UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
METALLURG, INC
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-1661467
_______________________________ _____________________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organiz Identification No.)
6 EAST 43RD STREET
NEW YORK, NEW YORK 10017
________________________
(Address of Principal Executive Offices)
(Zip Code)
(212) 835-0200
_____________
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
The number of shares of common stock, $0.01 par value, issued and outstanding as
of September 9, 1998 was 100.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
Page No.
________
Part I. FINANCIAL INFORMATION:
Item 1 - Financial Statements (Unaudited)
Condensed Statements of Consolidated Operations for the Quarter
and the Two Quarters Ended July 31, 1998 and the Quarters Ended
July 31, 1997 and March 31, 1997 3
Condensed Statements of Consolidated Comprehensive Income for
the Quarter and the Two Quarters Ended July 31, 1998 and the
Quarters Ended July 31, 1997 and March 31, 1997 4
Condensed Consolidated Balance Sheets at July 31, 1998
and January 31, 1998 5
Condensed Statements of Consolidated Cash Flows for the
Two Quarters Ended July 31, 1998 and the Quarters Ended
July 31, 1997 and March 31, 1997 6
Notes to Condensed Unaudited Consolidated Financial Statements 7 - 14
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 -19
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF THE
SECURITY HOLDERS
Item 6. (a) EXHIBITS
6. (b) REPORT ON FORM 8-K
Signature Page
2
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Predecessor
Reorganized Company Company
---------------------------------------------------- -------------------
Quarter Two Quarters Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, March 31,
1998 1998 1997 1997
----------------- ---------------- ----------------- -------------------
Total revenue ........................................... $170,013 $337,843 $166,879 $155,587
----------------- ---------------- ----------------- -------------------
Operating costs and expenses:
Cost of sales ........................................ 142,671 281,679 142,135 134,060
Selling, general and administrative expenses ......... 15,147 29,908 14,427 15,046
Merger costs ......................................... 4,416 4,416 - -
----------------- ---------------- ----------------- -------------------
----------------- ---------------- ----------------- -------------------
Total operating costs and expenses ................... 162,234 316,003 156,562 149,106
----------------- ---------------- ----------------- -------------------
Operating income .................................. 7,779 21,840 10,317 6,481
Other income (expense):
Other income (expense), net .......................... (333) 545 (76) 3,179
Interest expense, net ................................ (2,544) (4,616) (1,479) (245)
Reorganization expense ............................... - - - (2,663)
Fresh-start revaluation .............................. - - - 5,107
----------------- ---------------- ----------------- -------------------
Income before income tax provision and
extraordinary item ................................ 4,902 17,769 8,762 11,859
Income tax provision (benefit) .......................... 3,404 9,481 5,111 (3,063)
----------------- ---------------- ----------------- -------------------
Net income before extraordinary item .................... 1,498 8,288 3,651 14,922
Extraordinary item ...................................... - - - 43,032
----------------- ---------------- ----------------- -------------------
Net income .............................................. $ 1,498 $ 8,288 $ 3,651 $ 57,954
----------------- ---------------- ----------------- -------------------
----------------- ---------------- ----------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to condensed unaudited consolidated financial statements.
3
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Predecessor
Reorganized Company Company
----------------------------------------------------
-----------------
Quarter Two Quarters Quarter Ended Quarter Ended
Ended Ended July 31, March 31, 1997
July 31, July 31, 1997
1998 1998
----------------- ---------------------------------- -----------------
Net income ............................................... $ 1,498 $8,288 $3,651 $57,954
Other comprehensive income (loss):
Foreign currency translation adjustments (a)............ (1,152) (1,076) 1,245 (1,224)
----------------- ---------------------------------- -----------------
Comprehensive income .................................... $ 346 $7,212 $4,896 $56,730
----------------- ---------------------------------- -----------------
----------------- ---------------------------------- -----------------
(a) The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
See notes to condensed unaudited consolidated financial statements.
4
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
Reorganized Company
--------------------------------------------
July 31, January 31,
1998 1998
--------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 44,423 $ 43,003
Accounts and notes receivable, net ......................... 95,192 83,931
Inventories ................................................ 121,651 117,589
Other assets ............................................... 15,708 14,239
--------------------------------------------
Total current assets .................................... 276,974 258,762
Property, plant and equipment, net ............................ 43,851 41,502
Other assets .................................................. 20,505 19,522
--------------------------------------------
TOTAL ................................................... $341,330 $319,786
--------------------------------------------
--------------------------------------------
LIABILITIES
Current liabilities:
Short-term debt and current portion
of long-term debt ....................................... $ 1,868 $ 4,016
Trade payables ............................................. 59,226 51,308
Accrued expenses ........................................... 31,559 30,575
Other current liabilities .................................. 9,262 5,106
--------------------------------------------
Total current liabilities ............................... 101,915 91,005
--------------------------------------------
Long-term debt ................................................ 102,641 103,133
Accrued pension liabilities ................................... 38,134 38,351
Environmental liabilities, net ................................ 37,161 38,527
Other liabilities ............................................. 6,618 6,999
--------------------------------------------
Total long-term liabilities ............................. 184,554 187,010
--------------------------------------------
Total liabilities ....................................... 286,469 278,015
--------------------------------------------
SHAREHOLDERS' EQUITY
Common stock .................................................. - 50
Additional paid-in capital .................................... 46,137 40,209
Accumulated other comprehensive income (loss).................. (403) 673
Retained earnings ............................................. 9,127 839
--------------------------------------------
Total shareholders' equity ................................. 54,861 41,771
--------------------------------------------
TOTAL ................................................... $341,330 $319,786
--------------------------------------------
--------------------------------------------
--------------------------------------------
- -------------------------------------------------------------------------------------------------------------
See notes to condensed unaudited consolidated financial statements.
