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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 of incorporation) (I.R.S. Employer Identification No.)
1940 OHIO FERRO ROAD
MT. MEIGS, ALABAMA 36057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (334) 215-7560
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 [ ]
The number of shares of the registrant's Common Stock outstanding as of
November 14, 2001 was 10,889.
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PART I. FINANCIAL INFORMATION*
ITEM 1. FINANCIAL STATEMENTS
SIMCALA, INC.
CONDENSED BALANCE SHEETS
September 30, 2001 December 31, 2000
ASSETS (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 1,729,191 $ 989,201
Accounts receivable 4,698,684 5,318,822
Inventories 3,212,274 7,862,051
Other current assets 992,860 435,741
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 10,633,009 14,605,815
Restricted Cash 6,163,486 6,214,883
Property, Plant and Equipment, net of accumulated
depreciation of $15,108,865 and $11,666,262, at
September 30, 2001 and December 31, 2000, respectively 14,851,540 47,845,256
Deferred Debt Issuance Costs, net of accumulated
amortization of $2,334,505 and $1,834,254 as
of September 30, 2001 and December 30, 2000 3,287,770 3,501,756
Goodwill, net of accumulated amortization of
$3,813,401 as of December 31, 2000 -- 31,111,861
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $34,935,805 $103,279,571
===========================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Accounts payable $2,348,851$ 4,567,595
Accrued expenses and deferred revenue 1,788,823 724,603
Accrued interest payable 3,321,023 1,548,441
Senior Notes 75,000,000
Current maturities of capital leases 9,572 13,038
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 82,408,269 6,853,677
Long Term Debt and Capital Leases - Net of Current Portion 6,000,000 81,007,030
Deferred Income Taxes -- 8,453,688
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities $88,468,269 $ 96,314,395
- ---------------------------------------------------------------------------------------------------------------------------
Stockholder's Equity (Deficit)
Preferred Stock (Series B preferred stock, 3,000 shares authorized,
none issued and outstanding, $1.00 par value) -- --
Common stock, 20,000 shares authorized - 10,889 shares
issued and outstanding, par value $.01 per share 109 109
Additional paid-in capital 18,806,891 18,806,891
Accumulated deficit (72,339,404) (11,841,824)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity (deficit) (53,532,404) 6,965,176
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity (Deficit) $34,935,805 $103,279,571
===========================================================================================================================
* See Notes to Condensed Financial Statements.
2
SIMCALA, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30
(UNAUDITED)
Three months ended Three months ended
September 30, 2001 September 30, 2000
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales $ 10,739,778 $ 12,206,606
Cost of Goods Sold (including impairment
charges of $31,727,941 in 2001) 42,607,320 11,823,115
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit (Loss) (31,867,542) 383,491
Selling and Administrative Expenses (including
impairment charge of $30,064,104 in 2001) 30,983,541 989,508
- ----------------------------------------------------------------------------------------------------------------------------
Operating Loss (62,851,083) (606,017)
Interest Expense 2,059,827 2,072,784
Other Income, Net (106,459) (225,231)
- ----------------------------------------------------------------------------------------------------------------------------
Loss before Income Taxes (64,804,451) (2,453,570)
Income Tax Benefit 7,464,212 658,776
- ----------------------------------------------------------------------------------------------------------------------------
Net Loss $(57,340,239) $ (1,794,794)
============================================================================================================================
See Notes to Condensed Financial Statements.
3
SIMCALA, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30
(UNAUDITED)
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales $ 38,307,497 $ 37,357,348
Cost of Goods Sold (including impairment
charges of $31,727,941 in 2001) 68,574,985 34,023,155
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit (Loss) (30,267,488) 3,334,193
Selling and Administrative Expenses (including
impairment charge of $30,064,104 in 2001) 32,842,591 2,975,373
- ----------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (63,110,079) 358,820
Interest Expense 6,183,051 6,207,936
Other Income, Net (345,413) (713,996)
- ----------------------------------------------------------------------------------------------------------------------------
Loss before Income Taxes (68,947,717) (5,135,120)
Income Tax Benefit 8,450,077 1,219,831
- ----------------------------------------------------------------------------------------------------------------------------
Net Loss $(60,497,640) $ (3,915,289)
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4
SIMCALA, INC.
