<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1998
REGISTRATION NO. 333-60077
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
METALLURG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 23-29675771
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
800 THE SAFEGUARD BUILDING
435 DEVON PARK DRIVE
WAYNE, PENNSYLVANIA 19087
(610) 293-0838
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ARTHUR R. SPECTOR
VICE PRESIDENT
METALLURG HOLDINGS, INC.
800 THE SAFEGUARD BUILDING
435 DEVON PARK DRIVE
WAYNE, PENNSYLVANIA 19087
(610) 293-0838
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
SAMUEL M. FEDER, ESQ.
ROGERS & WELLS LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 878-8000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the exchange offer ("Exchange Offer") pursuant to the registration
agreement (the "Registration Agreement") described in the enclosed Prospectus
have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE(2)(3)
<S> <C> <C> <C> <C>
12 3/4% Series B Senior Discount Notes due
2008........................................... $121,000,000 53.865% $65,176,650 $19,234
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee under the
Securities Act of 1933.
(2) Calculated pursuant to Rule 457(f)(2).
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 14, 1998
OFFER TO EXCHANGE 12 3/4% SERIES B SENIOR DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
ANY AND ALL OUTSTANDING 12 3/4% SERIES A SENIOR DISCOUNT NOTES DUE 2008
($121,000,000 PRINCIPAL AMOUNT OUTSTANDING AT MATURITY)
OF
METALLURG HOLDINGS, INC.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
NOVEMBER 25, 1998 (AS SUCH DATE MAY BE EXTENDED,
THE "EXPIRATION DATE").
Metallurg Holdings, Inc. (the "Issuer") hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange an aggregate of up to $121,000,000 principal amount
at maturity of 12 3/4% Series B Senior Discount Notes due 2008 (the "New Notes")
for an identical face amount of the outstanding 12 3/4% Series A Senior Discount
Notes due 2008 (the "Old Notes" and, with the New Notes, the "Notes"). The
issuance of the Old Notes generated gross proceeds of approximately $65.2
million to the Issuer. The terms of the New Notes are identical in all material
respects to the terms of the Old Notes except that the rights relating to the
exchange of Old Notes for New Notes and the restrictions on transfer set forth
on the Old Notes will not appear on the New Notes. See "The Exchange Offer." The
New Notes are being offered hereunder in order to satisfy certain obligations of
the Issuer under a Registration Agreement dated as of July 13, 1998 (the
"Registration Agreement") between the Issuer and BancBoston Securities Inc. (the
"Initial Purchaser"). Based on an interpretation by the staff of the Securities
and Exchange Commission (the "Commission") set forth in no-action letters issued
to third parties unrelated to the Issuer, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold, and
otherwise transferred by a holder thereof (other than a holder which is an
"affiliate" of the Issuer within the meaning of Rule 405, under the Securities
Act of 1933, as amended (the "Securities Act"), without compliance with the
registration and the prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement with any person to
participate in or is engaged in the distribution of such New Notes.
The New Notes will mature on July 15, 2008. Commencing July 15, 2003, the
New Notes will accrue cash interest at the rate of 12 3/4% per annum, payable
semiannually in arrears on January 15 and July 15 of each year, commencing
January 15, 2004. The New Notes will be redeemable at the option of the Issuer,
in whole or in part, in cash, at any time on or after July 15, 2003, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any, to the date of redemption. In
addition, prior to July 15, 2001, up to 34% of the aggregate principal amount at
maturity of the New Notes originally issued may be redeemed at the option of the
Issuer, in whole or in part, at any time and from time to time, at 112.750% of
the Accreted Value (as defined herein) thereof, plus Liquidated Damages, if any,
thereon to the date of redemption, with the net proceeds of one or more Public
Equity Offerings (as defined herein) following which there is a Public Market
(as defined herein), provided that at least 66% of the aggregate principal
amount at maturity of the New Notes originally issued remains outstanding
immediately after such redemption. In the event of a Change of Control (as
defined herein), each holder of the New Notes will have the right to require the
Issuer to purchase all or a portion of such holder's New Notes at a cash price
equal to 101% of the Accreted Value thereof, plus Liquidated Damages, if any,
thereon to the date of purchase (if such date of purchase is prior to July 15,
2003) or 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of purchase (if such date of
purchase is on or after July 15, 2003). See "Description of the New
Notes--Repurchase at the Option of Holders Upon a Change of Control."
The New Notes will be secured obligations of the Issuer. The New Notes will
rank PARI PASSU in right of payment with all existing and future unsubordinated
indebtedness of the Issuer and senior in right of payment to all subordinated
indebtedness of the Issuer. As debt of the Issuer however, the New Notes will be
effectively subordinated to all existing and future liabilities of Metallurg,
Inc. and its subsidiaries. The Issuer's subsidiaries may incur significant
additional indebtedness and other liabilities in the future. See "Description of
the New Notes--Certain Covenants-- Limitation on Debt." As of July 31, 1998,
after giving effect to the Acquisition Transactions (as defined herein), the New
Notes were effectively subordinated to approximately $286.5 million of balance
sheet liabilities, of which $104.5 million was indebtedness. See "Risk
Factors--Holding Company Structure; Effective Subordination." Furthermore, the
indenture governing the Notes (the "Indenture") permits the Issuer's
subsidiaries to incur additional indebtedness, which may be substantial. For
example, as of July 31, 1998, the Issuer and its subsidiaries could have
incurred up to approximately $308.4 million of indebtedness under the Indenture.
See "Description of the New Notes--Certain Covenants--Limitation on Debt."
The Issuer will accept for exchange from an Eligible Holder any and all Old
Notes that are validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date. For purposes of the Exchange Offer, "Eligible Holder" shall
mean the registered owner of any Old Notes that remain Transfer Restricted
Securities, as reflected on the records of United States Trust Company of New
York as registrar for the Old Notes (in such capacity, the "Registrar"), or any
person whose Old Notes are held of record by the depositary of the Old Notes.
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. For purposes of the Exchange Offer, "Transfer
Restricted Securities" means each Old Note until the earliest to occur of (i)
the date on which such Old Note is exchanged in this Exchange Offer and entitled
to be resold to the public by the holder thereof without complying with the
prospectus delivery provisions of the Securities Act; (ii) the date on which
such Old Note is registered under the Securities Act and is disposed of in a
shelf registration statement, if applicable; or (iii) the date on which such Old
Note has been distributed to the public pursuant to Rule 144 under the
Securities Act or by a broker-dealer pursuant to the plan of distribution
described herein. See "Plan of Distribution."
The maximum period of time that the Exchange Offer will remain open is 45
days. The Issuer will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. If the Issuer terminates
the Exchange Offer and does not accept for exchange any Old Notes, it will
promptly return the Old Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that it will make this Prospectus available to
any broker-dealer for use in connection with any such resale beginning on the
date hereof (the "Expiration Date") and ending on the close of business on the
first anniversary of the Expiration Date. See "The Exchange Offer" and "Plan of
Distribution." Any broker-dealer that acquired Old Notes directly from the
Issuer and not as a result of market-making activities or other trading
activities, in the absence of an exemption from the registration requirements of
the Securities Act, must comply with such registration requirements and the
prospectus delivery requirements of the Securities Act in connection with any
secondary resales of New Notes received in exchange for such Old Notes.
Prior to this Exchange Offer, there has been no public market for the Notes.
To the extent that Old Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Old Notes could be adversely affected. If a
market for the New Notes should develop, the New Notes could trade at a discount
from their principal amount. The Issuer does not currently intend to list the
New Notes on any securities exchange or to seek approval for quotation through
any automated quotation system, although the Notes are eligible for trading in
the PORTAL Market of the Nasdaq Stock Market, Inc. There can be no assurance
that an active public market for the New Notes will develop.
The Exchange Agent for the Exchange Offer is United States Trust Company of
New York.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Each statement made in
this Prospectus referring to a document filed as an exhibit or schedule to the
Registration Statement is qualified in its entirety by reference to the exhibit
or schedule for a complete statement of its terms and conditions, although all
of the material terms of the Issuer's contracts and agreements that would be
material to an investor have been summarized in this Prospectus. In addition,
upon the effectiveness of the Registration Statement filed with the Commission,
the Issuer will be subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith the Issuer will file periodic reports and other information with the
Commission relating to its business, financial statements and other matters.
Metallurg Inc. is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files periodic reports and other information with
the Commission. Any interested parties may inspect and/or copy the Registration
Statement, its schedules and exhibits, and the periodic reports and other
information filed in connection therewith, at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices located at
Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained at prescribed rates by addressing written requests for
such copies to the Public Reference Section of the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants. The
Commission's Web site can be accessed on the World Wide Web at
http://www.sec.gov. The obligations of the Issuer under the Exchange Act to file
periodic reports and other information with the Commission may be suspended,
under certain circumstances, if the New Notes are held of record by fewer than
300 holders at the beginning of any fiscal year and are not listed on a national
securities exchange. The Issuer has agreed that, whether or not it is required
to do so by the rules and regulations of the Commission, for so long as any of
the New Notes remain outstanding it will furnish to the holders of the New
Notes, and if required by the Exchange Act, file with the Commission all annual,
quarterly and current reports that the Issuer is or would be required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act. In
addition, for so long as any of the Old Notes remain outstanding, the Issuer has
agreed to make available to any prospective purchaser of the Old Notes or
beneficial owner of the Old Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE ISSUER SINCE
THE DATE HEREOF.
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EXCHANGE RATES
Except as otherwise noted, amounts in this Prospectus presented in
Deutschemarks have been converted into U.S. dollars at the rate of DM
1.81/$1.00; amounts presented in British pounds have been converted into U.S.
dollars at the rate of L0.60/$1.00; and amounts presented in Swiss francs have
been converted into U.S. dollars at the rate of SFr 1.52/$1.00. These
translations represent the exchange rates in effect on June 30, 1998 as reported
in THE WALL STREET JOURNAL. These translations are presented solely for the
convenience of the reader and should not be construed as representations that
the foreign currency amounts actually represent such U.S. dollar amounts or
could be converted into U.S. dollars at the rates indicated.
MARKET DATA
Market data used throughout this Prospectus were obtained from internal
Metallurg surveys, industry publications or other publicly available
information. Although Metallurg believes that such sources are reliable, the
accuracy and completeness of such information is not guaranteed and has not been
independently verified.
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THE FINANCIAL
STATEMENTS, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE ISSUER IS A NEWLY FORMED
HOLDING COMPANY ESTABLISHED FOR PURPOSES OF CONSUMMATING THE ACQUISITION
TRANSACTIONS (AS DEFINED HEREIN). THE ISSUER OWNS ALL THE OUTSTANDING COMMON
STOCK OF METALLURG. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES HEREIN
TO THE "COMPANY" OR "METALLURG" MEAN METALLURG, INC. AND ITS DIRECT AND INDIRECT
SUBSIDIARIES. FOR A DISCUSSION OF THE COMPANY'S FISCAL YEAR AND THE EFFECTS OF
METALLURG'S REORGANIZATION PLAN (AS DEFINED HEREIN) ON ITS FINANCIAL
INFORMATION, SEE "SUMMARY FINANCIAL DATA."
THE COMPANY
GENERAL
Metallurg, founded in 1911, is a leading international producer and seller
of high-quality metal alloys and specialty metals used by manufacturers of
steel, aluminum, superalloys and chemicals and other metal consuming industries,
based on the Company's internal data and its knowledge of the markets for its
products. The Company sells more than 500 different products to over 3,000
customers worldwide. The Company's operations are global in scope with eight
production facilities located in four countries in Europe, North America and
South America. In addition to selling products manufactured by the Company,
Metallurg also leverages its global sales force by distributing products
manufactured by third parties ("Merchanted Products"). For the Last Twelve
Months (as defined in the preamble to "Summary Financial Data"), the Company had
sales and Adjusted EBITDA (as defined in note (f) to "Summary Financial Data")
of $647.1 million and $51.8 million, respectively. The Issuer's executive office
is located at 800 The Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania 19087, telephone number (610) 293-0838.
MARKET OVERVIEW
IRON AND STEEL INDUSTRIES; SPECIALTY FERROALLOYS. The Company manufactures
and sells specialty ferroalloys to some of the world's largest iron and steel
producers, such as Algoma Steel Inc., British Steel plc, Nucor Corporation,
Thyssen AG and US Steel Group. The Company's principal specialty ferroalloy
products are ferrovanadium and standard grades of low carbon ferrochrome. These
products are used by iron and steel producers to increase temperature and
corrosion resistance and strength-to-weight ratios for metals used in the
energy, automotive and construction industries. For the 1997 Fiscal Year (as
defined in the preamble to "Summary Financial Data"), the Company had sales in
this category of approximately $282.8 million, representing 45% of the Company's
total sales. Raw steel production has rebounded from a recessionary low of
approximately 722 million tons in 1992 to approximately 793 million tons in
1997. See "Risk Factors--Dependence on Cyclical Markets, Including International
Markets, for Metallurg's Products."
ALUMINUM INDUSTRY; ALUMINUM MASTER ALLOYS AND COMPACTED PRODUCTS. The
Company manufactures a series of master alloys and briquettes and tablets for
sale to the aluminum industry. The Company's customers in this sector include
leading producers such as Alcan Aluminium Limited, Alcoa Aluminum Co. of
America, Aluminium Pechiney, Reynolds Metals Co. and Sumitomo Metals Industries
Ltd. Metallurg's principal aluminum products include titanium boron tertiary
alloys (which improve the conductivity of aluminum for electric cable),
strontium master alloys (which modify silicon-containing foundry alloys for
improved mechanical properties, as in automotive wheels) and chrome, iron and
manganese briquettes and tablets (which maximize the ductility and strength of
aluminum used in the manufacture of can sheet and aerospace components,
respectively). The Company also manufactures binary master alloys containing
boron, zirconium or titanium (which are used for the grain refining of aluminum
alloy ingots, billets and continuous cast sheet). For the 1997 Fiscal Year, the
Company had sales to the aluminum industry of $120.0 million, representing 19%
of the Company's total sales. Aluminum
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consumption in the Western world has grown from approximately 15.9 million
metric tons in 1993 to approximately 18.8 million metric tons in 1997. This
growth has been driven in large part by demand for durable products, as well as
the increased substitution of aluminum for steel in certain transportation and
construction applications. See "Risk Factors--Dependence on Cyclical Markets,
Including International Markets, for Metallurg's Products."
SPECIALTY METALS AND ALLOYS; SUPERALLOY AND TITANIUM ALLOY INDUSTRIES. The
Company manufactures and sells specialty metals and alloys used by producers of
superalloys and titanium alloys to enhance the performance of finished metal
products such as aircraft engines and frames, gas turbines and boiler tubes. The
Company's customers for specialty metals and alloys include Allegheny Teledyne,
Inc., Carpenter Technology Corp., INCO Alloys, Kanthal AB, Oregon Metallurgical
Corp., RMI Titanium Company, Sandvik AB, Special Metals Corporation and Titanium
Metals Corp. For the 1997 Fiscal Year, the Company had sales in this category of
$92.6 million, representing 15% of the Company's total sales. Metallurg's
principal products in this category include chromium metal, special grades of
low carbon ferrochrome and vanadium aluminum. Growth and demand for superalloys
and titanium have been driven principally by commercial aerospace production. In
addition, new applications for these metals and alloys have been developed for
use in the consumer goods, power generation, oil and gas, chemical and
biomedical industries. See "Risk Factors--Dependence on Cyclical Markets,
Including International Markets, for Metallurg's Products."
OTHER INDUSTRIES AND PRODUCTS. Metallurg also manufactures and distributes
a number of products used outside of the iron, steel, aluminum and superalloy
industries. These products include coating materials, which are sold to
electronics and tool manufacturers, vanadium oxytrichloride for use in the
synthetic rubber industry and polishing powders used by the glass polishing
industry. These products generally are higher-margin, technically sophisticated
products. For the 1997 Fiscal Year, the Company had $136.5 million in sales of
these products, representing 21% of the Company's total sales.
MERCHANTED PRODUCTS. The merchanting of products manufactured by third
parties is a natural complement to the Company's manufacturing operations.
Merchanted Products leverage the Company's global sales staff by providing a
broader product offering to its existing customers without incurring significant
additional overhead. As a result, Metallurg becomes a more significant supplier
to its customers, as they can more conveniently procure supplies and decrease
their sourcing costs by reducing their number of vendors and optimizing freight
costs. In addition, by offering Merchanted Products, the Company has greater
access to raw materials. The Company's total sales of $631.9 million for the
1997 Fiscal Year included an aggregate of $266.8 million in sales from
Merchanted Products.
COMPETITIVE STRENGTHS
The Company believes that its long-standing customer relationships, strong
name recognition and global distribution capabilities provide an attractive
platform for growth. The Company believes that it is distinguished by the
following competitive strengths:
- INDUSTRY LEADERSHIP. The Company enjoys significant worldwide recognition
in the metal alloys and specialty metals industries as a result of its
87-year history. With its longevity, technical innovation, high-quality
reputation, long-standing customer relationships and diverse product base,
the Company has developed and maintained significant market shares in the
markets for ferrovanandium consumed by the U.S. iron and steel industries,
special grades of low carbon ferrochrome and chromium metal consumed by
the superalloy industry and aluminum master alloys.
- LONG-STANDING CUSTOMER RELATIONSHIPS. The Company has developed and
maintained long-term relationships with a high-quality, internationally
diverse customer base. The Company has built its customer base by
providing consistent quality, a diverse portfolio of high-quality metal
alloys and
5
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specialty metals and a high level of technical support. The Company's
customers include some of the largest metals producing companies in the
world.
- DIVERSIFIED SALES BASE. Metallurg's revenue base is diversified across
markets, regions and customers. The Company sells more than 500 different
products to over 3,000 customers worldwide, none of which represents more
than 5% of the Company's sales. By serving customers in the iron, steel,
aluminum, superalloy, titanium and chemical markets, Metallurg believes
that it is relatively less vulnerable than certain of its competitors to
the cycle of any one end-use market. Furthermore, the Company's sales are
globally balanced, with approximately 47% and 38% of revenues coming from
Europe and North America, respectively, for the 1997 Fiscal Year.
- RAW MATERIAL SOURCING. The Company generally sources raw materials from a
diverse group of suppliers and actively pursues alternative low cost
sources of raw materials. The Company has opened purchasing offices in
Russia and China which have enabled the Company to develop new sources of
supply for the Company's manufacturing and distribution businesses. The
Company also derives the competitive benefit of vertical integration
through its ownership of chrome ore mines located in Turkey. Furthermore a
key goal of the Company's capital expenditure program is to expand the
usage of lower cost raw materials. Management believes that obtaining
access to consistent, lower cost sources of supply represents a key
barrier to entry facing potential new competitors.
- GLOBAL MANUFACTURING AND SALES NETWORK. Metallurg is well positioned to
serve its global customer base through its eight production facilities,
three mines, 17 sales offices and two purchasing offices located
throughout the world. The Company believes that its international sales
force comprised of 121 sales personnel provides it with a key competitive
advantage and the ability to enhance its customer relationships through
aiding customers with more efficient and innovative use of products. The
Company leverages the expertise of its sales force by merchanting products
manufactured by third parties, which results in the offering of a broader
product line and Metallurg becoming a more significant supplier to its
customers, while at the same time strengthening ties to its sources of raw
materials.
BUSINESS STRATEGIES
The Company's business objective is to maximize the long-term profitability
of its operations while maintaining a strong financial position through the
various business and market cycles. The Company's continuing strategies for
achieving this objective are as follows:
- FOCUS ON CORE BUSINESSES. The Company seeks to achieve high market shares
in markets where the Company can differentiate itself on the basis of
technical expertise and product quality. As part of this strategy, the
Company is focusing its production and sales efforts on higher margin
specialized alloy businesses, and is investing in capital projects that
will expand its capacity or lower its costs in those areas. In recent
years, the Company has divested certain non-core and lower margin
businesses, including its tantalum carbide and United States titanium
scrap processing businesses.
- AGGRESSIVELY MANAGE COSTS. In recent years, the Company has instituted
measures to reduce operating costs and enhance profitability. Through a
combination of divesting non-core businesses, using contractors and
improving productivity, the Company has reduced the number of employees
from 2,508 at the end of 1992 to 1,493 as of July 31, 1998, while sales
have grown from $591.1 million in 1992 to $647.1 million for the Last
Twelve Months. The Company has restructured its operations into individual
business units focused on particular customer groups in order to better
manage costs and improve profitability. The Company's cost rationalization
program is ongoing and management anticipates that further cost savings
and productivity gains may be realized as a result.
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- IMPROVE PRODUCT MIX. The Company continually pursues opportunities to
increase profitability through the Company's existing distribution network
by improving its product mix by: (i) divesting low margin products; (ii)
developing value added, higher margin products; and (iii) acquiring, or
entering into merchanting arrangements for, product lines that complement
the Company's core product offerings. Examples of high margin products
that have experienced significant recent growth include coating materials
for thin film technology and titanium carbon aluminum sold to the aluminum
industry.
- SELECTIVELY PURSUE ACQUISITIONS AND OTHER STRATEGIC EXPANSION
INITIATIVES. The Company believes that its leading position in a diverse
group of specialty metals markets provides it with a strong base to
continue to expand its core businesses. The Company has the industry and
financial expertise of Safeguard International Fund, L.P. ("Safeguard
International") as its equity sponsor. The Company will pursue acquisition
opportunities and expansion initiatives as warranted by market conditions.
The Company intends to pursue acquisitions that: (i) add to or complement
its specialty metals portfolio; (ii) leverage its existing manufacturing
and distribution capabilities; or (iii) enhance its raw materials sourcing
capabilities. The Company is currently evaluating several acquisition and
expansion opportunities. See "Business--Business Strategies."
ISSUANCE OF THE OLD NOTES
The outstanding $121.0 million principal amount at maturity of 12 3/4%
Series A Senior Discount Notes due 2008 (the "Old Notes") were sold by the
Issuer to BancBoston Securities Inc. (the "Initial Purchaser") on July 13, 1998
(the "Closing Date") pursuant to a Purchase Agreement, dated as of July 6, 1998
(the "Purchase Agreement"), between the Issuer and the Initial Purchaser. The
issuance of the Old Notes generated gross proceeds of approximately $65.2 mllion
to the Issuer. The Initial Purchaser subsequently resold the Old Notes in
reliance on Rule 144A under the Securities Act and other available exemptions
under the Securities Act on or about July 13, 1998. The Issuer and the Initial
Purchaser also entered into the Registration Agreement pursuant to which the
Issuer granted certain registration rights for the benefit of the holders of the
Old Notes. The Exchange Offer is intended to satisfy certain of the Issuer's
obligations under the Registration Agreement with respect to the Old Notes. See
"The Exchange Offer-- Purpose and Effects."
The Old Notes were issued under an indenture, dated as of July 13, 1998 (the
"Indenture"), between the Issuer and United States Trust Company of New York as
trustee (in such capacity, the "Trustee"). The New Notes are also being issued
under the Indenture and are entitled to the benefits of the Indenture. The form
and terms of the New Notes will be identical in all material respects to the
form and terms of the Old Notes except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof; and (ii) holders of New Notes will not be, and
upon the consummation of the Exchange Offer, Eligible Holders of Old Notes will
no longer be, entitled to certain rights under the Registration Agreement
intended for the holders of unregistered securities. The Exchange Offer shall be
deemed consummated upon the delivery by the Issuer to the Exchange Agent under
the Indenture of New Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that are validly tendered by holders
thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of
Certain Rights" and "--Procedures for Tendering" and "Description of New
Notes--General."
The proceeds received by the Issuer from the issuance of the Old Notes were
used to fund a portion of the purchase price of the Acquisition Transactions (as
defined herein). There will be no proceeds to the Issuer from any exchange
pursuant to the Exchange Offer.
7
<PAGE>
THE ACQUISITION TRANSACTIONS
On July 13, 1998, Metallurg Acquisition Corp., a wholly owned subsidiary of
the Issuer ("Acquisition Corp.") merged with and into Metallurg, Inc., with
Metallurg, Inc. being the surviving company and the Issuer becoming the holding
company for Metallurg, Inc. (the "Merger"). At the time of the Merger, each
outstanding share of Metallurg, Inc. common stock, par value $0.01 per share (a
"Metallurg Share"), was converted into the right to receive $30 in cash,
representing an aggregate cash purchase price of approximately $152.2 million
(including payments for cancellation of compensatory options). The total value
of the transaction, including existing indebtedness and environmental, pension
and other liabilities, net of cash, was approximately $300 million.
In order to finance the Merger, (i) Safeguard International and certain of
its limited partners (the "Investor Group") contributed approximately $97.0
million of capital to the Issuer (the "Equity Contribution"); and (ii) the
Issuer consummated the offering of the Old Notes (the "Offering"). As used
herein, the term "Acquisition Transactions" means the Equity Contribution, the
Offering, the Merger, the Consent Solicitation (as defined herein) and the
execution of a supplemental indenture to the indenture (the "Senior Note
Indenture") governing Metallurg, Inc.'s 11% Senior Notes due 2007 (the "Senior
Notes").
In connection with the Merger, Metallurg, Inc. received the consents (the
"Consent Solicitation") of 100% of the registered holders of its Senior Notes to
a one-time waiver of the change of control provisions of the Senior Note
Indenture to make such provisions inapplicable to the Merger (the "Waiver") and
to amend the definition of "Permitted Holders" under the Senior Note Indenture
to reflect the post-Merger ownership of Metallurg (the "Amendment").
Safeguard International is an international private equity fund with current
committed capital in excess of $250.0 million, which includes coinvestment
commitments of up to $45.0 million. Safeguard International invests primarily in
equity securities of companies in process industries--industries which convert
raw or semi-finished materials into products for use by other businesses. With a
presence in both the United States and Europe and investment professionals that
have substantial management experience in process industries, Safeguard
International has a strong international operating orientation and concentrates
on situations where it believes that it can create value by drawing upon the
experience of its investment team. See "Management" and "Share Ownership."
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer.................. The Issuer is offering, upon the terms and subject to
the conditions set forth herein and in the
accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange its 12 3/4% Series B
Senior Discount Notes due 2008 (the "New Notes," and,
with the Old Notes, the "Notes") for an identical
face amount of the outstanding Old Notes (the
"Exchange Offer"). As of the date of this Prospectus,
$121.0 million in aggregate principal amount at
maturity of the Old Notes is outstanding, the maximum
amount authorized by the Indenture for all Notes. As
of , 1998, there were registered holders
of the Old Notes, which held $121.0 million of
aggregate principal amount at maturity of the Old
Notes. See "The Exchange Offer--Terms of the Exchange
Offer."
Expiration Date..................... 5:00 p.m., New York City time, on November 25, 1998,
as the same may be extended. See "The Exchange
Offer-- Expiration Date; Extension; Termination;
Amendments."
Conditions of the Exchange Offer.... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject
to certain customary conditions, which may be waived
by the Issuer. See "The Exchange Offer--Conditions of
the Exchange Offer."