5
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------
Predecessor
Reorganized Company Company
---------------------------------- -----------------
Two Quarters Quarter Quarter
Ended Ended Ended
July 31, July 31, March 31,
1998 1997 1997
---------------------------------- -----------------
Cash Flows from Operating Activities:
Net income ................................................... $8,288 $3,651 $57,954
Adjustments to reconcile net income to net cash provided by
operating activities: ........................................
Executive stock awards ..................................... 750 500 500
Extraordinary item ......................................... - - (43,032)
Fresh-start revaluation .................................... - - (5,107)
Depreciation and amortization .............................. 4,282 1,962 2,143
Gain on sale of assets ..................................... (592) (6) (3,266)
Reorganization expense, net of payments .................... (144) (3,989) 1,538
Deferred income taxes ...................................... 2,029 1,661 (3,767)
Provision for doubtful accounts ............................ 606 61 162
Provision for environmental costs, net of payments ......... (1,006) (393) (256)
Other, net ................................................. 2,791 1,628 3,057
---------------------------------- -----------------
Total .................................................... 17,004 5,075 9,926
Change in operating assets and liabilities:
(Increase) decrease in trade receivables ................... (12,596) 8,032 (20,272)
Increase in inventories .................................... (5,774) (8,953) (6,120)
Decrease (increase) in other current assets ................ 1,586 1,769 (355)
Increase (decrease) in trade payables and accrued expenses . 16,542 (2,890) 18,895
Decrease in prepetition liabilities ........................ - - (39)
Receipt from environmental trust, net ...................... - - 5,928
Other assets and liabilities, net .......................... (8,270) (523) (1,547)
---------------------------------- -----------------
Net cash provided by operating activities ................ 8,492 2,510 6,416
---------------------------------- -----------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ................. (6,998) (3,309) (2,774)
Proceeds from asset sales .................................. 1,286 1,205 4,966
Other, net ................................................. (2,254) 33 (25)
---------------------------------- -----------------
Net cash (used in) provided by investing activities ...... (7,966) (2,071) 2,167
---------------------------------- -----------------
Cash Flows from Financing, Merger and Reorganization
Activities:
Capital contribution from Safeguard ........................ 3,541 - -
Cash distribution pursuant to plan of reorganization ....... - - (59,366)
Drawdown of prepetition letters of credit .................. - - 9,700
Proceeds from long-term debt, net .......................... - - 8,100
Net short-term borrowings................................... (1,851) (1,608) 1,062
Repayment of long-term debt ................................ (548) (83) (487)
---------------------------------- ------------------
Net cash provided by (used in) financing and
reorganization activities ............................. 1,142 (1,691) (40,991)
---------------------------------- -----------------
Effects of exchange rate changes on cash and cash
equivalents ................................................ (248) 75 (526)
---------------------------------- ------------------
Net increase (decrease) in cash and cash equivalents ......... 1,420 (1,177) (32,934)
Cash and cash equivalents - beginning of period .............. 43,003 30,340 63,274
---------------------------------- -----------------
Cash and cash equivalents - end of period .................... $44,423 $29,163 $30,340
---------------------------------- -----------------
---------------------------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------
See notes to condensed unaudited consolidated financial statements.
6
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
- ---------------------------------------------
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.....Basis of Presentation
The accompanying condensed unaudited consolidated financial statements
include the accounts of Metallurg, Inc. ("Metallurg") and its
majority-owned subsidiaries (collectively, the "Company"). These financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information pursuant to
Accounting Principles Board Opinion No. 28. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet as of January 31, 1998 and the
condensed statements of consolidated operations and of consolidated cash
flows for the quarter ended March 31, 1997 were derived from audited
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the interim
periods presented are not necessarily indicative of the results to be
expected for a full year.
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led
by Safeguard International Fund, L.P. ("Safeguard"). The acquisition was
accomplished by Metallurg Acquisition Corp., a wholly owned subsidiary of
Metallurg Holdings, Inc. ("Metallurg Holdings"), a Delaware corporation,
merging with and into Metallurg with Metallurg being the surviving company
and Metallurg Holdings becoming the sole parent of Metallurg (the
"Merger"). Metallurg Holdings was formed on June 10, 1998 and is a wholly
owned subsidiary of Safeguard, an international private equity fund that
invests primarily in equity securities of companies in process industries.
At the time of the Merger, each outstanding share of Metallurg common
stock was converted into the right to receive $30 in cash. In connection
with the Merger, Metallurg received the consents of 100% of the registered
holders of its Senior Notes to a one-time waiver of the change of control
provisions of the Senior Note Indenture to make such provisions
inapplicable to the Merger and to amend the definition of "Permitted
Holders" under the Senior Note Indenture to reflect the post-merger
ownership of Metallurg. As of July 13, 1998, in connection with the
Merger, all of the then outstanding shares of common stock of Metallurg
were cancelled and 100 shares of common stock, $0.01 par value, were
issued to Metallurg Holdings.