CONDENSED STATEMENTS OF CASH FLOW
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30
(UNAUDITED)
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss $(60,497,640) $(3,915,289)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,704,346 4,826,559
Non-cash impairment charge 61,792,045 --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 620,138 (173,824)
(Increase) decrease in inventories 4,649,777 (3,154,707)
Increase in other assets (557,119) (346,693)
Decrease in deferred income taxes (8,453,687) (1,219,830)
Increase in accounts payable and accrued expenses 618,056 2,417,623
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,875,916 (1,566,161)
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities -
Purchase of property, plant and equipment (2,176,828) (2,319,233)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,176,828) (2,319,233)
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities -
Decrease (increase) in restricted cash 51,397 (290,776)
Payments on non-interest-bearing debt (10,495) (10,357)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 40,902 (301,133)
- ----------------------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents 739,990 (4,186,527)
Cash and Cash Equivalents at Beginning of Period 989,201 9,819,378
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,729,191 $ 5,632,851
============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 3,987,660 $ 4,046,310
------------ -----------
See Notes to Condensed Financial Statements.
5
SIMCALA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed financial statements of SIMCALA, Inc. have been
prepared in accordance with the instructions for Form 10-Q and therefore, do not
include all information on footnotes that generally accepted accounting
principles require for complete financial statements. The unaudited condensed
financial statements should be read in conjunction with the audited financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000. In the opinion of management, the
unaudited condensed financial statements contain all necessary adjustments
(which include only normal, recurring adjustments) for a fair presentation of
the interim period presented. Operating results for the nine-months ended
September 30, 2001 are not necessarily indicative of operating results for the
entire year ending December 31, 2001. The Company is not currently able to meet
debt service requirements and has not paid interest due October 15, 2001 on its
Senior Notes 9 5/8% due 2006 (the "Notes"). The Company expects that its
existing cash balances are sufficient for its operating needs for the foreseable
future. However, with its ability to borrow under its line of credit presently
suspended, existing cash balances are insufficient to meet the Company's debt
requirements without successful renegotiation with the holders of the Notes (See
note 3).
NOTE 2 - IMPAIRMENT LOSSES
In September 2001, the Company recorded a non-cash accounting charge related to
an impairment of certain long-lived assets as required by SFAS 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." As a result of the continuing poor market conditions, the Company's view
that it now expects such conditions to continue in the near term, indications of
reduced needs of the Company's largest customer, and changes in the Company's
business leading to a restructuring of the Company's senior notes, analyses were
prepared to determine if there was impairment of any long-lived assets and
certain assets, including acquisition goodwill. These assets were associated
with the fixed assets relating to our production and the goodwill associated
with the acquisition of the Company. The revised carrying values of these assets
were calculated using valuation techniques considered appropriate by the Company
and resulted in a pre-tax non-cash charge of $61,792,045, which includes the
write-off of goodwill in the amount of $30,064,104 and write down of the
property, plant and equipment of $31,727,941. The impairment losses are based on
Company's estimates of fair value.
The SFAS 121 charge had no impact on the Company's 2001 cash flow or its ability
to generate cash flow in the future. As a result of the SFAS 121 charge,
depreciation and amortization will decrease in future periods.
NOTE 3 - DEBT RESTRUCTURING
As a result of unfavorable business conditions, the Company did not make the
interest payment due on October 15, 2001 on the Notes. As a result, the Company
has had preliminary discussions with the holders of the Notes regarding the
restructuring of the debt. The Company and its financial advisors are presently
developing a proposal to present to the holders of the senior notes which will
substantially change the terms of the Notes or exchange the Notes for other
securities, if accepted. The outcome of these discussions cannot be predicted.
Additionally, as a result of these discussions and the terms of the Company's
credit agreements, the Notes have been reclassified as a current liability.
NOTE 4 - ORGANIZATION AND OPERATIONS
The Company is a producer of silicon metal for sale to the aluminum and
silicones industries. The Company sells to customers in these industries who are
located primarily throughout the United States. During the nine months ended
September 30, 2001 and the nine months ended September 30, 2000, three customers
accounted for 49%, 23%, and 14% and 51%, 25%, and 8% of net sales, respectively.
At September 30, 2001 and December 31, 2000, three customers accounted for 49%,
17%, and 13% and 34%, 32%, and 12%, respectively, of outstanding receivables.