Procedures for Tendering Old
Notes............................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Old
Notes and any other required documentation to the
Exchange Agent at the address set forth herein. Old
Notes may be physically delivered, but physical
delivery is not required if a confirmation of a
book-entry of such Old Notes to the Exchange Agent's
account at The Depository Trust Company ("DTC") is
delivered in a timely fashion. By executing the
Letter of Transmittal, each holder will represent to
the Issuer that, among other things, the New Notes
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such
person is the holder, that neither the holder nor any
such other person is engaged in, or intends to engage
in, or has an arrangement or understanding with any
person to participate in, the distribution of such
New Notes and that neither the holder nor any such
other person is an "affiliate," as defined under Rule
405 of the Securities Act, of the Issuer. Each broker
or dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of
market-making
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"The Exchange Offer--Procedures for Tendering" and
"Plan of Distribution."
Guaranteed Delivery Procedures...... Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver
their Old Notes or any other documents required by
the Letter of Transmittal to the Exchange Agent prior
to the Expiration Date (or complete the procedure for
book-entry transfer on a timely basis), may tender
their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal.
See "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes and Delivery
of New Notes........................ Upon satisfaction or waiver of all conditions of the
Exchange Offer, the Issuer will accept any and all
Old Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly after
acceptance of the Old Notes. See "The Exchange
Offer--Procedures for Tendering."
Withdrawal Rights................... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer--Withdrawal
of Tenders." United States Trust Company of New York
is the exchange agent (in such capacity, the
"Exchange Agent"). The address and telephone number
of the Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
Fees and Expenses................... All expenses incident to the Issuer's consummation of
the Exchange Offer and compliance with the
Registration Agreement will be borne by the Issuer.
The Issuer will also pay certain transfer taxes
applicable to the Exchange Offer. See "The Exchange
Offer--Fees and Expenses."
Notes Offered....................... $121,000,000 aggregate principal amount at maturity
of 12 3/4% Series B Senior Discount Notes due 2008
(the "New Notes").
Resales of the New Notes............ Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Issuer believes that New Notes
issued pursuant to the Exchange Offer to an Eligible
Holder in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by such
Eligible Holder (other than (i) a broker-dealer who
purchased the Old Notes directly from the Issuer for
resale pursuant to Rule 144A under the Securities Act
or any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the
Issuer within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions of
the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Securities Act, provided that the Eligible Holder is
acquiring the New Notes in the ordinary course of
business and is not participating, and has no
arrangement or understanding with any person to
participate, in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old
Notes were acquired by such broker as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"The Exchange Offer--Purpose and Effects" and "Plan
of Distribution."
</TABLE>
DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $121.0 million aggregate principal amount at
maturity of Old Notes. The terms of the New Notes are identical in all material
respects to the Old Notes, except for certain transfer restrictions and other
rights relating to the exchange of the Old Notes for New Notes. The New Notes
will evidence the same debt as the Old Notes and will be entitled to the
benefits of the Indenture under which both the Old Notes were, and the New Notes
will be, issued. See "Description of The New Notes."
<TABLE>
<S> <C>
Notes Offered....................... $121,000,000 aggregate principal amount at maturity
of 12 3/4% Series B Senior Discount Notes due 2008.
Maturity Date....................... July 15, 2008.
Accretion........................... The New Notes will accrete at a rate of 12 3/4%,
compounded semi-annually, to an aggregate principal
amount of $121.0 million at July 15, 2003. Cash
interest will not accrue or be payable on the New
Notes prior to such date.
Interest Rate....................... Commencing July 15, 2003, the New Notes will accrue
cash interest at the rate of 12 3/4% per annum,
payable semi-annually in arrears on January 15 and
July 15 of each year, commencing January 15, 2004.
Optional Redemption................. The New Notes will be redeemable at the option of the
Issuer in whole or in part, in cash, at any time on
or after July 15, 2003, at the redemption prices set
forth herein, together with accrued and unpaid
interest and Liquidated Damages, if any, to the date
of redemption. In addition, at the option of the
Issuer, up to 34% of the aggregate principal amount
at maturity of the originally issued Old Notes may be
redeemed prior to July 15, 2001 with the net proceeds
of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price
equal to 112.750% of the Accreted Value thereof, plus
Liquidated Damages, if any, thereon to the redemption
date (subject to the right of holders of record on
the relevant record date to receive interest due on
the relevant interest payment date), provided that at
least 66% of the aggregate principal amount at
maturity of the originally issued Old Notes remain
outstanding following such redemption. See
"Description of the New Notes--Optional Redemption."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Sinking Fund........................ None.
Change of Control................... Upon the occurrence of a Change of Control each
holder of New Notes (a "Holder") will have the right
to require the Issuer to purchase all or a portion of
such Holder's New Notes at a cash purchase price
equal to 101% of the Accreted Value thereof plus
Liquidated Damages, if any, thereon to the date of
purchase (if such date of purchase is prior to July
15, 2003) or 101% of the principal amount thereof
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (if
such date of purchase is on or after July 15, 2003).
See "Description of the New Notes-- Repurchase at the
Option of Holders Upon a Change of Control." There
can be no assurance that, in the event of a Change of
Control, the Issuer would have sufficient funds or
otherwise be able to purchase all New Notes tendered.
See "Risk Factors--Limitations on Ability to make
Change of Control Payment."
Ranking............................. The New Notes will be secured obligations of the
Issuer. The New Notes will rank PARI PASSU in right
of payment with all existing and future
unsubordinated indebtedness of the Issuer and senior
in right of payment to all subordinated indebtedness
of the Issuer. As debt of the Issuer, however, the
New Notes will be effectively subordinated to all
existing and future liabilities of the Company and
its subsidiaries. As of July 31, 1998, after giving
effect to the Acquisition Transactions, the New Notes
were effectively subordinated to approximately $286.5
million of balance sheet liabilities, of which $104.5
million was indebtedness. See "Risk Factors-- Holding
Company Structure; Effective Subordination."
Furthermore, the Indenture permits the Issuer's
subsidiaries to incur additional indebtedness which
may be substantial. For example, at July 31, 1998,
the Issuer and its subsidiaries could have incurred
up to approximately $308.4 million of indebtedness
under the Indenture. See "Risk Factors-- Holding
Company Structure; Effective Subordination and
"Description of the New Notes--Ranking," "--Certain
Covenants--Limitation on Debt."
Security............................ The obligations of the Issuer with respect to the New
Notes will be secured by an assignment and pledge to
the Trustee of (a) all of the outstanding equity
interests held by the Issuer in Metallurg, Inc. and
(b) all promissory notes issued from time to time to
the Issuer by Metallurg, Inc. (collectively, the
"Collateral"). The security interests in the
Collateral will be exclusive, first priority security
interests. Absent any acceleration of the New Notes
or failure to pay the same in full at maturity, the
Issuer will generally be able to vote pledged
securities and to receive distributions and other
proceeds in respect thereof. Subject to certain
conditions, the Issuer will be permitted to cause the
release of collateral in
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
connection with sales thereof otherwise made in
accordance with the Indenture covenants. The Issuer
has agreed that for so long as the Collateral is
pledged to secure the New Notes, the Issuer will not
permit Metallurg to issue additional shares of its
common stock to affiliates of the Issuer and will not
permit Metallurg to issue additional shares of its
common stock to others unless such issuance to
non-affiliates of the Issuer complies with the
limitations on asset sales contained in the
Indenture. See "Description of the New Notes--
Certain Covenants--Limitation on Asset Sales."
Limitation on Access to
Subsidiaries' Cash Flow............. The Issuer does not have, and may not in the future
have, any material assets other than common stock of
Metallurg, Inc. As a result, the Issuer's ability to
pay cash interest on the New Notes, and to purchase
New Notes upon the occurrence of a Change of Control,
will depend upon the receipt of dividends and other
distributions from its subsidiaries. The Revolving
Credit Facility and the Senior Note Indenture
restrict the Company's ability to pay dividends and
make other distributions to the Issuer, and without
such dividends or distributions, the Issuer will
likely not have the financial resources to pay cash
interest on the New Notes, or to purchase New Notes
upon a Change of Control. In addition, there can be
no assurance that the Issuer's subsidiaries will have
the resources available to pay any such dividends or
distributions. The Issuer's failure to pay cash
interest on the New Notes when due and payable, or to
make a Change of Control Offer when required or to
purchase New Notes when tendered pursuant thereto,
would constitute an Event of Default (as defined
herein) under the Indenture. See "Risk
Factors--Limitation on Access to Subsidiaries' Cash
Flow," "Description of the New Notes--General,"
"Description of the New Notes--Certain Covenants" and
"Description of the New Notes--Repurchase at the
Option of Holders Upon a Change of Control."
Certain Covenants................... The Indenture contains limitations on, among other
things, the ability of the Issuer and its Restricted
Subsidiaries (as defined herein) to: (i) incur
indebtedness; (ii) pay dividends, redeem capital
stock or make certain other restricted payments or
investments; (iii) enter into certain transactions
with affiliates; (iv) dispose of assets; (v) create
liens; (vi) enter into sale and leaseback
transactions; (vii) permit arrangements that restrict
dividends and other payments from subsidiaries; and
(viii) enter into certain mergers, consolidations or
asset sales. All of such covenants are subject to
significant exceptions. See "Description of the New
Notes--Certain Covenants."
Use of Proceeds..................... There will be no proceeds to the Issuer from any
exchange pursuant to the Exchange Offer. The net
proceeds to the
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Issuer from the sale of the Old Notes were used to
finance a portion of the purchase price in the
Acquisition Transactions.
Original Issue Discount............. The New Notes are being issued with original issue
discount ("OID") for United States federal income tax
purposes. Thus, although cash interest will not be
payable on the New Notes prior to January 15, 2004,
OID will accrue on a constant yield to maturity basis
from the issue date of the Old Notes and will be
included as interest income in a Holder's gross
income for United States federal income tax purposes
in advance of receipt of the cash payments to which
such income is attributable.
PORTAL Listing...................... The Issuer does not intend to apply for listing of
the New Notes on any securities exchange or for
quotation through the NASDAQ National Market or any
other quotation system, although the New Notes are
eligible for trading in The PORTAL Market of The
Nasdaq Stock Market, Inc.
</TABLE>
RISK FACTORS
See "Risk Factors" beginning on page 19 for a discussion of certain factors
which should be considered by Eligible Holders in evaluating the Exchange Offer.
14
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary financial data of the Company for each
of the years in the two-year period ended December 31, 1996, the quarter ended
March 31, 1997, the three quarters ended January 31, 1998 and the two quarters
ended July 31, 1998. Information for each of the two years in the period ended
December 31, 1996, for the quarter ended March 31, 1997 and for the three
quarters ended January 31, 1998 is derived from the consolidated financial
statements of the Company included elsewhere herein, which have been audited by
Deloitte & Touche LLP, independent public accountants. The data for the Company
as of and for the two quarters ended July 31, 1998 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for such periods. The results of operations for the quarter ended
March 31, 1997 and the three quarters ended January 31, 1998 are not necessarily
indicative of results for the full year.
The Issuer was formed on June 10, 1998 in connection with the Acquisition
Transactions and did not exist during any of the periods prior to such date for
which the statement of operations, balance sheet and other data are presented.
Accordingly, such data reflect the consolidated results of operations and
financial position of the Company. The information in this table should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, and the notes thereto, included elsewhere in this Prospectus. Issuer
Pro Forma financial data reflect the consolidated results of operations and
financial position of the Issuer subsequent to June 10, 1998, the date of its
inception. For a discussion of pro forma financial data included in the summary
financial data, see "Unaudited Pro Forma Condensed Consolidated Financial Data."
Financial information contained in this Prospectus for periods and dates
after March 31, 1997 reflects the effects of Metallurg's Reorganization Plan (as
defined in note (a) below), including the implementation of fresh-start
reporting, as of March 31, 1997. Accordingly, the Company's consolidated
financial statements for periods and dates prior to March 31, 1997 are not
comparable to subsequent consolidated financial statements. In addition,
Metallurg, Inc. changed its fiscal year from a calendar year to the period ended
January 31, for fiscal periods after consummation of its Reorganization Plan,
while its subsidiaries have retained a calendar fiscal year. As a result,
financial data for the Company for reported periods include the following:
THE TWO QUARTERS ENDED JULY 31, 1998--Consolidated results of operations are
comprised of (i) the six months ended July 31, 1998 for Metallurg, Inc. on a
stand-alone basis; and (ii) the six months ended June 30, 1998 for its
subsidiaries. The consolidated balance sheet data at July 31, 1998 reflect the
financial position of Metallurg, Inc. at July 31, 1998 and the operating
subsidiaries at June 30, 1998.
THE THREE FISCAL QUARTERS ENDED JANUARY 31, 1998--Consolidated results of
operations are comprised of: (i) the post-confirmation ten months ended January
31, 1998 for Metallurg, Inc. on a stand-alone basis and (ii) the
post-confirmation nine months ended December 31, 1997 for its subsidiaries.
THE LAST TWELVE MONTHS ENDED JULY 31, 1998--Consolidated results of
operations are comprised of: (i) the 12 months ended July 31, 1998 for
Metallurg, Inc. on a stand-alone basis and (ii) the 12 months ended June 30,
1998 for its operating subsidiaries.
In addition, the consolidated balance sheet at July 31, 1998 for the Issuer
reflects the financial position of Metallurg, Inc. and the Issuer at July 31,
1998 and Metallurg, Inc.'s operating subsidiaries at June 30, 1998. The fiscal
year of the Issuer is January 31.
15
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY COMPANY ISSUER
PRE-CONFIRMATION (A) POST-CONFIRMATION PRO FORMA (H)(I)
--------------------------------- ------------------------------------- ----------------------
THREE TWO THREE TWO
YEARS ENDED QUARTER QUARTERS QUARTERS LTM QUARTERS QUARTERS
DECEMBER 31, ENDED ENDED ENDED ENDED ENDED ENDED
-------------------- MARCH 31, JAN. 31, JULY 31, JULY 31, JAN. 31, JULY 31,
1995 1996 1997 1998 1998 1998 1998 1998
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $ 688,002 $ 648,816 $ 155,427 $ 476,426 $ 337,429 $ 647,137 $ 476,426 $ 337,429
Commission income............. 1,362 1,186 160 541 414 794 541 414
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
Total revenues.............. 689,364 650,002 155,587 476,967 337,843 647,931 476,967 337,843
Gross profit.................. 85,829 83,464 21,527 66,934 56,164 98,354 66,934 56,164
Operating income (loss)....... 15,705 (11,221 (b) 6,481 23,371 21,840 34,894 19,029 24,007
Net income (loss)............. 1,665 (28,495) 57,954(c) 6,272(d) 8,288 10,909 (6,854 (d) 4,617
OTHER DATA:
Environmental remediation
expenditures(e)............. 2,769 2,282 1,729 2,635 1,006 3,248 2,635 1,006
Depreciation and
amortization................ 15,296 10,688 2,143 5,320 4,282 7,640 10,043 6,933
Adjusted EBITDA (f)........... 47,149 38,928 10,498 32,515 32,889 51,760 32,307 32,764
Adjusted EBITDA margin........ 6.9% 6.0% 6.8% 6.8% 9.7% 8.0% 6.8% 9.7%
Capital expenditures.......... $ 6,712 $ 9,531 $ 2,774 $ 9,447 $ 6,998 $ 13,136 $ 9,447 $ 6,998
EBITDA as defined in
Indenture(g)................ 22,100 (8,262) 5,730 24,461 20,110 36,595 24,253 19,985
<CAPTION>
LTM
ENDED
JULY 31,
1998
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $ 647,137
Commission income............. 794
-----------
Total revenues.............. 647,931
Gross profit.................. 98,354
Operating income (loss)....... 34,456
Net income (loss)............. (78)
OTHER DATA:
Environmental remediation
expenditures(e)............. 3,248
Depreciation and
amortization................ 13,111
Adjusted EBITDA (f)........... 51,510
Adjusted EBITDA margin........ 8.0%
Capital expenditures.......... $ 13,136
EBITDA as defined in
Indenture(g)................ 36,345
</TABLE>
<TABLE>
<S> <C>
Pro forma cash interest expense..................................................................................... 12,405
Pro forma interest expense.......................................................................................... 22,342
Ratio of Adjusted EBITDA to pro forma cash interest expense (f)..................................................... 4.2x
Ratio of Adjusted EBITDA to pro forma interest expense (f).......................................................... 2.3x
Ratio of pro forma net debt to Adjusted EBITDA (f).................................................................. 2.4x
Ratio of pro forma debt to Adjusted EBITDA (f)...................................................................... 3.3x
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1998
------------------------
<S> <C> <C>
COMPANY ISSUER
ACTUAL ACTUAL
----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................ $ 44,423 $ 46,482
Working capital...................................................................................... 175,059 176,079
Total assets......................................................................................... 341,330 445,855
Pension liabilities.................................................................................. 38,134 38,134
Environmental liabilities, net....................................................................... 43,943 43,943
Total debt........................................................................................... 104,509 170,102
Shareholders' equity................................................................................. 54,861 92,407
</TABLE>
- ------------------------
(a) In April 1997, Metallurg and its subsidiary Shieldalloy Metallurgical
Corporation ("Shieldalloy") consummated their Joint Plan of Reorganization
dated December 18, 1996 (the "Reorganization Plan"), pursuant to Chapter 11
of the United States Bankruptcy Code. Metallurg and Shieldalloy sought
Chapter 11 protection in September 1993 following the Company's inability to
restructure or refinance its long-term indebtedness and revolving credit
facility in light of a confluence of negative economic factors that caused
the Company to default on certain of its then outstanding indebtedness. The
Company was particularly affected by (i) "dumping" by exporters from the
former Soviet Union of excess stocks of metals and alloys, which drove
prices of ferroalloys in Europe and the United States to very low levels and
(ii) the general economic recession that began in 1989 in the end-use
markets of the Company's customers.
16
<PAGE>
(b) Includes effects of settlement arrangements entered into by the Company in
connection with the Reorganization Plan with regard to the settlement of
environmental claims with federal and state regulators (approximately $37.6
million) and the settlement of prepetition claims with certain other
creditors (approximately $10.5 million).
(c) Includes an extraordinary item of $43.0 million representing the net gain on
the discharge of indebtedness resulting from the consummation of the
Reorganization Plan.
(d) Includes an extraordinary item of $(0.8) million representing the net loss
on the early extinguishment of debt in November 1997.
(e) Environmental expenditures related to ongoing operations are generally
included in cost of goods sold and are therefore deducted in calculating net
income and Adjusted EBITDA for any period. Environmental remediation
expenditures represent the costs associated with remedial activities. Such
remediation expenditures are charged to previously established accruals and
are therefore excluded from the calculation of net income and Adjusted
EBITDA. However, the cash expended by the Company in any period for
environmental remediation expenditures will affect the Company's cash flow.
(f) For purposes of this Prospectus, "Adjusted EBITDA" is defined as net income
(loss) before: (i) income taxes; (ii) interest expense; (iii) extraordinary
item; (iv) depreciation; (v) amortization; (vi) non-cash stock compensation;
(vii) loss (gain) on sale of assets; (viii) restructuring and merger
expenses; (ix) reorganization expenses; (x) non-cash fresh-start
adjustments; and (xi) non-cash environmental provisions. Adjusted EBITDA has
not been reduced to reflect environmental remediation expenditures. This
definition of Adjusted EBITDA differs from the definition of EBITDA used in
the Indenture. The Company's use of Adjusted EBITDA may not be comparable to
similarly titled measures due to the use by other companies of different
financial statement components in calculating Adjusted EBITDA. See "Selected
Financial Data--Calculation of Adjusted EBITDA" and "Description of the
Discount Notes."
The Company considers Adjusted EBITDA to be useful in measuring the operating
performance of the Company because, together with net income and cash flows,
Adjusted EBITDA provides investors with additional measures to evaluate the
ability of the Company to incur and service debt and to fund acquisitions
and other capital expenditures. Adjusted EBITDA does not represent net
income or cash flows from operations as defined by generally accepted
accounting principles. Adjusted EBITDA is not an alternative to net income
as a reliable measure of the Company's operating performance or an
alternative to cash flows as measures of liquidity.
Adjusted EBITDA does not measure whether cash flow is sufficient to fund all
of the Company's cash needs, including principal amortization, capital
improvements and debt service. Adjusted EBITDA does not represent cash flows
from operating, investing or financing activities as defined by generally
accepted accounting principles.
(g) Under the terms of the Indenture, "EBITDA" is defined as follows
(capitalized terms have the meanings set forth in the Indenture):
"EBITDA" means, for any period, an amount equal to, for the Issuer and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income
for such period, plus the following to the extent reducing Consolidated Net
Income for such period: (i) the provision for taxes based on income or
profits or utilized in computing net loss, (ii) Consolidated Interest
Expense, (iii) depreciation, (iv) amortization of intangibles and (v) any
other non-cash items (other than any such non-cash item to the extent that
it represents an accrual of, or reserve for, cash expenditures in any future
period), minus (b) all non-cash items increasing Consolidated Net Income for
such period (other than any such non-cash item to the extent that it will
result in the receipt of cash payments in any future period).
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization of, a Restricted
Subsidiary shall be added to Consolidated Net Income to compute EBITDA only
to the extent (and in the same proportion) that the net income of such
Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Issuer by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
EBITDA as defined in the Indenture is used as a measure of operating cash
flow. Subject to certain exceptions set forth in the Indenture, the Issuer
may only incur additional Debt if its pro forma ratio of EBITDA to
Consolidated Fixed Charges for the most recent four consecutive fiscal
quarters is more than 2.00 to 1.00. See "Description of the New
Notes--Certain Covenants-- Limitation on Debt." For the purposes of these
calculations, restrictions on the Issuer's subsidiaries' ability to pay
dividends to the Issuer in existence at December 31, 1997 are assumed for
all periods presented.
(h) Pro forma information reflects the effects of the Acquisition Transactions
and certain other pro forma adjustments. See "Unaudited Pro Forma Condensed
Consolidated Financial Data."
17
<PAGE>
(i) Interest on the New Notes is not paid in cash for the initial five years.
The table below presents cash interest payments and the book interest
expense for the life of the New Notes (in thousands):
<TABLE>
<CAPTION>
ANNUAL
CASH PAYMENTS OF INTEREST
YEAR INTEREST EXPENSE
- ---------------------------------------------------------- ----------------- -----------
<S> <C> <C>
1......................................................... -- $ 8,575
2......................................................... -- 9,703
3......................................................... -- 10,980
4......................................................... -- 12,424
5......................................................... -- 14,059
6......................................................... $ 15,417 15,417
7......................................................... 15,417 15,417
8......................................................... 15,417 15,417
9......................................................... 15,417 15,417
10........................................................ 15,417 15,417
</TABLE>
18
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements", which statements can
be identified by the use of forward-looking terminology, such as "may,"
"intends," "will," "expects," "anticipates," "estimates," "seeks" or "continues"
or the negative thereof or other variations thereon or comparable terminology.
Any statements with regard to the Issuer's expectations as to industry
conditions and its financial results, demand for or acceptance of Metallurg's
(as defined herein) products and services and other aspects of its business may
constitute forward-looking statements. Although the Issuer makes such statements
based on assumptions that it believes to be reasonable, there can be no
assurance that actual results will not differ materially from the Issuer's
expectations. Accordingly, the Issuer hereby identifies the following important
factors, among others, that could cause its results to differ from any results
that might be projected, forecasted or estimated in any such forward-looking
statements: risks associated with the substantial leverage of Metallurg and the
Issuer, subordination of the New Notes, restrictive debt covenants, integration
of acquisitions, cyclical nature of Metallurg's business, Metallurg's dependence
on foreign customers (particularly customers in Europe), the economic strength
of Metallurg's markets generally and particularly the strength of the demand for
iron, steel, aluminum and superalloys and titanium alloy industries in those
markets, the accuracy of Metallurg's estimates of the costs of environmental
remediation and the extension or expiration of existing anti-dumping duties.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE EXCHANGE
OFFER.
SUBSTANTIAL LEVERAGE
The Issuer and the Company are highly leveraged as a result of the Offering
and the other Acquisition Transactions. As of July 31, 1998, after giving effect
to the Offering, the Issuer had total indebtedness of $65.6 million on a
stand-alone basis and $170.1 million on a consolidated basis. The Issuer, the
Company and the Company's subsidiaries will be permitted to incur additional
indebtedness in the future, subject to certain limitations contained in the
instruments governing their indebtedness. See "Capitalization," "Description of
Certain Indebtedness" and "Description of the New Notes."
The Issuer's and the Company's ability to make scheduled payments of
principal of, or to pay the interest or liquidated damages, if any, on, or to
refinance, their respective indebtedness, or to fund planned capital
expenditures will depend on their future performance, which, to a certain
extent, will be subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond their control. There
can be no assurance that the Company's business will generate sufficient cash
flow from operations or that anticipated revenue growth and operating
improvements will be realized in an amount sufficient to enable the Issuer or
the Company to service their respective indebtedness or to fund its other
liquidity needs. If the Company is unable to generate sufficient cash flow to
enable the Issuer and the Company to meet their respective debt obligations,
each of them will have to adopt one or more alternatives, such as restructuring
their respective debt, reducing or delaying capital expenditures, selling assets
or obtaining additional equity or debt financing. There can be no assurance that
any of these actions could be effected on a timely basis or on satisfactory
terms, if at all, or that these actions would enable the Issuer and the Company
to continue to satisfy their respective debt service requirements. The terms of
the indebtedness, including the Indenture, the Revolving Credit Facility and the
Senior Note Indenture, also may prohibit the Issuer or the Company from taking
such actions. If the Company is unable to satisfy its obligations related to its
indebtedness, substantially all of its long-term debt could be declared
immediately due and payable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Financial
Resources."
19
<PAGE>
The degree to which the Issuer and the Company are leveraged could have
important consequences to Holders of the New Notes, including, but not limited
to: (i) making it more difficult for the Issuer to satisfy its obligations with
respect to the New Notes; (ii) increasing the Issuer's and the Company's
vulnerability to general adverse economic and industry conditions; (iii)
limiting the Issuer's and the Company's ability to obtain additional financing
to fund future working capital, capital expenditures and other general corporate
requirements; (iv) requiring the dedication of a substantial portion of the
Issuer's and the Company's cash flow from operations to the payment of principal
of, interest on, and liquidated damages, if any, on their indebtedness, thereby
reducing the availability of such cash flow to fund working capital, capital
expenditures or other general corporate purposes; (v) limiting the Issuer's and
the Company's flexibility in planning for, or reacting to, changes in its
business and the industry; (vi) placing the Issuer and the Company at a
competitive disadvantage relative to less leveraged competitors; and (vii)
restricting the Company's ability to pay dividends to the Issuer so that the
Issuer can pay its cash interest expense (which payments are scheduled to begin
in 2004) and other debt service obligations on the New Notes, the failure of
which may create an event of default under the New Notes, which, if not cured or
waived, could have a material adverse effect on the Issuer and the Company. In
addition, the Company's Senior Note Indenture, Revolving Credit Facility and
other indebtedness subject the Company to numerous financial and other
restrictive covenants, including, among other things, limitations on the ability
of Metallurg and its subsidiaries to incur additional indebtedness, to create
liens and other encumbrances, to make certain payments and investments, to sell
or otherwise dispose of assets, or to merge or consolidate with another entity.