On February 26, 1997, the Fourth Amended and Restated Joint Plan of
Reorganization (the "Plan") of Metallurg and one of its subsidiaries,
Shieldalloy Metallurgical Corporation ("Shieldalloy"), was confirmed by
the U.S. Bankruptcy Court for the Southern District of New York.
Transactions contemplated by the Plan were consummated on April 14, 1997
(the "Effective Date"). For financial reporting purposes, the Company has
reflected the effects of the Plan consummation as of March 31, 1997. As a
result of the consummation of the Plan and the adoption of fresh-start
reporting under the American Institute of Certified Public Accountants'
("AICPA") Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", financial statements for the
quarter ended March 31, 1997, which includes the effects of the adoption
of fresh-start reporting and consummation of the Plan are referred to as
the "Predecessor Company". Financial statements for periods subsequent to
March 31, 1997 are referred to as the "Reorganized Company". The financial
statements of the Company after consummation of the Plan are not
comparable to the Company's financial statements of prior periods and
accordingly, a black line has been used to separate the periods.
For further information, see the financial statements and footnotes
thereto included in the Company's audited consolidated financial
statements for the three quarters ended January 31, 1998 and the quarter
ended March 31, 1997.
Effective April 1, 1997, the Company changed the reporting period of
Metallurg from a calendar year ending December 31 to a fiscal year ending
January 31 and began reporting the results of its operating subsidiaries
on a one-month lag. Accordingly, the two quarters ended July 31, 1998
include worldwide operating results for the six months ended June 30, 1998
and operating results of Metallurg, the parent holding company, for the
six months ended July 31, 1998. Balance sheet data at July 31, 1998
reflect the financial position of Metallurg at July 31, 1998 and of its
subsidiaries at June 30, 1998.
2. Change of Control
Pursuant to existing employment agreements between Metallurg and Michael
A. Standen, J. Richard Budd, Michael A. Banks, Barry C. Nuss and Eric L.
Schondorf, each of these individuals is, in certain circumstances,
entitled to payments of $1.2 million, $474,300, $321,300, $321,300 and
$313,650, respectively, if their employment is terminated by them or by
the Surviving Corporation in accordance with the terms of their respective
employment agreements following the Merger. See Metallurg's Annual Report
on Form 10-K for the year ended January 31, 1998 which has been filed with
the Securities and Exchange Commission for a discussion of these
employment agreements and of certain other benefits to which these
employees may become entitled in the event of their termination.
As of August 10, 1998, Mr. Standen resigned as Metallurg's President and
chief executive officer and therefore became entitled to the payments set
forth in his contract, including the payments described above. No other
member of management has agreed to waive his right to receive the payments
described above and, therefore additional payments may need to be made
under existing contractual arrangements as described above.
3. Inventories
Inventories, net of reserves, consist of the following (in thousands):
July 31, January 31,
1998 1998
------------------- -----------------
Raw materials ................. $ 29,751 $ 32,938
Work in process ............... 2,551 1,981
Finished goods ................ 84,523 77,473
Other ......................... 4,826 5,197
------------------- -----------------
Total ..................... $121,651 $117,589
------------------- -----------------
4. Commitments and Contingencies
The Company continues defending various claims and legal actions arising
in the normal course of business, including those relating to
environmental matters. Management believes, based on the advice of
counsel, that the outcome of such litigation will not have a material
adverse effect on the Company's consolidated financial statements.
5. Earnings Per Common Share
The presentation of earnings per share is not meaningful since the Company
is a wholly owned subsidiary of Metallurg Holdings.
8
6. Recently Issued Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", as of February 1, 1998. This
standard requires the display of comprehensive income and its components
in the financial statements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 131 requires the reporting of profit and loss,
specific revenue and expense items and assets for reportable segments. It
also requires the reconciliation of total segment revenues, total segment
profit or loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. The Company will adopt this standard in the fourth quarter of
1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
About Pensions and Other Postretirement Benefits". SFAS No. 132 changes
current financial disclosure requirements from those that were required
under SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlement and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The Company
will adopt this standard in the fourth quarter of 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the impact SFAS No. 133 will have on its financial
statements.
7. Supplemental Guarantor Information
In November 1997, the Company sold $100 million principal amount of 11%
senior notes due 2007 (the "Senior Notes"). Under the terms of the Senior
Notes, Shieldalloy, Metallurg Holdings Corporation, Metallurg Services,
Inc. and MIR (China), Inc. (collectively, the "Guarantors"), wholly-owned
subsidiaries of the Company, will fully and unconditionally guarantee on a
joint and several basis the Company's obligations to pay principal,
premium and interest relative to the Senior Notes. Management has
determined that separate, full financial statements of the Guarantors
would not be material and, accordingly, such financial statements are not
provided. Supplemental financial information of the Guarantors is
presented below.