6
Credit is extended based on an evaluation of the customer's financial condition.
The Company maintains credit insurance for all customer accounts receivable.
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a summary of the Company's accounting policies, please refer to the
Company's Form 10-K for the year ended December 31, 2000.
NOTE 6 - INVENTORIES
As of September 30, 2001 and December 31, 2000, inventories consisted of the
following:
September 30, December 31,
2001 2000
(unaudited)
------------- ------------
Raw Materials $ 812,445 $ 714,551
Finished Goods 2,103,829 6,851,500
Supplies 296,000 296,000
---------- ----------
$3,212,274 $7,862,051
========== ==========
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. ("SFAS") 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 (as amended by SFAS 137 and SFAS
138) was effective January 1, 2001. 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.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. ("SFAS") 142, "Accounting for Goodwill and
Other Intangible Assets," effective for fiscal years beginning after December
15, 2001. SFAS 142 establishes new accounting standards for goodwill and
continues to require the recognition of goodwill as an asset but does not permit
amortization of goodwill as previously required by Accounting Principles Board
Opinion No. ("APB") 17, "Intangible Assets." SFAS 142 also establishes a new
method of testing goodwill for impairment. It requires goodwill to be separately
tested for impairment at a reporting unit level. The amount of goodwill
determined to be impaired would be expensed to current operations. The Company
intends to adopt SFAS 142 effective January 1, 2002. The Company does not
believe that the new pronouncement will have a significant impact on the
financial statements.
In August 2001, the FASB issued SFAS 144, Accounting for the impairment or
disposal of long-lived assets, which addresses financial accounting and
reporting for the impairment and disposition of long-lived assets. SFAS 144,
which supersedes SFAS 121, will become effective for fiscal years beginning
after December 15, 2001. The Company is currently assessing the impact of SFAS
144 on its financial statements.
NOTE 8 - RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparative purposes.
NOTE 9 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH CGW, ITS AFFILIATES AND CERTAIN STOCKHOLDERS
On March 31, 1998 (the "Acquisition Date") in connection with the acquisition
(the "Acquisition") of the Company by SAC Acquisition Corp. ("SAC"), a Georgia
corporation and then wholly-owned subsidiary of Simcala Holdings, Inc.
("Holdings"), CGW Southeast III, L.L.C. (the "General Partner") entered into a
consulting agreement (the
7
"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. That monthly retainer fee will no longer be paid after
September 30, 2001. The General Partner is the general partner of CGW Southeast
Partners III, L.P. ("CGW"), which in turn holds a controlling interest in
Holdings. 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
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 CGW Southeast Management, L.L.C. (the "Management
Company"), an affiliate of CGW.
Messrs. Wahlen and Kitchen 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 April 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
for the three months ended September 30, 2001 and 2000 was approximately $67,000
and $107,000, respectively, and for the nine months ended September 30, 2001 and
2000 was approximately $212,000 and $174,000, respectively.
NOTE 10 - CREDIT AGREEMENTS
On March 31, 1998, in connection with the Acquisition, the Company entered into
a Credit Agreement (the "Bank of America Credit Facility") 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, and included certain covenants regarding the Company's financial
performance. As a result of the excess supply of silicon metal in the domestic
markets, the Company was unable to satisfy these financial covenants as of
December 31, 2000. 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 contained in the Credit Facility as of December
31, 2000. 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 (the "L/C")
issued to support the Company's Industrial Revenue Bonds ("IRBs"). Subject to
the condition that the L/C remain fully cash collateralized, Bank of America
renewed the L/C 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 into negotiations with CIT Business Credit ("CIT") for a new
credit facility (the "CIT Credit Facility"). Negotiations and documentation were
completed and the CIT Credit Facility was fully available on June 29, 2001. The
CIT Credit Facility, the initial term of which is two years, provides the
Company with $10.0 million in available credit, $6.2 million of which is
reserved to provide for the L/C issued by the Company. As part of the
negotiations, Bank of America, CIT, and the Company reached an agreement whereby
the L/C currently issued by Bank of America will remain outstanding. In exchange
for the continuation of the L/C, CIT has agreed to assume the credit risk of the
L/C and to indemnify Bank of America from any risk therefrom. In exchange for
this guarantee, the Company has agreed to post cash collateral for that portion
of the $10.0 million credit facility that is reserved for the L/C and to pledge
that cash collateral to CIT for as long as the L/C remains guaranteed by CIT.
