Selling and administrative expenses increased $0.6 million, or 17.6%, to $4.0 million in 2000 as compared to $3.4 million in 1999. The increase was primarily due to employee overtime and other employee support costs related to the ongoing strike by the USWA that began in August 2000. These extra expenses were incurred in the first two months of the strike. Since then, these costs have returned to levels comparable to costs for the same period in 1999. In addition, the expenses for 2000 include the cost of a management bonus, while there was no such expense in 1999. Operating Income Income from operations decreased $3.0 million to an operating loss of $0.8 million in 2000 from an operating profit of $2.1 million in 1999, while the operating margin decreased to (1.8)% from 3.8% for the same period in 1999. The decrease in income results from the combined effect of decreased sales due to lower prices and volumes coupled with increased administrative expenses and the asset write-off referred to above. Interest Expense The change in interest expense for the year was not material. Other Income - Net The Change in Other Income Net for the year was not material. Provision for Income Taxes The provision for income taxes increased to a benefit of $2.5 million in 2000 from a benefit of $1.4 million in 1999. This increase in the tax benefit was primarily due to the increase in the loss before taxes from $3.9 million in 1999 to $5.8 million in -11- 14 2000. Net Income (Loss) As a result of the above factors, the net loss for 2000 was $5.8 million compared to a net loss of $3.9 million for 1999, an increase of 48.7%. 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 and 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 that resulted from an oversupply of silicon metal in the aluminum silicon metal markets. Much of the decline was offset by an increase in tons sold. The Company produced 36,800 metric tons of silicon metal in 1999, compared with 36,515 metric tons in 1998. The Company's 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 $3.2 million, or 36.8%, to $5.5 million in 1999 as compared to $8.7 million in 1998. The gross profit margin decreased to 10.0% in 1999 from 15.6% 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. 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 $3.4 million, or 50.0%, to $3.4 million in 1999 as compared to $6.8 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 $0.2 million to $2.1 million in 1999 from $1.9 million in 1998, while the operating margin increased to 3.8% from 3.5% 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 $1.7 million, or 25.8%, to $8.3 million in 1999 from $6.6 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 30.8%, to $0.9 million in 1999 from $1.3 million in 1998. The -12- 15 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 increase in the tax benefit was primarily due to the increase in the loss before taxes from $3.4 million in 1998 to $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 $2.8 million for 1998. LIQUIDITY AND CAPITAL RESOURCES During 2000, the Company's primary sources of liquidity were 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. Cash Flow from Operations The Company's cash flows from its operations are influenced by selling prices of its products, the volume of products sold and raw materials costs. The Company's cash flows are subject to wide 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 additional capacity created an over supply of silicon metal in the domestic markets. This excess supply brought about significant price decreases in all aluminum markets in which the Company competes. In 2000, the excess supply spilled over into the markets for the Company's chemical grade silicon metal. Historically, the Company's microsilica business has been affected by the developing nature of the markets for this product. Cash and cash equivalents were $1.0 million, $9.8 million, and $14.7 million at December 31, 2000, 1999, and 1998, respectively. The decrease in cash in 2000 is the result of a significant decrease in the Company's operating income coupled with a significant increase in its finished goods inventory. The increase in inventory resulted from improved production efficiencies achieved by the Company coupled with orders postponed by customers from 2000 until 2001. By the end of January 2001, these postponed orders had been shipped. The decrease in cash in 1999 was 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 Bank of America 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. Depreciation and amortization for 2000 totaled $6.4 million, compared to $6.4 million for 1999 and $5.0 million for 1998. 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. In 2000, net cash used by operating activities was $7.2 million, while in 1999 and 1998, net cash provided by operating activities was $3.5 million and $0.5 million, respectively. The significant decrease in 2000 resulted from the Company's larger net loss coupled with a large increase in finished goods inventories and a slight increase in accounts receivable. In 2000, 1999, and 1998, net cash used in investing activities was $1.8 million, $2.0 million, and $3.9 million, respectively. In 2000, capital spending was $2.5 million. In 2000, the Company wrote-off $654,000 of amounts previously capitalized in connection with the fourth smelting furnace. For all years, the changes primarily reflect different levels of capital spending. In 2000, 1999 and 1998, net cash provided by financing activities was approximately $114,000, $(6.4) million, and $(28,000), respectively. In 2000 and 1998, there was no significant financing activity. In 1999, the increase was due to the restriction of $6.4 million in cash. Credit Agreements -13- 16 On March 31, 1998, in connection with the acquisition of the Company by Holdings, the Company entered into a Credit Agreement with NationsBank, N.A. (now Bank of America). The Bank of America Credit Facility provided revolving borrowings and letters of credit in an aggregate principal amount of $15.0 million. At December 31, 2000, the Company had no borrowings outstanding under the Bank of America Credit Facility, but was using $6.1 million for a letter of credit supporting the Company's $6.0 million IRB's. There were no other borrowings under the Bank of America Credit Facility at that time. The letter of credit is fully cash collateralized. The Bank of America Credit Facility contained a number of financial covenants with respect to the Company's interest coverage, net leverage, and EBITDA. As a result of lower prices for products sold to the aluminum industry and lower sales of the Company's products in the fourth quarter of 2000, the Company was unable to satisfy these financial covenants as of December 31, 2000, which could have resulted in a subsequent default of the Credit Agreement. On or about January 12, 2001, Bank of America notified the Company that it would waive any default triggered by the Company's inability to satisfy the financial covenants. In exchange for such waiver, Bank of America asked that Simcala agree to replace the Bank of America Credit Facility with a reimbursement agreement (the "Reimbursement Agreement") governing the letter of credit. Subject to the condition that the letter of credit remain fully cash collateralized, Bank of America has agreed to renew the letter of credit for one year. Bank of America and the Company entered into the Reimbursement Agreement as of January 12, 2001. Under the Reimbursement Agreement, Simcala will not have access to the additional $8.9 million of credit previously available under the Bank of America Credit Facility. Subsequent to the replacement of the Bank of America Credit Facility, the Company entered negotiations with CIT Business Credit ("CIT") for a new credit facility. CIT has approved a $10.0 million revolving credit facility (the "CIT Credit Facility") to the Company, for which documentation is pending. Availability of funds under the CIT Credit Facility will be based on the values of eligible accounts receivable and eligible inventory of the Company. The CIT Credit Facility will be used to fund working capital needs, operating expenses, and general corporate purposes. The Notes 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 the Company 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, 2000, interest on the IRBs accrued at a rate equal to approximately 6.7% per annum. Capital Resources 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. The Facility presently 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 ton of microsilica. The Company has recently decided not to pursue its plan to construct a fourth furnace, in light of declining market prices and improved production efficiencies. As part of its original strategy to build a fourth furnace, the Company had allocated the volume to be produced by the fourth smelting furnace under the Supply Agreement. Due to the Company's improved operating efficiencies, as well as poor market conditions, Dow Corning and the Company have mutually agreed that construction of the fourth furnace is no longer necessary. As of January 30, 2001, Dow Corning has waived the requirement that Simcala begin construction on the furnace, and has agreed to amend certain provisions of the Supply Agreement that were related to the construction of the fourth -14- 17 furnace. In the fourth quarter, the Company recorded a write-off of $654,147, representing certain costs of preliminary work completed in connection with the proposed fourth furnace, which were previously capitalized. Loan Covenants The agreement governing the CIT Credit Facility, once completed, together with the indenture governing the Notes (the "Indenture"), will likely 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 CIT Credit Agreement, among other things, may 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. The Indenture contains a limitation on the ability of the Company and its subsidiaries to incur indebtedness. This limitation 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, 2000, 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. Revenue Recognition - In December, 1999 the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. ("SAB") 101, Revenue Recognition in Financial Statements. SAB 101, as amended by SAB's 101A and 101B, provides guidance in applying accounting principles generally accepted in the United States of America ("GAAP") to revenue recognition in financial statements. SAB 101 was effective on October 1, 2000. The Company recognizes revenue on all product sales upon delivery. At this point, persuasive evidence of a sale arrangement exists, delivery has occurred, the Company's price to the buyer is fixed, and collectibility of the associated receivable is reasonably assured. The adoption of SAB 101 had no material impact on the Company's 2000 financial position or results of operations. New Accounting Pronouncement - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 (as amended by SFAS' 137 and 138) was effective January 1, 2001, SFAS 133 establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company realize all derivatives as either assets or liabilities in the balance sheet measured at fair value. The Company's adoption of SFAS 133 on January 1, 2001 had no impact on its financial position or results of operations, as the Company has no derivative instruments. 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, 2000, 1999, and 1998. -15- 18
HYPOTHETICAL CARRYING FAIR INCREASE IN VALUE VALUE(A) FAIR VALUE(B) 2000 Long-term debt and capital leases, including current portion $81,020,068 $34,345,068 $37,492,290 =========== =========== =========== 1999 Long-term debt and capital leases, including current portion $81,061,644 $64,261,644 $69,094,977 =========== =========== =========== 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. (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, 2000, the Company had approximately $82.6 million of indebtedness outstanding, consisting primarily of $75 million borrowed under the Notes and $6.1 million of secured indebtedness reserved under the Bank of America Credit Facility to support 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 contains, and the CIT Credit Facility will likely 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 CIT Credit Facility, once completed, in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to satisfy its other liquidity needs. 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 Indenture contains, and the CIT Credit Facility will likely 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 -16- 19 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 CIT Credit Facility may also contain 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 CIT 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 CIT 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, including under the CIT Credit Facility, may contain financial or other covenants more restrictive than those contained in the Bank of America 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 Certain of the Company's customers are material to its business and operations. In 2000, Dow Corning accounted for approximately $22.8 million, or approximately 49%, of net sales, Wabash Alloys accounted for approximately $14.4 million, or approximately 31%, of net sales, and Alcan accounted for approximately $4.4 million, or approximately 9%, of net sales. In 2000, the Company's five largest customers accounted for approximately $43.1 million, or approximately 89%, 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 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." Impairment of Goodwill The Company suffered an operating loss for the fiscal year ended December 31, 2000. Future operating results may fluctuate or continue to decline as a result of a number of factors, including, but not limited to, a decrease in prices resulting from an oversupply of silicon metal in the market, possible increased labor costs resulting from any new agreement with the USWA, potential increases in the costs of the Company's supplies and raw materials, or increases in expenses related to the Company's debt service. In the event that any one of these factors, or a combination of them, has a material adverse effect on the Company's future operations, the Company may determine that the carrying amount of goodwill may not be recoverable. 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 Item 1, "Business -- Competition." Anti-Dumping Duties on Foreign Competitors' Products In 1990 and 1991, domestic producers of silicon metal successfully prosecuted anti-dumping actions against 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 U.S. Department of Commerce and the U.S. 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 duty -17- 20 order requires special duties to be imposed in the amount of the margin of dumping (i.e., the percentage difference between the United States price for the goods received by the foreign producer or exporter and the normal value of the merchandise). Once an order is in place, each year foreign producers, importers, domestic producers and other interested parties may request a new investigation (or "administrative review") to determine the margin of dumping during the immediately preceding year. The rates calculated in these administrative reviews (or the existing rates if no review is requested) are used to assess anti-dumping duties on imports during the review period and to collect cash deposits on future imports. An administrative review covering five Brazilian producers and a review covering two PRC exporters are now in progress. The rates established in these reviews and in future reviews will depend upon the prices and costs during the periods covered by the reviews, the methodologies applied, and other factors. Anti-dumping orders duty remain in effect until they are revoked. In order for an individual producer or exporter to qualify for revocation of an anti-dumping duty 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 the PRC. The full review was completed in December 2000. As a result of the reviews, the ITC's commissioners voted to keep the anti-dumping duty orders on imports from Brazil and the PRC. The commissioners however, voted to lift the anti-dumping duty orders on imports from Argentina. 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 duty orders may be revoked or effective duty rates may not continue to be imposed. See Item 1, "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 Item 1, "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. 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. Impact of Inflation The Company has not experienced any material adverse effects on operations in recent years because of inflation, though margins can be affected by inflationary conditions. The Company's primary cost components include electricity, carbon electrodes, quartz, coal, charcoal, wood chips, and labor, which are susceptible to domestic inflationary pressures. While the Company has generally been successful in passing on cost increases through price adjustments, the effect of market price competition and under-utilized industry capacity could limit the Company's ability to adjust pricing in the future. 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 -18- 21 Beneficial Owners and Management." ITEM 7(A).