9
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JULY 31, 1998
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ---------------- -------------------- ------------------ -------------------
Total revenue ...................... $14,513 $57,205 $121,775 $(23,480) $170,013
------------------ ---------------- -------------------- ------------------ -------------------
Operating costs and expenses:
Cost of sales ................... 14,009 47,264 104,878 (23,480) 142,671
Selling, general and
administrative expenses ...... 2,009 2,718 10,420 - 15,147
Merger costs .................... 4,416 - - - 4,416
------------------ ---------------- -------------------- --------------------------------------
Total operating costs and
expenses ..................... 20,434 49,982 115,298 (23,480) 162,234
----------------------------------- -------------------- ------------------ -------------------
Operating income (loss) ............ (5,921) 7,223 6,477 - 7,779
Other income (expense):
Other income (expense), net ..... - (7) (326) - (333)
Interest income (expense), net (2,382) 316 (478) - (2,544)
Equity in earnings of
subsidiaries ................. 7,870 3,148 - (11,018) -
----------------------------------- -------------------- --------------------------------------
Income before income
tax provision ................. (433) 10,680 5,673 (11,018) 4,902
Income tax provision (benefit) ..... (1,931) 3,114 2,471 (250) 3,404
------------------ ---------------- -------------------- --------------------------------------
Net income ......................... $ 1,498 $ 7,566 $ 3,202 $(10,768) $ 1,498
------------------ ---------------- -------------------- ------------------ -------------------
------------------ ---------------- -------------------- ------------------ -------------------
10
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
----------------- ---------------- -------------------- ----------------------------------
Total revenue ...................... $26,309 $112,752 $247,902 $(49,120) $337,843
------------------ ---------------- -------------------- ----------------------------------
Operating costs and expenses:
Cost of sales ................... 24,340 92,867 213,092 (48,620) 281,679
Selling, general and
administrative expenses ...... 4,014 5,246 20,648 - 29,908
Merger costs .................... 4,416 - - - 4,416
------------------ ---------------- -------------------- ----------------------------------
Total operating costs and
expenses ..................... 32,770 98,113 233,740 (48,620) 316,003
------------------ ---------------- -------------------------------------------------------
Operating income (loss) ............ (6,461) 14,639 14,162 (500) 21,840
Other income (expense):
Other income (expense), net ..... 878 (7) (326 ) - 545
Interest income (expense), net (4,559) 554 (611) - (4,616)
Equity in earnings of
subsidiaries ................. 16,033 5,752 - (21,785) -
------------------ ---------------- -------------------------------------------------------
Income before income
tax provision ................. 5,891 20,938 13,225 (22,285) 17,769
Income tax provision (benefit) ..... (2,397) 6,280 5,848 (250) 9,481
------------------ ---------------- -------------------------------------------------------
Net income ......................... $ 8,288 $ 14,658 $ 7,377 $(22,035) $ 8,288
------------------ ---------------- -------------------- ----------------------------------
------------------ ---------------- -------------------- ----------------------------------
11
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE QUARTER ENDED JULY 31, 1998
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ---------------- -------------------- ------------------ -------------------
Net income ......................... $1,498 $7,566 $3,202 $(10,768) $ 1,498
Other comprehensive income
(loss):
Foreign currency translation
adjustment ................... (1,152) (841) (1,163) 2,004 (1,152)
------------------ ---------------- -------------------- ------------------ -------------------
Comprehensive income ............... $ 346 $6,725 $2,039 $ (8,764) $ 346
------------------ ---------------- -------------------- ------------------ -------------------
------------------ ---------------- -------------------- ------------------ -------------------
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ---------------- -------------------- ------------------ -------------------
Net income ......................... $ 8,288 $14,658 $7,377 $(22,035) $8,288
Other comprehensive income
(loss):
Foreign currency translation
adjustment ................... (1,076) (401) (1,087) 1,488 (1,076)
------------------ ---------------- -------------------- ------------------ -------------------
Comprehensive income ............... $ 7,212 $14,257 $6,290 $(20,547) $7,212
------------------ ---------------- -------------------- ------------------ -------------------
------------------ ---------------- -------------------- ------------------ -------------------
12
CONDENSED CONSOLIDATING BALANCE SHEET AT JULY 31, 1998
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ----------------- -------------------- -------------------------------------
ASSETS
Current assets:
Cash and cash equivalents ...... $ 17,775 $ 2,432 $ 24,216 $ 44,423
Accounts and notes
receivable, net ............. 39,557 64,565 69,219 $ (78,149) 95,192
Inventories .................... 7,347 43,287 75,262 (4,245) 121,651
Other assets ................... 8,302 97 7,059 250 15,708
----------------------------------- -------------------- -------------------------------------
Total current assets ....... 72,981 110,381 175,756 (82,144) 276,974
Investments - intergroup .......... 104,625 54,766 - (159,391) -
Investments - other ............... 250 - 3,351 - 3,601
Property, plant and
equipment, net ................. 982 6,866 36,003 - 43,851
Other assets ...................... 5,851 3 11,089 (39) 16,904
----------------------------------- -------------------- -------------------------------------
Total ....................... $184,689 $172,016 $226,199 $(241,574) $341,330
----------------------------------- -------------------- -------------------------------------
----------------------------------- -------------------- -------------------------------------
LIABILITIES
Current liabilities:
Short-term debt and current
portion of long-term debt .... $ 1,868 $ 1,868
Trade payables ................ $ 2,599 $ 16,828 52,927 $ (13,128) 59,226
Accrued expenses ............... 3,429 9,432 18,698 - 31,559