The remaining portion of the CIT Credit Facility which is supported by the
Company's accounts receivable and inventories, has been suspended and no
borrowings are available thereunder pending successful completion of the debt
restructuring negotiations with the holders of the senior notes (See note 3).
CIT has indicated to the Company that the CIT Credit Facility would be fully
available in the event of a successful restructuring but there are no assurances
that CIT will continue to make the line available to the Company.
8
Loan Covenants
The agreement governing the CIT Credit Facility and the indenture (the
"Indenture") governing the Notes 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 CIT credit facility contains covenants requiring the maintenance of a
minimum "Interest Coverage Ratio," a maximum "Secured Obligations to earnings
before interest, taxes, depreciation and amortization ("EBITDA") Ratio," and a
cross-default provision over the life of the agreement.
The "Interest Coverage Ratio" as of the last day of each fiscal quarter
of the Company must be greater than or equal to:
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Fiscal Year March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------
2001 na 0.60 0.75 0.85
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2002 0.85 0.85 0.85 0.85
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2003 0.85 1.00 1.00 1.00
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thereafter 1.00 na na na
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Interest Coverage Ratio is defined generally to mean the ratio of the Company's
consolidated EBITDA to its consolidated interest expense for the twelve-month
period ending on the last day of any fiscal quarter of the Company.
The "Secured Obligations to EBITDA Ratio" as of the last day of each
fiscal quarter of the Company must be less than or equal to:
---------------------------------------------------------------------------------------------
Fiscal Year March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------
2001 na 2.25 2.00 1.50
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2002 1.50 1.50 1.50 1.50
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2003 1.50 1.50 1.50 1.50
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thereafter 1.50 na na na
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Secured Obligations to EBITDA Ratio is defined generally to mean the ratio of
the Company's secured indebtedness to its consolidated EBITDA for the
twelve-month period ending on the last day of any fiscal quarter of the Company.
The cross-default clause provides that the occurrence of an event of default
under credit agreements involving a certain amount of indebtedness, such as the
Indenture and the IRBs, would also constitute an event of default under the CIT
Credit Facility.
As of September 30, 2001, the Company was not in compliance with the Interest
Coverage Ratio but was in compliance with the Secured Obligations to EBITDA
Ratio.
ITEM 2. 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 the three-month and nine-month periods ended September
30, 2001 in comparison to those same periods ended September 30, 2000.
Percentage changes included in the following narrative paragraphs of this Item 2
are based on the figures included in the consolidated financial statements.
The table below sets forth certain statement of operations information as a
percentage of net sales during the three- month and nine-month periods ended
September 30, 2001 and September 30, 2000:
9
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 179.0 91.1 396.7 96.9
----- ---- ----- -----
Gross profit (loss) (79.0) 8.9 (296.7) 3.1
Selling and administrative
expenses 85.7 8.0 288.5 8.1
----- ---- ----- -----
Operating loss (164.7) 0.9 (585.2) (5.0)
Interest expense 16.1 16.6 19.2 17.0
Other income, net (0.9) (1.9) (1.0) (1.8)
----- ---- ----- -----
Loss before income taxes (179.9) (13.8) (603.4) (20.2)
Income tax benefit 22.1 3.3 69.5 5.4
----- ---- ----- -----
Net Loss (157.8)% (10.9)% (533.9)% (14.8)%
========================================================
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
NET SALES
Net sales decreased by $1.5 million, or 12.0%, to $10.7 million in the three
months ended September 30, 2001 compared to $12.2 million in the same period in
2000. The Company experienced a decrease in sales volume in the third quarter of
2001, although this volume decrease was partially offset by an increase in
average selling prices for all grades of silicon metal. In the third quarter,
the Company's sales mix changed as a result of the volume reduction with more
chemical grade silicon being sold in the third quarter of 2001. This change in
sales mix accounts for the increase in average selling price. Production of
silicon metal in the third quarter of 2001 was 6,590 metric tons, compared with
9,799 metric tons produced in the third quarter of 2000, a decrease of 32.8%.
The lower production tonnage resulted from the shutdown of one of the Company's
furnaces in the third quarter of 2001 for extended maintenance. Although that
maintenance has been completed, the furnace remains shutdown due to unfavorable
market conditions.