Furthermore, indebtedness under the Revolving Credit Facility and credit
facilities of the Company's subsidiaries are at variable rates of interest,
which will cause the Company and its subsidiaries to be vulnerable to increases
in interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Certain Indebtedness" and
"Description of the New Notes." The Company also has substantial environmental
and pension liabilities, which could further restrict its financial flexibility.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Issuer is a holding company and does not have any material operations or
assets other than the ownership of Metallurg. Accordingly, the New Notes will be
effectively subordinated to all existing and future liabilities of Metallurg and
its subsidiaries, including indebtedness under Metallurg's Senior Note Indenture
and its Revolving Credit Facility. Metallurg itself is a holding company with
limited operations of its own and substantially all of Metallurg's operating
income is generated by its subsidiaries. As of July 31, 1998, after giving
effect to the Acquisition Transactions, the New Notes were effectively
subordinated to approximately $286.5 million of balance sheet liabilities of
Metallurg and its subsidiaries, including $100.0 million of indebtedness under
its Senior Note Indenture and Revolving Credit Facility. In addition, the New
Notes will be subordinated to all contingent obligations of the Company, which
include reimbursement obligations in respect of $28.3 million of letters of
credit outstanding under the Revolving Credit Facility as of July 31, 1998. The
Issuer, Metallurg and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the instruments governing
their indebtedness. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Liquidity and Financial Resources."
Any right of the Issuer to participate in any distribution of assets of its
subsidiaries upon the liquidation, reorganization or insolvency of Metallurg
(and the consequent right of the Holders of the New Notes to participate in the
distribution of those assets) will be subject to the prior claims of Metallurg's
creditors. The obligations of Metallurg under the Revolving Credit Facility are
secured by substantially all of its assets. See "Description of Certain
Indebtedness."
20
<PAGE>
LIMITATION ON ACCESS TO SUBSIDIARIES' CASH FLOW
The Issuer's cash flow, and consequently its ability to service its
indebtedness, including its obligations under the New Notes, is dependent upon
the cash flows of Metallurg and its subsidiaries and the payment of funds by
Metallurg and its subsidiaries to the Issuer in the form of loans, dividends or
otherwise. Metallurg has no obligation, contingent or otherwise, to pay any
amounts due pursuant to the New Notes or to make any funds available therefor.
In addition, Metallurg's Revolving Credit Facility and the Senior Note Indenture
impose, and agreements entered into in the future may impose, significant
restrictions on the payment of dividends and the making of loans by Metallurg to
the Issuer. The payment restrictions contained in the Revolving Credit Facility
and the Senior Note Indenture were not amended in connection with the
Acquisition Transactions and, as a result, there are no specific carveouts that
contemplate distributions to a holding company. See "Description of Certain
Indebtedness." Accordingly, repayment of the New Notes may depend upon the
ability of the Issuer to effect an offering of its capital stock or to refinance
the New Notes.
In addition, under Delaware law, a subsidiary of a company is permitted to
pay dividends on its capital stock only out of its surplus or, if it has no
surplus, out of its net profits for the year in which a dividend is declared or
for the immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay a cash dividend, the Company
must have surplus or net profits equal to the full amount of the dividend at the
time the dividend is declared. In determining the Company's ability to pay
dividends, Delaware law permits the board of directors of the Company to revalue
its assets and liabilities from time to time to their fair market values in
order to create surplus.
The Issuer cannot predict what the value of its subsidiaries' assets or the
amounts of their liabilities will be in the future. Accordingly, there can be no
assurance that Metallurg will be able to dividend any amounts to the Issuer in
the future and, therefore, that the Issuer will be able to pay its debt service
obligations on the New Notes.
In some cases, local law applicable to Metallurg's subsidiaries restricts
the ability of certain subsidiaries to pay dividends to Metallurg. Metallurg's
German subsidiaries, Elektrowerk Weisweiler GmbH ("EWW"), in which Metallurg
owns a 98.0% interest, and GfE Gesellschaft fur Elektrometallurgie mbH ("GfE"),
in which Metallurg owns a 99.2% interest, are currently prohibited from paying
dividends under German law because their stated capital as reported in the
commercial register is higher than their actual capital as reported under German
accounting principles. Metallurg has made certain filings to reduce the stated
capital of its German operating subsidiaries which should enable such German
operating subsidiaries to make dividend payments by late 1998. However, there
can be no assurance that Metallurg's subsidiaries will be permitted or able to
pay to Metallurg dividends necessary to service its indebtedness. See
"Description of Certain Indebtedness." In addition, Metallurg's Turkish
subsidiary is limited in its ability to pay dividends from retained earnings, as
a result of historical currency devaluation. Metallurg's South African
subsidiary must obtain central bank approval prior to paying dividends.
In addition, working capital facilities and other financing arrangements at
Metallurg's subsidiaries restrict such subsidiaries' ability to pay dividends.
For example, EWW must obtain the consent of a German governmental authority,
which guarantees a portion of EWW's $8.3 million working capital facility, in
order to pay dividends to Metallurg. EWW's ability to pay dividends to Metallurg
is also restricted by the terms of a settlement arrangement entered into with a
German state pension board with regard to its pension liability. The stock of
EWW has been pledged to secure obligations owed by EWW to the German
governmental authority and the German state pension board. London & Scandinavian
Metallurgical Co., Limited ("LSM") is party to a working capital facility that
limits its ability to pay dividends and management fees to Metallurg in an
amount of up to 100% of LSM's annual net income. In addition, Metallurg's Swiss
merchanting subsidiary may only pay dividends to Metallurg in amounts up to 50%
of its net income. In the event that Metallurg is prohibited from receiving
dividends from these
21
<PAGE>
subsidiaries, Metallurg's ability to make required principal and interest
payments on its indebtedness will be adversely effected. See "Description of
Certain Indebtedness."
The contribution to Adjusted EBITDA generated by GfE and EWW for the Last
Twelve Months was $10.1 million, or 19.5% of Metallurg's Adjusted EBITDA for
such period. Although Metallurg may seek, subject to compliance with applicable
laws and other restrictions, to repatriate funds from these subsidiaries through
means other than dividend payments, such as by causing those subsidiaries to
repay principal and interest on outstanding obligations to Metallurg or to make
loans to Metallurg, there can be no assurance that any such arrangements could
be made.
DEPENDENCE ON CYCLICAL MARKETS, INCLUDING INTERNATIONAL MARKETS, FOR METALLURG'S
PRODUCTS
The performance of Metallurg's businesses is directly related to the
production levels of Metallurg's customers, which are mainly steel, aluminum,
superalloy and titanium alloy producers whose businesses are dependent on highly
cyclical markets, such as the automotive, construction, consumer durables and
aerospace markets. The iron and steel, aluminum, superalloy and titanium
industries have all exhibited a high degree of cyclicality. Consequently,
Metallurg's financial performance could fluctuate with the general economic
cycle, which could have a material adverse effect on Metallurg's business,
financial condition, and results of operations. In addition, many of Metallurg's
products are internationally traded products with prices that are significantly
affected by worldwide supply and demand. Although there has been an economic
recovery in certain of Metallurg's markets beginning in 1993, there can be no
assurance that the current recovery will continue for any extended period of
time. In particular, the economic uncertainty in Asia, Russia and South America
could cause Metallurg's customers to reduce production levels (either as a
result of lower demand from Metallurg's customers or increased competition from
these areas), which could in turn lead to a decline in demand for Metallurg's
products. Based on customer location, for the 1997 fiscal year, approximately 5%
of Metallurg's sales were made in Asia, 2% in South America and less than 1% in
Russia. See "--International Risks" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LIMITED SOURCES FOR RAW MATERIALS
Certain of Metallurg's subsidiaries are dependent on third parties for raw
material supplies. Shieldalloy's production unit in Cambridge, Ohio currently
obtains a majority of its raw materials requirements for the manufacture of
ferrovanadium from two sources. Although alternative sources of ferrovanadium
raw materials exist, there can be no assurance that Metallurg would be able to
obtain adequate supplies of such materials, if at all, on acceptable terms from
other sources. Titanium and boron salts for the manufacture of sophisticated
aluminum master alloys are sourced from long-time suppliers who in certain
instances also supply competitive producers with these raw materials. Although
these and other raw materials are generally priced with reference to perceived
related market prices, any increase in demand could cause raw material costs to
rise. To the extent Metallurg is unable to recover its increased costs,
operating results would be adversely affected.
END OF ANTI-DUMPING DUTIES
Since July 1995, the Department of Commerce has imposed incremental
anti-dumping duties of 3.8% to 108% on imports of Russian ferrovanadium and
nitrided vanadium into the United States. These duties are subject to a "sunset"
review in 2000, after which time the International Trade Commission and,
independently, the Department of Commerce will determine whether to terminate or
extend them. In addition, all anti-dumping duties are subject to annual review
by the Department of Commerce. Metallurg had revenues of $29 million from sales
of ferrovanadium produced by it and sold in the United States for the six months
ended July 31, 1998. If the incremental duties are not maintained at their
current levels, Metallurg may be materially adversely affected. Normal duties on
these products are 4.2%.
22
<PAGE>
Since 1993, the Council of the European Communities has imposed duties on
imports of low carbon ferrochrome from Russia, Kazakhstan and Ukraine as high as
0.31 ECU per kilogram of material. These duties were due to expire in October
1998 but have been extended pending a review by the Council of the European
Communities of these anti-dumping measures. Metallurg had revenues of $26
million from sales of ferrochrome produced in Europe for the six months ended
July 31, 1998. The expiration of these duties may have a material adverse effect
on Metallurg. There is no assurance that these duties shall be extended further
by the Council of the European Communities following the review.
HIGHLY COMPETITIVE INDUSTRY
The metals industry is highly competitive on a worldwide basis. Competition
is primarily based on price, quality and timely delivery. In recent years, price
competition has intensified as a result of excess capacity in certain products.
In addition, export sales from the former Soviet Union of excess stocks of metal
and alloy additives severely hurt the price of ferroalloys in Europe and the
United States, which in turn exerted a negative impact on the price of
Metallurg's products. Although Metallurg believes that the downward effect of
this increased competition has abated, there can be no assurance that excessive
price competition will not recur. This is particularly true in light of the
economic uncertainty in Russia and Asia. To the extent that Metallurg's
competitors in those regions reduce prices in order to make their products more
competitive, or if their prices are reduced as a result of currency
devaluations, Metallurg could be materially adversely affected. There can be no
assurance that new entrants will not increase competition in the metals
industry, which could materially adversely affect Metallurg. An increase in the
use of substitutes for metal alloys also could have a material adverse effect on
the financial condition and operations of Metallurg.
ENVIRONMENTAL REGULATION
Metallurg's manufacturing businesses are subject to extensive laws and
regulations governing, among other things, emissions to air, discharges and
releases to land and water (including groundwater), the generation, handling,
storage, transportation, treatment and disposal of wastes and other materials,
including wastes and materials containing low levels of radioactivity, and the
remediation of contamination caused by releases of wastes and other material, as
well as worker exposure to hazardous or toxic substances. There can be no
assurance that these laws and regulations will not result in the imposition of
future liabilities and obligations that would be material to Metallurg's
business operations, financial condition or cash flow. Metallurg's cost of
compliance with environmental laws and remediation obligations under such laws
has been and is expected to continue to be significant. In addition to its
ongoing compliance obligations, Shieldalloy entered into environmental
settlement agreements with federal and state regulators in connection with the
Reorganization Plan pursuant to which it has agreed to remediate historical
contamination at the Shieldalloy facilities in Newfield, New Jersey and
Cambridge, Ohio, which will require Metallurg to make significant expenditures
in coming years. Although the scope of Shieldalloy's remediation obligations
relating to the historical contamination at these facilities has been defined,
there can be no assurance that the ultimate cost of fulfilling these obligations
will not materially exceed Shieldalloy's current estimates or currently
established reserves. Such expenditures are currently estimated at $38.9
million, of which approximately $2.9 million is expected to be expended in the
second half of 1998, $4.3 million in 1999 and $8.1 million in 2000. In addition,
Metallurg estimates it will make expenditures of $5.0 million for remediation at
its foreign facilities. Of this amount, approximately $0.5 million is expected
to be expended in the second half of 1998, $0.7 million in 1999 and $0.7 million
in 2000. For a detailed discussion of these matters, see
"Business--Environmental Matters."
INTERNATIONAL RISKS
Metallurg has substantial operations outside the United States. At July 31,
1998, Metallurg's operations located outside the United States represented
approximately 60% (based on book values) of
23
<PAGE>
Metallurg's assets. Approximately 80% of Metallurg's employees were outside the
United States at July 31, 1998. Based on customer location, for the 1997 Fiscal
Year, approximately 38% of Metallurg's sales were made in North America, 47% in
Europe, 5% in Asia, 2% in South America and 8% throughout the rest of the world.
Foreign operations are subject to special risks that can materially affect the
sales, profits, cash flows and financial position of Metallurg, including taxes
on distributions or deemed distributions to Metallurg or any United States
subsidiary, currency exchange rate fluctuations, limitations on repatriation of
funds, maintenance of minimum capital requirements, and import and export
controls. In general, Metallurg's cost of sales for products manufactured in
certain foreign locations has in the past been adversely impacted by the
appreciation of the respective local currencies of those locations relative to
the U.S. dollar and other currencies in which it sells. While Metallurg engages
in hedging transactions to reduce certain of the risks of currency rate
fluctuations, there can be no assurances regarding the effectiveness or adequacy
of those transactions.
LABOR RELATIONS
Approximately 50% of Metallurg's employees are covered by collective
bargaining or similar agreements. Many of these agreements covering Metallurg's
union employees at its foreign subsidiaries are renewable on an annual basis.
There can be no assurance that new labor agreements will be reached without a
work stoppage or strike or will be reached on terms satisfactory to Metallurg.
See "Business-- Employees."
RESTRICTIVE DEBT COVENANTS
The Indenture imposes significant operating and financial restrictions on
the Issuer. The Indenture significantly limits or prohibits, among other things,
the ability of the Issuer to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments or investments, consummate
certain asset sales, enter into certain transactions with affiliates, permit
arrangements that impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Issuer, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Issuer. The ability of the Issuer
to comply with these and other provisions of the Indenture may be affected by
events beyond the Issuer's control. These restrictions could limit the ability
of the Issuer to respond to market conditions or meet extraordinary capital
needs or otherwise restrict corporate activities. There can be no assurances
that such restrictions will not materially adversely affect the ability of the
Issuer to finance its future operations or capital needs. See "Description of
Certain Indebtedness" and "Description of the New Notes--Certain Covenants."
The Revolving Credit Facility and the Senior Note Indenture impose
significant operating and financial restrictions on Metallurg and its
subsidiaries. The Revolving Credit Facility and the Senior Note Indenture
significantly limit or prohibit, among other things, the ability of Metallurg
and its restricted subsidiaries to incur additional indebtedness, incur liens,
pay dividends or make certain other restricted payments or investments,
consummate certain asset sales, enter into certain transactions with affiliates,
permit arrangements that impose restrictions on the ability of a subsidiary to
pay dividends or make certain payments to Metallurg, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of the assets of Metallurg. The ability of Metallurg
to comply with these and other provisions of the Revolving Credit Facility and
the Senior Note Indenture may be affected by events beyond the Issuer's and
Metallurg's control. These restrictions could limit the ability of Metallurg to
respond to market conditions or meet extraordinary capital needs or otherwise
restrict corporate activities. There can be no assurances that such restrictions
will not materially adversely affect the ability of Metallurg to finance its
future operations or capital needs. See "Description of Certain Indebtedness"
and "Description of the New Notes--Certain Covenants."
24
<PAGE>
LIMITATIONS ON ABILITY TO MAKE CHANGE OF CONTROL PAYMENT
The Indenture provides that, upon the occurrence of any Change of Control
(as defined herein), the Issuer will be required to make an offer (a "Change of
Control Offer") to repurchase all the New Notes issued and then outstanding
under the Indenture at a price equal to 101% of the Accreted Value (as defined
therein) thereof (if such date of repurchase is prior to July 15, 2003) or 101%
of the principal amount thereof (if such date of repurchase is on or after July
15, 2003) plus, in each case, accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase. Any Change of Control under the
Indenture would likely trigger a similar change of control offer under the
Senior Note Indenture and would constitute a default under the Revolving Credit
Facility. Upon such event, such lenders would be entitled to receive payment of
all outstanding obligations under the Revolving Credit Facility. See
"Description of Certain Indebtedness." If a Change of Control were to occur and
waivers under the Senior Note Indenture and the Revolving Credit Facility were
not obtained, it is unlikely that the Issuer would have sufficient funds
available to repurchase the New Notes pursuant to a Change of Control Offer or
refinance the New Notes. If the Issuer does not have sufficient financial
resources to effect a Change of Control Offer, it would be required to seek
additional financing from outside sources to enable it to repurchase the New
Notes. There can be no assurance that such financing would be available to the
Issuer on satisfactory terms.
RISK OF FRAUDULENT TRANSFER LIABILITY
If a court of competent jurisdiction in a suit by an unpaid creditor or a
representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that either the Issuer did not receive fair
consideration or reasonably equivalent value for issuing the New Notes and, at
the time of the incurrence of indebtedness represented by the New Notes, the
Issuer was insolvent, was rendered insolvent by reason of such incurrence, was
engaged in a business or transaction for which its remaining assets constituted
unreasonably small capital, intended to incur, or believed that it would incur,
debts beyond its ability to pay as such debts matured, or intended to hinder,
delay or defraud their creditors, such court could avoid such indebtedness,
subordinate such indebtedness to other existing and future indebtedness of the
Issuer or take other action detrimental to the Holders of the New Notes. The
measure of insolvency for purposes of the foregoing will vary depending upon the
law of the relevant jurisdiction. Generally, however, a company would be
considered insolvent for purposes of the foregoing if the sum of such company's
debts is greater than all the company's property at a fair valuation, or if the
present fair saleable value of the company's assets is less than the amount that
would be required to pay its probable liability on its existing debts as they
become absolute and matured.
RECENT BANKRUPTCY
Metallurg and Shieldalloy sought protection under Chapter 11 of the United
States Bankruptcy Code in September 1993 following Metallurg's inability to
restructure or refinance its long-term indebtedness and revolving credit
facility in light of the confluence of several negative economic factors that
caused Metallurg to default on certain then-outstanding indebtedness. Metallurg
was particularly affected by recessionary conditions in the end-markets for its
products and "dumping" by certain foreign competitors. There can be no assurance
that such economic factors will not recur in the future. See "--Dependence on
Cyclical Markets, Including International Markets, for Metallurg's Products",
"--End of Anti-Dumping Duties" and "Highly Competitive Industry."
Metallurg and Shieldalloy consummated the Reorganization Plan in April 1997.
While in Chapter 11 proceedings, Metallurg and Shieldalloy substantially reduced
their debt, restructured significant obligations, restructured their operations
and made certain management changes, reduced expenses and entered into
settlement agreements with various environmental regulatory authorities. Certain
of these activities, particularly reducing debt and restructuring obligations,
could have been accomplished only in the context of Chapter 11 and should not be
viewed as indicative of Metallurg's performance in the future.
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PRINCIPAL STOCKHOLDERS
The sole stockholders of the Issuer are Safeguard International, the
Investor Group and a private equity fund, which is associated with Safeguard
International. The Issuer is the 100% parent of the Company, and Safeguard
International, controls the majority of the voting power of the Issuer,
therefore, Safeguard International has the ability to designate all of the
directors of the Issuer and the Company. See "The Acquisition Transactions" and
"Management." Safeguard International is in a position to direct the management
and affairs of the Issuer and the Company and may cause the Issuer and the
Company to enter into transactions that could ultimately enhance stockholder
value but may involve risks to Holders of the New Notes.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
If the New Notes are traded after their initial issuance, they may trade at
a discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities, the performance of the Company and
certain other factors. Historically, the market for non-investment grade debt
has been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the New Notes. There can be no assurance that if
a market for the New Notes develops, that market will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on holders of the
New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate that
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
holder which is an "affiliate" of the Issuer within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that it will make
this Prospectus available to any such broker-dealer for use in connection with
any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes will be adversely affected.
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THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Old Notes were sold by the Issuer on July 13, 1998 to the Initial
Purchaser, who resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and other institutional
"accredited investors" (as defined in Rule 501(a) under the Securities Act). In
connection with the sale of the Old Notes, the Issuer and the Initial Purchaser
entered into the Registration Agreement pursuant to which the Issuer agreed to
file with the Commission a registration statement (the "Exchange Offer
Registration Statement") with respect to an offer to exchange the Old Notes for
New Notes within 60 days following the original issuance of the Old Notes. In
addition, the Issuer agreed to cause the Exchange Offer Registration Statement
to become effective under the Securities Act and to issue the New Notes pursuant
to the Exchange Offer. A copy of the Registration Agreement has been filed as an
exhibit to the Exchange Offer Registration Statement.
The Exchange Offer is being made pursuant to the Registration Agreement to
satisfy the Issuer's obligations thereunder. For purposes of the Exchange Offer,
the term "Eligible Holder" shall mean the registered owner of any Old Notes that
remain Transfer Restricted Securities, as reflected on the records of United
States Trust Company of New York as registrar for the Old Notes (in such
capacity, the "Registrar"), or any person whose Old Notes are held of record by
the depositary of the Old Notes. The Issuer is not required to include any
securities other than the New Notes in the Exchange Offer Registration
Statement. Holders of Old Notes who do not tender their Old Notes or whose Old
Notes are tendered but not accepted would have to rely on exemptions from
registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Old Notes.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to the Issuer, the Issuer
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by any
holder of such New Notes (other than a person that is an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act and except as set
forth in the next paragraph) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating and does not intend to participate, and has no
arrangement or understanding with any person to participate, in the distribution
of such New Notes.
If any person were to be participating in the Exchange Offer for the purpose
of distributing securities in a manner not permitted by the Commission's
interpretation, (i) the position of the staff of the Commission enunciated in
interpretive letters would be inapplicable to such person and (ii) such person
would be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Issuer accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction. Prior to the Exchange Offer,
however, the Issuer will register or qualify or cooperate with the holders of
the Old Notes and their respective counsel in connection with the registration
or qualification of the New Notes for offer and sale under the securities or
blue sky laws of such jurisdictions as is necessary to permit consummation of
the Exchange Offer and do any and all other acts or things necessary or
advisable to enable the offer and sale in such jurisdictions of the New Notes.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Issuer will accept any and
all Old Notes validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date. The Issuer will issue up to $121,000,000 aggregate principal
amount at maturity of New Notes in exchange for a like principal amount of
outstanding Old Notes which are validly tendered and accepted in the Exchange
Offer. Subject to the conditions of the Exchange Offer described below, the
Issuer will accept any and all Old Notes which are so tendered. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer; however,
the Old Notes may be tendered only in multiples of $1,000. See "Description of
The New Notes."
The form and terms of the New Notes will be the same in all material
respects as the form and terms of the Old Notes, except that (i) the New Notes
will be registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (ii) because the New Notes will be
registered, holders of New Notes will not be, and upon the consummation of the
Exchange Offer, Eligible Holders of Old Notes will no longer be, entitled to
certain rights under the Registration Agreement intended for the holders of
unregistered securities.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware or the Indenture in
connection with the Exchange Offer. The Issuer intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Agreement. Old Notes
which are not tendered for exchange or are tendered but not accepted in the
Exchange Offer will remain outstanding and be entitled to the benefits of the
Indenture, but will not be entitled to any registration rights under the
Registration Agreement.
The Issuer shall be deemed to have accepted validly tendered Old Notes when,
as and if the Issuer has given oral or written notice thereof to the Exchange
Agent for the Exchange Offer. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the New Notes from the Issuer.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Eligible Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Issuer will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York City time, on November
25, 1998, subject to extension by the Issuer by notice to the Exchange Agent as
herein provided. The Issuer reserves the right to so extend the Exchange Offer
at its discretion, in which event the term "Expiration Date" shall mean the time
and date on which the Exchange Offer as so extended shall expire. The Issuer
will notify the Exchange Agent of any extension by oral or written notice and
will make a public announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Issuer reserves the right (i) to delay accepting for exchange any Old
Notes for any New Notes or to extend or terminate the Exchange Offer and not
accept for exchange any Old Notes for any New Notes if any of the events set
forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by the Issuer by giving oral or written
notice of such delay or termination to the Exchange Agent or (ii) to amend the
terms of the Exchange Offer in any manner. Any
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such delay in acceptance for exchange, extension or amendment will be followed
as promptly as practicable by public announcement thereof. If the Exchange Offer
is amended in a manner determined by the Issuer to constitute a material change,
the Issuer will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of Old Notes of such amendment, and the Issuer
will extend the Exchange Offer for a minimum of five business days, depending
upon the significance of the amendment and the manner of disclosure to the
holders of Old Notes, if the Exchange Offer would otherwise expire during such
five business-day period. The rights reserved by the Issuer in this paragraph
are in addition to the Issuer's rights set forth below under the caption
"Conditions of the Exchange Offer."
TERMINATION OF CERTAIN RIGHTS
The Registration Agreement provides that if (a) on or prior to the 60th day
following the date of original issuance of the Old Notes, neither the Exchange
Offer Registration Statement nor the Shelf Registration Statement has been filed
with the Commission, (b) on or prior to the 120th day following the date of
original issuance of the Old Notes, the Exchange Offer Registration Statement
has not been declared effective, (c) on or prior to the 150th day following the
date of original issuance of the Old Notes, neither the Exchange Offer has been
consummated nor the Shelf Registration Statement has been declared effective, or
(d) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective, such Registration Statement
thereafter ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Notes in accordance with and during the periods
specified in the Registration Agreement (each such event referred to in clauses
(a) through (d), a "Registration Default"), the Issuer will pay liquidated
damages ("Liquidated Damages"), to each Holder of the Old Notes with respect to
the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of the Old Notes held by such Holder. Upon a Registration Default,
Liquidated Damages will accrue at the rate specified above until such
Registration Default is cured and the amount of Liquidated Damages will increase
by an additional $.05 per week per $1,000 principal amount of Old Notes with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages of $.25 per week per
$1,000 principal amount of Old Notes (regardless of whether one or more than one
Registration Default is outstanding). All accrued Liquidated Damages will be
paid by the Issuer on January 15 and July 15 of each year to the Holders of Old
Notes by wire transfer of immediately available funds or by mailing checks to
their registered addresses if no such accounts have been specified.
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be, entitled to certain
other rights under the Registration Agreement intended for holders of Transfer
Restricted Securities. The Exchange Offer shall be deemed consummated upon the
occurrence of the delivery by the Issuer to the Registrar under the Indenture of
New Notes in the same aggregate principal amount as the aggregate principal
amount of Old Notes that are tendered by holders thereof pursuant to the
Exchange Offer.