Loans payable - intergroup .... 22,063 16,524 36,435 (75,022) -
Other current liabilities ...... - 6,099 3,163 - 9,262
----------------------------------- -------------------- -------------------------------------
Total current liabilities ... 28,091 48,883 113,091 (88,150) 101,915
----------------------------------- -------------------- -------------------------------------
Long-term liabilities:
Long-term debt ................. 100,000 - 2,641 - 102,641
Accrued pension liabilities .... 342 1,834 35,958 - 38,134
Environmental liabilities, net - 34,196 2,965 - 37,161
Other liabilities .............. 1,395 - 5,262 (39) 6,618
----------------------------------- -------------------- -------------------------------------
Total long-term liabilities 101,737 36,030 46,826 (39) 184,554
----------------------------------- -------------------- -------------------------------------
Total liabilities ........... 129,828 84,913 159,917 (88,189) 286,469
----------------------------------- -------------------- -------------------------------------
SHAREHOLDERS' EQUITY:
Common stock outstanding ....... - 1,227 80,358 (81,585) -
Additional paid-in capital ..... 46,137 90,867 1,104 (91,971) 46,137
Accumulated other
comprehensive income.......... (403) 708 21,299 (22,007) (403)
Retained earnings (deficit) .... 9,127 (5,699) (36,479) 42,178 9,127
----------------------------------- -------------------- -------------------------------------
Shareholders' equity ........... 54,861 87,103 66,282 (153,385) 54,861
----------------------------------- -------------------- -------------------------------------
Total ....................... $184,689 $172,016 $226,199 $(241,574) $341,330
----------------------------------- -------------------- -------------------------------------
----------------------------------- -------------------- -------------------------------------
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Consolidated
------------------ ----------------------------------- ----------------
Net Cash Flows from
Operating Activities ............................. $(12,319) $8,155 $12,656 $8,492
------------------ ----------------------------------- ----------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ....... (49) (786) (6,163) (6,998)
Proceeds from asset sales ........................ 1,122 109 55 1,286
Other, net ....................................... (212) - (2,042) (2,254)
------------------ ----------------------------------- ----------------
Net cash provided by (used in) investing
activities ....................................... 861 (677) (8,150) (7,966)
------------------ ----------------------------------- ----------------
Cash Flows from Financing and Merger
Activities:
Capital contribution from Safeguard .............. 3,541 - - 3,541
Intergroup borrowings (repayments) ............... 6,691 (5,770) (921) -
Net short-term borrowings ........................ - - (1,851) (1,851)
Repayment of long-term debt ...................... - - (548) (548)
Dividends received (paid) 3,118 - (3,118) -
------------------ ----------------------------------- ----------------
Net cash provided by (used in) financing
activities ....................................... 13,350 (5,770) (6,438) 1,142
------------------ ----------------------------------- ----------------
Effects of exchange rate changes on cash
and cash equivalents ............................. - - (248) (248)
------------------ ----------------------------------- ----------------
Net increase (decrease) in cash and cash
equivalents ...................................... 1,892 1,708 (2,180) 1,420
Cash and cash equivalents -
beginning of period .............................. 15,883 724 26,396 43,003
------------------ ----------------------------------- ----------------
Cash and cash equivalents -
end of period .................................... $17,775 $2,432 $24,216 $44,423
------------------ ----------------------------------- ----------------
------------------ ----------------------------------- ----------------
14
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
On July 13, 1998, Metallurg was acquired by a group of institutional
co-investors led by Safeguard. Metallurg is now a wholly owned subsidiary of
Metallurg Holdings Inc., a Delaware corporation formed on June 10, 1998 by
Safeguard to effect the acquisition.
Effective March 31, 1997, the Company implemented fresh-start reporting relating
to its emergence from bankruptcy. Accordingly, all assets and liabilities were
restated to reflect their respective fair values and the consolidated financial
statements subsequent to that date include the related amortization of credits
associated with the fair value adjustments. The consolidated financial
statements after that date are those of a new reporting entity and are not
comparable to the pre-confirmation periods.
In addition, as a result of Metallurg's change in its fiscal year from a
calendar year to January 31, effective as of April 1, 1997, the consolidated
operating results of the Company for the two quarters ending July 31, 1998
include the results of Metallurg, Inc., the parent holding company, for the six
month period ended July 31, 1998 and the results of its operating subsidiaries
(whose fiscal years remain the calendar year) for the six month period ended
June 30, 1998. The consolidated balance sheet data of the Company at July 31,
1998 reflect the financial position of Metallurg, Inc. at July 31, 1998 and of
the operating subsidiaries at June 30, 1998.
Results of Operations
Total Revenues
- ---------------
Total revenues for Metallurg increased by 1.9%, from $166.9 million in the
quarter ended July 31, 1997 to $170.0 million in the quarter ended July 31,
1998. Increased volume and selling prices of ferrovanadium accounted for most of
the increase. In addition, revenues from increased sales of ferrotitanium and
chromium metal, due primarily to increased volume, more than offset a reduction
in sales of low carbon ferrochrome, ferroboron and polishing powders due
primarily to increased price competition.
Total revenues for Metallurg increased by 7.9%, from $155.6 million in the first
quarter of 1997 to $167.8 million in the first quarter of 1998. Increased volume
and selling prices of ferrovanadium accounted for substantially all of the
increase. In addition, revenues from increased sales of ferrotitanium and low
carbon ferrochrome, due primarily to increased volume, more than offset a
reduction in sales of ferroboron and polishing powders due to increased price
competition.