GROSS PROFIT
Gross profit decreased by $32.3 million, to a gross loss of ($31.9) million in
the third quarter of 2001 as compared to gross profit $0.4 million in the same
period in 2000. The gross profit margin decreased to (296.7%) in the third
quarter of 2001 from 3.1% in the same period in 2000. These decreases were
principally due to an asset impairment write-off of $31.7 million taken in the
third quarter of 2001. For more information on this write-off, see Note 2 to the
Condensed Financial Statements.
Average selling price per metric ton increased by 2.8% to $1,438 in the third
quarter of 2001 from $1,399 in the same period in 2000. This increase was due to
a change in sales mix in the third quarter of 2001 resulting from lower sales of
aluminum grade silicon. Overall, the Company is experiencing continued weakness
in the secondary aluminum market and a continued influx of imported silicon, a
condition which began in early 2000 and continues today. Average production cost
per metric ton increased to $1,301 in the third quarter of 2001 compared to
$1,270 in the same period in 2000.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $30.0 million to $31.0 million in
the third quarter of 2001 from $1.0 million in the same period in 2000. The
increase was primarily the result of a goodwill impairment write-off
10
of $30.1 million taken in the third quarter of 2001. For more information on
this write-off, see Note 2 to the Condensed Financial Statements.
OPERATING LOSS
As a result of the above factors, the loss from operations increased $62.2
million to a loss from operations of $62.9 million in the third quarter of 2001
as compared to a loss from operations of $0.6 million in the same period of
2000. At the same time, the operating margin decreased to (585.2%) from (5.0%)
for the same period in the prior year.
INTEREST EXPENSE
Interest expense was materially unchanged for the three months ended September
30, 2001 when compared to the same period in 2000.
OTHER INCOME - NET
Other income - net decreased $0.1 million, or 52.7%, to $0.1 million in the
third quarter of 2001 from $0.2 million in the same period in 2000. The decrease
in other income was primarily due to lower interest income earned on short term
investments because of reduced levels of cash available for investment and
reduced "Mercedes" benefits realized by the Company in the third quarter of
2001. The Mercedes benefits recorded as Other Income stem from payroll
withholding for Alabama income tax that is retained by the Company pursuant to
an Alabama state law. The on-going strike by the United Steel Workers Union has
significantly reduced the wages paid to eligible employees and, as a result, the
amount of withholding for Alabama income tax.
INCOME TAX BENEFIT
The income tax benefit increased $6.8 million to $7.5 million in the third
quarter of 2001 as compared to $0.7 million in the same period of 2000. The
increase was primarily due to a larger taxable loss in the third quarter of
2001, as compared to the same period in 2000.
NET LOSS
As a result of the above factors, the net loss for the three months ended
September 30, 2001 was $57.3 million compared to a net loss of $1.8 million for
the same period in 2000, an increase of $55.5 million.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
NET SALES
Net sales increased by $1.0 million in the nine months ended September 30, 2001,
or 2.5%, to $38.3 million from $37.3 million for the same period in 2000. This
increase was due principally to increased sales volume in the first quarter of
2001. The impact of this volume increase on net sales was partially offset by a
reduction in average selling prices for all grades of silicon metal and a change
in sales mix resulting in a larger percentage of sales of the Company's lower
priced products. Production of silicon metal in the first nine months of 2001
was 23,401 metric tons, compared with 28,998 metric tons produced in the first
nine months of 2000, a decrease of 19.3%. The lower production tonnage resulted
from the shutdown of one of the Company's furnaces for most of the first quarter
of 2001 and the shutdown of a furnace in late June of 2001 for normal
maintenance which continued through the third quarter. During the first quarter
2001 shutdown, the Company completed extensive maintenance on two of its three
submerged-arc electric furnaces. Maintenance on the third furnace was completed
during the shutdown which began in June, but the furnace remains shutdown due to
unfavorable market conditions.
GROSS PROFIT
Gross profit decreased by $33.6 million to a gross loss of ($30.3) million in
the first nine months of 2001 as compared to $3.3 million in the same period in
2000. The gross profit margin decreased to (79.0%) in the first nine months of
2001 from 8.9% in the same period in 2000. These decreases were principally due
to the asset impairment charge taken in the third quarter of 2001. The
above-mentioned sales price and sales mix issues also adversely impacted gross
profit.