PROCEDURES FOR TENDERING
Only an Eligible Holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, an Eligible Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile, together
with the Old Notes (unless such tender is being effected pursuant to the
procedure for book-entry transfer described below) and any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility System may make book-entry delivery of the Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account in accordance with
DTC's procedure for such transfer. Although delivery of Old Notes
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may be effected through book-entry transfer into the Exchange Agent's account at
DTC, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Exchange Agent at its addresses
as set forth under the caption "Exchange Agent" below prior to 5:00 p.m., New
York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
The tender by an Eligible Holder of Old Notes will constitute an agreement
between such holder and the Issuer in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Eligible Holders. Instead of delivery by mail, it is recommended that
Eligible Holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the Exchange Agent on or
before the Expiration Date. No Letter of Transmittal or Old Notes should be sent
to the Issuer. Eligible Holders may request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the tenders for such
holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Notes tendered pursuant thereto are tendered for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member of a signature guarantee program within the
meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Issuer,
evidence satisfactory to the Issuer of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be determined
by the Issuer in its sole discretion, which determination will be final and
binding. The Issuer reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Issuer's acceptance of which might,
in the judgment of the Issuer or its counsel, be unlawful. The Issuer also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Issuer's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such times as the Issuer in its sole discretion shall determine. Although
the Issuer intends to request the Exchange Agent to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Issuer, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Issuer reserves the right in its sole discretion (subject
to limitations contained in the Indenture) (i) to purchase or make offers for
any Old Notes that remain outstanding subsequent to the Expiration Date and (ii)
to the extent permitted by applicable law, to purchase Old Notes in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
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By tendering, each Eligible Holder will represent to the Issuer that, among
other things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business by the person receiving such New
Notes, whether or not such person is the holder and that neither the Eligible
Holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such New Notes and that neither the
Eligible Holder nor any such other person is an "affiliate," as defined in Rule
405 under the Securities Act, of the Issuer. If the holder is a broker-dealer
that will receive New Notes for its own account in exchange for Old Notes that
were acquired as a result of market-making activities or other trading
activities, such holder by tendering will acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes.
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Notes and (i) whose Old Notes
are not immediately available, or (ii) who cannot deliver their Old Notes and
other required documents to the Exchange Agent or cannot complete the procedure
for book-entry transfer prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand) setting forth
the name and address of the Eligible Holder, the certificate number(s) of
such Old Notes (if available) and the principal amount of Old Notes tendered
together with a duly executed Letter of Transmittal (or a facsimile
thereof), stating that the tender is being made thereby and guaranteeing
that, within five business days after the Expiration Date, the
certificate(s) representing the Old Notes to be tendered in proper form for
transfer (or a confirmation of a book entry transfer into the Exchange
Agent's account at the depositary of the Old Notes delivered electronically)
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such certificate(s) representing all tendered Old Notes in proper
form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the depositary of the Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Eligible Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date, and prior to acceptance for exchange thereof by the Issuer.
Any such notice of withdrawal must (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Old Notes), (iii) be signed by the Depositor in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if
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different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Issuer in its sole discretion, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer, and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly re-tendered. Any Old Notes which have been tendered but which are not
accepted for exchange or which are withdrawn will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be re-tendered by following one of the procedures described above
under "Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer, the
Issuer will not be required to accept for exchange any Old Notes tendered for
any New Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if any of the following conditions
exist:
(a) Any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority with respect to
the Exchange Offer which, in the sole judgment of the Issuer, might
materially impair the ability of the Issuer to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of the
Exchange Offer to the Issuer; or
(b) There shall have occurred any change, or any development involving a
prospective change, in the business or financial affairs of the Issuer,
which in the sole judgment of the Issuer, might materially impair the
ability of the Issuer to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Issuer; or
(c) There shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the sole judgment of the Issuer, might
materially impair the ability of the Issuer to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of the
Exchange Offer to the Issuer; or
(d) There shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on the New
York Stock Exchange (whether or not mandatory); (ii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory); (iii) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States; (iv) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other lending institutions in the United
States; or (v) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to such
conditions or may be waived by the Issuer in whole or in part at any time and
from time to time in its sole discretion. If the Issuer waives or amends the
foregoing conditions, the Issuer will, if required by applicable law, extend the
Exchange Offer for a minimum of five business days from the date that the Issuer
first gives notice, by public announcement or otherwise, of such waiver or
amendment, if the Exchange Offer would otherwise expire within such five
business-day period. Any determination by the Issuer concerning the events
described above will be final and binding upon all parties.
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FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Issuer. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitation may be
made by telecopy, telephone or in person by officers and regular employees of
the Issuer and its affiliates.
The Issuer has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Issuer, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The Issuer
may also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
Prospectus, Letters of Transmittal and related documents to the beneficial
owners of the Old Notes and in handling or forwarding tenders for exchange. The
Issuer will pay the other expenses to be incurred in connection with the
Exchange Offer, including fees and expenses of the Trustee, accounting and legal
fees and printing costs.
The Issuer will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The exchange of the Old Notes for the New Notes in the Exchange Offer should
not constitute an exchange for federal income tax purposes. Consequently, (i) no
gain or loss should be realized by a U.S. Holder upon receipt of a New Note;
(ii) the holding period of the New Note should include the holding period of the
Old Note exchanged therefor and (iii) the adjusted tax basis of the New Note
should be the same as the adjusted tax basis of the Old Note exchanged therefor
immediately before the exchange. Even if the exchange of an Old Note for a New
Note were treated as an exchange, however, such an exchange should constitute a
tax-free recapitalization for federal income tax purposes. Accordingly, a New
Note should have the same issue price as an Old Note and a U.S. Holder should
have the same adjusted basis and holding period in the New Note as it had in an
Old Note immediately before the exchange. As used herein, the term "U.S. Holder"
means a person who is, for United States federal income tax purposes, (i) a
citizen or resident of the United States; (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof; or (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Generally, Eligible Holders (other than any holder who is an "affiliate" of
the Issuer within the meaning of Rule 405 under the Securities Act) who exchange
their Old Notes for New Notes pursuant to the Exchange Offer may offer such New
Notes for resale, resell such New Notes, and otherwise transfer such New Notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided such New Notes are acquired in the ordinary course
of the holders' business, and such holders have no arrangement with any person
to participate in a distribution of such New Notes. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
33
<PAGE>
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." To comply with the securities laws of certain jurisdictions, it
may be necessary to qualify for sale or register the New Notes prior to offering
or selling such New Notes. Upon request by Eligible Holders prior to the
Exchange Offer, the Issuer will register or qualify the New Notes in certain
jurisdictions subject to the conditions in the Registration Agreement. If an
Eligible Holder does not exchange such Old Notes for New Notes pursuant to the
Exchange Offer, such Old Notes will continue to be subject to the restrictions
on transfer contained in the legend thereon and will not have the benefit of any
covenant regarding registration under the Securities Act. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered Old Notes could be adversely affected.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Notes. Holders of Old Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Issuer's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Issuer upon the consummation of the Exchange Offer. The expenses of the Exchange
Offer will be amortized by the Issuer over the term of the New Notes.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. All correspondence in connection with the Exchange Offer
and the Letter of Transmittal should be addressed to the Exchange Agent, as
follows:
<TABLE>
<CAPTION>
BY FACSIMILE: BY MAIL: BY HAND BEFORE 4:30 P.M.:
<S> <C> <C>
(212) 780-0592 United States Trust Company United States Trust Company
Attention: Customer Service of New York of New York
Confirm by Telephone to: P.O. Box 843 Cooper Station 111 Broadway
(800) 548-6565 New York, New York 10276 New York, New York 10006
Attention: Corporate Trust Attention: Lower Level
Services Corporate Trust Window
</TABLE>
BY OVERNIGHT COURIER AND BY HAND AFTER 4:30 P.M. ON EXPIRATION DATE:
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
34
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1998 the cash and cash
equivalents and consolidated capitalization (i) of the Company on an actual
basis and (ii) of the Issuer on an actual basis, reflecting effects of the
Offering, the Merger and other Acquisition Transactions. This table should be
read in conjunction with the information set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1998
----------------------
<S> <C> <C>
COMPANY ISSUER
ACTUAL ACTUAL
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................. $ 44,423 $ 46,482
---------- ----------
---------- ----------
Short-term debt (a):
Revolving Credit Facility...............................................................
Other indebtedness...................................................................... $ 798 $ 798
---------- ----------
Total short-term debt..................................................................... 798 798
---------- ----------
Long-term debt, including current maturities:
Other indebtedness...................................................................... 3,711 3,711
Senior Notes............................................................................ 100,000 100,000
New Notes offered hereby................................................................ -- 65,593
---------- ----------
Total long-term debt, including current maturities........................................ 103,711 169,304
---------- ----------
Total shareholders' equity................................................................ 54,861 92,407(b)
---------- ----------
Total capitalization...................................................................... $ 159,370 $ 262,509
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) Following the Acquisition Transactions, Metallurg had approximately $45
million of available borrowing capacity under the Revolving Credit Facility
and its working capital facilities at LSM, GfE and EWW, subject to certain
limitations contained in the instruments governing their indebtedness. See
"Description of Certain Indebtedness--Revolving Credit Facility and Other
Financing Arrangements" for a description of the Revolving Credit Facility.
(b) Includes an Equity Contribution of approximately $97.0 million to finance a
portion of the purchase price in the Acquisition Transactions.
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The Unaudited Pro Forma Condensed Consolidated Financial Data of the Issuer
have been derived by the application of pro forma adjustments to the Company's
historical financial data included elsewhere in this Prospectus. The pro forma
condensed consolidated statements of operations of the Issuer for the three
quarters ended January 31, 1998 and the fiscal two quarters ended July 31, 1998
give effect to the Acquisition Transactions as if the Acquisition Transactions
had been consummated as of April 1, 1997. In addition, the pro forma condensed
consolidated statements of operations of the Issuer for the three quarters ended
January 31, 1998 give effect to the issuance by the Company of the Senior Notes
and the use of proceeds therefrom to repay certain indebtedness of the Company
and its subsidiaries as described below (the "Other Pro Forma Adjustments") as
if such Other Pro Forma Adjustments had occurred on April 1, 1997. The condensed
consolidated balance sheet data of the Issuer reflect the Acquisition
Transactions described elsewhere herein. The pro forma adjustments are based
upon available information and upon certain assumptions that management of the
Issuer believes are reasonable under the circumstances. The adjustments are
described in the accompanying notes. The Unaudited Pro Forma Condensed
Consolidated Financial Data do not purport to represent what the Issuer's
results of operations or financial position actually would have been if the
Acquisition Transactions and the Other Pro Forma Adjustments had been
consummated on the dates indicated, or what such results of operations or
financial position will be for any future period or date. The Unaudited Pro
Forma Condensed Consolidated Financial Data should be read in conjunction with
"Selected Financial Data" and the notes thereto and the consolidated financial
statements and notes thereto included elsewhere in this Prospectus.
36
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
METALLURG
METALLURG, HOLDINGS,
INC. OFFERING MERGER OTHER INC.
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
-------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenue............................ $ 337,843 $ 337,843
Cost of sales............................ (281,679) (281,679)
-------------- -------------
Gross margin........................... 56,164 56,164
Selling, general and administrative
expenses............................... (29,908) $ (2,603)(a) $ 354(c) (32,157)
Merger costs............................. (4,416) -- 4,416(c) --
-------------- ----------- ------ -------------
Operating income....................... 21,840 (2,603) 4,770 24,007
Other income, net........................ 545 545
Interest expense, net.................... (4,616) $ (4,780)(b) -- -- (9,396)
-------------- ----------- ----------- ------ -------------
Income before income taxes............. 17,769 (4,780) (2,603) 4,770 15,156
Income tax provision (benefit)........... 9,481 (59) (43) 1,160(c) 10,539
-------------- ----------- ----------- ------ -------------
Net income............................. $ 8,288 $ (4,721) $ (2,560) $ 3,610 $ 4,617
-------------- ----------- ----------- ------ -------------
-------------- ----------- ----------- ------ -------------
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C>
(a) Reflects the following:
Amortization of goodwill............................................................................ $ (2,478)
General overhead expenses, including professional fees, of the Issuer............................... (125)
---------
$ (2,603)
---------
---------
Represents an estimate; the Issuer's actual overhead expenses cannot be predicted with certainty.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
(b) Reflects interest expense on the New Notes and amortization of deferred issuance costs in connection therewith, as
follows:
Interest (compounded semi-annually): 69,332
Principal (1)................................................................... $
Interest rate..................................................................... 0.1275
X2 months......................................................................... $ (1,473)(2)
Principal (1) + (2)+($2,947 - 4 mos. ended Jan. 31, 1998)......................... $ 73,752
Interest rate..................................................................... 0.1275
X4 months......................................................................... (3,134)
Amortization of deferred issuance costs: 3,465
Total costs..................................................................... $
Amortization period............................................................... 10 years (173)
X6 months.........................................................................
---------
$ (4,780)
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(c) To reverse non-recurring charges directly related to the Merger, as follows:
Costs associated with the acceleration of vesting of stock awards upon
change of control............................................................................... $ (354)
Stock option cancellation expenses................................................................ (3,541)
Fees associated with the solicitation of consents from the
Senior Note holders related to the Merger....................................................... (625)
Other costs, including professional fees.......................................................... (250)
---------
Subtotal.......................................................................................... (4,770)
Tax effect........................................................................................ 1,160
---------
Net adjustments................................................................................... $ (3,610)
---------
---------
</TABLE>
37
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE QUARTERS ENDED JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
METALLURG
HOLDINGS,
METALLURG, INC.
INC. OFFERING MERGER CONSOLIDATED
HISTORICAL ADJUSTMENTS ADJUSTMENTS(D) PRO FORMA
-------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Total revenue.............................. $ 476,967 $ 476,967
Cost of sales.............................. (410,033) (410,033)
-------------- -------------
Gross margin............................. 66,934 66,934
Selling, general and administrative
expenses................................. (43,563) $ (4,342)(a) (47,905)
-------------- ------- -------------
Operating income......................... 23,371 (4,342) 19,029
Other income, net.......................... 1,805 -- 1,805
Interest expense, net...................... (5,653) $ (9,994) (c) -- (15,647)
-------------- ----------- ------- -------------
Income before income taxes............... 19,523 (9,994) (4,342) 5,187
Income tax provision (benefit)............. 12,459 (1,139) (71) 11,249
-------------- ----------- ------- -------------
Income (loss) before extraordinary
item................................... $ 7,064 $ (8,855) $ (4,271) $ (6,062)
-------------- ----------- ------- -------------
-------------- ----------- ------- -------------
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C>
(a) Reflects the following:
Amortization of goodwill.......................................................................... $ (4,134)
General overhead expenses, including professional fees, of the Issuer............................. (208)
---------
$ (4,342)
---------
---------
Represents an estimate; the Issuer's actual overhead expenses cannot be predicted with certainty.
(b) Reflects interest expense on the New Notes and amortization of deferred issuance costs on the New
Notes as follows:
Interest (compounded semi-annually):
Principal(1).................................................................... $ 65,177
Interest rate................................................................... .1275 $ (4,155)(2)
X6 months.......................................................................
Principal(1)+(2)................................................................ $ 69,332
Interest rate................................................................... .1275 (2,947)
X4 months.......................................................................
Amortization of deferred issuance costs:
Total costs..................................................................... $ 3,465
Amortization period............................................................. 10 yrs. (289)
X10 months......................................................................
--------------
$ (7,391)
--------------
--------------
(c) Reflects the following:
Interest on the Senior Notes at an assumed issuance date of April 1, 1997 as
follows:
Principal....................................................................... $100,000
Interest rate................................................................... .11 $ (9,167)
X10 months......................................................................
Less amounts recorded on historical books:
November 25--December 31, 1997.................................................. 1,067
January 1998.................................................................... 917
</TABLE>
<TABLE>
<S> <C> <C>
Amortization of deferred issuance costs on the Senior Notes at an assumed issuance date of April
1, 1997......................................................................................... (300)
Reversal of interest on 12% senior-secured notes assumed repaid on April 1, 1997.................. 3,474
Reversal of historical interest expense on GfE bank debt and LSM Term Loan Facility (as defined
herein) assumed replaced with Company loans at April 1, 1997.................................... 1,406
---------
$ (2,603)
---------
---------
In November 1997, the Company used the proceeds from the issuance of the Senior Notes to retire
the 12% senior-secured notes, GfE bank debt and the LSM Term Loan Facility.
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
(d) The Company has not included as pro forma adjustments the following non-recurring charges directly
related to the Merger, as follows:
Costs associated with the acceleration of vesting of stock awards upon change of control.......... $ (750)
Stock option cancellation expenses................................................................ (3,541)
Fees associated with the solicitation of consents from the Senior Note holders related to the
Merger.......................................................................................... (625)
Other cost, including professional fees........................................................... (250)
---------
Subtotal........................................................................................ (5,166)
Tax effect........................................................................................ 1,325
---------
Net adjustments................................................................................... $ (3,841)
---------
---------
</TABLE>
39
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company for each of the years in the four-year period ended December 31, 1996,
the three months ended March 31, 1996, the nine months ended December 31, 1996,
the quarter ended March 31, 1997, the three quarters ended January 31, 1998 and
the two quarters ended July 31, 1998. Information as of December 31, 1993, 1994
and 1995 and for the years ended December 31, 1993 and 1994 is derived from the
consolidated financial statements of the Company, which have been audited by
Deloitte & Touche LLP, independent public accountants. The information as of
December 31, 1996, March 31, 1997 and January 31, 1998 and for each of the two
years in the period ended December 31, 1996, for the quarter ended March 31,
1997 and for the three quarters ended January 31, 1998 is derived from the
consolidated financial statements of the Company included elsewhere herein,
which have been audited by Deloitte & Touche LLP, independent public
accountants. The selected financial data for the Company as of March 31, 1996
and July 31, 1998 and for the three months ended March 31, 1996, the nine months
ended December 31, 1996 and the two quarters ended July 31, 1998 are unaudited
and reflect all adjustments (consisting only of normal recurring adjustments)
that are, in the opinion of management, necessary for a fair presentation of the
results of operations for such periods. The results of operations for the
quarter ended March 31, 1997 and the three quarters ended January 31, 1998 are
not necessarily indicative of results for the full year. The information in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements of the Company, and the notes thereto, included elsewhere in this
Prospectus.
Financial information contained in this Prospectus for periods and dates
after March 31, 1997 reflects the effects of Metallurg's Reorganization Plan,
including the implementation of fresh-start reporting, as of March 31, 1997.
Accordingly, the Company's consolidated financial statements for periods and
dates prior to March 31, 1997 are not comparable to subsequent consolidated
financial statements. In addition, Metallurg, Inc. changed its fiscal year from
a calendar year to the period ended January 31, for fiscal periods after
consummation of its Reorganization Plan, while its subsidiaries have retained a
calendar fiscal year. As a result, financial data for reported periods include
the following;
THE TWO QUARTERS ENDED JULY 31, 1998--Consolidated results of operations are
comprised of: (i) the six months ended July 31, 1998 for Metallurg, Inc. on a
stand-alone basis; and (ii) the six months ended June 30, 1998 for its
subsidiaries. The consolidated balance sheet data at July 31, 1998 reflect the
financial position of Metallurg, Inc. at July 31, 1998 and the operating
subsidiaries at June 30, 1998.
THE THREE FISCAL QUARTERS ENDED JANUARY 31, 1998--Consolidated results of
operations are comprised of: (i) the post-confirmation ten months ended January
31, 1998 for Metallurg, Inc. on a stand-alone basis and (ii) the
post-confirmation nine months ended December 31, 1997 for its subsidiaries.
40
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-CONFIRMATION
-----------------------------------------------------------------------------------
THREE NINE
MONTHS MONTHS QUARTER
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED
------------------------------------------ MARCH 31, DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1996 1996 1997
--------- --------- --------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................... $ 541,188 $ 553,479 $ 688,002 $ 648,816 $ 165,294 $ 483,522 $ 155,427
Commission income................... 674 838 1,362 1,186 329 857 160
--------- --------- --------- --------- ----------- ------------- -----------
Total revenue..................... 541,862 554,317 689,364 650,002 165,623 484,379 155,587
Cost of sales....................... 508,424 496,218 603,535 566,538 144,474 422,064 134,060
--------- --------- --------- --------- ----------- ------------- -----------
Gross margin...................... 33,438 58,099 85,829 83,464 21,149 62,315 21,527
Selling, general and administrative
expenses.......................... 55,735 50,652 52,842 57,103 13,922 43,181 15,046
Environmental expenses(a)........... 2,342 2,082 5,624 37,582 606 36,976 --
Merger costs........................ -- -- -- -- -- -- --
Restructuring charges............... -- 2,653 11,658 -- -- -- --
--------- --------- --------- --------- ----------- ------------- -----------
Operating income (loss)........... (24,639) 2,712 15,705 (11,221) 6,621 (17,842) 6,481
Other:
Other income (expense), net......... (27,682) 7,477 7 (6,759) 1,656 (8,415) 3,179
Interest income (expense), net...... (7,027) (2,555) (1,949) 1,473 (452) 1,925 (245)
Reorganization expense.............. (3,409) (7,118) (3,927) (3,535) (610) (2,925) (2,663)
Fresh-start revaluation............. -- -- -- -- -- -- 5,107
--------- --------- --------- --------- ----------- ------------- -----------
Income (loss) before income tax
provision and extraordinary item.... (62,757) 516 9,836 (20,042) 7,215 (27,257) 11,859
Income tax provision (benefit)........ 225 2,507 8,171 8,453 2,649 5,804 (3,063)
--------- --------- --------- --------- ----------- ------------- -----------
Income (loss) before extraordinary
item................................ (62,982) (1,991) 1,665 (28,495) 4,566 (33,061) 14,922
Extraordinary item, net of tax(b)..... -- -- -- -- -- -- 43,032
Cumulative effect of change in
accounting principle................ (2,496) -- -- -- -- -- --
--------- --------- --------- --------- ----------- ------------- -----------
Net income (loss)..................... $ (65,478) $ (1,991) $ 1,665 $ (28,495) $ 4,566 $ (33,061) $ 57,954
--------- --------- --------- --------- ----------- ------------- -----------
--------- --------- --------- --------- ----------- ------------- -----------
Basic and diluted earnings per
share(c):
Income before extraordinary item.... -- -- -- -- -- -- --
Extraordinary item, net of tax...... -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- ------------- -----------
Net income.......................... -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- ------------- -----------
--------- --------- --------- --------- ----------- ------------- -----------
<CAPTION>
POST-CONFIRMATION
------------------------
THREE TWO
QUARTERS QUARTERS
ENDED ENDED
JANUARY 31, JULY 31,
1998 1998(D)
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................... $ 476,426 $ 337,429
Commission income................... 541 414
----------- -----------
Total revenue..................... 476,967 337,843
Cost of sales....................... 410,033 281,679
----------- -----------
Gross margin...................... 66,934 56,164
Selling, general and administrative
expenses.......................... 43,563 29,908
Environmental expenses(a)........... -- --
Merger costs........................ -- 4,416
Restructuring charges............... -- --
----------- -----------
Operating income (loss)........... 23,371 21,840
Other:
Other income (expense), net......... 1,805 545
Interest income (expense), net...... (5,653) (4,616)
Reorganization expense.............. -- --
Fresh-start revaluation............. -- --
----------- -----------
Income (loss) before income tax
provision and extraordinary item.... 19,523 17,769
Income tax provision (benefit)........ 12,459 9,481
----------- -----------
Income (loss) before extraordinary
item................................ 7,064 8,288
Extraordinary item, net of tax(b)..... (792) --
Cumulative effect of change in
accounting principle................ -- --
----------- -----------
Net income (loss)..................... $ 6,272 $ 8,288
----------- -----------
----------- -----------
Basic and diluted earnings per
share(c):
Income before extraordinary item.... $1.43 --
Extraordinary item, net of tax...... (0.16 ) --
----------- -----------
Net income.......................... $1.27 --
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRE-CONFIRMATION
-------------------------------------------------------
POST-CONFIRMATION
DECEMBER 31, ------------------------
------------------------------------------ MARCH 31, MARCH 31, JANUARY 31,
1993 1994 1995 1996 1996 1997 1998
--------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................... $ 306,948 $ 326,981 $ 342,610 $ 331,626 $ 348,420 $ 305,704 $ 43,003
Working capital.................... 140,857 152,627 166,823 173,734 167,037 143,316 167,757
Property, plant and equipment,
net.............................. 81,254 65,921 53,516 47,885 51,664 38,907 41,502
Total debt......................... 29,212 37,719 37,625 19,869 32,005 66,488 107,149
Pension liabilities................ 46,750 43,921 47,409 43,926 46,524 41,090 38,351
Environmental liabilities.......... 18,497 17,762 12,780 44,011 16,290 48,135 45,080
Liabilities subject to
compromise....................... 162,320 162,042 169,519 179,897 169,517 -- --
Total shareholders' equity
(deficit)........................ (16,989) (18,561) (17,952) (42,179) (14,024) 50,000 41,771
<CAPTION>
JULY 31,
1998(D)
-----------
<S> <C>
BALANCE SHEET DATA:
Total assets....................... $ 341,330
Working capital.................... 175,059
Property, plant and equipment,
net.............................. 43,851
Total debt......................... 104,509
Pension liabilities................ 38,134
Environmental liabilities.......... 43,943
Liabilities subject to
compromise....................... --
Total shareholders' equity
(deficit)........................ 54,861
</TABLE>
- ------------------------------
(a) As part of the Reorganization Plan, Shieldalloy entered into settlement
agreements with various environmental regulatory authorities with regard to
all of Shieldalloy's known significant environmental remediation
liabilities. Pursuant to these
41
<PAGE>
agreements, Shieldalloy has agreed to perform environmental remediation
which as of July 31, 1998 had an estimated cost of completion of $38.9
million, including approximately $15.3 million to be incurred by Shieldalloy
through the end of 2000.
(b) Reflects discharge of indebtedness income, net of tax effects, relating to
the consummation of the Reorganization Plan and the early extinguishment of
debt in November 1997.
(c) The computation of basic and diluted earnings per share is based on
4,956,406 common shares and common share equivalents outstanding during the
three quarters ended January 31, 1998. Earnings per share for periods prior
to April 1, 1997 are not presented because such presentation would not be
meaningful due to fresh-start reporting and the recapitalization of the
Company as of March 31, 1997. The presentation of earnings per share for the
two quarters ended July 31, 1998 is not meaningful since the Company is a
wholly owned subsidiary of the Issuer.