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures about Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements in Part IV and Item 14(a)(1) 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........ 54 President, Chief Executive Officer and Director Dwight L. Goff............. 46 Executive Vice President R. Myles Cowan, II......... 49 Chief Financial Officer W. Edward Boardwine........ 29 Plant Manager Roger Hall................. 59 Superintendent of Engineering and Maintenance Mark V. Lough.............. 42 Technical & Operations Manager Linda L. Kelley............ 51 Controller Edwin A. Wahlen, Jr........ 53 Director William A. Davies.......... 55 Director James A. O'Donnell......... 48 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. Mr. Boardwine is the father of W. Edward Boardwine, the Plant Manager for the Company. DWIGHT L. GOFF has been the Executive Vice President of the Company since March 31, 1998. Prior to that he served as the Company's Vice President 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 Predecessor 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, most recently as its 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. -19- 22 W. EDWARD BOARDWINE has been with the Company since 1996. Prior to being promoted to Plant Manager in December 2000, Mr. Boardwine held various positions with the Company such as Maintenance Supervisor, Plant Engineer, and Superintendent of Engineering. He holds a B.S. degree in electrical engineering from Penn State University. Mr. Boardwine is the son of C. Edward Boardwine, the President and Chief Executive Officer of the Company. 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 Technical & Operations Manager for the Company since November 2000. Prior thereto, he served as Operations Manager of the Company since March 1999. Prior to joining the Company, he was employed as Operations Manager for the Millville, New Jersey plant of U. S. Silica since March 1997. Prior to that, he was employed as Operations Superintendent/Plant Manager at the Mill Creek, Oklahoma plant of U.S. Silica since August 1989. LINDA L. KELLEY has been the Controller of the Company since June 1997. Prior thereto, she was the Company's Assistant Controller 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 their 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. Mr. Davies became a director of the Company on the Acquisition Date and is also a director of several other private companies with which CGW is associated. 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. and several private companies with which CGW is associated. 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, 2000, 1999 and 1998 by the Chief Executive Officer of the Company and each other executive officer of the Company who served as such at December 31, 2000 and whose total salary and bonus exceeded $100,000 (collectively, the "Named Executive Officers"). The Company did not grant any stock appreciation rights or make any long-term incentive plan payouts during the periods shown. -20- 23 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------------- ------------------------------------------- AWARDS SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION($) ----------------------------------- ------ ----------- ------------ --------------------- ---------------- C. Edward Boardwine, 2000 214,319 -- -- 12,003(1) President and Chief Executive Officer 1999 214,120 44,882 -- 10,091(2) 1998 197 310 75,768 109 1,186,769(3) Dwight L. Goff, 2000 127,852 -- -- 1,735 Executive Vice President 1999 112,442 18,974 -- -- 1998 97,423 33,776 -- 196,250(4) R. Myles Cowan, II, 2000 98,441 -- -- 1,708 Chief Financial Officer 1999 99,614 17,077 -- -- 1998 88,196 29,527 -- 196,250(5)
- -------------- (1) Includes $10,031 for premiums paid by the Company with respect to a split-dollar life insurance policy for Mr. Boardwine. (2) Includes $8,786 for premiums paid by the Company with respect to a split-dollar life insurance policy for Mr. Boardwine. (3) 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. (4) Reflects a one-time bonus paid in connection with the Acquisition. EMPLOYMENT AGREEMENTS The Company 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 of his 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. 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 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. Upon the closing of the Acquisition, Messrs. Boardwine, Goff and Cowan were issued Options to acquire 2,046, 512 and 512 -21- 24 shares, respectively, of Holdings Stock. The Options are subject to a five-year vesting period and the Options issued on the Acquisition Date are exercisable at an initial price per share of $1,000. The Options will immediately and fully vest in the event of a merger or consolidation of Holdings with, or the sale of substantially all of the assets or stock of Holdings to, any person other than CGW or a CGW affiliate. The term of the Options expires ten years from the date of grant. The Plan also provides for other equity-based forms of incentive compensation in addition to the Options. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Holdings owns 100% of the issued and outstanding capital stock of the Company. The issued and outstanding Holdings Stock is owned 90.9% by CGW (79.8% on a fully diluted basis) 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 Item 10,"Directors and Executive Officers of the Registrant" and Item 13,"Certain Relationships and Related Transactions." The following table sets forth, as of March 1, 2001, 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PERCENT OF ALL NUMBER OF SHARES HOLDINGS STOCK NAME OF STOCKHOLDER BENEFICIALLY OWNED(1) OUTSTANDING ----------------------------------------------------- --------------------- ----------- CGW Southeast Partners III, L.P.(2).................... 20,000 83.9% Edwin A. Wahlen, Jr. William A. Davies James A. O'Donnell C. Edward Boardwine(3)................................. 2,883 12.1% Dwight L. Goff......................................... 502 2.1% R. Myles Cowan, II..................................... 457 1.9% All directors and executive officers as a group (6 Persons)(2).......................................... 23,842 100%
- --------------- (1) Includes 1,228, 307, and 307 shares of Holdings Stock which may be acquired upon the exercise of Options held by Messrs. Boardwine, Goff, and Cowan vested as of March 31, 2001. A total of 2,040, 512, and 512 options were granted to Messrs. Boardwine, Goff and Cowan, respectively, on the Acquisition Date. (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 for Messrs. Boardwine, Goff, and Cowan is SIMCALA, Inc., 1940 Ohio Ferro Road, Mt. Meigs, Alabama 36057. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. SHAREHOLDERS AGREEMENT On the Acquisition Date, CGW and the Senior Management, as the shareholders of Holdings, entered into a Shareholders Agreement (the "Shareholders Agreement"). All future purchasers of Holdings Stock will be required to enter into the Shareholders Agreement. The Shareholders Agreement contains restrictions on the transferability of the Holdings Stock and other rights and obligations of Holdings, CGW and the Senior Management with respect to the Holdings Stock. In addition, the Shareholders Agreement grants to the Senior Managers pre-emptive rights, exercisable pro rata in accordance with their respective ownership of Holdings Stock, to purchase shares or equity securities of Holdings (other than -22- 25 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 the Company). 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. No such additional payments were made in 1999 or 2000. 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. CONTRACT FOR CLEANING OF SILICON METAL During 2000, the Company entered into a contract with Rhodes Metals for the cleaning of silicon metal. Rhodes Metals was selected as the vendor after another party who previously bid on the services proved unable to provide service to the Company. Norman Rhodes, the President of Rhodes Metals, is the brother-in-law of C. Edward Boardwine, our President and Chief Executive Officer. The total value of services provided by Rhodes Metals to the Company during 2000 was approximately $200,000. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Certificate of Incorporation of the Company contains a provision eliminating, to the full extent permitted by Delaware law or any other applicable law, the personal liability of directors to the Company or its stockholders with respect to any acts or omissions in the performance of a director's duties as a director of the Company. The Certificate of Incorporation of the Company also provides that directors and officers of the Company will be indemnified by the Company to the full extent permitted by Delaware law or any other applicable law, but the Company may enter into agreements providing for greater or different indemnification. The Articles of Incorporation of Holdings contains a provision eliminating the personal liability of directors to Holdings or its shareholders for monetary damages for breaches of their duty of care or other duty as a director, except in certain prescribed circumstances. The Bylaws of Holdings provide that directors and officers of Holdings will be indemnified -23- 26 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, 2000, December 31, 1999, and December 31, 1998 Statements of Operations for the years ended December 31, 2000 and December 31, 1999, the nine months ended December 31, 1998, and the three months ended March 31, 1998 Statements of Changes in Shareholders' Equity for the years ended December 31, 2000 and December 31, 1999, the nine months ended December 31, 1998, and the three months ended March 31, 1998 Statements of Cash Flows for the years ended December 31, 2000 and December 31, 1999, the nine months ended December 31, 1998, and the three months ended March 31, 1998 Notes to Financial Statements 2. FINANCIAL STATEMENT SCHEDULES All schedules have been omitted, as they are not required under the related instructions or are inapplicable, or because the information required is included in the consolidated financial statements. 3. EXHIBITS The exhibits indicated below are either included or incorporated by reference herein, as indicated. -24- 27
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). 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,
-25- 28 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). 10.6 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). 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
-26- 29 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) 10.15 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) 10.19 Supply Agreement, dated January 1, 2000, between UCAR Carbon Company, Inc. and SIMCALA, Inc. * 10.20 Supply Agreement for the Supply of Silicon Metal between Simcala, Inc. and Alcan Aluminum Ltd., dated August 8, 2000 (incorporated by reference from Exhibit 10.20 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.)* 10.21 Reimbursement Agreement dated as of January 12, 2001 between Simcala, Inc. and Bank of America, N.A. *** 10.22 Revised Supply Agreement dated as of January 1, 2001 between Simcala, Inc. and Dow Corning Corporation.**,*** 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 -27- 30 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 -28- 31 (B) REPORTS ON FORM 8-K None. (C) EXHIBITS See Item 14(a)(3) above. (D) FINANCIAL STATEMENT SCHEDULES None. -29- 32 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 April 2, 2001. 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 April 2, 2001.
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 - --------------------------- Executive Vice President Dwight L. Goff /s/ R. Myles Cowan, II - --------------------------- Chief Financial Officer (Principal Accounting and R. Myles Cowan, II Financial Officer) /s/ Edwin A. Wahlen, Jr. - --------------------------- Director Edwin A. Wahlen, Jr. /s/ James A. O'Donnell - --------------------------- Director James A. O'Donnell
-30- 33 SIMCALA, Inc. Index to Financial Statements
PAGE ---- Independent Auditors' Report................................................................. F-1 Balance Sheets as of December 31, 2000 and December 31, 1999................................. F-2 Statements of Operations for the years ended December 31, 2000, December 31, 1999, the nine months ended December 31, 1998, and the three months ended March 31, 1998............................................................................... F-3 Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, December 31, 1999, the nine months ended December 31, 1998 and the three months ended March 31, 1998............................................................................... F-4 Statements of Cash Flows for the years ended December 31, 2000, December 31, 1999, the nine months ended December 31, 1998, and the three months ended March 31, 1998........................... 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. 34 INDEPENDENT AUDITORS' REPORT Board of Directors SIMCALA, Inc. We have audited the accompanying balance sheets of SIMCALA, Inc. (the "Company") as of December 31, 2000 and 1999 and the related statements of operations, changes in shareholders' equity, and cash flows for the years ended December 31, 2000 and 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 for the Predecessor (Note 1) for the three months ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999 and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999, the nine months ended December 31, 1998, and the three months ended March 31, 1998 (Predecessor) in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Atlanta, Georgia March 20, 2001 35 SIMCALA, INC. BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, 2000 1999 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 989,201 $ 9,819,378 Accounts receivable 5,318,822 5,016,002 Inventories 7,862,051 2,561,105 Other current assets 435,741 284,172 Total current assets 14,605,815 17,680,657 RESTRICTED CASH 6,214,883 6,370,775 PROPERTY, PLANT, AND EQUIPMENT: Land, building, and improvements 2,288,506 1,720,075 Machinery and equipment, furniture and fixtures 54,666,202 55,299,789 Construction in-progress 2,556,810 720,483 ------------- ------------- 59,511,518 57,740,347 Accumulated depreciation and amortization (11,666,262) (7,259,635) ------------- ------------- Property, plant, and equipment, net 47,845,256 50,480,712 INTANGIBLE ASSETS (net of accumulated amortization of $5,647,715 and $3,583,705 in 2000 and 1999, respectively) 34,613,617 36,677,627 ------------- ------------- $ 103,279,571 $ 111,209,771 ============= ============= DECEMBER 31, DECEMBER 31, 2000 1999 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,567,595 $ 4,195,134 Accrued interest payable 1,548,441 1,566,331 Accrued expenses 724,603 729,198 Current portion of long-term debt 13,038 41,689 Total current liabilities 6,853,677 6,532,352 LONG-TERM DEBT 81,007,030 81,019,955 DEFERRED INCOME TAXES 8,453,688 10,925,499 ------------- ------------- Total liabilities 96,314,395 98,477,806 COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Common stock, 20,000 shares authorized - 10,899 shares issued and outstanding, par value $.01 109 109 Additional paid-in capital 18,806,891 18,806,891 Accumulated deficit (11,841,824) (6,075,035) ------------- ------------- Total shareholders' equity 6,965,176 12,731,965 ------------- ------------- $ 103,279,571 $ 111,209,771 ============= =============
See notes to financial statements. -2- 36 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 YEAR NINE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 2000 1999 1998 1998 ------------ ------------ ------------ ------------ NET SALES $ 47,097,099 $ 55,229,558 $ 40,802,907 $ 14,853,920 COST OF GOODS SOLD 43,924,784 49,695,573 35,372,348 11,616,650 ------------ ------------ ------------ ------------ Gross profit 3,172,315 5,533,985 5,430,559 3,237,270 SELLING AND ADMINISTRATIVE EXPENSE 4,006,665 3,410,311 2,881,899 3,870,218 ------------ ------------ ------------ ------------ OPERATING (LOSS) INCOME (834,350) 2,123,674 2,548,660 (632,948) INTEREST EXPENSE 8,286,706 8,253,638 6,277,013 330,450 OTHER INCOME, NET 882,606 914,738 1,013,611 282,272 ------------ ------------ ------------ ------------ (LOSS) INCOME BEFORE BENEFIT FOR INCOME TAXES (8,238,450) (5,215,226) (2,714,742) (681,126) BENEFIT FOR INCOME TAXES (2,471,661) (1,362,595) (492,338) (100,198) ------------ ------------ ------------ ------------ NET LOSS $ (5,766,789) $ (3,852,631) $ (2,222,404) $ (580,928) ============ ============ ============ ============
See notes to financial statements. -3- 37 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.
RETAINED ADDITIONAL EARNINGS COMMON PAID-IN (ACCUMULATED STOCK CAPITAL DEFICIT) TOTAL ----- ---------- ------------ ----- 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 Net loss (5,766,789) (5,766,789) ----------- ------------ ------------ ----------- BALANCE - December 31, 2000 $ 109 $ 18,806,891 $(11,841,824) $ 6,965,176 =========== ============ ============ ===========
See notes to financial statements. -4- 38 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 states report results of operations and cash flows of these two separate entities.