11
Average selling price per metric ton decreased to $1,380 in the first nine
months of 2001 from $1,417 in the same period in 2000 due to continued weakness
in the secondary aluminum market and a continued influx of imported silicon, a
condition which began in early 2000 and continues today. Average production cost
per metric ton increased slightly to $1,191 in the first nine months of 2001
from $1,187 in the same period in 2000. This increase resulted primarily from
reduced production volume in the period due to the extended shutdown of the
Company's furnaces for maintenance. The reduced volumes provide fewer tons over
which to spread fixed costs, causing cost per ton to rise. This increase was
offset to a large extent by improved production efficiencies with an aggressive
cost control program implemented by the Company in the third quarter of 2000.
The cost control program remains in effect today.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $29.9 million to $32.8 million in
the first nine months of 2001 from $2.9 million in the same period in 2000. The
increase was primarily the result of the goodwill impairment charge taken in the
third quarter of 2001.
OPERATING (LOSS) INCOME
As a result of the above factors, the loss from operations increased $63.5
million to a loss from operations of $63.1 million in the first nine months of
2001 as compared to income from operations of $0.4 million in the same period of
2000, while the operating margin decreased to (164.7%) from 0.9% for the same
period in the prior year.
INTEREST EXPENSE
Interest expense was materially unchanged for the nine months ended September
30, 2001 when compared to the same period in 2000.
OTHER INCOME - NET
Other income - net decreased $0.4 million, or 51.6%, to $0.3 million in the
first nine months of 2001 from $0.7 million in the same period in 2000. The
decrease in other income was primarily due to lower interest income earned on
short term investments because of reduced levels of cash available for
investment and reduced Mercedes benefits realized by the Company in the first
nine months of 2001. The Mercedes benefits recorded as Other Income stem from
payroll withholding for Alabama income tax that is retained by the Company
pursuant to an Alabama state law. The on-going strike by the United Steel
Workers Union has significantly reduced the wages paid to eligible employees and
as a result, the amount of withholding for Alabama income tax.
INCOME TAX BENEFIT
The income tax benefit increased $7.2 million to $8.4 million in the first nine
months of 2001 as compared to $1.2 million in the same period of 2000. The
increase was due to a larger taxable loss in the first nine months of 2001, as
compared to the same period in 2000.
NET LOSS
As a result of the above factors, the net loss for the nine months ended
September 30, 2001 was $60.5 million compared to a net loss of $3.9 million for
the same period in 2000, an increase of $56.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations and
available borrowings from lines of credit. The Company's principal uses of
liquidity are to fund operations and to meet debt service requirements.
12
The Company is not currently able to meet debt service requirements and has not
paid interest due on October 15, 2001 on its 9 5/8% Senior Notes due 2006 (the
"Notes"). The Company expects that its existing cash balances are sufficient for
its operating needs for the foreseable future. However, with its ability to
borrow under its line of credit presently suspended, existing cash balances are
insufficient to meet the Company's debt requirements without successful
renegotiation with the holders of the Notes (See note 3 to the Condensed
Financial Statements). As a result, the Company has engaged Jefferies and
Company, Inc. as a financial advisor to facilitate discussions with the holders
of the Notes. The outcome of these discussions cannot be predicted.
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 continues to depress prices in all aluminum markets
in which the Company competes.
Cash and cash equivalents were $1.7 million and $1.0 million at September 30,
2001 and December 31, 2000, respectively. The increase in cash in the first nine
months of 2001 is principally the result of a decrease in inventories offset by
the Company's net loss.
Depreciation and amortization was materially unchanged in the first nine months
of 2001 compared to the same period in 2000
In the first nine months of 2001, net cash provided by operating activities was
$2.9 million compared to a use of cash of ($1.6) million in the first nine
months of 2000. The increase in the first nine months of 2001 resulted primarily
from a reduction in inventory, although this was partially offset by the
Company's net loss, a reduction in accounts payable, an increase in other assets
and an increase in accrued expenses and accounts receivable. In the first nine
months of 2001 and 2000, net cash used in investing activities was $2.2 million
and $2.3 million, respectively, reflecting capital spending during the
corresponding periods of each year. In the first nine months of 2001, net cash
provided by financing activities was $0.04 million, compared to $0.3 million net
cash used in financing activities for the same period in 2000. The increase in
cash provided by financing activities in the first nine months of 2001 is the
direct result of reduced levels of Restricted Cash. Net cash used in financing
activities in both periods was insignificant.