(d) The above table does not include selected historical financial data of the
Issuer for the two quarters ended July 31, 1998, a loss of $0.7 million, as
it was deemed immaterial for purposes of this presentation. Balance sheet
data at July 31, 1998 not included above follows (in thousands):
<TABLE>
<S> <C>
Total assets (including goodwill of $99.0 million)...................................... $159,386
Working capital......................................................................... 1,020
Total debt.............................................................................. 65,593
Total shareholders' equity.............................................................. 92,407
</TABLE>
<TABLE>
<CAPTION>
PRE-CONFIRMATION
--------------------------------------------------------------------------
THREE NINE
MONTHS MONTHS QUARTER
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED
------------------------------------ MARCH 31, DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1996 1996 1997
-------- ------- ------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Adjusted EBITDA (a)..................... $ (3,768) $25,715 $47,149 $ 38,928 $ 9,651 $ 29,277 $ 10,498
Environmental remediation expenditures
(b)................................... 751 814 2,769 2,282 -- 2,282 1,729
Capital expenditures.................... 6,280 7,566 6,712 9,531 1,014 8,517 2,774
Gross margin as percentage of sales..... 6.2% 10.5% 12.5% 12.9% 12.8% 12.9% 13.9%
Adjusted EBITDA as percentage of
sales................................. NM 4.6% 6.9% 6.0% 5.8% 6.1% 6.8%
Ratio of earnings to fixed charges
(c)................................... NM NM 1.0x NM 2.4x NM 3.4x
Cash flow from operating activities..... $ 22,247 $ (589) $ 5,658 $ 47,665 $14,905 $ 32,760 $ 6,416
Cash flow from investing activities..... (6,785) (3,700) (3,945) (5,019) 1,151 (6,170) 2,167
Cash flow from financing and
reorganization activities............. (11,371) 3,673 6,182 (16,117) (4,624) (11,493) (40,991)
EBITDA as defined in Indenture (d)...... (27,297) 16,132 22,100 (8,262) 5,144 (13,406) 5,730
<CAPTION>
POST-CONFIRMATION
-----------------------
THREE TWO
QUARTERS QUARTERS
ENDED ENDED
JANUARY 31, JULY 31,
1998 1998
----------- ---------
<S> <C> <C>
OTHER DATA:
Adjusted EBITDA (a)..................... $32,515 $32,889
Environmental remediation expenditures
(b)................................... 2,635 1,006
Capital expenditures.................... 9,447 6,998
Gross margin as percentage of sales..... 14.0% 16.6%
Adjusted EBITDA as percentage of
sales................................. 6.8% 9.7%
Ratio of earnings to fixed charges
(c)................................... 3.2x 3.7x
Cash flow from operating activities..... $ (346) $ 8,492
Cash flow from investing activities..... (5,686) (7,966)
Cash flow from financing and
reorganization activities............. 19,048 1,142
EBITDA as defined in Indenture (d)...... 24,461 20,110
</TABLE>
- ------------------------------
(a) For purposes of this Prospectus, "Adjusted EBITDA" is defined as net income
(loss) before: (i) income taxes; (ii) interest expense; (iii) extraordinary
item; (iv) depreciation; (v) amortization; (vi) non-cash stock compensation;
(vii) loss (gain) on sale of assets; (viii) restructuring and merger
expenses; (ix) reorganization expenses; (x) non-cash fresh-start
adjustments; and (xi) non-cash environmental provisions. Adjusted EBITDA has
not been reduced to reflect environmental remediation expenditures. This
definition of Adjusted EBITDA differs from the definition of EBITDA used in
the Indenture. The Company's use of Adjusted EBITDA may not be comparable to
similarly titled measures due to the use by other companies of different
financial statement components in calculating Adjusted EBITDA. See "Selected
Financial Data--Calculation of Adjusted EBITDA" and "Description of the
Discount Notes."
The Company considers Adjusted EBITDA to be useful in measuring the operating
performance of the Company because, together with net income and cash flows,
Adjusted EBITDA provides investors with additional measures to evaluate the
ability of the Company to incur and service debt and to fund acquisitions
and other capital expenditures. Adjusted EBITDA does not represent net
income or cash flows from operating, investing or financial activities as
defined by generally accepted accounting principles. Adjusted EBITDA is not
an alternative to net income as a reliable measure of the Company's
operating performance or an alternative to cash flows as measures of
liquidity.
42
<PAGE>
Adjusted EBITDA does not measure whether cash flow is sufficient to fund all
of the Company's cash needs, including principal amortization, capital
improvements and debt service.
(b) Environmental expenditures related to ongoing operations are generally
included in cost of goods sold and are therefore deducted in calculating net
income and Adjusted EBITDA for any period. Environmental remediation
expenditures represent the costs associated with remedial activities. Such
remediation expenditures are charged to previously established accruals and
are therefore excluded from the calculation of net income and Adjusted
EBITDA. However, the cash expended by the Company in any period for
environmental remediation expenditures will affect the Company's cash flow.
(c) The ratio of earnings to fixed charges is computed by dividing pretax income
from operations before fixed charges (other than capitalized interest) by
fixed charges. Fixed charges consist of interest charges (including
contractual interest stayed pursuant to the Chapter 11 proceedings) and that
portion of rental expense Metallurg believes to be representative of
interest. For the years ended December 31, 1993, 1994 and 1996 and the nine
months ended December 31, 1996, pre-tax earnings were insufficient to cover
fixed charges by $65.4 million, $7.8 million, $28.6 million and $33.7
million, respectively.
(d) Under the terms of the Indenture, "EBITDA" is defined as follows
(capitalized terms have the meanings set forth in the Indenture):
"EBITDA" means, for any period, an amount equal to, for the Issuer and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income
for such period, plus the following to the extent reducing Consolidated Net
Income for such period: (i) the provision for taxes based on income or
profits or utilized in computing net loss, (ii) Consolidated Interest
Expense, (iii) depreciation, (iv) amortization of intangibles and (v) any
other non-cash items (other than any such non-cash item to the extent that
it represents an accrual of, or reserve for, cash expenditures in any future
period), minus (b) all non-cash items increasing Consolidated Net Income for
such period (other than any such non-cash item to the extent that it will
result in the receipt of cash payments in any future period).
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization of, a Restricted
Subsidiary shall be added to Consolidated Net income to compute EBITDA only
to the extent (and in the same proportion) that the net income of such
Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Issuer by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
EBITDA as defined in the Indenture is used as a measure of operating cash
flow. Subject to certain exceptions set forth in the Indenture, the Company
may only incur additional Debt if its pro forma ratio of EBITDA to
Consolidated Fixed Charges for the most recent four consecutive fiscal
quarters is more than 2.00 to 1.00. See "Description of New Notes--Certain
Covenants-- Limitation on Debt." For purposes of these calculations,
restrictions on the Company's subsidiaries' ability to pay dividends to the
Company in existence at December 31, 1997 are assumed for all periods
presented.
NM--Not meaningful.
43
<PAGE>
CALCULATION OF ADJUSTED EBITDA
<TABLE>
<CAPTION>
PRE-CONFIRMATION
-----------------------------------------------------------------------------------
THREE NINE
MONTHS MONTHS QUARTER
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED
------------------------------------------ MARCH 31, DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1996 1996 1997
--------- --------- --------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)...................... $ (65,478) $ (1,991) $ 1,665 $ (28,495) $ 4,566 $ (33,061) $ 57,954
Adjustments:
Income tax provision (benefit)....... 225 2,507 8,171 8,453 2,649 5,804 (3,063)
Interest expense..................... 9,434 4,815 4,851 3,043 1,335 1,708 1,706
Depreciation and amortization........ 20,294 12,986 15,296 10,688 2,414 8,274 2,143
--------- --------- --------- --------- ----------- ------------- -----------
EBITDA................................. (35,525) 18,317 29,983 (6,311) 10,964 (17,275) 58,740
Adjustments to EBITDA:
Environmental provisions............. 6,400 -- 3,552 34,754 -- 34,754 --
Provision for allowed claims......... -- -- -- 10,547 -- 10,547 --
Fresh-start revaluation.............. -- -- -- -- -- -- (5,107)
Writedown of investment in
subsidiaries....................... 5,732 -- -- -- -- -- --
Extraordinary item, net of tax....... -- -- -- -- -- -- (43,032)
Restructuring provision.............. 13,616 2,653 11,658 -- -- -- --
Merger costs......................... -- -- -- -- -- -- --
Noncash cumulative effect of
accounting changes................. 2,496 -- -- -- -- -- --
(Gains) losses on asset sales........ 104 (2,373) (1,971) (3,597) (1,923) (1,674) (3,266)
Reorganization expense............... 3,409 7,118 3,927 3,535 610 2,925 2,663
Non-cash stock compensation.......... -- -- -- -- -- -- 500
--------- --------- --------- --------- ----------- ------------- -----------
31,757 7,398 17,166 45,239 (1,313) 46,552 (48,242)
--------- --------- --------- --------- ----------- ------------- -----------
Adjusted EBITDA...................... $ (3,768) $ 25,715 $ 47,149 $ 38,928 $ 9,651 $ 29,277 $ 10,498
--------- --------- --------- --------- ----------- ------------- -----------
--------- --------- --------- --------- ----------- ------------- -----------
<CAPTION>
POST-CONFIRMATION
------------------------
THREE TWO
QUARTERS QUARTERS
ENDED ENDED
JANUARY 31, JULY 31,
1998 1998
----------- -----------
<S> <C> <C>
Net income (loss)...................... $ 6,272 $ 8,288
Adjustments:
Income tax provision (benefit)....... 12,459 9,481
Interest expense..................... 8,270 6,264
Depreciation and amortization........ 5,320 4,282
----------- -----------
EBITDA................................. 32,321 28,315
Adjustments to EBITDA:
Environmental provisions............. -- --
Provision for allowed claims......... -- --
Fresh-start revaluation.............. -- --
Writedown of investment in
subsidiaries....................... -- --
Extraordinary item, net of tax....... 792 --
Restructuring provision.............. -- --
Merger costs......................... -- 4,416
Noncash cumulative effect of
accounting changes................. -- --
(Gains) losses on asset sales........ (1,848) (592)
Reorganization expense............... -- --
Non-cash stock compensation.......... 1,250 750
----------- -----------
194 4,574
----------- -----------
Adjusted EBITDA...................... $ 32,515 $ 32,889
----------- -----------
----------- -----------
</TABLE>
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH METALLURG'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE ISSUER'S
BALANCE SHEET AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
In 1994, Metallurg began to recover from the effects of depressed industry
conditions principally caused by (i) the impact of the "dumping" of low-priced
vanadium and ferrochrome products by former Soviet Union exporters and (ii) a
recession in the iron and steel industry that lasted from 1989 to 1993 and
particularly affected the aerospace, automotive, durable goods, construction and
defense sectors in North America and Europe. Metallurg's recovery started
approximately two years after the recovery of its customers because the
stockpiles of metals being sold by those exporters took some time to be
consumed. The subsequent reduction of stockpiles of metals in the former Soviet
Union, the implementation of duties from successful anti-dumping petitions by
Metallurg and increased production by the steel, aluminum and superalloy
industries since 1993, have contributed to Metallurg's operating performance
beginning in 1994. See "Risk Factors--End of Anti-Dumping Duties, --Dependence
on Cyclical Markets, Including International Markets, for Metallurg's Products
and --Highly Competitive Industry."
In April 1997, Metallurg and Shieldalloy consummated the Reorganization
Plan. Metallurg settled its prepetition liabilities by distributing cash and
issuing Metallurg Shares and its 12% senior-secured notes, which have
subsequently been repaid. Effective March 31, 1997, Metallurg implemented
fresh-start reporting relating to its emergence from bankruptcy. Accordingly,
all assets and liabilities were restated to reflect their respective fair
values, and the consolidated financial statements subsequent to that date
include the related amortization credits associated with the fair value
adjustments. The consolidated financial statements after that date are those of
a new reporting entity and are not comparable to the pre-confirmation periods.
Significant differences between periods due to fresh-start reporting adjustments
are explained below where necessary. For example, the adoption of fresh-start
reporting resulted in a reduction of depreciation expense for all periods
subsequent to March 31, 1997, thus increasing gross margin and operating income.
Additionally, the adoption of fresh-start reporting will result in an increase
in additional paid-in capital, rather than an income tax benefit, as the
benefits relating to existing net loss carryforwards are recognized in the
future.
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led
by Safeguard International. The acquisition was accomplished by Metallurg
Acquisition Corp., a wholly owned subsidiary of the Issuer, a Delaware
corporation, merging with and into Metallurg, Inc. with Metallurg, Inc. being
the surviving company and the Issuer becoming the sole parent of Metallurg, Inc.
The Issuer was formed on June 10, 1998 and is a subsidiary of Safeguard
International, an international private equity fund that invests primarily in
equity securities of companies in process industries. At the time of the Merger,
each outstanding share of Metallurg, Inc. common stock was converted into the
right to receive $30 in cash. In connection with the Merger, Metallurg, Inc.
received the consents of 100% of the registered holders of its Senior Notes to a
one-time waiver of the change of control provisions of the Senior Note Indenture
to make such provisions inapplicable to the Merger and to amend the definition
of "Permitted Holders" under the Senior Note Indenture to reflect the
post-merger ownership of Metallurg, Inc. As of July 13, 1998, in connection with
the Merger, all of the then outstanding shares of common stock of Metallurg,
Inc. were cancelled and 100 shares of common stock, $0.01 par value, were issued
to the Issuer.
The fiscal year of the Issuer is January 31. In addition, Metallurg, Inc.
changed its fiscal year from a calendar year to the period ended January 31, for
fiscal periods after consummation of its Reorganization Plan, while its
subsidiaries have retained a calendar fiscal year. As a result, financial data
for reported periods include the following:
45
<PAGE>
THE QUARTER ENDED JULY 31, 1998--Consolidated results of operations are
comprised of: (i) the three months ended July 31, 1998 for Metallurg, Inc. on a
stand-alone basis; and (ii) the three months ended June 30, 1998 for its
subsidiaries. The consolidated balance sheet data at July 31, 1998 reflect the
financial position of Metallurg, Inc. and the Issuer at July 31, 1998 and the
operating subsidiaries at June 30, 1998.
THE QUARTER ENDED APRIL 30, 1998--Consolidated results of operations are
comprised of: (i) the three months ended April 30, 1998 for Metallurg, Inc. on a
stand-alone basis; and (ii) the three months ended March 31, 1998 for its
subsidiaries.
THE QUARTER ENDED JULY 31, 1997--Consolidated results of operations in this
transition period are comprised of: (i) the post-confirmation four months ended
July 31, 1997 for Metallurg, Inc. on a stand-alone basis; and (ii) the three
months ended June 30, 1997 for its subsidiaries.
THE THREE FISCAL QUARTERS ENDED JANUARY 31, 1998--Consolidated results of
operations are comprised of: (i) the post-confirmation ten months ended January
31, 1998 for Metallurg, Inc. on a stand-alone basis and (ii) the
post-confirmation nine months ended December 31, 1997 for its subsidiaries.
1997 FISCAL YEAR--Consolidated results of operations are comprised of: (i)
the pre-confirmation three months ended March 31, 1997 for Metallurg, Inc. and
its subsidiaries; (ii) the post-confirmation ten months ended January 31, 1998
for Metallurg, Inc. on a stand-alone basis; and (iii) the post-confirmation nine
months ended December 31, 1997 for its subsidiaries.
THE ISSUER'S RESULTS OF OPERATIONS--PERIOD ENDED JULY 31, 1998
The net loss of $4.6 million was primarily attributable to the Merger costs
of $4.4 million. These costs included (a) $3.5 million for payment to cancel
compensatory options; (b) $0.6 million in consent fees incurred in order to
obtain a one-time waiver of the change of control provisions of the Senior Note
Indenture and to amend the Senior Note Indenture to reflect the post-merger
ownership of Metallurg, Inc.; and (c) $0.3 million of other Merger costs.
METALLURG INC.'S RESULTS OF OPERATIONS--QUARTER ENDED JULY 31, 1998 COMPARED TO
QUARTER ENDED JULY 31, 1997 AND QUARTER ENDED APRIL 30, 1998 COMPARED TO
QUARTER ENDED MARCH 31, 1997
The following discussion of results of operations relates only to Metallurg,
Inc. and its consolidated subsidiaries and does not include the results of
operations for the Issuer. As stated previously, the Issuer was formed on June
10, 1998 for the purpose of consummating the acquisition of Metallurg, Inc.,
which was completed on July 13, 1998.
46
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
------------------------------- -----------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
JULY 31, APRIL 30, JULY 31, MARCH 31,
1998 1998 1997 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total revenue...................................... $ 170,013 $ 167,830 $ 166,879 $ 155,587
--------- --------- --------- -----------
Operating costs and expenses:
Cost of sales.................................... 142,671 139,008 142,135 134,060
Selling, general and administrative expenses..... 15,147 14,761 14,427 15,046
Merger costs..................................... 4,416 -- -- --
--------- --------- --------- -----------
Total operating costs and expenses............... 162,234 153,769 156,562 149,106
--------- --------- --------- -----------
Operating income............................... 7,779 14,061 10,317 6,481
Other income (expense):
Other income (expense), net...................... (333) 878 (76) 3,179
Interest expense, net............................ (2,544) (2,072) (1,479) (245)
Reorganization expense........................... -- -- -- (2,663)
Fresh-start revaluation.......................... -- -- -- 5,107
--------- --------- --------- -----------
Income before income tax provision and
extraordinary item............................... 4,902 12,867 8,762 11,859
Income tax provision (benefit)..................... 3,404 6,077 5,111 (3,063)
--------- --------- --------- -----------
Net income before extraordinary item............... 1,498 6,790 3,651 14,922
Extraordinary item................................. -- -- -- 43,032
--------- --------- --------- -----------
Net income......................................... $ 1,498 $ 6,790 $ 3,651 $ 57,954
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
TOTAL REVENUES
Total revenues for Metallurg increased by 1.9%, from $166.9 million in the
quarter ended July 31, 1997 to $170.0 million in the quarter ended July 31,
1998. Increased volume and selling prices of ferrovanadium accounted for most of
the increase. In addition, revenues from increased sales of ferrotitanium and
chromium metal, due primarily to increased volume, more than offset a reduction
in sales of low carbon ferrochrome, ferroboron and polishing powders due
primarily to increased price competition.
Total revenues for Metallurg increased by 7.9%, from $155.6 million in the
first quarter of 1997 to $167.8 million in the first quarter of 1998. Increased
volume and selling prices of ferrovanadium accounted for substantially all of
the increase. In addition, revenues from increased sales of ferrotitanium and
low carbon ferrochrome, due primarily to increased volume, more than offset a
reduction in sales of ferroboron and polishing powders due to increased price
competition.
GROSS MARGINS
Gross margins increased from $24.7 million in the quarter ended July 31,
1997 to $27.3 million in the quarter ended July 31, 1998, an increase of 10.5%,
due principally to the price and volume increases in ferrovanadium and
ferrotitanium. In aluminum master alloys and compacted products, a slight
decrease in volume was more than offset by improvements in product mix and
selling prices. Improvement in gross margins was partially offset by decreases
in low carbon ferrochrome margins resulting from lower selling prices and less
favorable product mix. The values of Metallurg's assets were reduced pursuant to
fresh-start
47
<PAGE>
reporting, reducing depreciation expense in each of the quarters ended July 31,
1998 and 1997 by $0.3 million and increasing gross margins by an equal amount.
Gross margins increased from $21.5 million in the first quarter of 1997 to
$28.8 million in the first quarter of 1998, an increase of 33.9%, due
principally to the price and volume increases discussed above. In aluminum
master alloys and compacted products, a slight decrease in volume was more than
offset by improvements in product mix and selling prices, which offset negative
production variances. The values of Metallurg's assets were reduced pursuant to
fresh-start reporting, reducing depreciation expense in the quarter ended April
30, 1998 by $0.3 million and increasing gross margins by an equal amount.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased from $14.4
million in the quarter ended July 31, 1997 to $15.1 million in the quarter ended
July 31, 1998, an increase of 5.0%. For the quarter ended July 31, 1997, SG&A
represented 8.7% of Metallurg's sales compared to 8.9% for the quarter ended
July 31, 1998. SG&A were higher in 1998 due partly to the accelerated
amortization of awards under the Stock Award and Stock Option Plan of Metallurg
issued in connection with the consummation of the Reorganization Plan.
SG&A decreased from $15.0 million in the first quarter of 1997 to $14.8
million in the first quarter of 1998, a decrease of 1.9%. For the first quarter
of 1997, SG&A represented 9.7% of Metallurg's sales compared to 8.8% for the
first quarter of 1998. SG&A was higher in 1997 due to increased bonus accruals
and stock awards incurred in connection with the consummation of the
Reorganization Plan and additional costs related to the audit of March 31, 1997
financial statements.
OPERATING INCOME
Operating income decreased from $10.3 million in the quarter ended July 31,
1997 to $7.8 million in the quarter ended July 31, 1998, a decrease of 24.6%.
The decrease results almost entirely from the Merger costs of $4.4 million
incurred in July 1998. These costs included (a) $3.5 million for payments to
cancel compensatory options; (b) $0.6 million in consent fees incurred in order
to obtain a one-time waiver of the change of control provisions of the Senior
Note Indenture and to amend the Senior Note Indenture to reflect the post-Merger
ownership of Metallurg, Inc.; and (c) $0.3 million of other Merger costs.
Operating income increased from $6.5 million for the first quarter of 1997
to $14.1 million for the first quarter of 1998, an increase of 117.0%. The
increase resulted from the improvement in gross margins and decrease in SG&A,
mentioned above.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
JULY 31, APRIL 30, JULY 31, MARCH 31,
1998 1998 1997 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Interest income....................................................... $ 820 $ 828 $ 947 $ 1,461
Interest expenses..................................................... (3,364) (2,900) (2,426) (1,706)
--------- --------- --------- -----------
Interest income (expense), net...................................... $ (2,544) $ (2,072) $ (1,479) $ (245)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
Interest expense increased significantly in 1998. In each of the first two
quarters of 1998, Metallurg accrued approximately $2.8 million of interest
expense on the $100 million aggregate principal amount of Senior Notes, which
were issued in November 1997. Metallurg used a portion of the proceeds from the
Senior Notes to retire $39.5 million of the then outstanding 12% Senior-Secured
Notes of Metallurg, Inc. due 2007 (the "12% Senior-Secured Notes"). In each of
the first two quarters of 1997, Metallurg accrued approximately $1.2 million of
interest expense on the 12% Senior-Secured Notes. Metallurg did not accrue
48
<PAGE>
interest on debt incurred prior to entering Chapter 11 proceedings. As a result,
approximately $2.1 million of contractual interest on these unsecured
obligations, which were reported as part of liabilities subject to compromise,
was not reflected in the quarter ended March 31, 1997.
INCOME TAX PROVISION (BENEFIT):
Income tax provision, net of tax benefits, is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
JULY 31, APRIL 30, JULY 31, MARCH 31,
1998 1998 1997 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total current......................................................... $ 2,512 $ 4,690 $ 2,410 $ 704
Total deferred........................................................ 892 1,387 2,701 (3,767)
--------- --------- --------- -----------
Income tax provision (benefit), net................................. $ 3,404 $ 6,077 $ 5,111 $ (3,063)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
The differences between the statutory Federal income tax rate and
Metallurg's effective rate result primarily from: (i) the excess of foreign tax
rates over the statutory Federal income tax rate; (ii) certain deductible
temporary differences which, in other circumstances would have generated a
deferred tax benefit, have been fully provided for in a valuation allowance;
(iii) the deferred tax effects of certain tax assets, primarily foreign net
operating losses, for which the benefit had been previously recognized
approximating $0.1 million and $0.5 million in the quarters ended July 31, 1998
and April 30, 1998, respectively; and (iv) the deferred tax effects of certain
deferred tax assets for which a corresponding credit has been recorded to
"Additional paid-in capital" approximating $1.0 million and $0.9 million in the
quarters ended July 31, 1998 and April 30, 1998, respectively. The deferred tax
expenses referred to in items (iii) and (iv) above will not result in cash
payments in future periods.
NET INCOME
Net income decreased from $3.7 million for the quarter ended July 31, 1997
to $1.5 million for the quarter ended July 31, 1998. The decrease resulted
primarily from the Merger costs and increased interest expense, partially offset
by increased gross margins, noted above.
Net income was $6.8 million for the first quarter of 1998 compared to $58.0
million for the first quarter of 1997. Included in the 1997 net income is an
extraordinary item of $43.0 million representing the cancellation of debt
resulting from the consummation of Metallurg's Reorganization Plan and a $5.1
million credit representing the effects of revaluing Metallurg's assets and
liabilities under fresh-start reporting. Reorganization expenses for the first
quarter of 1997 were $2.7 million. In March 1998, Metallurg sold its minority
investment in a Luxembourg affiliate and realized a gain of approximately $0.9
million. In the first quarter of 1997, other income included a $2.7 million gain
on the sale of Metallurg's New York office building.
THREE QUARTERS ENDED JANUARY 31, 1998 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1996
Total revenues for Metallurg, Inc. and its subsidiaries decreased from
$484.4 million in the nine months ended December 31, 1996 to $477.0 million in
the three quarters ended January 31, 1998, a decrease of 1.5%. Sales
attributable to Frankel Metal Company ("FMC") accounted for a decrease of $7.0
million from the prior period's total revenues. Reduced volumes and selling
prices for manganese and ferrosilicon products in the United States, resulting
from strong competition and lack of supply at competitive prices, respectively,
accounted for a decrease in sales of approximately 2.8% from the prior period's
total revenues. In addition, decreased sales of low carbon ferrochrome accounted
for a decline in total revenues from the prior period of approximately 1.6% as
customers slowed down their buying in the quarter ended January 31, 1998.
Offsetting this decrease, however, were increased volumes and selling prices for
ferrovanadium and ferrotitanium, resulting from a strong steel market, which
resulted in
49
<PAGE>
increased sales of approximately 2.9% compared to the prior period's total
revenues. In addition, the installation in 1997 of a new plant for the
production of chromium metal in the U.K. contributed to an increase in sales of
approximately 1.6% from the prior period's total sales.
Gross margins increased from $62.3 million in the nine months ended December
31, 1996 to $66.9 million in the three quarters ended January 31, 1998, an
increase of 7.4%. Increases in volumes and selling prices of ferrovanadium and
ferrotitanium, as discussed above, accounted for an increase of approximately
7.8% from the prior period's gross margins. Although Metallurg's United Kingdom
aluminum powder producing division recorded a $0.5 million decrease in sales in
the three quarters ended January 31, 1998 compared to the nine months ended
December 31, 1996, margins relating to such division increased by $0.8 million
as compared to the prior period due to a change in product mix. The values of
Metallurg's assets were reduced pursuant to fresh-start reporting, reducing
depreciation expense in the three quarters ended January 31, 1998 by $1.1
million, or 1.7%, compared to the prior period, and increasing gross margin by
an equal amount. FMC accounted for a further decrease in gross margins of $1.0
million or 1.6% during this period as compared to the prior period. Gross
margins related to ferrosilicon products, however, accounted for a decline in
gross margins of approximately 1.9% as compared to the prior period as a result
of reduced volumes and selling prices as discussed above. In aluminum master
alloys and compacted products, increased volumes of 9.6% improved production
variances and significantly offset a decrease in margins at Metallurg's United
Kingdom operations caused by the impact of a strong British pound.
SG&A increased from $43.2 million in the nine months ended December 31, 1996
to $43.6 million in the three quarters ended January 31, 1998, an increase of
0.9%. For the nine months ended December 31, 1996, SG&A represented 8.9% of
Metallurg's sales compared to 9.1% for the three quarters ended January 31,
1998. SG&A increased principally as a result of the inclusion of an extra month
of Metallurg, Inc.'s operations.
Operating loss was $17.8 million in the nine months ended December 31, 1996,
compared to operating income of $23.4 million in the three quarters ended
January 31, 1998. The loss in 1996 was due principally to an environmental
provision of $37.6 million, representing the anticipated future costs of
remediation and maintenance of various environmental projects, primarily at
Shieldalloy. The improvement resulted from an increase in margins on sales of
ferrovanadium, ferrotitanium and aluminum powders due to the strength of the
steel, superalloy and chemical industries, partially offset by a decrease in
margins on aluminum master alloys and briquettes resulting from a highly
competitive marketplace. Operating income for the nine months ended December 31,
1996 included $1.1 million of environmental expenses related to the operation of
the water remediation facility at Metallurg's Newfield, New Jersey site. As a
result of the Company's adoption of the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 96-1, "Environmental Remediation
Liabilities," operating income in the three quarters ended January 31, 1998 does
not include such water remediation expenses. In addition, as discussed above, as
a result of the change of the holding company's fiscal year, operating income of
$23.4 million in the three quarters ended January 31, 1998 included
approximately $0.4 million of expenses related to the operations of the holding
company for the month of January 1998.