COMPANY PREDECESSOR --------------------------------------------- ------------- Year Year Nine Months Three Months Ended Ended Ended Ended December 31, December 31, December 31, March 31, --------------------------------------------- ------------- 2000 1999 1998 1998 OPERATING ACTIVITIES: Net loss $(5,766,789) $(3,852,631) $(2,222,404) $ (580,928) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant, and equipment 4,406,628 4,285,496 2,974,138 447,674 Amortization of intangible assets 2,064,010 2,049,843 1,533,761 9,229 Debt discount 14,000 (Decrease) increase in net deferred income tax liability (2,471,811) (1,365,945) (492,338) 800,000 Noncash stock option compensation 903,680 Change in assets and liabilities: Accounts receivable (302,820) 1,110,284 2,497,277 20,824 Other receivables (2,806,751) Inventories (5,300,946) 855,172 (545,377) (206,968) Other assets (151,569) (12,059) (355,508) 202,831 Accounts payable and accrued expenses 349,976 473,056 (4,036,645) 2,364,754 ----------- ----------- ----------- ----------- Net cash (used in) provided by operating activities (7,173,321) 3,543,216 (647,096) 1,168,345 INVESTING ACTIVITIES - Purchase of property, plant, and equipment (1,771,170) (1,960,651) (2,690,822) (1,184,422)
See notes to financial statements. -5- 39 SIMCALA, INC. STATEMENTS OF CASH FLOWS - CONTINUED - -------------------------------------------------------------------------------
PREDECESSOR -------------------------------------------------- ------------ YEAR YEAR NINE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, ------------ ------------ ------------ ------------ 2000 1999 1998 1998 ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Decrease (increase) in restricted cash 155,891 (6,370,775) (Repayments) borrowings of long-term debt, net (41,577) (76,094) (66,625) 39,085 Additional long-term borrowings 30,893 ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 114,314 (6,415,976) (66,625) 39,085 ------------ ------------ ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,830,177) (4,833,411) (3,404,543) 23,008 CASH AND CASH EQUIVALENTS: Beginning of period 9,819,378 14,652,789 18,057,332 634,877 ------------ ------------ ------------ ------------ End of period $ 989,201 $ 9,819,378 $ 14,652,789 $ 657,885 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 7,637,593 $ 7,658,866 $ 4,203,730 $ 161,000 ============ ============ ============ ============ Income taxes $ $ $ 125,000 $ 112,000 ============ ============ ============ ============
See notes to financial statements. - 6 - 40 SIMCALA, INC. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999, FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999, THE NINE MONTHS ENDED DECEMBER 31, 1998, AND THE THREE MONTHS ENDED MARCH 31, 1998 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. (the "Company"). On such date, SAC was merged into the Company (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 business segment. The Company sells to primarily domestic customers in the metal industry. Credit is extended based on an evaluation of the customer's financial condition. During 2000, 1999, the nine months ended December 31, 1998 ("Nine Months"), and the three months ended March 31, 1998 ("Three Months"), three customers accounted for 49%, 31%, and 9%; 40%, 31%, and 10%; 40%, 15%, and 14%; and 40%, 21%, and 10% of net sales, respectively. At December 31, 2000 and 1999, these customers accounted for 32%, 34%, and 12%; and 43%, 27%, and 5%, respectively, of outstanding receivables. Substantially all of such receivable balances have been collected subsequent to each respective year end. 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 Consensus No. ("EITF") 88-16, Basis in Leveraged Buyout Transactions, and is allocated to property, plant and equipment, and goodwill based upon the March 31, 1998 balances. - 7 - 41 The Acquisition was financed through the issuance of senior notes in the amount of $75,000,000 (Note 4) and contributed capital 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, constituted a change in control of the Company. The financial statements included herein for the Three Months 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 2000, 1999, and Nine Months financial statements reflect the adjustments that were made to record the Acquisition. Accordingly, the financial statements of the Predecessor for the Three Months 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 2000, 1999, and the Nine Months. The following unaudited pro forma financial data has been prepared assuming that the Acquisition was consummated on January 1, 1998. This pro forma financial data is not necessarily indicative of the operating results that would have occurred had the Acquisition been consummated on January 1, 1998.
THREE MONTHS ENDED MARCH 31, 1998 Net Sales $ 14,854,000 Net Loss $ (2,377,000)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 - The Company is required to provide cash collateral to support a $6,147,946 letter of credit backing the industrial development bonds (Note 4). This cash, plus interest paid thereon, is reflected as restricted cash on the accompanying balance sheet. Inventories - Inventories are stated at the lower of average cost or market. - 8 - 42 Property, Plant, and Equipment - Property, plant, and equipment are stated at cost. The Company provides for depreciation and amortization over the estimated useful lives of property, 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. 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. During 2000, 1999, the Nine Months, and the Three Months, the Company capitalized $164,597, $105,240, $93,094, and $0 of interest expense, respectively. Intangible Assets - Intangible assets consist of $34.5 million in goodwill, representing the excess of the cash consideration over the estimated fair market value of the net assets acquired in the Acquisition and $5.3 million in debt issuance costs. In 2000, 1999, the Nine Months, and the Three Months, the Company amortized $1,397,009, $1,382,842, $1,033,510, and $0, respectively, for goodwill, and $667,001, $667,001, $500,252, and $16,504, respectively, for debt issuance costs. Goodwill is being amortized over 25 years, and debt issue costs are being amortized as interest expense over eight years. Impairment - The Company reviews long-lived assets and goodwill for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable based on its expectation of undiscounted future cash flows associated with the operation of the assets. If impairment is indicated, any impairment losses are reported in the period in which the recognition criteria are first applied based on the difference between the carrying value and the fair value of the assets. Long-lived assets held for sale are carried at the lower of carrying amount or fair value, less costs to sell such assets. The Company discontinues depreciating assets held for sale at the time the decision to sell the assets is made. During 2000, the Company recorded a $654,148 impairment charge, included in cost of goods sold in the accompanying statement of operations, to write off previously capitalized costs to construct a fourth furnace. - 9 - 43 Stock-Based Compensation - Stock-based compensation is accounted for in accordance with Accounting Principles Board Opinion No. ("APB") 25, Accounting for Stock Issued to Employees, and related interpretations. The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. ("SFAS") 123, Accounting for Stock-Based Compensation (Note 8). Revenue Recognition - In December, 1999 the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. ("SAB") 101, Revenue Recognition in Financial Statements. SAB 101, as amended by SAB's 101A and 101B, provides guidance in applying accounting principles generally accepted in the United States of America ("GAAP") to revenue recognition in financial statements. SAB 101 was effective on October 1, 2000. The Company recognizes revenue on all product sales upon delivery. At this point, persuasive evidence of a sale arrangement exists, delivery has occurred, the Company's price to the buyer is fixed, and collectibility of the associated receivable is reasonably assured. The adoption of SAB 101 had no material impact on the Company's 2000 financial position or results of operations. New Accounting Pronouncement - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 (as amended by SFAS' 137 and 138) was effective January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company realize all derivatives as either assets or liabilities in the balance sheet measured at fair value. The Company's adoption of SFAS 133 on January 1, 2001 had no impact on its financial position or results of operations, as the Company has no derivative instruments. Reclassifications - Certain prior period amounts have been reclassified for comparative purposes. 3. INVENTORIES Inventories consisted of the following as of December 31, 2000 and 1999:
2000 1999 Raw materials $ 714,551 $ 1,143,075 Finished goods 6,851,500 1,122,030 Supplies 296,000 296,000 ----------- ----------- $ 7,862,051 $ 2,561,105 =========== ===========
- 10 - 44 4. LONG-TERM DEBT The following is a summary of long-term debt as of December 31, 2000 and 1999:
2000 1999 Senior notes which bear interest at 9.625% and are due April 2006 $ 75,000,000 $ 75,000,000 Industrial development bonds which bear interest at a variable rate. At December 31, 2000 and 1999, the interest rate was 6.50% and 6.00%, 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 with interest rates ranging from 0.9% to 10.16% expiring at various dates through 2002. Aggregate monthly payments approximate $3,700. 20,068 61,644 ------------ ------------ 81,020,068 81,061,644 Less current portion 13,038 41,689 ------------ ------------ Long-term debt $ 81,007,030 $ 81,019,955 ============ ============
The Senior Notes (the "Notes") mature on April 15, 2006, unless previously redeemed. Interest on the Notes is payable semiannually on April 15 and October 15, commencing October 15, 1998. The Notes are redeemable at the option of the Company, in whole or in part, on or after April 15, 2002, at the redemption price, plus accrued interest and liquidated damages, as defined, if any. 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 the Notes remains outstanding immediately after the occurrence of such redemption. No redemptions were made through December 31, 2000. The Notes are unsecured and rank senior to all existing and future subordinated indebtedness of the Company. The Notes contain a number of covenants that, among others, restrict the ability of the Company to incur additional debt (including contingent obligations), create liens, enter into transactions with affiliates, change the nature of its business, merge or consolidate, dispose of assets, make investments and loans, pay dividends, prepay debt, and enter into sale/leaseback transactions. Through December 31, 2000, the Company was in compliance with such covenants. Future maturities of long term debt are as follows at December 31, 2000:
YEAR ENDED DECEMBER 31, 2001 $ 13,038 2002 7,030 2003 -- 2004 -- 2005 -- Thereafter 81,000,000 ----------- $81,020,068 ===========
- 11 - 45 The Company leases its land and buildings at its Alabama manufacturing facility under a capital lease from the Industrial Development Board of the City of Montgomery, Alabama (the "IDB Lease"). The IDB Lease requires the payment of $2,000 per year through June 1, 2009, and expires on June 1, 2010, and allows the Company to purchase the land and buildings for $2,000 at that time. In conjunction with the Acquisition, the Company entered into an agreement with a bank, as amended through January 25, 1999 (the "Credit Agreement"), providing for availability of $15,000,000 in combined revolving loans and letters of credit and maturing on March 31, 2003. Borrowings under the Credit Agreement bore interest at a variable rate equal, at the Company's option, to Libor plus a margin of up to 3.0% or the Base Rate, plus a margin of up to 2.0%, all as defined. At December 31, 2000 and 1999, the Company had no outstanding borrowings under the Credit Agreement and had a $6,147,946 letter of credit outstanding collateralizing the Company's $6,000,000 industrial development bonds. The letter of credit is cash collateralized, matures on April 15, 2002, and allows for automatic annual renewals unless otherwise notified by the bank (Note 1). The Credit Agreement contained covenants substantially the same as the Notes, and also contained certain financial ratio covenants including: (i) earnings before interest, taxes, depreciation and amortization ("EBITDA"), (ii) Interest Coverage, and (iii) Net Leverage, all as defined. The Notes, Industrial Development Bonds ("IDBs"), IDB Lease and Credit Facility require compliance with the covenants of all of the Company's debt agreements and provides for a period subsequent to a covenant violation to cure such violation. At December 31, 2000, the Company was not in compliance with the Credit Facility financial ratio covenants. On March 20, 2001, the Company entered into an agreement with the bank (the "Reimbursement Agreement") which, effective January 12, 2001, waived the December 31, 2000 covenant violations and amended and restated the Credit Agreement in its entirety. The terms of the Reimbursement Agreement: (i) terminate the Company's ability to obtain additional borrowings or letters of credit, and (ii) release the Credit Agreement's collateral requirements except for the existing letter of credit cash collateral. Borrowings, if any, related to payment of the existing letter of credit will bear interest at the Base Rate plus 3.25%, not to exceed the Maximum Rate, all as defined. The Reimbursement Agreement replaces the Credit Agreement covenants with covenants that restrict the Company's ability to enter into transactions with affiliates and change the nature of its business. The Reimbursement Agreement requires the payment of a quarterly commitment fee equal to 1% per annum of the existing letter of credit as long as the letter of credit remains outstanding. The Reimbursement Agreement has no expiration date. The Company is currently negotiating with CIT Business Credit ("CIT") to obtain a new credit facility to replace the Reimbursement Agreement that will provide for a $10,000,000 revolving line of credit based on eligible accounts receivable and inventory and up to $6,500,000 in letters of credit collateralized by cash or otherwise reduced line of credit availability. The Company expects completion of such facility in April 2001. - 12 - 46 5. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents (including restricted cash), accounts receivable, inventory, accounts payable, and accrued expenses approximate fair value due to the short duration of these instruments. The carrying value of long-term debt, excluding the Notes, approximates fair value due to its variable nature. The estimated fair value of the Notes is $28,325,000 and $58,200,000 as of December 31, 2000 and 1999, respectively, based on quoted market prices. Considerable judgment is required in developing the estimates of fair value of long-term debt and, therefore, such values are not necessarily indicative of the amounts that could be realized in a current market exchange. 6. INCOME TAXES The provision for income taxes for 2000, 1999, the Nine Months, and the Three Months consisted of the following:
COMPANY PREDECESSOR --------------------------------------------------------------------- 2000 1999 NINE MONTHS THREE MONTHS ------------ ------------ ------------ ------------ Current $ 150 $ 3,350 $ (900,198) Deferred (2,471,811) (1,365,945) $ (492,338) 800,000 ------------ ------------ ------------ ------------ Benefit for income taxes $ (2,471,661) $ (1,362,595) $ (492,338) $ (100,198) ============ ============ ============ ============
The difference between the effective tax rate and the statutory rate is reconciled below (amounts in thousands):
COMPANY PREDECESSOR ----------------------------------------------------------------------------------------- 2000 1999 NINE MONTHS THREE MONTHS --------------------- --------------------- ------------------- -------------------- DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE Statutory rate $(2,801) (34.0)% $(1,773) (34.0)% $(923) (34.0)% $(232) (34.0)% State income tax, net of federal benefit (154) (1.9) (135) (2.6) (59) (2.2) Nondeductible goodwill 470 5.7 480 9.2 350 12.9 Other permanent items 13 0.2 65 1.3 140 5.2 132 19.4 ------- ----- ------- ----- ----- ----- ----- ----- Recorded tax benefit $(2,472) (30.0)% $(1,363) (26.1)% $(492) (18.1)% $(100) (14.6)% ======= ===== ======= ===== ===== ===== ===== =====
- 13 - 47 Significant components of the Company's deferred tax assets and liabilities at December 31, 2000 and 1999 are as follows:
2000 1999 Deferred tax liabilities: Accelerated tax depreciation $ 14,217,354 $ 14,379,119 Other liabilities 388,625 264,726 ------------ ------------ 14,605,979 14,643,845 ------------ ------------ Deferred tax assets: Net operating loss carryforwards 4,728,411 2,676,851 AMT credit carryforwards 956,624 956,624 Other assets 467,256 84,871 ----------- ------------ 1,423,880 3,718,346 ----------- ------------ Net deferred tax liability $(8,453,688) $(10,925,499) =========== ============
Based on management's assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings. As of December 31, 2000, the Company had federal and state operating loss carryforwards of $11,848,617 and $13,997,641, respectively. The net operating loss will expire as follows:
FEDERAL STATE 2018 $ 4,405,837 $ 5,513,593 2019 3,496,972 3,190,193 2020 3,945,808 5,293,855 ------------ ------------ $ 11,848,617 $ 13,997,641 ============ ============
7. 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, 2000, 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 exercised through December 31, 2000. As of December 31, 2000 and 1999, 1,228 and 614 options were exercisable. 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. During 1995, the Company granted options to purchase 780 shares at an exercise price of $100 per share. On March 31, 1998, the Company granted additional options to acquire the remaining 109 shares at $100 per share. All options were vested and exercised as of March 31, 1998. In accordance with the Stock Purchase - 14 - 48 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. Compensation expense of $903,680 associated with such options was recognized in the Three Months. The weighted-average fair value of the options granted under the 1998 Plan and 1995 Plan, using the Black-Scholes Option Pricing Model, with the following assumptions were:
