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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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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]
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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.
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SIMCALA, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2000
Table of Contents
Item Page
Number Number
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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
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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
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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
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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
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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.
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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.
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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
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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.
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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.
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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
- ----------
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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 $100,000
(collectively, the "Named Executive Officers"). The Company did not grant any
stock appreciation rights or make any long-term incentive plan payouts during
the periods shown.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------- -------------------------------------------
AWARDS
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) 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)
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(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
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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%
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(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
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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
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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.
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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.
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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
=========== ===========
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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
===========
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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.
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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)%
======= ===== ======= ===== ===== ===== ===== =====
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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
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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:
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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):
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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.
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