Interest income (expense), net is as follows (in thousands):
<TABLE>
<CAPTION>
THREE QUARTERS ENDED NINE MONTHS ENDED
JANUARY 31, 1998 DECEMBER 31, 1996
--------------------- ------------------
<S> <C> <C>
Interest income........................................................ $ 2,617 $ 3,633
Interest expense....................................................... (8,270) (1,708)
------- -------
Interest income (expense), net......................................... $ (5,653) $ 1,925
------- -------
------- -------
</TABLE>
Interest expense increased in the three quarters ended January 31, 1998, as
Metallurg recognized interest expense of $4.7 million on its 12% senior-secured
notes through December 1997 and accrued
50
<PAGE>
interest expense of $1.1 million on its Senior Notes that were issued in
November 1997. As a result of the change in the fiscal year, the three quarters
ended January 31, 1998 contain an additional month of interest expense of
approximately $0.9 million. In 1996, Metallurg did not accrue interest on debt
incurred prior to entering Chapter 11 proceedings and therefore approximately
$6.5 million of contractual interest on these unsecured obligations, which were
reported as part of liabilities subject to compromise, were not reflected in the
nine months ended December 31, 1996.
Income tax (provision) benefit, net is as follows (in thousands):
<TABLE>
<CAPTION>
THREE QUARTERS ENDED NINE MONTHS ENDED
JANUARY 31, 1998 DECEMBER 31, 1996
-------------------- ------------------
<S> <C> <C>
Total current.......................................................... $ (7,121) $ (5,838)
Total deferred......................................................... (5,338) 34
-------- -------
Income tax provision, net.............................................. $ (12,459) $ (5,804)
-------- -------
-------- -------
</TABLE>
The differences between the statutory federal income tax rate and
Metallurg's effective rate are principally due to: (i) the excess of foreign tax
rates over the statutory federal income tax rate; (ii) certain deductible
temporary differences that, in the absence of fresh-start reporting would have
generated a deferred tax benefit, have been fully provided for in a valuation
allowance, (iii) the deferred tax effects of certain tax assets, primarily
foreign net operating losses, for which the benefit had been previously
recognized approximating $2.3 million in the three quarters ended January 31,
1998 and (iv) the deferred tax effects of certain deferred tax assets for which
a corresponding credit has been recorded to "Additional paid-in capital"
approximating $2.9 million in the three quarters ended January 31, 1998. The
deferred tax expenses referred to in items (iii) and (iv) above will not result
in cash payments in future periods.
Net income was $6.3 million for the three quarters ended January 31, 1998
compared to a loss of $33.1 million for the nine months ended December 31, 1996
due primarily to increases in interest and income tax expenses partially offset
by improved operating income, noted above. Net income for the three quarters
ended January 31,1998 included a loss of approximately $1.2 million related to
the operations of Metallurg, Inc. for the month of January 1998. Reorganization
expenses for the nine months ended December 31, 1996 totaled $2.9 million
whereas no such expenses were recorded in the three quarters ended January 31,
1998. In the three quarters ended January 31, 1998, other income included a gain
on the sale of certain plant assets of one of Metallurg's German subsidiaries.
In the nine months ended December 31, 1996, other income included an additional
gain on the sale of land in Turkey.
QUARTER ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total revenues for Metallurg and its subsidiaries decreased by 6.1% from
$165.6 million in the first three months of 1996 to $155.6 million in the first
quarter of 1997. Sales attributable to FMC, the Company's former titanium scrap
processing subsidiary, which was sold in December 1996, accounted for $3.3
million of the decrease. Reductions in the Company's sales of manganese and
silicon products, resulting primarily from a decrease in selling prices, and a
reduction in sales of the Company's ferrochrome products manufactured by third
parties, resulting primarily from a decrease in volume, were partially offset by
increases in the selling prices of ferrovanadium in the United States and low
carbon ferrochrome produced by the Company.
Gross margins increased from $21.1 million in the first three months of 1996
to $21.5 million in the first quarter of 1997, an increase of 1.8%, due
principally to the price increases in ferrovanadium and low carbon ferrochrome
discussed above. In aluminum master alloys and compacted products, increased
volumes of 13% improved production variances and significantly offset a decrease
in margins at the Company's United Kingdom operations caused by the impact of a
strong British pound. Gross margins related to FMC accounted for an additional
decrease in gross margins of $0.6 million during this period.
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<PAGE>
SG&A increased from $13.9 million in the first three months of 1996 to $15.0
million in the first quarter of 1997, an increase of 8.1%. For the first three
months of 1996, SG&A represented 8.4% of the Company's sales compared to 9.7%
for the first quarter of 1997. SG&A increased as a result of increased bonus
accruals and awards under the SASOP incurred in connection with the consummation
of the Reorganization Plan and additional costs related to the audit of the
March 31, 1997 financial statements.
Operating income decreased from $6.6 million for the first three months of
1996 to $6.5 million for the first quarter of 1997, a decrease of 2.1%. The
decrease resulted from increased SG&A expenses as discussed above, which were
offset somewhat by the increased margins, as discussed above. In addition,
operating income for the first three months of 1996 included $0.4 million of
environmental expenses related to the operation of the water remediation
facility at the Company's Newfield, New Jersey site. As discussed above,
operating income in the first quarter of 1997 does not include such water
remediation expenses.
Net income was $58.0 million for the first quarter of 1997 compared to $4.6
million for the first three months of 1996. Included in the net income for the
first quarter of 1997 is an extraordinary item of $43.0 million representing the
discharge of indebtedness resulting from the consummation of the Company's
Reorganization Plan and a $5.1 million credit representing the effects of
revaluing the Company's assets and liabilities under fresh-start reporting.
Reorganization expenses for the first quarter of 1997 and the first three months
of 1996 were $2.7 million and $0.6 million, respectively. In the first quarter
of 1997, other income included a $2.7 million gain on the sale of the Company's
New York office building. A gain of $1.9 million on the sale of land in Turkey
was reported in the first three months of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues for Metallurg and its subsidiaries decreased by 5.7%, from
$689.4 million in 1995 to $650.0 million in 1996, due to a significant decrease
in prices of certain products, particularly ferrovanadium and ferrotitanium, and
a decrease in the availability to Metallurg of raw materials from the former
Soviet Union. As described below, worldwide consumption of aluminum was
unchanged from 1995, but pricing competition among suppliers adversely affected
Metallurg's sales.
Gross margins decreased by 2.8% in 1996 compared to 1995. The price increase
of ferrovanadium in the first quarter of 1995 was not repeated in 1996, as
quoted prices stayed relatively steady throughout 1996. As a result, margins on
vanadium products fell by 45% in 1996, compared to the prior year. Tonnage sales
and prices of low carbon ferrochrome continued to improve in 1996 as demand from
the expanding aerospace industry increased, resulting in a 20% rise in margins
from 1995. Chromium metal margins increased by almost 80% due to price
improvements resulting from the strength of the aerospace industry and the
closure of an important competitor. Sales of aluminum products fell by 8% and
margins by 40%, as LSM declined to compete at some of the very low prices
offered by competitors. In the fourth quarter of 1996 a sharp appreciation of
sterling by almost 20% against the European currencies also negatively impacted
LSM. Gross margins on aluminum products at Metallurg's Brazilian operations fell
by 40% as overseas competition cut prices in an effort to penetrate the South
American market.
SG&A increased by 8.1% from $52.8 million in 1995 to $57.1 million in 1996
due principally to the restructuring of German operations into a holding company
with several operating subsidiaries. In connection with this restructuring,
certain personnel who had previously concentrated solely on production aspects
of the business became more involved in general management and administrative
functions. This resulted in lower costs of production and increased SG&A
expenses being reported in 1996. SG&A represented 8.8% of Metallurg's sales in
1996, compared to 7.7% in 1995.
Operating loss was $11.2 million in 1996, compared to operating income of
$15.7 million in 1995. The loss in 1996 was principally due to an environmental
provision of $37.6 million, representing the anticipated future costs of
remediation and maintenance of various environmental projects at Shieldalloy. In
1995, operating income included a charge of $11.7 million for a restructuring of
Metallurg's principal German subsidiary into separate business units and a
restructuring of Metallurg's mining operations in
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<PAGE>
Brazil. In connection with the restructuring of Metallurg's principal German
subsidiary into separate business units, certain manufacturing facilities were
decommissioned and environmental expenses of $3.6 million were recognized
representing the estimated costs of remedial cleanup of the decommissioned
areas. Operating income in 1996 also was negatively impacted by the increase in
SG&A and decrease in gross margins in 1996, compared to 1995 as described above.
Other expense for 1996 was $6.8 million. The significant items included in
this expense consisted of the allowance of additional unsecured prepetition
claims of $10.5 million relating to withdrawal by Shieldalloy from a
multiemployer pension plan, the settlement of certain environmental claims and
additional claims by institutional debtholders. This was partially offset by the
gain on the sale in 1996 of a parcel of land owned by Metallurg's Turkish
subsidiary.
For the years ended December 31, 1996 and 1995, Metallurg recorded tax
provisions of $8.5 million and $8.2 million, respectively, including current
foreign tax provisions of $8.1 million and $8.3 million, respectively, on net
foreign income of $25.8 million and $2.7 million, respectively. These foreign
tax provisions were calculated on a jurisdiction by jurisdiction basis and
resulted from income producing jurisdictions aggregating income of $36.1 million
and $27.1 million in the years ended December 31, 1996 and 1995, respectively.
Due to domestic losses in 1996 and utilization of net operating loss
carryforwards in 1995, no United States current tax provisions were recorded in
each of the years. Metallurg did not record benefits for foreign operations with
losses based on the uncertainty of realization of such benefits.
Net loss was $28.5 million in 1996, compared to net income of $1.7 million
in 1995. As discussed above, the principal reasons for this net loss were the
environmental provision of $37.6 million and the other expense of $6.8 million,
offset partially by $11.7 million in restructuring charges relating to
Metallurg's German and Brazilian subsidiaries recorded in 1995.
LIQUIDITY AND FINANCIAL RESOURCES
GENERAL. Metallurg's principal sources of liquidity include cash from
operations and amounts available under credit facilities. In November 1997,
Metallurg sold $100 million principal amount of Senior Notes, the proceeds of
which were used in part to retire Metallurg's then existing 12% senior-secured
notes (approximately $39.5 million), to repay certain debt of the UK and German
subsidiaries (approximately $19.8 million) and to pay a cash dividend
(approximately $20.0 million).
At July 31, 1998, Metallurg and the Issuer had $46.5 million of cash and
cash equivalents and working capital of $176.1 million. Metallurg had $44.4
million in cash and cash equivalents and working capital of $175.1 million at
July 31, 1998, as compared to $43.0 million and $167.8 million, respectively, at
January 31, 1998. For the first two quarters of 1998, Metallurg generated $8.5
million in cash from operations and received proceeds of approximately $1.1
million on the sale of its Luxembourg affiliate. Capital expenditures
approximated $7.0 million in the first two quarters and in February 1998,
Metallurg purchased an additional 5% interest in a Russian magnesium metal
producer for approximately $2.0 million. In the 1997 Fiscal Year, Metallurg
generated $6.1 million in cash from operations. In connection with the
Reorganization Plan, however, Metallurg distributed $59.4 million in cash,
offset by a drawdown of prepetition letters of credit of $9.7 million and
proceeds from debt of LSM of $8.1 million. Capital expenditures of $12.2 million
in the 1997 Fiscal Year included approximately $3.0 million to install a new
plant for the production of chromium metal at LSM. Metallurg received proceeds
of $1.7 million from the sale of certain plant assets of one of Metallurg's
German subsidiaries, $3.4 million on the sale of commercial real estate property
in New York City and $3.6 million from the sale of other assets during the 1997
Fiscal Year. See "Description of Certain Indebtedness" for information
concerning the Senior Notes, the Revolving Credit Facility and certain other
financing arrangements to which Metallurg or its subsidiaries is a party.
At July 31, 1998, Metallurg had approximately $45 million of available
borrowing capacity under the Revolving Credit Facility and its working capital
facilities at LSM, GfE and EWW, subject to certain limitations contained in the
instruments governing their indebtedness. The Company believes that these
sources are sufficient to fund the current and anticipated future requirements
of working capital, capital
53
<PAGE>
expenditures, pension benefits, potential acquisitions and environmental
expenditures through at least 1999.
Metallurg's subsidiaries are, in certain circumstances, subject to
restrictions under local law and under their credit facilities that limit their
ability to pay dividends to Metallurg. See "Risk Factors--Limitation on Access
to Subsidiaries' Cash Flow."
EWW has a contingent obligation to a German state pension authority which as
of July 31, 1998, was DM 8.2 million (approximately $4.6 million). Metallurg
expects that EWW will pay approximately DM 6.5 million (approximately $3.6
million) to the pension authority in 1998 in respect of this obligation.
CAPITAL EXPENDITURES. Metallurg had capital expenditures of $7.0 million
and $12.2 million in the two quarters ended July 31, 1998 and the 1997 Fiscal
Year, respectively. Metallurg's capital expenditures include projects related to
improving Metallurg's operations and productivity improvements, replacement
projects and ongoing environmental requirements (which are in addition to
expenditures discussed in "--Environmental Remediation Costs"). Capital
expenditures for the 1997 Fiscal Year included approximately $3.0 million to
install a new plant for the production of chromium metal at LSM. Capital
expenditures are expected to increase significantly over 1997 levels to
approximately $20.0 million in 1998, including $5.9 million of capital
investments that Metallurg believes will result in decreased costs of
production, improved efficiency and expanded production capacities. The
remaining capital expenditures planned for 1998 are primarily for replacement
and major repairs of existing facilities, some of which were deferred from
earlier periods. Although Metallurg has budgeted these items in 1998, Metallurg
has not committed to complete these projects, which are contingent on senior
management approval and other conditions. Metallurg believes that these projects
will be funded through internally generated cash, borrowings under the Revolving
Credit Facility and local credit lines.
ENVIRONMENTAL REMEDIATION COSTS. In 1996, Metallurg elected early adoption
of SOP 96-1, "Environmental Remediation Liabilities," which among other
requirements, states that losses associated with environmental remediation
obligations are accrued when such losses are deemed probable and reasonably
estimable. Such accruals generally are recognized no later than the completion
of the remedial feasibility study and are adjusted as further information
develops or circumstances change. Costs of future expenditures for environmental
remediation obligations are generally not discounted to their present value.
Metallurg expended $1.0 million and $4.2 million for environmental remediation
in the two quarters ended July 31, 1998 and the 1997 Fiscal Year, respectively.
As part of the Reorganization Plan, Shieldalloy entered into settlement
agreements with various environmental regulatory authorities with regard to all
of the significant environmental remediation liabilities of which it is aware.
Pursuant to these agreements, Shieldalloy has agreed to perform environmental
remediation which, as of July 31, 1998, had an estimated cost of completion of
$38.9 million. Of this amount, approximately $2.9 million is expected to be
expended in the second half of 1998, $4.3 million in 1999 and $8.1 million in
2000. In addition, Metallurg estimates it will make expenditures of $5.0 million
with respect to environmental remediation at its foreign facilities. Of this
amount, approximately $0.5 million is expected to be expended in the second half
of 1998, $0.7 million in 1999 and $0.7 million in 2000. These amounts are not
included in the calculation of operating income.
Metallurg believes that while its remediation obligations and other
environmental costs, in the aggregate, will reduce its liquidity, its cash
balances, cash from operations and cash available under its credit facilities
are sufficient to fund its current and anticipated future requirements for
environmental expenditures.
POST-MERGER. The Issuer is a holding company, and its ability to meet its
payment obligations on the New Notes is dependent upon the receipt of dividends
and other distributions from its direct and indirect subsidiaries. The Issuer
does not have, and may not in the future have, any material assets other than
the common stock of the Company. The Company and its subsidiaries are parties to
various credit agreements,
54
<PAGE>
including the Senior Note Indenture and the Revolving Credit Facility, which
impose substantial restrictions on the Company's ability to pay dividends to the
Issuer. See "Risk Factors--Limitation on Access to Subsidiaries' Cash Flow,"
"Risk Factors--Holding Company Structure; Effective Subordination," "Risk
Factors--Restrictive Debt Covenants" and "Unaudited Pro Forma Condensed
Consolidated Financial Data."
Management believes that cash flow from operations, together with available
borrowings under the Revolving Credit Facility, will provide adequate funds for
the Company's foreseeable working capital needs, planned capital expenditures,
debt service and other obligations through at least 1999. The Company's ability
to fund its operations and make planned capital expenditures, to make scheduled
debt payments, to refinance indebtedness and to remain in compliance with all of
the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which, in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond its control. See "Risk Factors."
YEAR 2000 COMPLIANCE. Metallurg has completed an internal review of its and
its subsidiaries' information technology systems in connection with its
assessment of Year 2000 compliance. Metallurg is in the process of replacing or
modifying some of the management and accounting systems at its subsidiaries to
upgrade them generally and to make them Year 2000 compliant. Metallurg expects
to spend between $1.0 million and $2.0 million on these systems changes.
Metallurg expects that the information technology systems for all of its
subsidiaries will be Year 2000 compliant by March 31, 1999. Metallurg is
currently assessing whether any of its non-information technology will need to
be modified to become Year 2000 compliant.
Metallurg has not received written assurances from its significant suppliers
and customers to determine the state of their readiness with regard to Year 2000
compliance. Metallurg believes that they will be prepared for Year 2000 based on
Metallurg's normal interactions with its customers and suppliers and because of
the wide attention which the issue has received. Metallurg has not yet seen the
need for contingency plans for the Year 2000 issue, but this need will continue
to be monitored as Metallurg obtains more information about the state of
readiness of its suppliers and customers.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for its business systems. However, if any
needed modifications and conversions were not made, or were not completed
timely, the Year 2000 issue could have an adverse impact on the Metallurg's
operations and liquidity. If any of Metallurg's suppliers or customers do not,
or if Metallurg itself does not, successfully deal with the Year 2000 issue,
Metallurg could experience delays in receiving or shipping products and in
receiving payments. The severity of these possible problems would depend on the
nature of the problem and how quickly it could be corrected or an alternative
implemented, which is unknown at this time.
The anticipated costs for Metallurg to become Year 2000 compliant and the
anticipated timing for Metallurg to complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including timely performance by third parties who
will provide Metallurg with the software for its new systems. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to locate and
correct all relevant computer codes, the ability to successfully integrate new
business systems with existing operations and similar uncertainties. Some risks
of the Year 2000 issue are beyond the control of Metallurg and its suppliers and
customers. In particular, the Company cannot predict the effect that the Year
2000 issue will have on the general economy.
EURO CONVERSION. Metallurg has conducted an internal analysis of the effect
on Metallurg's European operations of the adoption of the euro as the common
legal currency of 11 member countries of the European Union on January 1, 1999.
Metallurg's German subsidiaries are the only significant subsidiaries
55
<PAGE>
located in one of the participating countries. The German subsidiaries are in
the process of modifying their computer software programs and operating systems
to accommodate euro-denominated transactions. Management does not expect the
cost of these modifications or the costs of the German subsidiaries to conduct
business in an additional currency to be significant. There can be no assurance
as to the effect on Metallurg's financial condition of the adoption of the euro
by non-participating countries or as to the effect of the euro conversion on the
economies of the participating countries, including markets where Metallurg
sells its products.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS. Metallurg has adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," issued in February 1997 by the Financial Accounting Standards Board
("FASB"). This statement requires the disclosure of basic and diluted earnings
per share and revises the method to calculate these amounts. The effect on
Metallurg's financial statements were not significant.
In February 1997, the FASB also issued SFAS No. 129, "Disclosure of
Information about Capital Structure." This statement is effective for financial
statements issued for periods ending after December 15, 1997. Management has
evaluated the effect on its financial reporting and determined that no further
disclosures are needed.
Metallurg has adopted SFAS No. 130, "Reporting Comprehensive Income," as of
February 1, 1998. This standard requires the display of comprehensive income and
its components in the financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company will adopt this standard in the fourth quarter of 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Postretirement Benefits." SFAS No. 132 changes current
financial disclosure requirements from those that were required under SFAS No.
87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlement and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company will adopt this
standard in the fourth quarter of 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company is currently evaluating the impact SFAS No. 133 will
have on its financial statements.
EFFECTS OF INFLATION
Inflation has not had a significant effect on Metallurg's operations.
However, there can be no assurance that inflation will not have a material
effect on Metallurg's operations in the future. Metallurg is subject to price
fluctuations in its raw materials and products. These fluctuations have affected
and will continue to affect Metallurg's results of operations.
56
<PAGE>
BUSINESS
OVERVIEW
Metallurg is a leading international producer and seller of high-quality
metal alloys and specialty metals used by manufacturers of steel, aluminum,
superalloys and chemicals and other metal consuming industries, based on the
Company's internal data and its knowledge of the markets for its products. The
Company sells more than 500 different products to over 3,000 customers
worldwide. See Note 3 to the Consolidated Financial Statements of the Company
and its subsidiaries. The Company's operations are global in scope with eight
production facilities located in four countries in Europe, North America and
South America. In addition to selling products manufactured by the Company,
Metallurg also leverages its global sales force by distributing Merchanted
Products. For the Last Twelve Months, the Company had sales and Adjusted EBITDA
of $647.1 million and $51.8 million, respectively. For a discussion of the
Company's fiscal year and the effects of Metallurg's Reorganization Plan on its
financial information, see "Summary Financial Data."
The Metallurg group was founded in 1911 with the construction of a vanadium
alloy and chemical producing plant in Nuremberg, Germany. The Company began
mining chrome ore in Turkey in 1916, and constructed a ferrochrome manufacturing
plant in Weisweiler, Germany in 1917. In subsequent years, the Company's
customer base grew throughout Europe and, in 1938, the Company added its first
subsidiary in the United Kingdom and a sales and distribution subsidiary in
Switzerland. Metallurg was established as a New York holding company in 1947 and
reincorporated as a Delaware corporation in 1997.
COMPETITIVE STRENGTHS
The Company believes that its long-standing customer relationships, strong
name recognition and global distribution capabilities provide an attractive
platform for growth. The Company believes that it is distinguished by the
following competitive strengths:
- INDUSTRY LEADERSHIP. The Company enjoys significant worldwide recognition
in the metal alloys and specialty metals industries as a result of its
87-year history. With its longevity, technical innovation, high-quality
reputation, long-standing customer relationships and diverse product base,
the Company has developed and maintained significant market shares in the
markets for ferrovanandium consumed by the U.S. iron and steel industries,
special grades of low carbon ferrochrome and chromium metal consumed by
the superalloy industry and aluminum master alloys.
- LONG-STANDING CUSTOMER RELATIONSHIPS. The Company has developed and
maintained long-term relationships with a high-quality, internationally
diverse customer base. The Company has built its customer base by
providing consistent quality, a diverse portfolio of high-quality metal
alloys and specialty metals and a high level of technical support. The
Company's customers include some of the largest metals producing companies
in the world.
- DIVERSIFIED SALES BASE. Metallurg's revenue base is diversified across
markets, regions and customers. The Company sells more than 500 different
products to over 3,000 customers worldwide, none of which represents more
than 5% of the Company's sales. By serving customers in the iron, steel,
aluminum, superalloy, titanium and chemical markets, Metallurg believes
that it is relatively less vulnerable than certain of its competitors to
the cycle of any one end-use market. Furthermore, the Company's sales are
globally balanced, with approximately 47% and 38% of revenues coming from
Europe and North America, respectively, for the 1997 Fiscal Year.
- RAW MATERIAL SOURCING. The Company generally sources raw materials from a
diverse group of suppliers and actively pursues alternative low cost
sources of raw materials. The Company has opened purchasing offices in
Russia and China which have enabled the Company to develop new sources of
supply for the Company's manufacturing and distribution businesses. The
Company also derives the competitive benefit of vertical integration
through its ownership of chrome ore mines
57
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located in Turkey. Furthermore a key goal of the Company's capital
expenditure program is to expand the usage of lower cost raw materials.
Management believes that obtaining access to consistent, lower cost
sources of supply represents a key barrier to entry facing potential new
competitors.
- GLOBAL MANUFACTURING AND SALES NETWORK. Metallurg is well positioned to
serve its global customer base through its eight production facilities,
three mines, 17 sales offices and two purchasing offices located
throughout the world. The Company believes that its international sales
force comprised of 121 sales personnel provides it with a key competitive
advantage and the ability to enhance its customer relationships through
aiding customers with more efficient and innovative use of products. The
Company leverages the expertise of its sales force by merchanting products
manufactured by third parties, which results in the offering of a broader
product line and Metallurg becoming a more significant supplier to its
customers, while at the same time strengthening ties to some of its
sources of raw materials.
BUSINESS STRATEGIES
The Company's business objective is to maximize the long-term profitability
of its operations while maintaining a strong financial position through the
various business and market cycles. The Company's continuing strategies for
achieving this objective are as follows:
- FOCUS ON CORE BUSINESSES. The Company seeks to achieve high market shares
in markets where the Company can differentiate itself on the basis of
technical expertise and product quality. As part of this strategy, the
Company is focusing its production and sales efforts on higher margin
specialized alloy businesses, and is investing in capital projects that
will expand its capacity or lower its costs in those areas. In recent
years, the Company has divested certain non-core and lower margin
businesses, including its tantalum carbide and United States titanium
scrap processing businesses.
- AGGRESSIVELY MANAGE COSTS. In recent years, the Company has instituted
measures to reduce operating costs and enhance profitability. Through a
combination of divesting non-core businesses, using contractors and
improving productivity, the Company has reduced the number of employees
from 2,508 at the end of 1992 to 1,493 as of July 31, 1998, while sales
have grown from $591.1 million in 1992 to $647.1 million for the Last
Twelve Months. The Company has restructured its operations into individual
business units focused on particular customer groups in order to better
manage costs and improve profitability. The Company's cost rationalization
program is ongoing and management anticipates that further cost savings
and productivity gains may be realized as a result.
- IMPROVE PRODUCT MIX. The Company continually pursues opportunities to
increase profitability through the Company's existing distribution network
by improving its product mix by: (i) divesting low margin products; (ii)
developing value added, higher margin products; and (iii) acquiring, or
entering into merchanting arrangements for, product lines that complement
the Company's core product offerings. Examples of high margin products
that have experienced significant recent growth include coating materials
for thin film technology and titanium carbon aluminum sold to the aluminum
industry.
- SELECTIVELY PURSUE ACQUISITIONS AND OTHER STRATEGIC EXPANSION
INITIATIVES. The Company believes that its leading position in a diverse
group of specialty metals markets provides it with a strong base to
continue to expand its core businesses. The Company has the industry and
financial expertise of Safeguard International as its equity sponsor. The
Company will pursue acquisition opportunities and expansion initiatives as
warranted by market conditions. The Company intends to pursue acquisitions
that: (i) add to or complement its specialty metals portfolio; (ii)
leverage its existing manufacturing and distribution capabilities; or
(iii) enhance its raw materials sourcing capabilities. The Company is
currently evaluating several acquisition and expansion opportunities.