1998 PLAN 1995 PLAN ------------ -------------------------- THREE MONTHS THREE MONTHS 1995 Fair value of options $ 171.98 $ 28.11 $ 29.74 Risk-free interest rate 5.64% 6.6% 7.1% Dividend yield 0% 0% 0% Expected volatility 0% 0% 0% Forfeiture rate 0% 0% 0% Expected life, in years 3.4 5 5
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 loss for 2000, 1999, the Nine Months, and the Predecessor's net loss for the Three Months would have been ($6,380,789), ($4,466,631), ($2,682,904), and ($217,569), respectively. 8. COMMITMENTS AND CONTINGENCIES On August 7, 2000, the 1995-2000 Basic Labor Agreement and Seniority Rules and Regulations dated August 8, 1995 between the United Steelworkers of America ("AFL-CIO") (the "USWA") and the Company expired after more than two months of negotiations over a new labor agreement. The USWA leadership called for a strike commencing at 12 p.m. on August 8, 2000. The USWA represents approximately 120 of the Company's employees. Substantially all of the employees represented by the USWA decided to strike and management has been unable to predict the strike's duration. The Company is mitigating the effects of the strike by using managers and supervisors and temporary contract employees to temporarily replace striking employees. The Company is encouraging the USWA employees to continue to work despite the absence of a new labor agreement, under the same general conditions as to wages and benefits only. Management believes its current financial resources are adequate to support the Company's operations during the strike. To date, operating time and production levels have exceeded the levels achieved prior to the strike. Expenses, which were higher than anticipated during the early weeks of the strike, have returned to levels achieved prior to the strike. Management does not expect that revenues will be adversely affected by the strike or that the Company will lose customers because of the strike. Nonetheless, Management cannot predict the exact financial impact of the strike, which will depend in part upon its duration. Additionally, if the Company and the USWA reach a new labor agreement, it is possible that certain terms of the labor agreement will result in employee expenses that are higher than those that existed before the strike. Management believes that the impact of the strike will not have a material adverse effect on the Company's financial position or results of operations. As of March 20, 2001, the Company has not achieved a settlement with the USWA. The Company leases certain property, plant, and equipment under noncancelable operating leases expiring through 2003. Future minimum lease payments under noncancelable leases as of December 31, 2000 are as follows: - 15 - 49
YEAR ENDED DECEMBER 31, 2001 $ 107,822 2002 29,562 2003 10,908 --------- $ 148,292 =========
Rent expense totaled $247,572, $284,044, $266,783, and $109,370 for 2000, 1999, the Nine Months and the Three Months, respectively. The Company is involved in routine litigation and proceedings in the normal course of business. Management believes that pending litigation matters will not have a material adverse effect on the Company's financial position or results of operations. 9. 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 2000, 1999, and the Nine Months, the Company paid CGW Management $180,000, $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 $1,350,000 million for its services in assisting the Company in structuring and negotiating the Acquisition. In connection with the exercise of stock options by certain members of management, the Company was owed $1,800,000 by management related to tax withholdings due on such compensation. Such amount was recorded as a receivable as of March 31, 1998 and was paid on June 12, 1998. 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 during the Three Months. Effective with the Acquisition, the Management Agreement was terminated. 10. RETIREMENT PLAN The Company sponsors a qualified 401(k) savings plan (the "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. During 2000, 1999, the Nine Months, and the Three Months the Company contributed $108,589, $94,204, $73,142, and $27,512, respectively, to the Plan. 11. UNAUDITED QUARTERLY FINANCIAL DATA Unaudited results of operations for each of the four quarters in 2000 and 1999 are as follows (in thousands): - 16 - 50
NET GROSS NET QUARTER ENDED SALES PROFIT (LOSS) March 31, 2000 $ 12,209 $ 1,646 $ (929) June 30, 2000 12,338 1,304 (1,192) September 30, 2000 11,867 384 (1,795) December 31, 2000 10,683 496 (1,851)(1) QUARTER ENDED March 31, 1999 $ 14,911 $ 2,070 $ (749) June 30, 1999 13,309 646 (1,541) September 30, 1999 13,271 1,115 (860) December 31, 1999 13,738 1,701 (703)
NOTES: (1) Includes a $654,148 write-off of previously capitalized costs to construct a fourth furnace. - 17 - EX-10.21 2 g68095ex10-21.txt REIMBURSEMENT AGREEMENT 1 EXHIBIT 10.21 *********************************************************************** SIMCALA, INC. REIMBURSEMENT AGREEMENT Dated as of January 12, 2001 BANK OF AMERICA, N.A. *********************************************************************** 2 TABLE OF CONTENTS
Page ---- ARTICLE I - DEFINITIONS................................................................................. 1 SECTION 1.1. DEFINITIONS.............................................................................. 1 SECTION 1.2. OTHER DEFINITIONAL PROVISIONS............................................................ 3 ARTICLE II - THE CREDIT.................................................................................. 4 SECTION 2.1. ADVANCES............................................................................... 4 SECTION 2.2. REPAYMENT OF ADVANCES.................................................................. 4 SECTION 2.3. INTEREST................................................................................ 4 SECTION 2.4. FEE..................................................................................... 4 SECTION 2.5. YIELD PROTECTION........................................................................ 5 SECTION 2.6. VERIFICATION............................................................................ 5 SECTION 2.7. COMMERCIAL PRACTICES.................................................................... 5 SECTION 2.8. MODIFICATIONS........................................................................... 6 SECTION 2.9. SEPARATE TRANSACTION.................................................................... 6 SECTION 2.10. TAXES.................................................................................. 6 ARTICLE III - PAYMENTS.................................................................................. 7 SECTION 3.1. METHOD OF PAYMENT....................................................................... 7 SECTION 3.2. PREPAYMENT.............................................................................. 7 SECTION 3.3. COMPUTATION OF INTEREST................................................................. 7 ARTICLE IV - SECURITY................................................................................... 7 SECTION 4.1. COLLATERAL.............................................................................. 7 SECTION 4.2. REGISTRATION............................................................................ 8 ARTICLE V - CONDITIONS PRECEDENT........................................................................ 8 SECTION 5.1. THE CREDIT.............................................................................. 8 ARTICLE VI - REPRESENTATIONS AND WARRANTIES............................................................. 9 SECTION 6.1. CORPORATE EXISTENCE..................................................................... 9 SECTION 6.2. FINANCIAL STATEMENTS.................................................................... 9 SECTION 6.3. CORPORATE EXISTENCE; NO BREACH.......................................................... 10 SECTION 6.4. OPERATION OF BUSINESS................................................................... 10 SECTION 6.5. LITIGATION AND JUDGMENTS................................................................ 10 SECTION 6.6. RIGHTS IN PROPERTIES; LIENS............................................................. 10 SECTION 6.7. ENFORCEABILITY.......................................................................... 10 SECTION 6.8. APPROVALS............................................................................... 10 SECTION 6.9. DEBT.................................................................................... 11 SECTION 6.10. TAXES.................................................................................. 11 SECTION 6.11. ERISA.................................................................................. 11 SECTION 6.12. DISCLOSURE............................................................................. 11 SECTION 6.13. SUBSIDIARIES........................................................................... 11 SECTION 6.14. AGREEMENTS............................................................................. 11
i 3 SECTION 6.15. COMPLIANCE WITH LAWS................................................................... 12 SECTION 6.16. INVESTMENT COMPANY ACT................................................................. 12 SECTION 6.17. PUBLIC UTILITY HOLDING COMPANY ACT..................................................... 12 ARTICLE VII - POSITIVE COVENANTS........................................................................ 12 SECTION 7.1. REPORTING REQUIREMENTS.................................................................. 12 SECTION 7.2. MAINTENANCE OF EXISTENCE; CONDUCT OF BUSINESS........................................... 14 SECTION 7.3. MAINTENANCE OF PROPERTIES............................................................... 14 SECTION 7.4. TAXES AND CLAIMS........................................................................ 14 SECTION 7.5. INSURANCE............................................................................... 14 SECTION 7.6. INSPECTION RIGHTS....................................................................... 14 SECTION 7.7. KEEPING BOOKS AND RECORDS............................................................... 14 SECTION 7.8. COMPLIANCE WITH LAWS.................................................................... 14 SECTION 7.9. COMPLIANCE WITH AGREEMENTS.............................................................. 15 SECTION 7.10. FURTHER ASSURANCES..................................................................... 15 ARTICLE VIII - NEGATIVE COVENANTS....................................................................... 15 SECTION 8.1. TRANSACTIONS WITH AFFILIATES............................................................ 15 SECTION 8.2. NATURE OF BUSINESS...................................................................... 15 ARTICLE IX - DEFAULT.................................................................................... 15 SECTION 9.1. EVENTS OF DEFAULT....................................................................... 15 SECTION 9.2. REMEDIES UPON DEFAULT................................................................... 17 ARTICLE X - MISCELLANEOUS............................................................................... 17 SECTION 10.1. EXPENSES OF LENDER..................................................................... 17 SECTION 10.2. INDEMNITY.............................................................................. 17 SECTION 10.3. LIMITATION OF LIABILITY................................................................ 18 SECTION 10.4. NO DUTY................................................................................ 18 SECTION 10.5. LENDER NOT FIDUCIARY................................................................... 18 SECTION 10.6. EQUITABLE RELIEF....................................................................... 19 SECTION 10.7. NO WAIVER; CUMULATIVE REMEDIES......................................................... 19 SECTION 10.8. SUCCESSORS AND ASSIGNS................................................................. 19 SECTION 10.9. SURVIVAL............................................................................... 19 SECTION 10.10. ENTIRE AGREEMENT: AMENDMENT; EXISTING AGREEMENT; AMENDMENTS TO SECURITY AGREEMENT..... 19 - SECTION 10.11. MAXIMUM INTEREST RATE................................................................. 20 SECTION 10.12. NOTICES............................................................................... 21 SECTION 10.13. APPLICABLE LAW........................................................................ 21 SECTION 10.14. COUNTERPARTS.......................................................................... 22 SECTION 10.15. SEVERABILITY.......................................................................... 22 SECTION 10.16. HEADINGS.............................................................................. 22 SECTION 10.17. PARTICIPATIONS........................................................................ 22 SECTION 10.18. CONSTRUCTION.......................................................................... 22 SECTION 10.19. WAIVER OF JURY TRIAL.................................................................. 22 SECTION 10.20. RELEASE............................................................................... 22
ii 4 REIMBURSEMENT AGREEMENT THIS REIMBURSEMENT AGREEMENT ("Agreement"), dated as of January 12, 2001, is between SIMCALA, INC., a Delaware corporation ("Applicant"), and BANK OF AMERICA, N.A., a national banking association formerly known as NationsBank, N.A. ("Lender"). RECITALS: Pursuant to that certain Credit Agreement dated as of March 31, 1998, between Applicant and Lender (as amended, the "Existing Agreement"), Lender heretofore issued for the account of Applicant its letter of credit number 970696 dated March 31, 1998, in favor of Regions Bank, as trustee ("Beneficiary"), in the amount of $6,147,946 by order and for the account of Applicant. Lender and Applicant desire to amend and restate in its entirety the Existing Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions Section 1.1. Definitions. As used in this Agreement, the following terms have the following meanings: "Advance" means any payment by Lender of drafts drawn and presented in accordance with the terms of the Credit. "Affiliate" means, as to any Person, any other Person (i) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (ii) that directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of such Person; or (iii) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term control means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall Lender be deemed an Affiliate of Applicant or any of its Subsidiaries. "Business Day" means any day on which commercial banks are not authorized or required to close in Dallas, Texas. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. 5 "Collateral" has the meaning specified in Section 4. 1. "Credit" means irrevocable letter of credit number 970696 issued by Lender for the account of Applicant and for the benefit of Beneficiary, in substantially the form of Exhibit "B" hereto, as the same may be amended, supplemented or modified. "Default Rate" means the sum of the Base Rate in effect from day to day plus three and one quarter percent (3.25%), but in no event to exceed the Maximum Rate. "Dollars" and "$" means lawful money of the United States of America. "Event of Default" has the meaning specified in Section 9. 1. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Loan Documents" means this Agreement and all promissory notes, security agreements, deeds of trust, assignments, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "Maximum Rate" means the maximum rate of nonusurious interest permitted from day to day by applicable law, including as to Chapter 303, Texas Finance Code (and as the same may be incorporated by reference in other Texas statutes), but otherwise without limitation, that rate based upon the "weekly rate ceiling" and calculated after taking into account any and all relevant fees, payments, and other charges in respect of the Loan Documents which are deemed to be interest under applicable law. "Note" means the promissory note of Applicant payable to the order of Lender, in substantially the form of Exhibit "A" hereto, and all extensions, renewals, and modifications thereof. "Obligated Party" means any Person who is or becomes party to any agreement that guarantees or secures payment and performance of the Obligations or any part thereof. "Obligations" means all obligations, indebtedness, and liabilities of Applicant to Lender, now existing or hereafter arising, whether direct, indirect, related, unrelated, -2- 6 fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, without limitation, the obligations, indebtedness, and liabilities of Applicant under this Agreement and the other Loan Documents, and all interest accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Person" means any individual, corporation, business trust, association, company, partnership, joint venture, governmental authority, or other entity. "Prime Rate" means, at any time, the rate of interest per annum then most recently established by Lender as its prime rate, which rate may not be the lowest rate of interest charged by Lender to its customers. "Reimbursement Obligation" means the obligation of Applicant under Section 2.2 hereof and the Note to reimburse Lender for the amount of any drawing under the Credit. "Regulatory Change" means any change after the date of this Agreement in federal, state, or foreign laws or regulations or the adoption or the making after such date of any interpretation, directive, or request applying to a class of banks including Lender of or under any federal, state, or foreign laws or regulations (whether or not having the force of law) by any court or any governmental or monetary authority charged with the interpretation or administration thereof. "Security Agreement" means the Assignment of Cash Collateral Account of Applicant dated as of January 25, 1999, as the same may be amended, supplemented, or modified. "Subsidiary" means any corporation of which more than fifty percent (50%) of the issued and outstanding securities having ordinary voting power for the election of a majority of directors is owned or controlled, directly or indirectly, by Applicant, by Applicant and one or more other Subsidiaries, or by one or more other Subsidiaries. Section 1.2. Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein", and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein, shall have the meanings specified in the Uniform Commercial Code as adopted by the State of Texas. -3- 7 ARTICLE II The Credit Section 2.1. Advances. Each payment by Lender pursuant to a drawing under the Credit shall constitute and be deemed an Advance by Lender to Applicant under this Agreement as of the day and time such payment is made by Lender and in the amount of such payment. Notwithstanding anything to the contrary contained in this Agreement, Applicant shall have no right to borrow and Lender shall have no duty to lend hereunder, except to the extent of the payment of drafts drawn and presented in accordance with the terms of the Credit. Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of Applicant to Lender resulting from each Advance made by Lender from time to time, including the amounts of principal and interest payable and paid to Lender from time to time hereunder. The entries maintained in such accounts shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of Lender to maintain such accounts or any error therein shall not in any manner effect the obligation of Applicant to repay the Obligations in accordance with the terms of this Agreement. The sole letter of credit issued under this Agreement is the Credit, and Lender shall maintain the issuance thereof in accordance with the Credit's terms. Section 2.2. Repayment of Advances. Applicant shall repay to Lender the Advances by 11:00 a.m. Central Standard Time on the date on which Lender is obligated to pay a drawing under the Credit. Section 2.3. Interest. The unpaid principal amount of the Advances shall bear interest prior to maturity at a varying rate per annum equal from day to day to the Default Rate, each such change in the rate of interest charged hereunder to become effective, without notice to Applicant, on the effective date of each change in the Prime Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest shall exceed the Maximum Rate, thereby causing the interest on the Advances to be limited to the Maximum Rate, then any subsequent reduction in the Prime Rate shall not reduce the rate of interest on the Advances below the Maximum Rate until the aggregate amount of interest accrued on the Advances equals the aggregate amount of interest which would have accrued on the Advances if the interest rate specified in clause (b) preceding had at all times been in effect. Accrued and unpaid interest on the Advances shall be due and payable on demand. Section 2.4. Fee. Applicant shall pay Lender a letter of credit fee on demand, or if no demand is sooner made, quarterly in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or portion thereof) in an amount equal to one percent (1.00%) per annum of the initial amount of the Credit, for the period during which the Credit will remain outstanding, based on a 360 day year and the actual number of days elapsed. -4- 8 Section 2.5. Yield Protection. Upon demand by Lender, Applicant shall pay to Lender from time to time such amounts as Lender may determine to be necessary to compensate it for any costs which Lender determines are attributable to its issuance of the Credit or its obligation to honor drafts drawn and presented in accordance with the terms of the Credit (such increases in costs being hereinafter referred to as "Additional Costs") resulting from any Regulatory Change which: (i) imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirements relating to letters of credit issued by, assets of, or any deposits with or other liabilities of Lender, or (ii) imposes any other condition affecting this Agreement or the Credit. Determinations and allocations by Lender of Additional Costs caused by any Regulatory Change shall, in the absence of manifest error, be conclusive and binding for all purposes as to the amount thereof. Section 2.6. Verification. Lender shall have no duty to verify or make any inquiry with regard to the truth or accuracy of any statement made in any draft or document presented to Lender under the Credit, nor shall Lender have any duty to make any inquiry into the genuineness of any signature on any such draft or document or into the due authorization of any party to execute and/or present such draft or document or to receive payment under any drafts drawn under Credit. Section 2.7. Commercial Practices. Neither Lender nor any of Lender's correspondents shall be liable or have any responsibility for: (i) the failure of any draft to bear any reference or adequate reference to the Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up the Credit or to send documents apart from drafts as required by the terms of the Credit, or the failure of any Person to note the amount of any instrument on the Credit, each of which requirements, if contained in the Credit itself, it is agreed may be waived by Lender, (ii) errors, omissions, interruptions, or delays in transmission or delivery of any messages, in person, by mail, cable, telegraph, wireless or otherwise whether or not they may be in cipher, (iii) any use which may be made of the Credit, (iv) any acts or omissions of Beneficiary (whether or not related to the Credit), (v) the validity, sufficiency, or genuineness of documents, or any endorsement(s) thereon, even if such documents should in fact prove to be in any and all respects invalid, insufficient, fraudulent, or forged, or (vi) the payment by Lender to the beneficiary of the Credit against presentation of any draft or other document that does not comply with the terms of the Credit, except, in each case, where such act or omission constitutes gross negligence or willful misconduct. Lender shall not be responsible for any act, error, neglect, default, omission, insolvency, or failure in business of any of Lender's correspondents, and the happening of any one or more of the contingencies referred to in this sentence or the preceding sentence shall not affect, impair, or prevent the vesting of any of Lender's rights or powers under this Agreement and the other Loan Documents. Lender and/or any of Lender's correspondents may receive, accept, or pay as complying with the terms of the Credit, any drafts or other documents, otherwise in order, which may be signed by, or issued to, the administrator or executor of, or the trustee in bankruptcy of, or the receiver for any of the property of, the party in whose name the Credit provides that any drafts or any other documents should be drawn or issued. In -5- 9 furtherance and extension and not in limitation of the foregoing provisions, it is hereby further agreed that any action, inaction, or omission taken or suffered by Lender, or by any of Lender's correspondents, under or in connection with the Credit or any drafts or documents referenced therein, if in good faith and in conformity with such foreign or domestic laws and customs or other regulations as Lender or any of Lender's correspondents may deem to be applicable thereto, shall be binding upon Applicant and shall not place Lender or any of Lender's correspondents under any resulting liability to Applicant. Section 2.8. Modifications. In the event of any change or modification with respect to: (i) the amount or duration of the Credit; (ii) the drawing, negotiation, presentation, acceptance, or maturity of any drafts or documents referenced in the Credit, or (iii) any of the other terms or provisions of the Credit, this Agreement shall be binding upon Applicant in all respects with regard to the Credit as so changed or modified, inclusive of any action taken by Lender or any of Lender's correspondents relative thereto. Section 2.9. Separate Transaction. Applicant hereby acknowledges that Lender has not made any representation in respect of and is not otherwise connected with the transaction underlying the issuance of the Credit, except as expressly provided herein. Applicant agrees that Lender may pay all drafts drawn and presented in accordance with the terms of the Credit notwithstanding any protests, objections, or instructions by Applicant. Section 2.10. Taxes. Applicant covenants and agrees that whether or not the Credit is issued hereunder: (a) Applicant shall pay when due, for its own account, all present and future stamp and other taxes and levies, imposts, deductions, charges, compulsory loans and withholdings howsoever imposed, assessed, levied or collected by any governmental or taxing authority, together with interest thereon and penalties with respect thereto, if any, on or relating to this Agreement, the Credit, or any other Loan Document and all payments of commissions, principal, interest, charges, fees, Reimbursement Obligation, Prepayment Obligation or other amounts made on, under or in respect thereof (all such taxes, levies, imposts, deductions, charges, compulsory loans and withholdings, and related interest and penalties, other than taxes or levies based on, imposed on, or measured by the net income or profits of Lender and other than franchise taxes, doing business taxes or minimum taxes imposed on it in the jurisdiction in which Lender is organized or the jurisdiction in which the principal office or lending office of Lender is located, being hereinafter called "Taxes"), and Applicant will promptly furnish Lender tax receipts and other evidence (if required by Lender) to demonstrate compliance with this Section 2.10. (b) Applicant will indemnify Lender against and reimburse Lender upon demand for any Taxes paid by Lender. -6- 10 (c) All payments of the Advances, the Prepayment Obligation, interest, fees, default commissions and all other amounts payable by Applicant to Lender hereunder or under any other Loan Document shall be made free and clear of and without reduction by reason of Taxes. (d) The covenants and agreements of Applicant under this Section 2.10 shall survive the payment of Applicant's other obligations under the Loan Documents and the cancellation or expiration of the Credit. ARTICLE III Payments Section 3.1. Method of Payment. All payments of principal, interest, default commission, and other amounts to be made by Applicant under this Agreement or any other Loan Document shall be made to Lender at its office at 901 Main Street, Dallas, Texas 75202, without setoff, deduction, or counterclaim, in Dollars and in immediately available funds. Applicant shall, at the time of making each such payment, specify to Lender the sums payable by Applicant under this Agreement or other Loan Document to which such payment is to be applied (and in the event Applicant fails to so specify, or if an Event of Default has occurred and is continuing, Lender may apply such payment to the Obligations in such order and manner as it may elect in its sole discretion). Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest and commitment fee, as the case may be. Section 3.2. Prepayment. Applicant may terminate the Credit at any time without premium or penalty. Section 3.3. Computation of Interest. Interest on the Advances outstanding from time to time shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. ARTICLE IV Security Section 4.1. Collateral. To secure full and complete payment and performance of the Obligations, Applicant shall execute and deliver or cause to be executed and delivered the documents described below covering the property and collateral described in this Section (which, together with any other property and collateral which may now or -7- 11 hereafter secure the Obligations or any part thereof, is sometimes herein called the "Collateral"): (a) Applicant shall grant to Lender a first priority lien on the deposit account number 3751246822 of Applicant maintained with Lender, all amounts on deposit therein, and all proceeds thereof and substitutions or replacements therefore pursuant to the Security Agreement. (b) Applicant shall execute and cause to be executed such further documents and instruments, including, without limitation, Uniform Commercial Code financing statements, as Lender, in its sole discretion, deems necessary or desirable to evidence and perfect its liens and security interests in the Collateral. Section 4.2. Registration. Lender is hereby authorized, at Lender's option and without any obligation to do so, to transfer to and/or register in the name(s) of Lender's nominee(s) all or part of any of the Collateral which may be held by Lender as security at any time for the Obligations or any part thereof, and to do so before or after maturity of any of the Obligations and with or without notice to Applicant. ARTICLE V Conditions Precedent Section 5.1. The Credit. The obligation of Lender to accept and execute this Agreement is subject to the condition precedent that Lender shall have received all of the following, each of which shall be in form and substance satisfactory to Lender: (a) Resolutions. Resolutions of the Board of Directors of Applicant certified by its Secretary or an Assistant Secretary which authorize the execution, delivery, and performance by Applicant of this Agreement and the other Loan Documents to which Applicant is or is to be a party; (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of Applicant certifying the names of the officers of Applicant authorized to sign this Agreement and each of the other Loan Documents to which Applicant is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such officers; (c) Certificate of Incorporation. The certificate of incorporation of Applicant certified by the Secretary of State of Delaware and dated as of a date current with the date of execution of this Agreement (or a certificate to the effect that no amendments to the certificate of incorporation of Applicant have been adopted since March 31, 1998); -8- 12 (d) Bylaws. The bylaws of Applicant certified by the Secretary or an Assistant Secretary of Applicant (or a certificate to the effect that no amendments to the bylaws of Applicant have been adopted since March 31, 1998); (e) Governmental Certificates. Certificates of the appropriate government officials of the state of incorporation of Applicant as to the existence and good standing of Applicant, each dated within ten (10) days prior to the date hereof; and (f) Attorneys' Fees and Expenses. Evidence that the costs and expenses (including reasonable attorneys' fees) referred to in Section 10.1, to the extent incurred, shall have been paid in full by Applicant. ARTICLE VI Representations and Warranties To induce Lender to enter into this Agreement, Applicant represents and warrants to Lender that: Section 6.1. Corporate Existence. Applicant and each Subsidiary (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation; (b) has all requisite corporate power and authority to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a material adverse effect on its business, condition (financial or otherwise), operations, prospects, or properties. Applicant has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party. Section 6.2. Financial Statements. Applicant has delivered to Lender audited consolidated financial statements of Applicant and its Subsidiaries as at and for the fiscal year ended December 31, 1999, and unaudited consolidated financial statements of Applicant and its Subsidiaries for the nine (9)-month period ended September 30, 2000. Such financial statements are true and correct, have been prepared in accordance with GAAP, and fairly and accurately present, on a consolidated basis, the financial condition of Applicant and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Applicant nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, material forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments not reflected in such financial statements. There has been no material adverse change in the business, condition (financial or otherwise), operations, prospects, or properties of Applicant or any of its Subsidiaries since the effective date of the most recent financial statements referred to in this Section. -9- 13 Section 6.3. Corporate Existence; No Breach. The execution, delivery, and performance by Applicant of this Agreement, the other Loan Documents to which Applicant is or may become a party, and the Applicant's Note and the issuance of the Credit for the account of Applicant have been duly authorized by all requisite action on the part of Applicant and do not and will not violate or conflict with the articles of incorporation or bylaws of Applicant or any law, rule, or regulation or any order, writ, injunction, or decree of any court, governmental authority or arbitrator, and do not and will not conflict with, result in a breach of, or constitute a default under, or result in the imposition of any Lien (except as provided in Article IV) upon any of the revenues or assets of Applicant or any Subsidiary pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement by which Applicant or any Subsidiary or their respective properties is bound. Section 6.4. Operation of Business. Applicant and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, where the failure to so possess could reasonably be expected to have a material adverse effect upon Applicant, and Applicant, and each of its Subsidiaries are not in violation of any valid rights of others with respect to any of the foregoing. Section 6.5. Litigation and Judgments. There is no action, suit, investigation, or proceeding before any court, governmental authority, or arbitrator pending, or to the knowledge of Applicant, threatened against or affecting Applicant or any Subsidiary, that would, if adversely