The Senior Notes
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 in part with the net proceeds of a $75,000,000
offering (the "Offering") of the Notes. 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 subsidiary of Holdings.
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 is required to make semiannual interest payments of
approximately $3.6 million over the life of the Notes. As noted above, on
October 15, 2001, the Company failed to pay to the Bank of New York, the trustee
for the Notes (the "Trustee"), a semi-annual interest payment of approximately
$3.6 million. The Company does not intend to make this interest payment. As a
result, the failure to make a timely payment on October 15, 2001 will likely
constitute an Event of Default under the terms of the indenture (the
"Indenture") governing the Notes, once the 30 day grace period expires on
November 14, 2001.
13
Credit Agreements
On March 31, 1998, in connection with the Acquisition, the Company entered into
a Credit Agreement (the "Bank of America Credit Facility") 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, and included certain covenants regarding the Company's financial
performance. As a result of the excess supply of silicon metal in the domestic
markets, the Company was unable to satisfy these financial covenants as of
December 31, 2000. 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 contained in the Credit Facility as of December
31, 2000. 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 ("L/C") issued to
support the Company's Industrial Revenue Bonds ("IRBs"). Subject to the
condition that the L/C remain fully cash collateralized, Bank of America renewed
the L/C 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 (the "CIT Credit Facility"). Negotiations and documentation of the CIT
Credit Facility were completed and the new credit facility became fully
available on June 29, 2001. The CIT Credit Facility, the initial term of which
is two years, provides the Company with $10.0 million in available credit, $6.2
million of which is reserved to provide for the L/C issued by the Company. As
part of the negotiations, Bank of America, CIT and the Company reached an
agreement whereby the L/C currently issued by Bank of America will remain
outstanding. In exchange for the continuation of the L/C, CIT has agreed to
assume the credit risk of the L/C and to indemnify Bank of America from any risk
therefrom. In exchange for this guarantee, the Company has agreed to post cash
collateral for that portion of the $10.0 million credit facility that is
reserved for the L/C and to pledge that cash collateral to CIT for as long as
the L/C remains guaranteed by CIT. The remaining portion of the CIT Credit
Facility which is supported by the Company's accounts receivable and
inventories, has been suspended and no borrowings are available thereunder
pending successful completion of the debt restructuring negotiations with the
holders of the Notes (See note 3 to the Condensed Financial Statements). CIT has
indicated to the Company that the CIT Credit Facility would be fully available
in the event of a successful restructuring but there are no assurances that CIT
will continue to make the line available to the Company.
The IRB Financing
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 September 30, 2001, interest on the IRBs accrued at a rate equal to
approximately 2.80% 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 upgrade its furnaces and
other production facilities. The Company's manufacturing facility presently
contains three identical 20 megawatt submerged-arc electric furnaces with an
annual capacity in excess of 36,000 metric tons of silicon metal and 16,000
metric ton of microsilica. As reported in the 10-K for the year ended December
31, 2000, 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.
14
Loan Covenants
The agreement governing the CIT Credit Facility and the Indenture, limit the
Company's ability to incur additional indebtedness. Such restrictions, together
with the highly leveraged nature of the Company, could limit the Company's
ability to respond to market conditions, to meet its capital spending program,
to provide for unanticipated capital investments, or to take advantage of
business opportunities. The CIT credit facility contains covenants requiring the
maintenance of a minimum "Interest Coverage Ratio," a maximum "Secured
Obligations to earnings before interest, taxes, depreciation and amortization
("EBITDA") Ratio," and a cross-default provision over the life of the agreement.
The "Interest Coverage Ratio" as of the last day of each fiscal quarter of
the Company must be greater than or equal to:
---------------------------------------------------------------------------------------------
Fiscal Year March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------
2001 Na 0.60 0.75 0.85
---------------------------------------------------------------------------------------------
2002 0.85 0.85 0.85 0.85
---------------------------------------------------------------------------------------------
2003 0.85 1.00 1.00 1.00
---------------------------------------------------------------------------------------------
thereafter 1.00 na na na
---------------------------------------------------------------------------------------------
Interest Coverage Ratio is defined generally to mean the ratio of the Company's
consolidated EBITDA to its consolidated interest expense for the twelve-month
period ending on the last day of any fiscal quarter of the Company.