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<PAGE>
PRODUCTS AND MARKETS
Metallurg sells more than 500 different products to over 3,000 customers
worldwide. The following table sets forth the dollar amounts and percentages of
Metallurg's sales attributable to Metallurg's various markets for the periods
presented, exclusive of commissions earned by Metallurg (dollars in millions):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 FISCAL ------------------------------------------
YEAR 1996 1995
---------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
SECTOR
Steel..................................................... $ 282.8 44.8% $ 328.1 50.6% $ 369.8 53.8%
Aluminum.................................................. 120.0 19.0 96.6 14.9 105.9 15.4
Superalloys............................................... 92.6 14.6 71.3 11.0 61.7 9.0
Chemicals................................................. 29.5 4.7 29.4 4.5 35.7 5.2
Other..................................................... 107.0 16.9 123.4 19.0 114.9 16.6
----------- --------- --------- --------- --------- ---------
Total............................................... $ 631.9 100.0% $ 648.8 100.0% $ 688.0 100.0%
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
The following table sets forth the most significant product groups based on
Metallurg's sales for the 1997 Fiscal Year:
TOP TEN PRODUCT GROUPS BY SALES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 FISCAL PERCENT OF
YEAR SALES TOTAL
----------- -----------
<S> <C> <C>
NAME OF PRODUCT GROUP
Chrome products........................................................................... $ 117.5 18.6%
Aluminum products......................................................................... 94.6 15.0
Vanadium products......................................................................... 90.7 14.3
Columbium products........................................................................ 48.1 7.6
Silicon products.......................................................................... 46.7 7.4
Metal powders............................................................................. 28.1 4.4
Titanium products......................................................................... 20.1 3.2
Nickel products........................................................................... 15.9 2.5
Boron products............................................................................ 15.2 2.4
Tantalum products......................................................................... 8.6 1.4
----------- -----
Total Product Group................................................................. $ 485.5 76.8%
----------- -----
----------- -----
Total Sales............................................................................... $ 631.9 100.0%
----------- -----
----------- -----
</TABLE>
IRON AND STEEL INDUSTRIES; SPECIALTY FERROALLOYS. The Company manufactures
and sells specialty ferroalloys to some of the world's largest iron and steel
producers, such as Algoma Steel Inc., British Steel plc, Nucor Corporation,
Thyssen AG and US Steel Group. The Company's principal specialty ferroalloy
products are ferrovanadium and standard grades of low carbon ferrochrome. These
products are used by iron and steel producers to increase temperature and
corrosion resistance and strength-to-weight ratios for metals used in the
energy, automotive and construction industries. For the 1997 Fiscal Year, the
Company had sales in this category of approximately $282.8 million, representing
45% of the Company's total sales.
The iron and steel industry is cyclical, with iron and steel consumption
depending greatly on demand for durable goods, such as automobiles, construction
materials, machinery, appliances and miscellaneous manufactured products. The
iron and steel industry was in a recession from 1989 to 1993. The recession
resulted in negative pressures on alloy prices and volumes and in iron and steel
production cutbacks. In
59
<PAGE>
addition, Metallurg's markets were disrupted in recent years by large flows of
competing products from the former Soviet Union. The end of the Cold War and the
resulting decrease in United States and Russian defense spending also
contributed to a reduced demand for Metallurg's products and low levels in the
prices of ferroalloys. Specifically, global raw steel production declined from a
peak of 786 million tons in 1989 to 722 million tons in 1992. Raw steel
production has rebounded from a recessionary low of approximately 722 million
tons in 1992 to approximately 793 million tons in 1997. See "Risk Factors--
Dependence on Cyclical Markets, Including International Markets, for Metallurg's
Products."
During the recession, Metallurg achieved significant reductions in costs
that have contributed to improvements in profitability and cash flow and
increased stabilization in its business. Management also believes that the flow
of competitive products from the former Soviet Union has slowed due to reduced
stockpiles of inventory and anti-dumping actions affecting imports of low carbon
ferrochrome and ferrovanadium from the former Soviet Union.
ALUMINUM INDUSTRY; ALUMINUM MASTER ALLOYS AND COMPACTED PRODUCTS. The
Company manufactures a series of master alloys and briquettes and tablets for
sale to the aluminum industry. The Company's customers in this sector include
leading producers such as Alcan Aluminium Limited, Alcoa Aluminum Co. of
America, Aluminium Pechiney, Reynolds Metals Co. and Sumitomo Metals Industries
Ltd. Metallurg's principal aluminum products include titanium boron tertiary
alloys (which improve the conductivity of aluminum for electric cable),
strontium master alloys (which modify silicon-containing foundry alloys for
improved mechanical properties, as in automotive wheels) and chrome, iron and
manganese briquettes and tablets (which maximize the ductility and strength of
aluminum used in the manufacture of can sheet and aerospace components,
respectively). The Company also manufactures binary master alloys containing
boron, zirconium or titanium (which are used for the grain refining of aluminum
alloy ingots, billets and continuous cast sheet). For the 1997 Fiscal Year, the
Company had sales to the aluminum industry of $120.0 million, representing 19%
of the Company's total sales. Aluminum consumption in the Western world has
grown from approximately 15.9 million metric tons in 1993 to approximately 18.8
million metric tons in 1997. This growth has been driven in large part by demand
for durable products, as well as the increased substitution of aluminum for
steel in certain transportation and construction applications. See "Risk
Factors--Dependence on Cyclical Markets, Including International Markets, for
Metallurg's Products."
Like the iron and steel industry, the aluminum industry is cyclical.
Aluminum consumption fluctuates with demand for durable goods, such as
construction materials, machinery, transportation and miscellaneous manufactured
products. In 1997, the markets in North America, Europe and Japan collectively
accounted for over 70% of the Western world demand for primary aluminum.
According to Feronomics, Inc., Western world primary aluminum consumption is
expected to increase by 3.0% per year from 1997 through 2002.
Although exports of primary aluminum from the former Soviet Union have
contributed to increased supply and reduced prices in the industry since 1989,
Metallurg was less affected by such Soviet dumping in this industry than in the
iron and steel industry. This is because Metallurg's products are not used in
the primary metal stage, but instead are used in the downstream processing of
aluminum products. Increases in the substitution of aluminum for steel, such as
in automobile manufacturing, have a significant positive impact on the aluminum
industry, but only a small effect on the iron and steel industry. Metallurg
believes that it is well positioned to capitalize on future growth areas in the
aluminum industry, such as transportation, due to the increased use of aluminum
in forging and casting applications, and building and construction.
SPECIALTY METALS AND ALLOYS; SUPERALLOY AND TITANIUM ALLOY INDUSTRIES. The
Company manufactures and sells specialty metals and alloys used by producers of
superalloys and titanium alloys to enhance the performance of finished metal
products such as aircraft engines and frames, gas turbines and boiler tubes. The
Company's customers for specialty metals and alloys include Allegheny Teledyne,
Inc., Carpenter
60
<PAGE>
Technology Corp., INCO Alloys, Kanthal AB, Oregon Metallurgical Corp., RMI
Titanium Company, Sandvik AB, Special Metals Corporation and Titanium Metals
Corp. For the 1997 Fiscal Year, the Company had sales in this category of $92.6
million, representing 15% of the Company's total sales. Metallurg's principal
products in this category include chromium metal, special grades of low carbon
ferrochrome and vanadium aluminum. Growth and demand for superalloys and
titanium have been driven principally by commercial aerospace production. In
addition, new applications for these metals and alloys have been developed for
use in the consumer goods, power generation, oil and gas, chemical and
biomedical industries. See "Risk Factors--Dependence on Cyclical Markets,
Including International Markets, for Metallurg's Products."
The aerospace industry is the largest user of superalloys. A significant
reduction in the manufacture of military and civilian aircraft between 1989 and
1992 resulted in a 30% decrease in global demand for superalloys and a resulting
adverse impact on Metallurg and other superalloy producers. The producers of
superalloys have partly counteracted this decline by finding new consumers in
the power generation, oil and gas, chemical, consumer goods and biomedical
industries.
Since 1994, however, demand by the aerospace industry has positively
impacted the titanium and superalloy producers. According to Aerospace
Industries Association ("AIA"), the industry delivered 395 large jet airliners
in 1996 and 556 in 1997 and the world jet fleet is expected to double by 2017.
Superalloy and titanium producers are adding capacity to cope with demand and
shorter lead times. Metallurg believes that the profitability of its chromium
metal, low carbon ferrochrome, vanadium aluminum and high purity nickel and
ferrocolumbium products, which are produced in Metallurg's United States, UK and
German facilities is dependent upon the titanium and superalloy industry.
OTHER INDUSTRIES AND PRODUCTS. Metallurg also manufactures and distributes
a number of products used outside of the iron, steel, aluminum and superalloy
industries. These products include coating materials, which are sold to
electronics and tool manufacturers, vanadium oxytrichloride for use in the
synthetic rubber industry and polishing powders used by the glass polishing
industry. These products generally are higher-margin, technically sophisticated
products. For the 1997 Fiscal Year, the Company had $136.5 million in sales of
these products, representing 21% of the Company's total sales.
MANUFACTURING PROCESSES
Metallurg's manufacturing processes involve melting, refining, casting,
sizing, blending and packaging operations, which vary from product to product.
For example, in the manufacture of low carbon ferrochrome, EWW consumes raw
materials including chrome ore, predominantly from Metallurg's Turkish mines,
and silicochrome. The raw materials are melted and reductants are added to
refine the chemistry of the production batch. The batch is poured into casting
molds that are cooled and then crushed, sized, blended and packaged. The
manufacture of ferrovanadium at Metallurg's Cambridge, Ohio, plant follows an
analogous process of melting, casting and crushing, except that
vanadium-containing raw materials are used. In general, the manufacture of
aluminum master alloys also follows similar principles using aluminum and other
additives; however, these master alloys are generally cast as waffle plate or
processed to a solid rod form for delivery to the customer. The manufacture of
briquettes and tablets involves the grinding and blending of raw materials, the
compression of these materials into a compacted form and packaging for delivery
to the customer. More sophisticated production routes are used for highly
specialized products which can require chemical processing or the use of vacuum
furnaces and a variety of other equipment.
CUSTOMERS
For the 1997 Fiscal Year, approximately 45% of Metallurg's sales were made
to the iron and steel industry, 19% to the aluminum industry, 15% to the
superalloy and titanium alloy industries, 5% to the
61
<PAGE>
chemicals industry, and the remaining 16% were made to other industries, none of
which was individually significant to Metallurg. No single customer accounted
for more than 5% of Metallurg's sales in 1997.
The following table sets forth a representative sample of Metallurg's
significant current customers in each of its customer industry categories:
<TABLE>
<CAPTION>
IRON AND STEEL ALUMINUM SUPERALLOY AND TITANIUM OTHER
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Algoma Steel Inc. Alcan Aluminium Limited Allegheny Teledyne, Inc. AKZO Chemical Company
Allegheny Teledyne, Inc. Alcoa Aluminum Co. of Carpenter Technology Corp. BASF Corporation
Avesta AB America INCO Alloys Cabot Corp.
British Steel plc Aluminium Pechiney Kanthal AB Rwe Dea
Inland Steel Co. Reynolds Metals Co. Oregon Metallurgical Corp. Treibacher Schleifmittel
Iscor Limited Shinwa Bussan RMI Titanium Company Corp.
The LTV Corporation Sumitomo Metals Industries Sandvik AB
Northwest Steel & Wire Co. Ltd. Titanium Metals Corp
Nucor Corporation
Outokumpu OY
Svenskt Stal AB
Thyssen AG
US Steel Group
</TABLE>
MERCHANTED PRODUCTS
The merchanting of products manufactured by third parties is a natural
complement to the Company's manufacturing operations. Merchanted Products
leverage the Company's global sales staff by providing a broader product
offering to its existing customers without incurring significant additional
overhead. As a result, Metallurg becomes a more significant supplier to its
customers, as they can more conveniently procure supplies and decrease their
sourcing costs by reducing their number of vendors and optimizing freight costs.
In addition, by offering Merchanted Products, the Company has greater access to
raw materials. The Company's merchanting revenues are from three sources:
"back-to-back" purchases and sales, which eliminate price risk to the Company,
purchases of stocks for the Company's own account for subsequent resale to
customers and agency sales for the account of another party where the Company
receives a commission and does not take title to the inventory. The Company's
total sales of $631.9 million for the 1997 Fiscal Year included an aggregate of
$266.8 million in sales from Merchanted Products.
FACILITIES AND OPERATIONS
PRODUCTION FACILITIES. Metallurg is organized geographically, having
established a worldwide sales network built around Metallurg's core production
facilities in the United States, the United Kingdom and Germany. These
production units have laboratories providing analytical, research and
development support to in-house operations, as well as analytical services to
customers and third parties. Metallurg owns all of the facilities listed.
62
<PAGE>
The following table sets forth for each Metallurg operating subsidiary the
location of its facilities, the key products manufactured by such subsidiary and
each facility's 1997 Fiscal Year sales of manufactured products and Merchanted
Products:
<TABLE>
<CAPTION>
SALES OF SALES OF
MANUFACTURED MERCHANTED
OPERATING SUBSIDIARY LOCATION KEY PRODUCTS PRODUCTS (A) PRODUCTS (A)
- -------------------------- -------------------------- -------------------------- --------------- -------------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Shieldalloy Newfield, New Jersey Aluminum Briquettes and
(Plant) Tablets
Aluminum Master Alloys
Ferrotitanium Metal
Powders $ 43.4 $ 116.9(b)
Cambridge, Ohio (Plant) Ferrovanadium
Grainal
Vanadium Chemicals 42.6 --
LSM Rotherham, UK (Plant) Aluminum Alloying Tablets
Aluminum Master Alloys
Chromium Metal
Ferroboron
Ferrotitanium
Glass Polishing Powders
Metal Powders
Nickel Boron
Nickel Cobalt Magnet
Alloys 133.7 27.2
GfE Nuremberg, Germany (Plant) Chromium Metal
Columbium Alloys
Magnet Alloys
Special Master Alloys
Vanadium Aluminum
Vanadium Chemicals 59.0 38.3
EWW Eschweiler-Weisweiler, Low Carbon Ferrochrome
Germany (Plant) 55.2 1.4
Aluminum Powder Co. Ltd. Holyhead, UK (Plant) Atomized Aluminum Powder 17.0 --
Companhia Industrial Sao Joao del Rei, Brazil Aluminum Master Alloys
Fluminense (Plant) Columbium Oxide
Tantalum Oxide 13.8 --
Turk Maadin Sirketi A.S. Kavak, Tavas and Gocek, Chrome Ore
Turkey (Mines) 5.3 --
</TABLE>
- ------------------------
(a) Includes external and intercompany sales, except for sales by Aluminum
Powder Co. Ltd., which do not include sales to its parent company LSM.
(b) Includes all Merchanted Products for Shieldalloy (both Newfield, New Jersey
and Cambridge, Ohio).
SALES OFFICES. Metallurg has sales personnel both at its production
facilities and at its 17 separate sales offices in the following countries:
Brazil, Canada, Germany, Italy, Japan, Mexico, Poland, South Africa, Sweden,
Switzerland, the United Kingdom, the United States and the former Yugoslavia.
RAW MATERIALS
Metallurg produces a wide variety of products which are sold into a number
of different metals industries. Metallurg also has followed a strategy of
specializing in products that command higher premiums because of their relative
technical sophistication; consequently, there is no single raw material that
makes up the basis of Metallurg's entire production.
Metallurg's Turkish subsidiary mines chrome ore which is supplied to EWW for
the production of low carbon ferrochrome. Management believes the mines have
identifiable reserves of 1.3 million tons and probable reserves of 700,000 tons
that would last until 2013.
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<PAGE>
For the production of chromium metal, Metallurg's UK-based subsidiary
purchases chromium oxide from the world's major producer, British Chrome
Chemicals, and supplements this supply with additional quantities from the
former Soviet Union. This product also requires large quantities of aluminum
powder substantially sourced from an affiliate of Metallurg.
Metallurg's four aluminum processing plants in the United States, UK and
Brazil buy approximately 30,000 tons of virgin aluminum from producers worldwide
while important alloying chemicals are sourced from five different suppliers
around the world.
Titanium scrap is sourced in significant quantities for the production of
ferrotitanium and other titanium containing products from countries active in
the aerospace industry, such as the United States, Russia and the UK, and from
sellers of surplus military equipment.
Vanadium pentoxide in its various forms is the source of raw material for
Metallurg's production of ferrovanadium, vanadium chemicals and vanadium
aluminum. For ferrovanadium production, Metallurg purchases slag containing
vanadium resulting from steel-making in South Africa and residues from
petrochemical companies resulting from the refining of petrochemical products
and from electric utilities which generate ash containing vanadium as a result
of burning fuel oil. Metallurg currently obtains a majority of these raw
materials from two sources. See "Risk Factors--Limited Sources for Raw
Materials." Vanadium chemicals and vanadium aluminum are produced from vanadium
pentoxide which is purchased on the open market and from vanadium residues which
are consumed in Metallurg's own production.
Niobium (columbium) oxide which is used as a raw material for the production
of sophisticated alloys by GfE and Shieldalloy is principally supplied by
Metallurg's Brazilian subsidiary which processes a variety of tantalum- and
niobium-containing minerals, ores and residues through its chemical plant.
Metallurg also utilizes a host of other raw materials such as cobalt,
nickel, boric acid, mischmetal, manganese, chrome silicide, etc., in the
manufacture of its wide product range which are purchased as required from
producers or traders. Most purchases are made on a spot basis at market price to
minimize the risk of exposure to market fluctuations.
COMPETITION
The metals industry is highly competitive on a worldwide basis. Competition
is primarily based on price, quality and timely delivery. Although Metallurg
faces competition in each of its markets, Metallurg does not believe that any
single competitor competes with Metallurg in all of its products or markets.
IRON AND STEEL INDUSTRY. In North America, products manufactured by
Strategic Minerals Corp. (Stratcor) and Masterloy Products Ltd. (Aimcor) compete
with Metallurg's ferrovanadium products. In Europe and the rest of the world,
Treibacher Industrie AG competes with Metallurg in its ferrovanadium products,
and a number of small producers and products from Russia compete with
Metallurg's ferrotitanium products. In standard grades of low carbon
ferrochrome, competition comes worldwide from Samancor Ltd. and Zimbabwe Alloys
Ltd. (Zimalloys).
ALUMINUM INDUSTRY. Competition is becoming more international because of
the growing number of master alloy and compacted product manufacturers. In
Europe and the Far East, KBM Affilips Ltd., Hydelko, Anglo Blackwells and
Aleastur-Asturiana de Aleaciones SA compete against products manufactured by
LSM, while in North and South America, KB Alloys and Milward Alloys Inc. (a
distribution agent of KBM Affilips Ltd.) compete against Metallurg in master
alloys. Competition in compacted products comes mainly from Elkem SA in North
America and Hoesch in the rest of the world.
SUPERALLOY AND TITANIUM ALLOY INDUSTRIES. Strategic Minerals Corp.
(Stratcor) and Reading Alloys Inc. compete internationally with Metallurg in
vanadium aluminum. Reading Alloys Inc. also competes in sophisticated alloys for
the superalloy industry, as do CBMM-Cia Brasileira de Metalurgica e Mineracao,
Cabot Corporation and H.C. Starck GmbH in certain products. Metallurg has no
significant competitor in
64
<PAGE>
special grades of low carbon ferrochrome. Delachaux Division Metaux and, to a
limited extent, Elkem SA compete with Metallurg in chromium metal.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") is carried out on behalf of Metallurg in
its two Technical Centers by a 15-member team at LSM and a five-member team at
GfE, both supported as necessary by staff drawn from production. The Technical
Centers have furnaces, laboratories, milling and testing equipment with R&D
efforts linked to product and process improvement as well as the development of
new product lines. Strong relationships are maintained with customers and
materials departments of universities. Recently, successful projects in LSM
include a new carbon-based grain refiner for the aluminum industry developed
jointly with Shieldalloy, titanium carbide alloys for addition to rolls in the
iron and steel industry and Raney type catalysts for the chemical industry. In
Germany, the research and development is focused on advanced intermetallic
phases for structural and functional applications as well as development
recently of nickel aluminum sputtering targets, improvement of granulation
techniques for metal alloy powders and development of multinary master alloys.
EMPLOYEES
As of July 31, 1998, Metallurg employed approximately 1,493 people
worldwide. Labor unions represent approximately 50% of Metallurg's employees.
Employees are represented by unions at seven locations in the United States, the
United Kingdom, Germany and Brazil. Many of the collective bargaining agreements
covering Metallurg's union employees at its foreign subsidiaries are renewable
on an annual basis. Metallurg's relationships with its unions are managed at the
local level and are considered by management to be good. Metallurg has not been
affected by strikes in the last ten years (other than one in Turkey which
occurred in 1988), and there has not been a strike at any of Metallurg's United
States facilities for over twenty years.
BANKRUPTCY
On April 14, 1997, Metallurg and Shieldalloy consummated the Reorganization
Plan. Metallurg and Shieldalloy sought Chapter 11 protection in September 1993
following Metallurg's inability to restructure or refinance its long-term
indebtedness and revolving credit facility in light of the confluence of
numerous economic factors that negatively impacted the Metallurg Group's
businesses and caused Metallurg to default on certain then-outstanding
indebtedness. In particular, the economic recession that began in 1989 in
end-use markets, such as the aerospace, automotive, durable goods, construction
and defense sectors, placed significant downward pressure on alloy prices and
volumes. In addition, increased competition as a result of sales by exporters
from the former Soviet Union of excess stocks of metals and alloys precipitated
by the economic collapse of the former Soviet Union and the end of the Cold War
drove prices of ferroalloys in Europe to very low levels. Moreover, in the wake
of reductions in United States defense spending, there was a reduction in demand
in the market for superalloys.
Metallurg has sought to stabilize and strengthen its business since the
bankruptcy filing through the implementation of the business strategies
described above. As a result of the consummation of the Offering and the other
financial arrangements made by Metallurg, Metallurg believes that its financial
position has improved from 1993 with enhanced liquidity and extended maturities
of its debt. In response to the dumping by the former Soviet Union, Metallurg
sought and obtained anti-dumping orders against Russia for imports of
ferrovanadium into the United States and against Russia, Kazakhstan and Ukraine
for imports of low carbon ferrochrome into Europe. See "Risk Factors--End of
Anti-Dumping Duties." Metallurg believes that most of the stockpiles in the
former Soviet Union have been depleted and, therefore, if the anti-dumping
duties are reduced, the impact will be less than that experienced by Metallurg
in the early 1990's.
65
<PAGE>
ENVIRONMENTAL MATTERS
The foreign and domestic operations of Metallurg's alloy manufacturing
business are subject to extensive laws and regulations governing, among other
things, emissions to air, discharges and releases to land and water (including
groundwater), the generation, handling, storage, transportation, treatment and
disposal of wastes and other materials, including wastes and materials
containing low levels of radioactivity, and the remediation of contamination
caused by releases of wastes and other material, as well as worker exposure to
hazardous or toxic substances. There can be no assurance that these laws and
regulations will not result in the imposition of future liabilities and
obligations, including future liability for other disposal or contamination at
both domestic and foreign facilities, that would be material to Metallurg's
business operations, financial condition or cash flow or that the current
estimates and reserves established by the Company and discussed herein are or
will be adequate. Management believes that Metallurg is faced with a number of
environmental matters which have largely resulted from changing environmental
laws and regulations and, increasingly, environmental controls and cleanup
requirements, particularly in the area of solid and hazardous waste removal. To
fulfill the terms of comprehensive settlement agreements with the environmental
regulatory authorities described more fully below, Shieldalloy has agreed to
perform environmental remediation which, as of July 31, 1998, had an estimated
cost of completion of $38.9 million. Of this amount, Shieldalloy expects to
expend approximately $2.9 million in the second half of 1998, $4.3 million in
1999 and $8.1 million in 2000. Although the scope of Shieldalloy's remediation
obligations has been defined pursuant to such settlement agreements, there can
be no assurance that the ultimate cost of fulfilling these obligations will not
materially exceed Shieldalloy's current estimates or currently established
reserves.
While its remediation obligations and other environmental costs will, in the
aggregate, reduce its liquidity, Metallurg believes its cash balances, cash from
operations and cash available under its credit facilities are sufficient to fund
its current and anticipated future requirements for environmental expenditures.
The historical manufacture of several products in Newfield, New Jersey and
Cambridge, Ohio resulted in the production of various by-products and wastes
that Shieldalloy is obligated to remediate under federal and state environmental
laws and regulations. The release or threatened release of hazardous substances
and wastes at the Newfield facility led that facility to be placed on the
National Priorities List for cleanup under the federal Comprehensive
Environmental Response, Compensation and Liability Act (also known as
"Superfund"). Pursuant to the Reorganization Plan, all known off-site
liabilities for disposal of solid and hazardous wastes were discharged.
Shieldalloy also entered into comprehensive settlement agreements with
governmental authorities covering remediation of various on-site and facility-
related environmental conditions at its Newfield and Cambridge facilities.
Metallurg has also provided for certain estimated costs associated with its
operating sites in Germany and Brazil, although there can be no assurance that
such estimates will prove to be accurate. Metallurg believes that total
environmental remediation and monitoring liabilities consist of the following
(in thousands):
<TABLE>
<CAPTION>
JULY 31, 1998
-------------
<S> <C>
Domestic:
Shieldalloy--New Jersey...................................................... $ 30,127
Shieldalloy--Ohio............................................................ 11,753
-------------
41,880
Foreign........................................................................ 5,047
-------------
Total environmental liabilities.............................................. 46,927
Less: trust funds.............................................................. 2,984
-------------
Net environmental liabilities................................................ $ 43,943
-------------
-------------
</TABLE>
66
<PAGE>
As part of the Reorganization Plan, Metallurg and Shieldalloy entered into
an Environmental Settlement Agreement with the Environmental Protection Agency
(the "EPA"), the Department of the Interior (the "DOI") and the Nuclear
Regulatory Commission (the "NRC") with respect to the Newfield and Cambridge
sites and with the New Jersey Department of Environmental Protection (the
"NJDEP") with respect to the Newfield site (the "U.S. and NJDEP Environmental
Settlement Agreement"). In addition to settling claims with federal authorities,
the U.S. and NJDEP Environmental Settlement Agreement memorialized prior
commitments to the State of New Jersey pursuant to Administrative Consent Orders
("ACOs") issued on September 5, 1984 and October 5, 1988. The U.S. and NJDEP
Environmental Settlement Agreement obligates Shieldalloy to complete a number of
environmental projects, including groundwater, soils and sediment remediation,
closure of nine wastewater and treatment lagoons, and related operation and
maintenance activities. The cost of fulfilling these obligations is currently
estimated to be approximately $30.1 million. Metallurg and Shieldalloy have
agreed to provide, create or make available financial assurance in this amount
for these projects through a combination of letters of credit and cash reserves.
At July 31, 1998, outstanding letters of credit issued as financial assurance in
favor of various environmental agencies were $21.4 million, and cash reserves
established as financial assurance total $0.8 million. The costs of providing
financial assurance over the term of the remediation activities have been
included in the accrued amounts to be disbursed over the next fourteen years.