Gross Margins
- -------------
Gross margins increased from $24.7 million in the quarter ended July 31, 1997 to
$27.3 million in the quarter ended July 31, 1998, an increase of 10.5%, due
principally to the price and volume increases in ferrovanadium and
ferrotitanium. In aluminum master alloys and compacted products, a slight
decrease in volume was more than offset by improvements in product mix and
selling prices. Improvement in gross margins was partially offset by decreases
in low carbon ferrochrome margins resulting from lower selling prices and less
favorable product mix. The values of the Company's assets were reduced pursuant
to fresh-start reporting, reducing depreciation expense in each of the quarters
ended July 31, 1998 and 1997 by $0.3 million and increasing gross margins by an
equal amount.
15
Gross margins increased from $21.5 million in the first quarter of 1997 to $28.8
million in the first quarter of 1998, an increase of 33.9%, due principally to
the price and volume increases discussed above. In aluminum master alloys and
compacted products, a slight decrease in volume was more than offset by
improvements in product mix and selling prices, which offset negative production
variances. The values of the Company's assets were reduced pursuant to
fresh-start reporting, reducing depreciation expense in the quarter ended April
30, 1998 by $0.3 million and increasing gross margins by an equal amount.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A") increased from $14.4
million in the quarter ended July 31, 1997 to $15.1 million in the quarter ended
July 31, 1998, an increase of 5.0%. For the quarter ended July 31, 1997, SG&A
represented 8.7% of the Company's sales compared to 8.9% for the quarter ended
July 31, 1998. SG&A were higher in 1998 due partly to the accelerated
amortization of awards under the Stock Award and Stock Option Plan of Metallurg
issued in connection with the consummation of the Plan.
SG&A decreased from $15.0 million in the first quarter of 1997 to $14.8 million
in the first quarter of 1998, a decrease of 1.9%. For the first quarter of 1997,
SG&A represented 9.7% of the Company's sales compared to 8.8% for the first
quarter of 1998. SG&A was higher in 1997 due to increased bonus accruals and
Stock Awards incurred in connection with the consummation of the Plan and
additional costs related to the audit of March 31, 1997 financial statements.
Operating Income
- ----------------
Operating income decreased from $10.3 million in the quarter ended July 31, 1997
to $7.8 million in the quarter ended July 31, 1998, a decrease of 24.6%. The
decrease results almost entirely from the merger costs of $4.4 million incurred
in July 1998. These costs included (a) $3.5 million for payments to cancel
compensatory options; (b) $0.6 million in consent fees incurred in order to
obtain a one-time waiver of the change of control provisions of the Senior Note
Indenture and to amend the Indenture to reflect the post-Merger ownership of
Metallurg, Inc.; and (c) $0.3 million of other merger costs.
Operating income increased from $6.5 million for the first quarter of 1997 to
$14.1 million for the first quarter of 1998, an increase of 117.0%. The increase
resulted from the improvement in gross margins and decrease in SG&A, mentioned
above.
Interest Income (Expense), Net
- -------------------------------
Interest income (expense), net is as follows (in thousands):
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
July 31, April 30, July 31, March 31,
1998 1998 1997 1997
---------------- ----------------- ------------------ --------------
Interest income ........................... $ 820 $ 828 $ 947 $ 1,461
Interest expense ........................... (3,364) (2,900) (2,426) (1,706)
---
---------------- ------------------ ----------------------------------
Interest income (expense), net ......... $(2,544) $(2,072) $(1,479) $ (245)
---------------- ------------------ ----------------------------------
---------------- ----------------- ----------------------------------
Interest expense increased significantly in 1998. In each of the first two
quarters of 1998, the Company accrued approximately $2.8 million of interest
expense on $100 million aggregate principal amount of its 11% senior notes due
2007 (the "11% Senior Notes"), which were issued in November 1997. The Company
used a portion of the proceeds from the 11% Senior Notes to retire $39.5 million
of the then outstanding 12% Senior-Secured Notes of Metallurg, Inc. due 2007
(the "12% Senior-Secured Notes"). In each of the first two quarters of 1997, the
Company accrued approximately $1.2 million of interest expense on these 12%
Senior-Secured Notes. The Company did not accrue interest on debt incurred prior
to entering Chapter 11 proceedings. As a result, approximately $2.1 million of
contractual interest on these unsecured obligations, which were reported as part
of liabilities subject to compromise, was not reflected in the quarter ended
March 31, 1997.
16
Income Tax Provision (Benefit):
- -------------------------------
Income tax provision, net of tax benefits, is as follows (in thousands):
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
July 31, April 30, July 31, March 31,
1998 1998 1997 1997
---------------- ----------------- ---------------- ----------------
Total current ............................. $2,512 $4,690 $2,410 $ 704
Total deferred ............................. 892 1,387 2,701 (3,767)
---
---------------- ----------------- ------------------ -----------------
Income tax provision (benefit), net .... $3,404 $6,077 $5,111 $(3,063)
---------------- ----------------- ------------------ -----------------
---------------- ----------------- ------------------ -----------------
The differences between the statutory Federal income tax rate and the Company's
effective rate result primarily because of: (i) the excess of foreign tax rates
over the statutory Federal income tax rate; (ii) certain deductible temporary
differences which, in other circumstances would have generated a deferred tax
benefit, have been fully provided for in a valuation allowance; (iii) the
deferred tax effects of certain tax assets, primarily foreign net operating
losses, for which the benefit had been previously recognized approximating
$(0.1) million and $0.5 million in the quarters ended July 31, 1998 and April
30, 1998, respectively; and (iv) the deferred tax effects of certain deferred
tax assets for which a corresponding credit has been recorded to "Additional
paid-in capital" approximating $1.0 million and $0.9 million in the quarters
ended July 31, 1998 and April 30, 1998, respectively. The deferred tax expenses
referred to in items (iii) and (iv) above will not result in cash payments in
future periods.