determined, have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of Applicant or any Subsidiary or the ability of Applicant to pay and perform the Obligations. There are no outstanding judgments against Applicant or any Subsidiary other than a judgment against Applicant in the amount of $125,000 in favor of American Coal Trade Association. Section 6.6. Rights in Properties; Liens. Applicant and each Subsidiary have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets, and leasehold interests reflected in the financial statements described in Section 6.2. Section 6.7. Enforceability. This Agreement and the Applicant's Note constitute, and the other Loan Documents to which Applicant is party, when delivered, shall constitute, the legal, valid, and binding obligations of Applicant, enforceable against Applicant in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. Section 6.8. Approvals. No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party is or will be necessary for (i) the issuance of the Credit for the account of Applicant, (ii) for the -10- 14 execution, delivery, or performance by Applicant of this Agreement and the other Loan Documents to which Applicant is or may become a party or the validity or enforceability thereof, (iii) the execution, delivery, and performance by Applicant of the Applicant's Note, or (iv) otherwise in connection with the transactions contemplated hereby. Section 6.9. Debt. Applicant and its Subsidiaries have no Debt, except as disclosed in the financial statements of Applicant heretofore delivered to Lender. Section 6.10. Taxes. Applicant and each Subsidiary have filed all tax returns (federal, state and local) required to be filed, including all income, franchise, employment, property, and sales taxes, and have paid all of their respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable, and Applicant knows of no pending investigation of Applicant or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of Applicant or any Subsidiary. Section 6.11. ERISA. Applicant and each Subsidiary have complied with all applicable minimum funding requirements and all other applicable and material requirements of the ERISA and there are no existing conditions that would give rise to liability thereunder. No Reportable Event has occurred in connection with any Plan that might constitute grounds for the termination thereof by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Plan. Section 6.12. Disclosure. No statement, information, report, representation, or warranty made by Applicant in this Agreement or in any other Loan Document or furnished to Lender in connection with the negotiation or preparation of this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Applicant which has a material adverse effect, or which might in the future have a material adverse effect, on the business, condition (financial or otherwise), operations, prospects, or properties of Applicant or any Subsidiary that has not been disclosed in writing to Lender. Section 6.13. Subsidiaries. Applicant has no Subsidiaries. Section 6.14. Agreements. Neither Applicant nor any Subsidiary is a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which could have a material adverse effect on the business, properties, assets, operations, or conditions, financial or otherwise, of Applicant or any Subsidiary, or the ability of Applicant to pay and perform its obligations under the Loan Documents to which it is a party. Neither Applicant nor any Subsidiary is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party. -11- 15 Section 6.15. Compliance with Laws. Neither Applicant nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any court, governmental authority, or arbitrator. Section 6.16. Investment Company Act. Neither Applicant nor any Subsidiary is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 6.17. Public Utility Holding Company Act. Neither Applicant nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. ARTICLE VII Positive Covenants Applicant covenants and agrees that, as long as the Obligations or any part thereof are outstanding or Lender has any commitment hereunder, Applicant will perform and observe the following positive covenants, unless Lender shall otherwise consent in writing: Section 7.1. Reporting Requirements. Applicant will furnish to Lender: (a) Annual Financial Statements. As soon as available, and in any event within ninety (90) days after the end of each fiscal year of Applicant, beginning with the fiscal year ending December 31, 2000, (i) a copy of the annual audit report of Applicant and the Subsidiaries for such fiscal year containing, on a consolidated basis, balance sheets, statements of income, statements of retained earnings, and statements of cash flows as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited and certified by independent certified public accountants of recognized standing acceptable to Lender, to the effect that such report has been prepared in accordance with GAAP, together with Applicant's Form 10-K as filed with the Securities and Exchange Commission; and (ii) an opinion of such independent certified public accountants to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants shall concur) and which opinion shall not be limited as to the scope of the audit or qualified as to the status of Applicant as a going concern; (b) Quarterly Financial Statements. As soon as available, and in any event within forty-five (45) days after the end of each of the quarters of each fiscal year of Applicant, a copy of an unaudited financial report of Applicant and the Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended, containing, on a consolidated basis, balance sheets, -12- 16 statements of income, statements of retained earnings, and statements of cash flows, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail certified by the chief financial officer of Applicant to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operations of Applicant and the Subsidiaries, on a consolidated basis, at the date and for the periods indicated therein, together with Applicants Form 10-Q as filed with the Securities and Exchange Commission; (c) Management Letters. Promptly upon a request therefor by Lender, a copy of any management letter or written report submitted to Applicant or any Subsidiary by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects, or properties of Applicant or any Subsidiary; (d) Notice of Litigation. Promptly after the commencement thereof, notice of all material actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting Applicant or any Subsidiary which, if determined adversely to Applicant or such Subsidiary, could have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of Applicant or such Subsidiary; (e) Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of each Event of Default and each event which, with the giving of notice or lapse of time or both, would constitute an Event of Default, a written notice setting forth the details of such Event of Default or event and the action which Applicant has taken and proposes to take with respect thereto; (f) Reports to Other Creditors. Promptly after the request therefor by Lender, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to Lender pursuant to any other clause of this Section; (g) Notice of Material Adverse Effect. As soon as possible and in any event within five (5) days after the occurrence thereof, written notice of any matter that could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of Applicant or any Subsidiary; (h) General Information. Promptly, such other information concerning Applicant or any Subsidiary as Lender may from time to time reasonably request. -13- 17 Section 7.2. Maintenance of Existence; Conduct of Business. Applicant will preserve and maintain, and will cause each Subsidiary to preserve and maintain, its corporate existence and all of its leases, privileges, licenses, permits, franchises, qualifications and rights that are necessary or desirable in the ordinary conduct of its business, and conduct, and cause each Subsidiary to conduct, its business as presently conducted in an orderly and efficient manner in accordance with good business practices except where the failure to do so could not reasonably be expected to have a material adverse effect upon Applicant. Section 7.3. Maintenance of Properties. Applicant will maintain, keep, and preserve, and cause each Subsidiary to maintain, keep, and preserve, all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition. Section 7.4. Taxes and Claims. Applicant will pay or discharge, and will cause each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent (i) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (ii) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that neither Applicant nor any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established. Section 7.5. Insurance. Applicant will maintain, and will cause each Subsidiary to maintain, with financially sound and reputable insurance companies, workmen's compensation insurance, liability insurance, and insurance on its property, assets, and business at least in such amounts and against such risks as are usually insured against by Persons engaged in similar businesses. Section 7.6. Inspection Rights. At any reasonable time and from time to time during normal working hours, Applicant will permit, and will cause each Subsidiary to permit, representatives of Lender to examine and make copies of the books and records of, and visit and inspect the properties of Applicant and any Subsidiary, and to discuss the business, operations, and financial condition of Applicant and the Subsidiaries with their respective officers and employees and, with their independent certified public accountants. Section 7.7. Keeping Books and Records. Applicant will maintain, and will cause each Subsidiary to maintain, proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Section 7.8. Compliance with Laws. Applicant will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, orders, or decrees of any court, governmental authority, or arbitrator, except for instances -14- 18 of noncompliance where the failure to so comply could not reasonably be expected to have a material adverse effect upon Applicant. Section 7.9. Compliance with Agreements. Applicant will comply, and will cause each Subsidiary to comply, in all material respects with all material agreements, contracts, and instruments binding on it or affecting its properties or business. Section 7.10. Further Assurances. Applicant will execute and deliver, and will cause each Subsidiary to execute and deliver, such further instruments as may be requested by Lender to carry out the provisions and purposes of this Agreement and the other Loan Documents and to preserve and perfect the Liens of Lender in the Collateral. ARTICLE VIII Negative Covenants Applicant covenants and agrees that, as long as the Obligations or any part thereof are outstanding or Lender has any commitment hereunder, Applicant will perform and observe the following negative covenants, unless Lender shall otherwise consent in writing: Section 8.1. Transactions With Affiliates. Applicant will not enter into, and will not permit any Subsidiary to enter into, any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of Applicant or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of Applicant's or such Subsidiary's business and upon fair and reasonable terms no less favorable to Applicant or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate of Applicant or such Subsidiary. Section 8.2. Nature of Business. Applicant will not, and will not permit any Subsidiary to, engage in any business other than the businesses in which they are engaged as of the date hereof or any business reasonably related thereto. ARTICLE IX Default Section 9.1. Events of Default. Each of the following shall be deemed an "Event of Default": (a) Applicant shall fail to pay when due the Obligations or any part thereof. (b) Any representation or warranty made or deemed made by Applicant or any Obligated Party (or any of their respective officers) in any Loan -15- 19 Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made. (c) Applicant or any Obligated Party shall fail to perform, observe, or comply with any covenant, agreement or term contained in this Agreement or any other Loan Document. (d) Applicant, any Subsidiary, or any Obligated Party shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing. (e) An involuntary proceeding shall be commenced against Applicant, any Subsidiary, or any Obligated Party seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of sixty (60) days. (f) Applicant, any Subsidiary, or any Obligated Party shall fail to discharge within a period of thirty (30) days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of One Million Dollars ($1,000,000) against any of its assets or properties. (g) Applicant, any Subsidiary, or any Obligated Party shall fail to satisfy and discharge promptly any judgment or judgments against it for the payment of money in an amount in excess of One Million Dollars ($1,000,000). (h) Applicant, any Subsidiary, or any Obligated Party shall fail to pay when due any principal of or interest on any Debt (other than the Obligations), or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof. (i) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by Applicant, any Subsidiary, any Obligated Party or any of their respective shareholders, or -16- 20 Applicant or any Obligated Party shall deny that it has any further liability or obligation under any of the Loan Documents, or any lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority perfected security interest in and lien upon any of the Collateral purported to be covered thereby. Section 9.2. Remedies Upon Default. If any Event of Default shall occur, Lender may declare the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Applicant; provided, however, that upon the occurrence of an Event of Default under Section 9.1(d) or Section 9.1(e), the Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Applicant. If any Event of Default shall occur, Lender may exercise all rights and remedies available to it in law or in equity, under the Loan Documents, or otherwise. Without limiting the generality of the foregoing, if any Event of Default shall occur, Lender may, at its sole discretion, (i) sell or foreclose upon any or all of the Collateral, (ii) apply Collateral or proceeds thereof to the Obligations in such order and manner as Lender may determine in its sole discretion, and/or (iii) hold proceeds of Collateral as security for the Obligations pursuant to the terms of this Agreement and the other Loan Documents. ARTICLE X Miscellaneous Section 10.1. Expenses of Lender. Applicant hereby agrees to pay Lender on demand: (i) all costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Agreement and the other Loan Documents and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the fees and expenses of Lender's legal counsel, (ii) all costs and expenses incurred by Lender in connection with the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of Lender's legal counsel, and (iii) all other costs and expenses incurred by Lender in connection with this Agreement or any other Loan Document, including, without limitation, all costs, expenses, taxes, assessments, filing fees, and other charges levied by an governmental authority or otherwise payable in respect of this Agreement or any other Loan Document. Section 10.2. INDEMNITY. APPLICANT HEREBY INDEMNIFIES LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLDS EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, COSTS, AND EXPENSES -17- 21 (INCLUDING ATTORNEYS' FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (I) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (II) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (III) ANY ACTION TAKEN BY LENDER IN CONNECTION WITH THE CREDIT, (IV) ANY BREACH BY APPLICANT OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (V) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS SUBSTANCE LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF APPLICANT OR ANY SUBSIDIARY, OR (VI) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING. Without limiting any provision of this Agreement or of any other Loan Document, it is the express intention of the parties hereto that each Person to be indemnified under this Section shall be indemnified from and held harmless against any and all losses, liabilities, claims, damages, penalties, judgments, costs, and expenses (including attorneys' fees) arising out of or resulting from the sole or contributory negligence of the Person to be indemnified, but not resulting from the gross negligence or willful misconduct of Lender. Section 10.3. Limitation of Liability. Neither Lender nor any Affiliate, officer, director, employee, attorney, or agent of Lender shall have any liability with respect to, and Applicant hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by Applicant in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Applicant hereby waives, releases, and agrees not to sue Lender or any of Lender's Affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 10.4. No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by Lender shall have the right to act exclusively in the interest of Lender and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to Applicant or any of Applicant's shareholders or any other Person. Section 10.5. Lender Not Fiduciary. The relationship between Applicant and Lender is solely that of debtor and creditor, and Lender has no fiduciary or other special relationship with Applicant, and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between Applicant and Lender to be other than that of debtor and creditor. -18- 22 Section 10.6. Equitable Relief. Applicant recognizes that in the event Applicant fails to pay, perform, observe, or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to Lender. Applicant therefore agrees that Lender, if Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 10.7. No Waiver; Cumulative Remedies. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 10.8. Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of Lender and Applicant and their respective successors and assigns, except that Applicant may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of Lender. Lender may assign or transfer this Agreement, or any instrument(s) evidencing all or any of the Obligations and may deliver all or any of the Collateral then held as security therefor, to the transferee(s), who shall thereupon become vested with all the powers and rights in respect thereto given Lender herein or in the instrument(s) transferred, and Lender shall thereafter be forever relieved and fully discharged from any liability or responsibility with respect thereto, but Lender shall retain all rights and powers hereby given with respect to any and all instrument(s), rights, or property not so transferred. Section 10.9. Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. Without prejudice to the survival of any other obligation of Applicant hereunder, the obligations of Applicant under Sections 2.5, 2.10, 10.1, and 10.2 shall survive repayment of the Note and any cancellation or expiration of the Credit. Section 10.10. ENTIRE AGREEMENT: AMENDMENT; EXISTING AGREEMENT; Amendments to Security Agreement. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL -19- 23 AGREEMENTS AMONG THE PARTIES HERETO. The provisions of this Agreement and the other Loan Documents to which Applicant is a party may be amended or waived only by an instrument in writing signed by the parties hereto. This Agreement amends and restates in its entirety the Existing Agreement. Effective as of the date hereof, Lender has no obligation to advance further funds or issue additional letters of credit to or for the account of Borrower. Lender hereby waives any Event of Default under Section 9.1 of the Existing Agreement which occurred as a result of Applicants failure to comply with Section 7.11 of the Existing Agreement for any fiscal quarter ending on or before December 31, 2000. Subject to the satisfaction of the conditions precedent to the effectiveness of this Agreement, Lender agrees to release its security interests in all assets of Applicant other than the Collateral. Applicant hereby ratifies and confirms the Security Agreement as amended hereby and Lender's security interest in the Collateral. Effective as of the date hereof, the Security Agreement is hereby amended (a) to revise the last sentence of Section 1.02 thereof to read as follows: "The foregoing power of attorney shall be a power coupled with an interest and shall be irrevocable," (b) to revise Section 1.03 thereof to delete therefrom the following phrase: "provided, however, so long as no Default or Event of Default has occurred and is continuing, the Pledgor may withdraw any interest earned on the Account so long as the Account contains funds in an amount greater than or equal to the amount of all outstanding LOC Obligations," and substitute in lieu thereof the following: "provided, however, so long as no Default or Event of Default has occurred and is continuing, the Lender shall, on a monthly basis, deliver any interest income from the Account to an account specified by the Pledgor so long as the Account contains funds in an amount greater than or equal to the amount of all outstanding Obligations," and (c) to revise the last sentence of Section 2.01 thereof to read as follows: "The Pledgor shall not grant a security interest in or permit a lien or encumbrance upon the Collateral to anyone except the Lender." All references in the Security Agreement from and after the date hereof to the Credit Party Obligations and the LOC Obligations shall hereinafter mean references to the Obligations, all references to the Agent shall mean references to the Lender, and all references to the Credit Agreement shall mean references to this Agreement as amended, modified or restated from time to time. Upon effectiveness of this Agreement, all other Collateral Documents (as defined in the Existing Agreement) are hereby cancelled and of no force and effect. The Agent's Fee Letter (as defined in the Existing Agreement) is hereby cancelled and of no force and effect. Lender agrees to execute all UCC, release, real estate quit claims and other lien release documents as Applicant shall reasonably request, at Applicant's expense, as may be necessary or appropriate to further evidence the cancellation of such Collateral Documents and the release of lien effected hereby. Lender shall return to Applicant all capital stock pledged to secure the obligations of Applicant under the Existing Agreement. Section 10.11. Maximum Interest Rate. No provision of this Agreement or any other Loan Document shall require the payment or the collection of interest in excess of the maximum permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Document or otherwise in connection with this loan transaction, the provisions of this Section shall govern and prevail and neither Applicant nor the sureties, guarantors, successors, or -20- 24 assigns of Applicant shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event Lender ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by this Agreement; and, if the principal owing under this Agreement has been paid in full, any remaining excess shall forthwith be paid to Applicant. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Applicant and Lender shall, to the extent permitted by applicable law, (i) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness owing pursuant to this Agreement so that interest for the entire term does not exceed the Maximum Rate. Section 10.12. Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which Applicant is a party shall be given or made by telex, telegraph, telecopy, cable, or in writing and telexed, telecopied, telegraphed, cabled, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party at such other address as shall be designated by such party in a notice to the other party given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopy, subject to telephone confirmation of receipt, or delivered to the telegraph or cable office, subject to telephone confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid; provided, however, notices to Lender pursuant to Article II shall not be effective until received by Lender. Section 10.13. Applicable Law. This Agreement has been entered into in Dallas County, Texas, and shall be performable for all purposes in Dallas County, Texas. The Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 ("UCP") shall apply to the Credit. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent such laws are inconsistent with the UCP. Any action or proceeding against Applicant under or in connection with any of the Loan Documents may be brought in any state or federal court in Dallas County, Texas. Applicant hereby irrevocably (i) submits to the nonexclusive jurisdiction of such courts, and (ii) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient forum. Applicant agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of Section 10.12. Nothing herein or in any of the other Loan Documents shall affect the right of Lender to serve process in any other manner permitted by law or shall limit the right of Lender to bring any action or proceeding against Applicant or with respect to its -21- 25 property in courts in other jurisdictions. Any action or proceeding by Applicant against Lender shall be brought only in a court located in Dallas County, Texas. Section 10.14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Telecopies of signatures shall be binding and effective as originals. Section 10.15. Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 10.16. Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 10.17. Participations. Lender shall have the right at any time and from time to time to grant participations in the indebtedness owing pursuant to this Agreement and any other Loan Documents. Each participant shall be entitled to receive all information received by Lender regarding the creditworthiness of Applicant, including, without limitation, information required to be disclosed to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether the participant is subject to the circular or not). Section 10.18. Construction. Applicant and Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by Applicant and Lender. Section 10.19. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, APPLICANT HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. Section 10.20. RELEASE. (a) Applicant hereby unconditionally and irrevocably remises, acquits, and fully and forever releases and discharges Lender and all respective affiliates and subsidiaries of the Lender, its respective officers, servants, employees, agents, attorneys, principals, directors and shareholders, and their respective heirs, legal representatives, -22- 26 successors and assigns (collectively, the "Released Lender Parties") from any and all claims, demands, causes of action, obligations, remedies, suits, damages and liabilities (collectively, the "Borrower Claims") of any nature whatsoever, whether now known, suspected or claimed, whether arising under common law, in equity or under statute, which the Applicant ever had or now has against the Released Lender Parties which may have arisen at any time on or prior to the date of this Agreement and which were in any manner related to any of the Loan Documents or the enforcement or attempted enforcement by the Lender of rights, remedies or recourses related thereto. (b) Applicant covenants and agrees never to commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against any of the Released Lender Parties any action or other proceeding based upon any of the Borrower Claims which may have arisen at any time on or prior to the date of this Agreement and were in any manner related to any of the Loan Documents. (c) The agreements of Applicant set forth in this Section 10.20 shall survive termination of this Agreement. -23- 27 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. APPLICANT: SIMCALA, INC. By: /s/ R. Myles Cowan -------------------------------- Title: Chief Financial Officer ----------------------------- Address for Notices: 1940 Ohio Ferro Road ----------------------------------- Mt. Meigs, AL 36057-0068 ----------------------------------- Fax No.: (334) 215-8969 --------------------------- Telephone No.: (334) 215-7560 x228 --------------------- Attention: Myles Cowan ------------------------- LENDER: BANK OF AMERICA, N.A. By: /s/ Mike W. Colon -------------------------------- Mike W. Colon, Principal Address for Notices: TX1-492-66-01 901 Main Street, 66th Floor Dallas, Texas 75202 Fax No.: (214) 209-3533 Telephone No.: (214) 209-0931 Attention: Mike W. Colon -24- EX-10.22 3 g68095ex10-22.txt AMENDED AND RESTATED SUPPLY AGREEMENT 1 EXHIBIT 10.22 CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN DELETED AND CONFIDENTIALLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST MADE 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 THE PLACE OF SUCH CONFIDENTIAL INFORMATION. IN ADDITION, EACH OF THE EXHIBITS TO THIS AGREEMENT HAVE BEEN DELETED AND CONFIDENTIALLY FILED WITH THE COMMISSION. REVISED JANUARY 29, 2001 SUPPLY AGREEMENT BETWEEN SIMCALA, INC. AND DOW CORNING CORPORATION 2 PREAMBLE SIMCALA and Dow Corning Corporation understand the need for continuous "real" cost improvement. SIMCALA understands that Dow Corning Corporation is entering into this revised contract with the intent to purchase silicon metal between January 1, 2001, and December 31, 2005, with convincing evidence that in so doing, Dow Corning Corporation will have significantly higher value through lower costs, better quality, and consistent reliability of supply for the life of the contract than it would have with short term and/or level volume supplier arrangements. SIMCALA gains a committed long-term customer who intends to provide consistent and dependable long-term growth. SIMCALA and Dow Corning Corporation are committed to working together towards continuous improvement of value in terms of the cost, price, quality, productivity, and service related to the production and use of silicon metal. Both parties agree that the key to the success of this contract is not in mechanics but in mutual trust that these commitments to continuous improvement will be fully implemented. -2- 3 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (hereinafter "Agreement") is made and entered into as of the 1st day of January, 2001 by and between SIMCALA, INC., a Delaware Corporation located in Montgomery, Alabama (hereinafter "Seller") and DOW CORNING CORPORATION, a Michigan Corporation with headquarters in Midland, Michigan (hereinafter "Buyer"). WHEREAS, Seller is a producer of silicon metal at its Montgomery, Alabama plant and is presently producing silicon metal sold to Buyer by Seller; and WHEREAS, Seller and Buyer desire to enter into this Agreement to provide for the sale and purchase of silicon metal and further cooperation between Seller and Buyer to extend the continuous improvement in cost, quality and performance of the product; and WHEREAS, in entering into this Agreement, it is intended that Seller will continue to have a committed long term customer and the opportunity to enjoy consistent long term growth; and WHEREAS, Buyer's aim in entering into this Agreement is to keep its assured long term supply of silicon metal for the life of the Agreement and its ongoing opportunity to lower costs and obtain better quality; and WHEREAS, both Seller and Buyer remain committed to continually working toward continuous improvement in cost, price, quality and service regarding the sale and purchase of silicon metal, and the parties agree that the key to a successful Agreement is still mutual trust and commitment to continuous improvement; and WHEREAS, the sale of silicon metal and the productivity improvement sharing shall be carried out under and subject to the terms and conditions set forth hereinafter and if appropriate in a separate sub-agreement(s) as needed; NOW, THEREFORE, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, silicon metal under and subject to the following terms and conditions: 1. Effective Date. This Agreement shall become effective January 1, 2001. This Agreement supersedes in its entirety the previous supply contract between the parties which had been effective since January 1, 1998 (the "Original Supply Contract"). Seller is released from any obligation under the original supply agreement to build a 4th furnace. 2. Cooperation and Sharing. Seller and Buyer agree to use their best efforts to work together to generate productivity improvements resulting in cost savings and product performance opportunities. Both Seller and Buyer understand the need for cooperation in order obtain this goal and agree to take commercially acceptable action, -3- 4 including appointing members to quality technical teams for handling various subjects, in order to pursue the goal. Seller and Buyer agree that the appointed teams will meet at least twice per year and discuss such opportunities. All such opportunities that require a change in specifications must be real and measurable, and the measurements involved must take account of the effect on both Seller and Buyer. Cost savings opportunities shall be shared equitably by Seller and Buyer net of any capital investments required. Seller and Buyer intend to enter into separate written sub-agreements which will set forth their mutual intentions and agreements regarding each such opportunity and necessary capital investments. When cooperation generates productivity improvements, the resultant cost savings shall be reflected in the annual price adjustment provided for under Exhibit A. In addition to the annual price changes pursuant to Exhibit A, the price may be adjusted to reflect cost savings through the Formula Price Adjustment as hereinafter defined in Exhibit B. Mutually developed and approved cost savings opportunities can be implemented at any time during a "Calendar Year" which term, as used in this Supply Agreement, shall mean a twelve (12) month period from January 1 to December 31. The cost savings idea shall be evaluated for a period of not less than six (6) months following its implementation, during which time. the real and measurable savings will be verified. Such savings shall be shared equitably between Buyer and Seller. A Formula Price Adjustment can be made to the actual price then in effect following the six (6) month evaluation period. During the six (6) month evaluation period, Buyer and Seller will monitor and review monthly performance of the cost savings idea. Once such a Formula Price Adjustment has been made to the actual price, Buyer and Seller may discontinue all or part of any cost savings practice by mutual agreement set forth in a written termination agreement which shall state the reasons for such discontinuance. If Buyer and Seller agree to discontinue a cost saving practice, the actual price will be readjusted, as appropriate, beginning with the month following that month during which the cost savings practice is discontinued. 3. Quantity. Seller agrees to sell and deliver to Buyer, and Buyer agrees to purchase and receive from Seller, a minimum total quantity of silicon metal of [***] metric tons during the initial three (3) Calendar Years set forth on Exhibit D hereto (the "3 Year Minimum"). During each three (3) Calendar Year period ending December 31 in each of the years 2004 and thereafter during the term hereof, Seller shall sell and deliver to Buyer, and Buyer shall purchase and receive from Seller, a quantity of silicon metal which complies with Buyer's specifications as set forth on Exhibit C that is equal to the amount set forth opposite the last year of such three (3) year period on Exhibit D under the caption "Rolling Minimum" (the "3 Year Rolling Minimum"). 4. Incremental Volume. Quantities up to the Total Maximum Purchases as defined in Exhibit D per Calendar Year shall be understood as conventional volume -4- 5 ("Conventional Volume"). Any additional quantity of silicon metal purchased by Buyer from Seller in any Calendar Year from the production tonnages of No. 1, No. 2 or No. 3 furnaces over and above the Conventional Volume for that Calendar Year shall be incremental volume ("Incremental Volume"). Any such Incremental Volume will be added to the Conventional Volume provided for in this Agreement by means of a sub-agreement between Seller and Buyer which shall set forth the agreed upon pricing, quantities and other specifications for such Incremental Volume. 