The "Secured Obligations to EBITDA Ratio" as of the last day of each fiscal
quarter of the Company must be less than or equal to:
---------------------------------------------------------------------------------------------
Fiscal Year March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------
2001 Na 2.25 2.00 1.50
---------------------------------------------------------------------------------------------
2002 1.50 1.50 1.50 1.50
---------------------------------------------------------------------------------------------
2003 1.50 1.50 1.50 1.50
---------------------------------------------------------------------------------------------
Thereafter 1.50 na na na
---------------------------------------------------------------------------------------------
Secured Obligations to EBITDA Ratio is defined generally to mean the ratio of
the Company's secured indebtedness to its consolidated EBITDA for the
twelve-month period ending on the last day of any fiscal quarter of the Company.
The cross-default clause provides that the occurrence of an event of default
under credit agreements involving a certain amount of indebtedness, such as the
Indenture and the IRBs, would also constitute an event of default under the CIT
Credit Facility.
As of September 30, 2001, the Company was not in compliance with the Interest
Coverage Ratio but was in compliance with the Secured Obligations to EBITDA
Ratio. CIT has agreed to waive noncompliance with the Interest Coverage Ratio
by amendment of the CIT Credit Facility as of November 13, 2001.
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
additional 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
September 30,
15
2001, the Fixed Charge Coverage Ratio for the most recently ended
four fiscal quarter period was less than 2.25 to 1, on a pro forma basis.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document, particularly regarding
anticipating future financial performance, business prospects, growth and
operating strategies, the effects of the Acquisition on the Company and similar
matters, and those preceded by, followed by or that otherwise include the words
"may," "would," "could," "will," "believes," "expects," "anticipates," "plans,"
"intends," "estimates," or similar expressions or variations thereof may
constitute "forward-looking statements" for purposes of the Securities Act of
1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended. For those statements, the Company claims the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve a number of
risks and uncertainties. A variety of factors, including without limitation
those discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" herein and in Item 7 of the Company's Annual Report
on Form 10-K, and in other filings by the Company with the Securities and
Exchange Commission, may affect the future results of the Company and could
cause those results to differ materially from those expressed in the
forward-looking statements.
ITEM 3. 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 Company determines
market value using a tiered approach based on quoted market prices. 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
September 30, 2001 and December 31, 2000.
Carrying Fair Hypothetical
Value Value (a) Fair Value (b)
September 30, 2001
- ------------------
Long-term debt and capital leases,
including current portion $81,009,572 $23,009,572 $24,899,572
=========== =========== ===========
December 31, 2000
- -----------------
Long-term debt and capital leases,
including, current portion $81,020,068 $34,345,068 $37,492,290
=========== =========== ===========
(a) Based on estimated market prices for these or similar items.
(b) Calculated based on the change in discounted cash flow.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On March 31, 1998 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 in party 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").
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
subsidiary of Holdings.
With respect to the $75.0 million borrowed under the Notes, the Company is
required to make semiannual interest payments of approximately $3.6 million over
the life of the Notes. On October 15, 2001, the Company failed to pay to the
Bank of New York, the trustee for the Notes a semi-annual interest payment of
approximately $3.6 million. The Company does not intend to make this interest
payment. As a result, the failure to make a timely payment on October 15, 2001
will likely constitute an Event of Default under the terms of the indenture
governing the Notes, once the 30 day grace period expires on November 14, 2001.
The Company has engaged Jefferies and Company, Inc. as a financial advisor to
facilitate discussions with the holders of the Notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 Financing Agreement dated June 15, 2001 by and between The
CIT Group/Business Credit, Inc. and Simcala, Inc.
10.2 Letter Agreement dated September 11, 2001 by and between
Jefferies & Company, Inc. and Simcala, Inc.
(b) Reports on Form 8-K
On November 9, 2001, the Company filed a Current Report on
Form 8-K, in which it reported certain events regarding
interest payments due under its 9 5/8 Senior Notes due 2006
and certain negotiations with the holders of the Senior Notes
regarding debt restructuring.
17
SIGNATURE
Pursuant to the requirements 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.
SIMCALA, Inc.
Date: November 14, 2001 /s/ R. Myles Cowan
--------------------------------------------
R. Myles Cowan
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
18