Net Income
- -----------
Net income decreased from $3.7 million for the quarter ended July 31, 1997 to
$1.5 million for the quarter ended July 31, 1998. The decrease resulted
primarily from the merger costs and increased interest expense, partially offset
by increased gross margins, noted above.
Net income was $6.8 million for the first quarter of 1998 compared to $58.0
million for the first quarter of 1997. Included in the 1997 net income is an
extraordinary item of $43.0 million representing the cancellation of debt
resulting from the consummation of the Company's Reorganization Plan and a $5.1
million credit representing the effects of revaluing the Company's assets and
liabilities under fresh-start reporting. Reorganization expenses for the first
quarter of 1997 were $2.7 million. In March 1998, the Company sold its minority
investment in a Luxembourg affiliate and realized a gain of approximately $0.9
million. In the first quarter of 1997, other income included a $2.7 million gain
on the sale of the Company's New York office building.
Liquidity and Financial Resources
General
- -------
The Company's sources of liquidity include cash from operations and amounts
available under credit facilities. In addition, the Company has $44.4 million of
cash and cash equivalents at July 31, 1998. In November 1997, the Company sold
$100 million principal amount of 11% Senior Notes due 2007, the proceeds of
which were used to retire the Company's then existing 12% Senior-Secured Notes
(approximately $39.5 million), repay certain debt of the UK and German
subsidiaries (approximately $19.8 million) and to pay a cash dividend
(approximately $20.0 million). The balance of the net proceeds will be used for
general corporate purposes. The Company believes that these sources are
sufficient to fund the current and anticipated future requirements of working
capital, capital expenditures, pension benefits, potential acquisitions and
environmental expenditures through at least 1999.
17
At July 31, 1998, the Company had $44.4 million in cash and cash equivalents and
working capital of $175.1 million, as compared to $43.0 million and $167.8
million, respectively, at January 31, 1998. For the first two quarters of 1998,
the Company generated $8.5 million in cash from operations and received proceeds
of approximately $1.1 million on the sale of its Luxembourg affiliate. Capital
expenditures approximated $7.0 million in the first two quarters and in February
1998, the Company purchased an additional 5% interest in a Russian magnesium
metal producer for approximately $2.0 million.
Credit Facilities and Other Financing Arrangements
- ---------------------------------------------------
The Company has a credit facility with certain financial institutions led by
BankBoston, N.A. as agent (the "Revolving Credit Facility") which provides
Metallurg, Shieldalloy and certain of their subsidiaries with up to $50.0
million of financing resources at a rate per annum equal to (i) the Alternate
Base Rate plus 1.0% per annum (the Alternate Base Rate is the greater of the
Base Rate or the Federal Funds Effective Rate plus 0.5%) or (ii) the reserve
adjusted Eurodollar rate plus 2.5% for interest periods of one, two or three
months. The Revolving Credit Facility permits borrowings of up to $50.0 million
for working capital requirements and general corporate purposes, up to $30.0
million of which may be used for letters of credit in the U.S. At July 31, 1998,
there were no outstanding loans and $28.3 million of letters of credit
outstanding in the U.S. under the Revolving Credit Facility. On October 20,
1997, BankBoston, N.A., through its Frankfurt office, made available up to DM
20.5 million (approximately $11.3 million) of financing to certain of its German
subsidiaries (the "German Subfacility"), which is guaranteed by Metallurg and
the other U.S. borrowers under the Revolving Credit Facility.
In addition, several of the other foreign subsidiaries of Metallurg have credit
facility arrangements with local banking institutions to provide funds for
working capital and general corporate purposes. These local credit facilities
contain restrictions that vary from company to company. At July 31, 1998, there
were $0.8 million of outstanding loans under these local credit facilities.
Capital Expenditures
The Company invested $7.0 million in capital expenditures during the first two
quarters of 1998. Capital expenditures are expected to total approximately $20.0
million in 1998. Although the Company has budgeted these items in 1998, the
Company has not committed to complete these projects which are contingent on
senior management approval and other conditions. The Company believes that these
projects will be funded through internally generated cash, borrowings under the
Revolving Credit Facility and local credit lines.
Environmental Remediation Costs
In 1996, the Company elected early adoption of the AICPA Statement of Position
96-1, "Environmental Remediation Liabilities", which among other requirements,
states that losses associated with environmental remediation obligations are
accrued when such losses are deemed probable and reasonably estimable. Such
accruals generally are recognized no later than the completion of the remedial
feasibility study and are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are generally not discounted to their present value. During the
first two quarters of 1998, the Company expended $1.0 million for environmental
remediation.
18
As part of the Plan, Shieldalloy entered into settlement agreements with various
environmental regulatory authorities with regard to all of the significant
environmental remediation liabilities of which it is aware. Pursuant to these
agreements, Shieldalloy has agreed to perform environmental remediation which,
as of July 31, 1998, had an estimated cost of completion of $38.9 million. Of
this amount, approximately $2.9 million is expected to be expended in the second
half of 1998, $4.3 million in 1999 and $8.1 million in 2000. In addition, the
Company estimates it will make expenditures of $5.0 million with respect to
environmental remediation at its foreign facilities. Of this amount,
approximately $0.5 million is expected to be expended in the second half of
1998, $0.7 million in 1999 and $0.7 million in 2000.