5. Quality. All of the silicon metal sold and delivered hereunder by Seller shall meet the specifications which are set forth in Exhibit C attached hereto and made a part hereof, as well as such other specifications which may be agreed upon in writing from time to time between Seller and Buyer, unless waived by Buyer. 6. Pricing. [***] 7. Term. The initial term of this Agreement (the "Term") shall be for five (5) Calendar Years commencing January 1, 2001 and, if either party issues a "notice of termination" prior to January 1, 2004, ending December 31, 2005, unless sooner terminated as provided below. If neither party issues a "notice of termination," the Term of this Agreement shall automatically continue from year to year after December 31, 2005 and may be terminated under this Section by either party submitting to the other party not less than twenty four (24) months prior written notice of such party's election to terminate this Agreement. 8. Confidentiality. This Supply Agreement and everything set forth herein, all information shared pursuant hereto between Seller and Buyer, and all related agreements and sub-agreements are and shall remain confidential and proprietary to the parties hereto, or to the disclosing party, if appropriate. All information disclosed by a party hereto under this Agreement shall be subject to the same obligations of non-disclosure and limited use by the receiving party in accordance with the terms of the Confidentiality Agreement dated July 17, 1995, between Dow Corning Corporation, Seller and Buyer, or in accordance with any present or future confidentiality agreements which may be applicable between Seller and Buyer. 9. Third Parties. Seller and Buyer understand and agree that some of the information, gains or improvements resulting from the cooperation and productivity sharing to be carried out hereunder and under any sub-agreement hereto will be applicable to the business of one or both of the parties as that business relates to third parties. Therefore, despite the provision for confidentiality set forth herein above, Seller and Buyer agree to meet and to discuss the desire of either party hereto to use information, gains or improvements in their business with third parties, and both Seller and Buyer agree that all reasonable requests or permission to so share such information, gains or improvements shall be mutually agreed to by both parties hereto and such agreement shall not be unreasonably withheld. -5- 6 10. Right to Audit. Buyer reserves the right to have Seller's records inspected by a certified public accountant agreed to by both parties at reasonable times during normal business hours to verify increases or decreases in the cost factors set forth in Exhibit A and compliance with the Best Customer Pricing clause. The certified public accountant will be instructed to only advise Buyer and Seller whether the increases or decreases are correct or incorrect according to the provisions of Exhibit A, and, if incorrect, to advise Buyer and Seller what the correct increase or decrease should be. The certified public accountant shall be advised not to reveal the facts forming the basis of his opinion regarding price increases or decreases to any party whatsoever, including Buyer, without the prior written consent of Seller. 11. Delivery and Acceptance. Delivery of the silicon metal hereunder by Seller to Buyer shall be [***] or other sources mutually approved by both parties hereto, such approval not to be unreasonably withheld. [***] 12. Specifications and Quality Control, Weight, Patents and Disclaimer. A. Product Specification and Quality Control. All of the silicon metal delivered hereunder shall conform to the specifications which are set forth in Exhibit C attached hereto and made a part hereof, unless waived by Buyer. Seller warrants that Buyer shall receive a good title to the silicon metal delivered hereunder. In the event of disqualification of the silicon metal because of failure to conform to the specifications, Buyer may suspend this Agreement at its discretion until the product is requalified by Buyer. Both parties will use their respective commercially reasonable best efforts to remedy the problems. Pending resolution of such problems, the minimum quantity of silicon metal that Buyer is obligated to purchase hereunder may at Buyer's option be adjusted downwards accordingly for that period of time. The analysis established by Seller is preliminarily binding. However, if Buyer's own sampling analysis within sixty (60) days after delivery states a deviation from the specification according to Exhibit C, then Buyer in writing immediately will give Seller the opportunity to carry out a joint sample taking. Should the parties fail to reach an agreement as to analysis, they shall jointly appoint an independent expert. The costs for the expert shall be borne by the party whose results deviates the most from the expert's analysis. B. Weight. Seller's certified weight shall govern [***]. However, Buyer reserves the right to submit any delivery to check weighing on a certified weight immediately after receipt of the material. If the value deviates [***] from the weight indicated by Seller, then Buyer will inform Seller in writing immediately about the difference, and an appropriate invoicing adjustment will be made. -6- 7 C. Patents. Notwithstanding any other limitations of liability in this Agreement, if any suit is brought against Buyer for infringement of any patents alleging that the silicon metal delivered under this Agreement or that Seller's method of manufacturing it infringes any patents, Seller shall, at its own expense, defend and control the suit against these allegations only, and shall pay any award of damages assessed against Buyer in the suit to the extent only that the damages are awarded in connection specifically with the alleged infringement, provided Buyer gives Seller prompt notice in writing of the institution of the suit and, to the full extent of the Buyer's power to do so, Buyer permits Seller to defend and control the suit against these allegations. The above fully expresses Buyer's exclusive remedy and Seller's sole liability with respect to infringement of any patent by the silicon metal delivered under this Agreement, and Seller expressly disclaims any express or implied warranty against infringement with respect to such silicon metal. In no case will Seller be liable to defend or pay any award of damages assessed against Buyer in any suit or cause of action alleging that the use of the silicon metal delivered under this Agreement infringes any patent. Buyer shall not hold Seller responsible for any claim, loss or expense arising out of Seller's compliance with any specifications furnished by Buyer with respect to the silicon metal. Notwithstanding any other limitations of liability in this Agreement, if any suit is brought against Seller for infringement of any patents alleging that Buyer's use of the silicon metal delivered under this Agreement infringes any patents, Buyer shall, at its own expense, defend and control the suit against these allegations only, and shall pay any award of damages assessed against Seller in the suit to the extent only that the damages are awarded in connection specifically with the alleged infringement, provided that Seller gives Buyer prompt notice in writing of the institution of the suit and, to the full extent of the Seller's power to do so, Seller permits Buyer to defend and control the suit against these allegations. The above fully expresses Seller's exclusive remedy and Buyer's sole liability with respect to infringement of any patent by Buyer's use of any silicon metal delivered under this Agreement, and Buyer expressly disclaims any express or implied warranty against infringement with respect to Buyer's use of silicon metal. D. Seller further warrants that it has taken adequate precautions to verify that its computer systems will properly process date calculations through the year 2000 and beyond and that its manufacture and delivery of the Goods will not be delayed or suspended due to the failure of its date calculations. E. DISCLAIMER. EXCEPT AS SPECIFIED HEREINABOVE IN THIS SECTION 12, THERE ARE NO EXPRESS WARRANTIES BY SELLER AND NO WARRANTIES BY SELLER SHALL BE IMPLIED OR OTHERWISE CREATED UNDER APPLICABLE LAW, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. -7- 8 13. Payment Terms. For all silicon metal sold, delivered and accepted hereunder, Buyer shall pay Seller, [***] of the receipt of Seller's invoice. 14. Force Majeure. A. Neither party shall be liable for its failure to perform hereunder (other than any failure to pay money) caused by contingencies beyond its reasonable control, including but not limited to acts of God, fire, floods, wars, sabotage, accidents, labor disputes (whether or not such disputes are within the power of the party to settle), serious equipment failure resulting in a full furnace outage in excess of twenty-one (21) days unless caused by a misuse or failure to perform routine maintenance or furnace power reduction in excess of thirty percent (30%) of furnace normal power for a period of twenty-eight (28) days, governmental actions, inability to obtain material, equipment or transportation and any other occurrence beyond its control. The party whose performance is prevented by such contingencies shall have the right not to perform as herein provided during the period of such contingency and the total amount of silicon metal herein provided for shall be reduced accordingly. B. If a force majeure event prohibits Seller from delivering to Buyer the quantities of Silicon Metal provided for hereunder, Seller shall deliver to Buyer that percentage of Seller's production which is equal to the percentage of Seller's production during the previous twelve (12) month period which was represented by Buyer's purchases during that time period, at a net unit price which is equal to the unit price which would have been paid by Buyer if its full purchase order had been filled. If the Buyer is required to purchase silicon metal from other sources due to a force majeure condition at the Seller, then the Buyer may reduce the contract minimum by a like amount. C. If Buyer is affected by an event of force majeure, Buyer shall purchase from Seller the quantity of silicon metal which shall be determined on the same basis as set forth in Paragraph B above. 15. Hardship. The intent of the parties is that the results of this Agreement are to be favorable to both parties over the long term, consistent with the attitude put forward in this Agreement. If during the term of this Agreement, one or both of the parties experiences unexpected or excessive hardship related to the performance of this Agreement, then both parties agree to try to resolve the hardship on a reasonable basis through mutual discussions. Hardship includes but is not limited to significant changes in costs greater than 10%, but in no event shall be related to a change in market conditions, such as supply/demand imbalances or market price changes. 16. Assignment/Successor. This Agreement may not be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld. Notwithstanding the above, Buyer may perform any of the -8- 9 obligations undertaken by it and may exercise any of the rights granted to it under this Agreement through Dow Corning Corporation, or any wholly owned subsidiary thereof; provided, however, that any act or omission of any such company with respect to this Agreement shall be deemed to be the act or omission of the Buyer. For the avoidance of doubt, any purchases by any such company shall be deemed to be purchases by the Buyer and counted towards meeting Buyer's minimum purchase obligations hereunder. In the event. of a change in the ownership or control of either party hereto, this Agreement shall remain fully enforceable according to the present terms and conditions; the other party will be notified accordingly by the affected party and should any new owner or controlling body be unacceptable to the other party, that other party may, upon notice to the affected party, terminate this Agreement with twelve (12) months written notice of termination. 17. Governing Law. The validity, interpretation and performance of this Agreement shall be governed under and in accordance with the laws of the State of Michigan. 18. Entire Agreement. As of the effective date 1 January 2001, this Agreement, along with its Exhibits, confidentiality agreement and any sub-agreements, contains the entire agreement of the parties, superseding any previous understandings, commitments or agreements, oral or written, with respect to the subject matter hereof. No modification of this Agreement or waiver of the terms and conditions hereof shall be binding upon either party unless approved in writing by an authorized representative of each party. Further, no modification of this Agreement shall be effected by the acknowledgment or acceptance of purchase order forms or releases containing other or different terms or conditions, whether or not signed by an authorized representative of each party. 19. Compliance with Law. Seller and Buyer hereby agree to comply with all provisions of all present and future laws and regulations applicable to this Agreement and its performance. 20. Relationship of the Parties. Seller and Buyer do not intend or contemplate the formation or establishment of any partnership, joint venture, pooling arrangement or other formal business organization of any kind. Nothing in this Agreement is to be construed as constituting the appointment of any party hereto as an employee or agent of the other party. Neither party shall have any right or authority to assume or to create any obligation or responsibility, as expressed or implied, on behalf of or in the name of the other party. Each party is acting hereunder solely as an independent contractor. 21. Representations of Buyer. Buyer represents and warrants to Seller that the purchase of silicon metal, including the purchase of silicon metal in the quantities and on the terms set forth herein, is a part of the regular and ordinary course of the business of Buyer, that this Agreement is made and entered into in the ordinary course of the business of Buyer, that the execution, delivery and performance of this Agreement by -9- 10 Buyer does not violate any law, rule, regulation, judicial order or decree to which Buyer is subject, that no consent or approval of any court, judicial body, governmental agency or third party to the execution, delivery or performance of this Agreement by Buyer is necessary or required, and that this Agreement is the legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. 22. Notices. Any written notice required to be provided to either of the parties hereunder shall be effective when mailed by registered or certified mail, postage prepaid, or when sent by facsimile or courier, in each case addressed to the party intended to receive the same as follows: To Seller: Simcala, Inc. P.0. Box 68 Ohio Farroalloys Rd. Mt. Meigs, AL 36057 Facsimile: (334) 215-8232 Attention: President and Chief Executive Officer To Buyer: Dow Corning Corporation 3901 S. Saginaw Rd. Midland, MI 48686-0995 Facsimile: (517) 496-1036 Attention: Global Procurement Director 23. Arbitration. If a dispute arises under this Supply Agreement which cannot be resolved by the personnel directly involved, either party may give written notice to the other designating an executive officer with appropriate authority to be its representative in negotiations relating to the dispute. Upon receipt of this notice, the other party shall, within five (5) business days, designate an executive officer with similar authority to be its representative. The designated executive officers shall, following whatever investigation each deems appropriate, promptly enter into discussions concerning the dispute. If the dispute is not resolved as a result of such discussions within ninety (90) days, such dispute shall be referred to final and binding arbitration in accordance with the commercial rules of the American Arbitration Association. Unless the parties agree otherwise in writing, such arbitration shall be held in a mutually acceptable location. The expense of arbitration shall be borne one-half (1/2) by Seller and one-half (1/2) by Buyer, unless otherwise specified in the award. Each party shall pay the fees and expenses of its own counsel, unless otherwise specified in the award. 24. Delivery/Scheduling. Seller shall deliver silicon metal to Buyer in approximately equal quarterly quantities starting in the year 2001. Prior to the beginning of each Calendar Year, Buyer shall provide Seller with a non-binding estimate of the -10- 11 quantity of silicon metal that it will purchase hereunder during each quarter of the following Calendar Year, which non-binding estimate shall be updated on a quarterly basis during the year. 25. Purchase Orders. Buyer may issue purchase orders to Seller hereunder for the silicon metal, for Buyer's administrative purposes only, and no terms and conditions contained in such purchase orders which conflict with anything in this Supply Agreement shall be effective as between Buyer and Seller. 26. Packaging. If any change in the herein agreed upon packaging is requested by Buyer, Seller shall package Products in accordance with instructions from Buyer, at Buyer's expense. 27. Counterparts. This Agreement is executed in any number of counterparts, each of which shall be deemed an original for all purposes, and all of which together shall constitute one agreement. -11- 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by representatives duly authorized as of the day and year first above written. WITNESS: SIMCALA, INC. By: /s/ C.E. Boardwine ---------------------------------- C.E. Boardwine President and Chief Executive Officer WITNESS: DOW CORNING CORPORATION By: /s/ Robert P. Krasa ---------------------------------- Robert P. Krasa Vice President -12- -----END PRIVACY-ENHANCED MESSAGE-----