Year 2000 Compliance
Metallurg has completed an internal review of its and its subsidiaries'
information technology systems in connection with its assessment of Year 2000
compliance. Metallurg is in the process of replacing or modifying some of the
management and accounting systems at its subsidiaries to upgrade them generally
and to make them Year 2000 compliant. Metallurg expects to spend between $1.0
million and $2.0 million on these systems changes. Metallurg expects that the
information technology systems for all of its subsidiaries will be Year 2000
compliant by March 31, 1999. Metallurg is currently assessing whether any of
its non-information technology will need to be modified to become Year 2000
compliant.
Metallurg has not received written assurances from its significant suppliers and
customers to determine the state of their readiness with regard to Year 2000
compliance. Metallurg believes that they will be prepared for Year 2000 based
on Metallurg's normal interactions with its customers and suppliers and because
of the wide attention which the issue has received. Metallurg has not yet seen
the need for contingency plans for the Year 2000 issue, but this need will
continue to be monitored as Metallurg obtains more information about the state
of readiness of its suppliers and customers.
Metallurg presently believes that the Year 2000 issue will not pose
significant operational problems for its business systems. However, if any
needed modifications and conversions were not made, or were not completed
timely, the Year 2000 issue could have an adverse impact on the Metallurg's
operations and liquidity. If any of Metallurg's suppliers or customers do not,
or if Metallurg itself does not, successfully deal with the Year 2000 issue,
Metallurg could experience delays in receiving or shipping products and in
receiving payments. The severity of these possible problems would depend on the
nature of the problem and how quickly it could be corrected or an alternative
implemented, which is unknown at this time.
The anticipated costs for Metallurg to become Year 2000 compliant and
the anticipated timing for Metallurg to complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including timely performance by third parties who
will provide Metallurg with the software for its new systems. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability
to locate and correct all relevant computer codes, the ability to successfully
integrate new business systems with existing operations and similar
uncertainties. Some risks of the Year 2000 issue are beyond the control of
Metallurg and its suppliers and customers. In particular, Metallurg cannot
predict the effect that the Year 2000 issue will have on the general economy.
19
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of the Security Holders
......Election of Directors
(a) The 1998 annual meeting of stockholders was held on June 10, 1998.
(b) All of the Company's nominees, as set forth below, were elected.
There was no solicitation in opposition to the Company's
nominees.
(c) The sole matter voted on at the 1998 annual meeting of
shareholders was the election of directors. Set forth below are
the number of votes cast for each director.
Director Votes For Voted Against or Abstentions Broker
Withheld Non-Votes
Michael A. Standen 2,957,756 193 ----- -----
Alan D. Ewart 2,957,915 34 ----- -----
Jon R. Bauer 2,957,915 34 ----- -----
Peter A. Langerman 2,957,915 34 ----- -----
Herbert E. Seif 2,957,915 34 ----- -----
Acquisition of Metallurg, Inc.
On June 15, 1998, Metallurg, Metallurg Holdings and Metallurg
Acquisition Corp. ("Metallurg Acquisition") entered into a merger
agreement (the "Merger Agreement"). On July 13, 1998, pursuant to the
Merger Agreement, Metallurg Acquisition merged with and into Metallurg,
with Metallurg being the surviving corporation of the merger (the
"Merger"). Upon consummation of the Merger, each share of Metallurg's
outstanding common stock was converted into the right to receive $30.00
in cash. Upon consummation of the Merger, Metallurg Holdings became the
owner of 100% of the outstanding common stock of Metallurg. Metallurg
Holdings is owned by a group led by Safeguard International. Safeguard
International is an international public equity fund based in Wayne,
Pennsylvania.
On June 18, Metallurg, Inc. received written consent from holders of
4,243,280 shares who voted for the Plan and Agreement of Merger dated
June 15, 1998 by and among, Metallurg, Metallurg Holdings, and
Metallurg Acquisition. No holders of shares abstained or withheld
consent with respect to such vote.
Item 6. (a) EXHIBITS
27 Financial Data Schedule
6. (b) REPORT ON FORM 8-K
1. Form 8-K dated June 15, 1998 (filed on June 16, 1998)
announcing that Metallurg had entered into a merger
agreement with Metallurg Holdings and Metallurg
Acquisition pursuant to which Metallurg Acquisition
merged with and into Metallurg with Metallurg being
the Surviving Corporation of the Merger. Upon
consummation of the Merger, each share of Metallurg's
outstanding common stock was converted into the right
to receive $30.00 in cash. Upon consummation of the
Merger, Metallurg Holdings became the owner of 100%
of the outstanding common stock of Metallurg.
20
2. Form 8-K/A (filed on July 2, 1998) relating to Press
Releases dated June 19, 1998 regarding the financing
of the Merger by Metallurg Holdings and the
Commencement of a Consent Solicitation of the 11%
Senior Notes.
3. Form 8-K/A (filed July 21, 1998) relating to Press
Release dated July 13, 1998 announcing consummation
of Merger transaction.
4. Form 8-K dated August 10, 1998 (filed August 12,
1998) announcement of new management team of
Metallurg.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on September 9, 1998 on its
behalf by the undersigned thereunto duly authorized.
METALLURG, INC.
/s/ BARRY C. NUSS
-------------------------------
Barry C. Nuss
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
22