Metallurg, Shieldalloy and Cyprus Foote Mineral Company ("Cyprus Foote"),
the former owner of the Cambridge site, have entered into a Permanent Injunction
Consent Order (the "Consent Order") with the State of Ohio resolving known
environmental remediation claims relating to the Cambridge site. The terms of
the Consent Order are incorporated by reference into the Settlement Agreement
entered into among Metallurg, Shieldalloy, Cyprus Foote, the Ohio Environmental
Protection Agency (the "OEPA") and the Ohio Department of Health (the "ODH")
(the "Ohio Environmental Settlement Agreement," and together with the U.S. and
NJDEP Environmental Settlement Agreement, the "Settlement Agreements"). Under
the Ohio Environmental Settlement Agreement, Shieldalloy and Cyprus Foote will
perform remedial design and remedial action at the Cambridge site, estimated to
cost approximately $8.7 million. Additionally, Shieldalloy and Cyprus Foote will
enhance, restore and preserve certain wetlands in the vicinity of the Cambridge
site. The Consent Order requires Shieldalloy and Cyprus Foote to provide
financial assurance for the above remediation projects in an initial amount of
$9.0 million. Pursuant to an agreement between Shieldalloy and Cyprus Foote,
Cyprus Foote will satisfy this requirement. In addition, the Consent Order
requires Shieldalloy to provide financial assurance for the long-term operation
and maintenance of the east and west slag piles at the Cambridge site, in the
amount of approximately $1.2 million, which was funded as part of the
Reorganization Plan, and an additional $0.1 million to fund extension of the
annuity for an additional 900 years. Metallurg has accrued its best estimate of
associated costs which it expects to substantially disburse over the next six
years.
As a result of historic manufacturing activities, slag piles that contain
low levels of naturally occurring radioactivity have accumulated at the
Cambridge and Newfield sites. These slag piles are subject to regulation by the
NRC and state agencies. As related production has ceased at the Cambridge
location, Shieldalloy is required to decommission the two slag piles at that
facility and obtain approval from the State of Ohio and the NRC to stabilize and
cap the slag piles. Authorization to cap on-site the larger slag pile at the
Cambridge site has been approved as protective of human health and the
environment by the State of Ohio. The NRC is expected to issue its final
environmental impact statements for Cambridge in 1998. As Ohio did before it
selected the cap on-site remedy, the NRC has considered a range of remedial
alternatives including removal of the slag pile to an off-site disposal facility
in previously issued draft environmental impact statements which have been
circulated to the public. The estimated costs for off-site disposal approached
$100.0 million; however, in the two draft environmental impact statements for
Cambridge issued in 1995 and 1996 and presented for public comment at two public
meetings in Cambridge, the NRC stated its current intention to accept the cap
on-site alternative already adopted by Ohio. As long as Shieldalloy continues
its ongoing efforts to sell the slag located at the Newfield location,
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the NRC will allow the slag pile to remain in place, subject to submission of a
conceptual decommissioning plan and financial assurance for implementation of
that plan. Metallurg's obligation for decommissioning costs for these sites is
partially assured by cash funds held in trust. As a condition precedent to
consummation of the Reorganization Plan, draws aggregating $1.5 million were
made under prepetition letters of credit relating to both the Newfield and
Cambridge facilities, and the proceeds were deposited in a trust fund for
purposes of NRC decommissions.
Metallurg is defending an action brought by local residents alleging
personal injury and property damage from groundwater contamination and other
exposure to hazardous materials allegedly originating from Metallurg's Newfield,
New Jersey plant. Metallurg is vigorously defending this action. Metallurg
believes that this matter is covered by its insurance and the costs of such
defense are being borne by Metallurg's insurance carriers. Based on the damages
being sought and the availability of insurance, Metallurg does not believe that
the outcome of this litigation or the ongoing costs of defense will have a
material adverse effect on Metallurg's operations or financial position.
Metallurg has also provided for certain estimated costs associated with its
sites in Germany and Brazil. Metallurg's German subsidiaries have accrued
environmental liabilities in the amount of $4.7 million and $4.8 million at July
31, 1998 and January 31, 1998, respectively, to cover the costs of closing an
off-site dump and for certain environmental conditions at a site in Nuremberg
owned by a subsidiary. In Brazil, costs of $0.3 million and $0.4 million have
been accrued at July 31, 1998 and January 31, 1998, respectively, to cover
reclamation costs of the closed mine sites.
In addition to its substantial remediation and monitoring obligations for
historical contamination, Metallurg's ongoing operations at its Cambridge
facility continue to be affected by actual and proposed changes to environmental
laws and regulations involving the treatment, storage and disposal of classified
hazardous wastes under the Resource Conservation and Recovery Act ("RCRA") and
control of air emissions under the Clean Air Act Amendments of 1990 ("CAAA"),
and under their state counterparts. In particular, Metallurg is currently
considering various options in connection with its production of ferrovanadium,
which may be affected by increasingly stringent sulfur dioxide emission
limitations under the CAAA, and by the EPA's proposed reclassification of spent
catalyst, one of Metallurg's raw materials, as a hazardous waste under RCRA.
Spent catalyst currently makes up approximately 8.0% of Metallurg's raw
materials. The combination of these pending regulatory requirements will compel
Metallurg to monitor the cost and constituents of its raw product slate with
increased care, and may require substantial capital expenditures at the
Cambridge facility in order to install appropriate pollution control devices,
reconfigure material handling facilities, or both, to allow Metallurg to process
the most cost-effective raw product mix.
See Note 14 to the Consolidated Financial Statements of Metallurg and its
subsidiaries contained elsewhere in this Prospectus for an additional discussion
of the environmental liabilities discussed above.
LEGAL PROCEEDINGS
Metallurg and certain of its subsidiaries are parties to a variety of legal
proceedings, none of which Metallurg believes is material, relating to their
operations. Management does not expect that these matters, individually or in
the aggregate, would have a material adverse impact on Metallurg's operations or
financial position. For a discussion of pending litigation regarding
environmental matters, see "-- Environmental Matters."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Issuer and with respect to Alan D.
Ewart, the President and Chief Executive Officer of Metallurg, Inc. (the "CEO"):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Heinz C. Schimmelbusch.................... 54 Director and President of the Issuer
Arthur R. Spector......................... 57 Director and Vice President of the Issuer
Michael R. Holly.......................... 52 Director and Vice President of the Issuer
Alan D. Ewart............................. 51 President and Chief Executive Officer of Metallurg, Inc.
Douglas A. Fastuca........................ 33 Treasurer of the Issuer
</TABLE>
Each director of the Issuer holds office until the next annual meeting of
stockholders of the Issuer or until his or her successor has been elected and
qualified. Officers of the Issuer are selected by the Board of Directors and
serve at the discretion of the Board of Directors.
HEINZ C. SCHIMMELBUSCH. Mr. Schimmelbusch is a Managing Director of the
general partner and of the management company of Safeguard International. He is
also Chairman of the Board, President and Chief Executive Officer of Allied
Resource Corporation, a company he founded in 1994. Until 1994, Mr.
Schimmelbusch was Chairman of the Management Board of Metallgesellschaft AG,
Germany, a multi-billion dollar multinational company in the process industries,
and Chairman of the Supervisory Board of LURGI AG, Germany's leading process
engineering firm; of Buderus AG, a leading manufacturer of commercial and
residential heating equipment; of Dynamit Nobel AG, a leading manufacturer of
explosives; and Norddeutsche Affinerie AG, Europe's largest copper producer. Mr.
Schimmelbusch also served on the Boards of several German and other foreign
corporations and institutions, including Allianz Versicherungs AG, Munich;
Philipp Holzmann AG, Frankfurt; Mobil Oil AG, Hamburg; Teck Corporation,
Vancouver; and others. Mr. Schimmelbusch has been the founder and Chairman of a
number of public companies in process industries, including: Inmet Corporation,
Toronto, (formerly Metall Mining Corporation); Methanex Corporation, Vancouver;
and B.U.S. Umweltservice AG, Frankfurt. Mr. Schimmelbusch is a director of
Safeguard Scientifics, Inc., a position he has held since 1989, and of Arthur
Treacher's Seafood Grill.
ARTHUR R. SPECTOR. Mr. Spector is a Managing Director of the general
partner and of the management company of Safeguard International. From January
1997 to March 1998, Mr. Spector served as a managing director of TL Ventures
LLC, a venture capital management company organized to manage day-to-day
operations of TL Ventures III L.P. and TL Ventures III Offshore L.P. From
January 1995 through December 1996, Mr. Spector served as Director of
Acquisitions of Safeguard Scientifics, Inc. From July 1992 until May 1995, Mr.
Spector served as Vice Chairman and Secretary of Casino & Credit Services, Inc.
From October 1991 to December 1994, Mr. Spector was Chief Executive Officer and
a director of Perpetual Capital Corporation, a merchant banking organization.
Mr. Spector serves as Chairman of Neoware Systems, Inc., a manufacturer of
thin-client computers; and as a director of USDATA Corporation, a company which
produces factory and process automation software; and Docucorp International,
Inc., a document automation company.
MICHAEL R. HOLLY. Mr. Holly is a Managing Director of the general partner
and of the management company of Safeguard International. He is also Executive
Vice President and Chief Financial Officer of Puralube, Inc. a co-investment by
Safeguard Scientifics, Inc. and Allied Resource Corporation which is
commercializing a technology on a worldwide basis that re-refines used oil into
high-quality base lube oils. Mr. Holly is a senior executive with over 30 years
of combined experience in the areas of finance operations, marketing and
strategic planning. Mr. Holly has spent the last five years providing merger and
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acquisition advisory services to a variety of companies, including the last four
years working in close association with Safeguard Scientifics, Inc. Mr. Holly is
a Certified Public Accountant and spent 12 years with Price Waterhouse LLP and
three years with Coopers & Lybrand. For ten years, Mr. Holly served as the
combined Chief Operating and Chief Financial Officer of a national professional
services organization.
ALAN D. EWART. Mr. Ewart was appointed Chief Executive Officer of
Metallurg, Inc. in August 1998. Prior to becoming Chief Executive Officer, Mr.
Ewart was the Joint Managing Director of LSM. Mr. Ewart joined LSM in 1969 and
held several positions in sales and purchasing management before he was
appointed Joint Managing Director of LSM in 1984. He was elected to the Board of
Directors of Metallurg, Inc. in 1987. Prior to joining LSM, Mr. Ewart worked in
the British Civil Service as a Patent Examiner.
DOUGLAS A. FASTUCA. Mr. Fastuca is a Director of the management company of
Safeguard International. Before joining Safeguard International, Mr. Fastuca was
Director of Business Development in SEI Investment's Global Asset Management
Unit from 1993 to 1997. He started his business career with General Electric
holding financial assignments in manufacturing and international operations at
GE Lighting and as a corporate auditor at GE Capital.
SHARE OWNERSHIP
The sole stockholders of the Issuer are Safeguard International, the
Investor Group and a private equity fund, which is associated with Safeguard
International.
CERTAIN TRANSACTIONS
The management company of Safeguard International was paid a one-time
financial advisory fee of $2.5 million for services performed, and reimbursed
for various expenses incurred, in connection with the Acquisition Transactions.
Messrs. Schimmelbusch, Spector and Holly each received $400,000 of the proceeds
from the financial advisory fee in their capacities as members of the management
company.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR NOTE INDENTURE. In April 1998, Metallurg completed the exchange of
its 11% Series B Senior Notes due 2007 for an identical face amount of Senior
Notes. The Senior Notes were issued in an aggregate principal amount of $100
million under the Senior Note Indenture and are senior, unsecured obligations of
Metallurg.
The Senior Notes bear interest at the rate of 11% per annum and mature on
December 1, 2007. They are redeemable by Metallurg, from time to time, in whole
or in part, in cash, after December 1, 2002 at the redemption price thereof,
together with accrued and unpaid interest thereon to the date fixed for
redemption. In addition, prior to December 1, 2000, up to 34% of the aggregate
principal amount of the Senior Notes originally issued may be redeemed at the
option of Metallurg, in whole or in part, at any time and from time to time, at
111% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of redemption with the net proceeds of one or more public equity
offerings following which there is a public market, provided that at least 66%
of the aggregate principal amount of the Senior Notes originally issued remain
outstanding immediately after such redemption. The Senior Notes are also
redeemable at the option of the holder thereof upon a Change of Control.
An event of default under the Senior Notes includes, among other things,
failure to make payments when due, defaults under certain other agreements or
instruments of indebtedness, non-compliance with covenants, certain bankruptcy
or insolvency events and any failure to comply with the terms of any Guaranty
(as defined in the Senior Note Indenture). The covenants under the Senior Note
Indenture applicable to the Company are substantially similar to the covenants
in the Indenture.
REVOLVING CREDIT FACILITY AND OTHER FINANCING ARRANGEMENTS. Metallurg has a
credit facility with certain financial institutions led by BankBoston, N.A., as
agent (the "Revolving Credit Facility"), which provides Metallurg, Shieldalloy
and certain of their subsidiaries with up to $50.0 million of financing
availability at a rate per annum equal to (i) the Alternate Base Rate plus 1.0%
per annum, (the Alternate Base Rate is the greater of the Base Rate or the
Federal Funds Effective Rate plus 0.5%) or (ii) the reserve adjusted Eurodollar
rate plus 2.5% for interest periods of one, two or three months. The Revolving
Credit Facility permits borrowings of up to $50.0 million for working capital
requirements and general corporate purposes, up to $30.0 million of which may be
used for letters of credit in the United States. Pursuant to the Revolving
Credit Facility, BankBoston, N.A. through its London office, is providing up to
DM 20.5 million (approximately $11.3 million) of financing to GfE and its
subsidiaries (the "German Subfacility"), which is guaranteed by Metallurg and
the other United States borrowers. Outstanding obligations under the Revolving
Credit Facility are limited to a borrowing base based on eligible accounts
receivable, eligible inventory and certain equipment. To the extent that the
outstanding amounts to GfE and its subsidiaries exceed the borrowing base of
those companies, a reserve will be established against the United States
borrowing base. At July 31, 1998, there were no outstanding loans and $28.3
million of letters of credit outstanding in the United States under the
Revolving Credit Facility and no borrowings outstanding under the German
Subfacility. The Revolving Credit Facility and the German Subfacility contain
various covenants that restrict, among other things, payments of dividends,
share repurchases, capital expenditures, investments in subsidiaries and
borrowings. Substantially all of the assets of the United States borrowers and
guarantors under the Revolving Credit Facility are pledged to secure all of the
obligations under the Revolving Credit Facility (including the German
Subfacility), and all accounts receivable, inventory, the stock of GfE's
subsidiaries and certain other assets are pledged to secure the German
Subfacility. Metallurg used a portion of the proceeds of the offering of the
Senior Notes to repay outstanding loans under the German Subfacility (but not to
reduce the related commitment thereunder).
In addition, several of the other foreign subsidiaries of Metallurg have
credit facility arrangements with local banking institutions to provide funds
for working capital and general corporate purposes. These local credit
facilities contain restrictions that vary from company to company. At July 31,
1998, there was $0.4 million in outstanding loans under these local credit
facilities.
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LSM has several credit facilities with Barclays Bank plc which provide LSM
and its subsidiaries with up to L7.0 million (approximately $11.7 million) of
borrowings, up to L3.8 million (approximately $6.3 million) of foreign exchange
exposure and up to L2.3 million (approximately $3.8 million) for other ancillary
banking arrangements including bank guarantees (the "LSM Credit Facility"). At
July 31, 1998, there were no borrowings outstanding under the LSM Credit
Facility. Borrowings under the LSM Credit Facility are payable on demand. The
outstanding loans under the LSM Credit Facility bear interest at the lender's
base rate plus 1.0%.
On April 11, 1997, LSM entered into a term loan facility with NM Rothschild
& Sons Limited in the amount of L5.0 million (approximately $8.3 million) (the
"LSM Term Loan Facility"), the proceeds of which were used to make a dividend to
Metallurg in order to fund the Reorganization Plan.
EWW has committed lines of credit with several banks in the aggregate amount
of DM 15.0 million (approximately $8.3 million) which reduce on an annual basis
by DM 3.0 million beginning July 1, 1999 and currently bear interest at rates
from 7.5% to 8.5%. As of July 31, 1998, there was DM 0.4 million (approximately
$0.2 million) outstanding under this facility.
DESCRIPTION OF THE NEW NOTES
The New Notes will be issued under an indenture, dated as of July 13, 1998
(the "Indenture"), by and between the Issuer and United States Trust Company of
New York, as trustee (the "Trustee"). A copy of the Indenture is available upon
request to the Issuer at the address set forth under "Available Information."
The following summaries of certain provisions of the Indenture do not purport to
be complete and are subject, and are qualified in their entirety by reference,
to the Trust Indenture Act of 1939 (the "Trust Indenture Act") and to all the
provisions of the New Notes and the Indenture, including the definitions therein
of certain terms. For purposes of this Section, references to the "Company"
shall mean Metallurg, Inc., excluding its subsidiaries. Capitalized terms used
in this Section and not otherwise defined below have the respective meanings
assigned to them in the Indenture.
GENERAL
The New Notes will mature on July 15, 2008 and will be limited to an
aggregate principal amount at maturity of $121.0 million. The New Notes will be
issued at a substantial discount from their principal amount at maturity, and
will accrete at a rate of 12 3/4% per annum, compounded semi-annually, from the
date of issuance to July 15, 2003, at which date the New Notes will have
accreted to an aggregate principal amount of $121.0 million. Cash interest will
not accrue or be payable on the New Notes prior to such date. Commencing July
15, 2003, cash interest on the New Notes will accrue at the rate of 12 3/4% per
annum and will be payable semi-annually in arrears on January 15 and July 15 of
each year, commencing on January 15, 2004, to the Persons who are registered
holders of the New Notes at the close of business on the preceding January 1 or
July 1, as the case may be. Accreted interest and stated interest, as
applicable, will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Principal of, premium and Liquidated Damages, if any, and interest on, the
New Notes will be payable in immediately available funds, and the New Notes will
be exchangeable and transferable, at an office or agency of the Issuer, one of
which will be maintained for such purpose in The City of New York (which
initially will be the corporate trust office of the Trustee); PROVIDED, HOWEVER,
that principal, premium, Liquidated Damages, if any, and interest with respect
to New Notes the Holders of which have given wire instructions to the Issuer
will be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof. The New Notes will be issued only
in fully registered form without coupons, in denominations of $1,000 or any
integral multiple thereof. No service charge will be made for any registration
of transfer or exchange of New Notes, except for any tax or other governmental
charge that may be imposed in connection therewith.
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RANKING
The New Notes will be senior, secured obligations of the Issuer and will
rank PARI PASSU with all senior indebtedness of the Issuer and senior to all
subordinated indebtedness of the Issuer. All debt and other liabilities of the
Issuer's Subsidiaries, including the claims of trade creditors, secured
creditors and creditors holding debt and guarantees issued by such Subsidiaries,
and claims of preferred stockholders, if any, of such Subsidiaries, will be
effectively senior to the New Notes. As of July 31, 1998, after giving effect to
the Acquisition Transactions, the Issuer's Subsidiaries had approximately $286.5
million of balance sheet liabilities, of which $104.5 million was indebtedness.
See "Risk Factors--Substantial Leverage" and "Risk Factors--Holding Company
Structure; Effective Subordination."
The Issuer and its Subsidiaries have other liabilities, including contingent
liabilities, which may be significant. Although the Indenture contains
limitations on the amount of additional Debt which the Issuer and the Restricted
Subsidiaries may Incur, all such Debt may be Incurred by Subsidiaries and the
amounts of such Debt could be substantial. See "--Certain Covenants--Limitation
on Debt," "Risk Factors-- Substantial Leverage," "Risk Factors--Holding Company
Structure; Effective Subordination" and "Description of Certain Indebtedness."
SECURITY FOR THE NEW NOTES
The obligations of the Issuer with respect to the New Notes will be secured
by an assignment and pledge to the Trustee of (a) all of the outstanding equity
interests held by the Issuer in the Company (but not any other Subsidiary the
Issuer may from time to time form or acquire) and (b) all promissory notes
issued from time to time to the Issuer by the Company (but not by any other
Subsidiary) (collectively, the "Collateral"). The security interests in the
Collateral will be exclusive, first priority security interests. Absent any
acceleration of the New Notes or failure to pay the same in full at maturity,
the Issuer will generally be able to vote pledged securities and to receive
distributions and other proceeds in respect thereof. In addition, so long as no
Default or Event of Default is in existence at the time of or immediately after
giving effect thereto, the Issuer will be permitted to cause the release of
Collateral in connection with sales thereof otherwise made in accordance with
the Indenture covenants.
There can be no assurance that the proceeds of any sale of the Collateral
pursuant to the Indenture following an Event of Default would be sufficient to
satisfy the expenses of such foreclosure and fees and other amounts payable to
the Trustee as well as payments due on the New Notes. In addition, the ability
of holders of New Notes to realize upon the Collateral may be subject to certain
bankruptcy law limitations in the event of a bankruptcy, particularly if such
bankruptcy proceeding were to be commenced by or against the Issuer prior to the
Trustee's having disposed of the Collateral.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the New Notes will not be
redeemable at the option of the Issuer prior to July 15, 2003. Thereafter, the
New Notes will be redeemable at the option of the Issuer, in whole or in part,
on not less than 30 nor more than 60 days' prior notice, at the following
redemption prices (expressed as percentages of principal amount), plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the redemption
date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period commencing on July 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------------------- ---------
<S> <C>
2003............................................................................... 106.375%
2004............................................................................... 104.250%
2005............................................................................... 102.125%
2006 and thereafter................................................................ 100.000%
</TABLE>
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In addition, prior to July 15, 2001, the Issuer may redeem up to a maximum
of 34% of the aggregate principal amount at maturity of the originally issued
New Notes with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price equal to 112.750% of the
Accreted Value thereof, plus Liquidated Damages, if any, thereon to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
PROVIDED, HOWEVER, that after giving effect to any such redemption, at least 66%
of the aggregate principal amount at maturity of the originally issued New Notes
remains outstanding.
In the case of a partial redemption, the Trustee shall select the New Notes
or portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The New Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent by first class mail to the Holder of
each New Note to be redeemed to such Holder's last address as then shown upon
the registry books of the Registrar. Any notice which relates to a New Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such New Note, a New Note or New Notes in a
principal amount equal to the unredeemed portion thereof will be issued. On and
after the date of redemption, the Accreted Value will cease to increase and
interest will cease to accrue on the New Notes or portions thereof called for
redemption, unless (in the case of accrued interest) the Issuer defaults in the
payment thereof.
SINKING FUND
There are no sinking fund payments for the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Issuer to repurchase all or any part of such
holder's New Notes pursuant to the offer described below (the "Change of Control
Offer") at a purchase price (the "Change of Control Purchase Price") equal to
101% of the Accreted Value thereof, plus Liquidated Damages, if any, thereon at
the purchase date, if the purchase date is prior to July 15, 2003, or 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the purchase date, if the purchase date
is on or after July 15, 2003 (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date). Neither the Board of Directors nor the Trustee may waive the covenant
relating to the right of each holder to redeem the New Notes upon a Change of
Control. The Issuer's failure to make any required repurchases in the event of a
Change of Control will create an immediate Event of Default with respect to the
New Notes.
Within 30 days following any Change of Control, the Issuer shall (a) cause a
notice of the Change of Control Offer to be sent at least once to the Dow Jones
News Service or similar business news service in the United States and (b) send,
by first-class mail, with a copy to the Trustee, to each holder of New Notes, at
such holder's address appearing in the Security Register, a notice stating: (i)
that a Change of Control has occurred and a Change of Control Offer is being
made pursuant to the covenant entitled "Repurchase at the Option of Holders Upon
a Change of Control" and that all New Notes timely tendered will be accepted for
payment; (ii) the Change of Control Purchase Price and the purchase date, which
shall be, subject to any contrary requirements of applicable law, a business day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed; (iii) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to the Change of Control); and (iv)
the procedures that holders of New Notes must follow in order to tender their
New Notes (or portions thereof) for payment, and the procedures that holders of
New Notes must follow in order to withdraw an election to tender New Notes (or
portions thereof) for payment.
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The Issuer will comply, to the extent applicable, with the requirements of
Rules 13e-4 and 14e-1 of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of New Notes pursuant to a Change
of Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Issuer will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant described
hereunder by virtue of such compliance.
The Change of Control repurchase feature is a result of negotiations between
the Issuer and the Initial Purchaser. The Issuer's management has no present
intention to engage in a transaction involving a Change of Control, although it
is possible that the Issuer would decide to do so in the future. Subject to
certain covenants described below, the Issuer could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of debt outstanding at such time
or otherwise affect the Issuer's capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
assignment, lease, conveyance, disposition or transfer of "all or substantially
all" the Issuer's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of New Notes to require the Issuer to repurchase such New Notes as a
result of a sale, assignment, lease, conveyance, disposition or transfer of less
than all the assets of the Issuer may be uncertain.
Future debt of the Issuer may contain prohibitions of certain events which
would constitute a Change of Control or require such debt to be repurchased upon
a Change of Control. Moreover, the exercise by holders of New Notes of their
right to require the Issuer to repurchase such New Notes could cause a default
under existing or future debt of the Issuer, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Issuer.
Finally, the Issuer's ability to pay cash to holders of New Notes upon a
repurchase may be limited by the Issuer's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases. The Issuer's failure to purchase the New Notes
in connection with a Change of Control would result in a default under the
Indenture which would, in turn, constitute a default under the existing or
future debt of the Issuer. The provisions under the Indenture relative to the
Issuer's obligation to make an offer to repurchase the New Notes as a result of
a Change of Control may be waived or modified (at any time prior to the
occurrence of such Change of Control) with the written consent of the holders of
a majority in aggregate principal amount of the New Notes then outstanding.
CERTAIN COVENANTS
LIMITATION ON DEBT. The Issuer shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any Debt (which
includes, in the case of Restricted Subsidiaries, Preferred Stock) unless, after
giving pro forma effect to the application of the proceeds thereof, no Default
or Event of Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence and either (a) after giving effect to the
Incurrence of such Debt and the application of the proceeds thereof, the
Consolidated Coverage Ratio would be greater than 2.00 to 1.00 or (b) such Debt
is Permitted Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt of the Issuer evidenced by the New Notes and represented by the
Indenture up to the amounts specified therein as of the Issue Date, together
with any accretion thereon, and the Exchange New Notes;
(b) Debt of the Company and its subsidiaries evidenced by the Senior
Notes and represented by the Senior Note Indenture;
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(c) Debt under the Credit Facility, PROVIDED that the aggregate
principal amount of all such Debt under the Credit Facility at any one time
outstanding shall not exceed the greater of (i) $50.0 million, which amount
shall be permanently reduced by the amount of Net Available Cash used to
repay Debt under the Credit Facility and permanently reduce the loan
commitment thereunder pursuant to the covenant described under "--Limitation
on Asset Sales" and (ii) the sum of the amounts equal to (x) 65% of the book
value of the inventory of the Issuer and the Restricted Subsidiaries and (y)
90% of the book value of the accounts receivable of the Issuer and the
Restricted Subsidiaries, in each case as of the most recently ended quarter
of the Issuer for which financial statements of the Issuer have been
provided to the holders of New Notes (the greater of (i) and (ii) being the
"Permitted Debt Amount"); PROVIDED, FURTHER, that the aggregate amount of
Debt Incurred pursuant to this clause (c) together with the aggregate amount
of Debt Incurred pursuant to clause (d) below shall not exceed an amount
equal to the Permitted Debt Amount at any one time outstanding;
(d) Debt of the Issuer or any Restricted Subsidiary under one or more
debt facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables), letters of
credit, foreign exchange, bankers acceptances or similar financial
arrangements, and any Permitted Refinancing Debt Incurred with respect
thereto, PROVIDEDthat the aggregate principal amount of all such Debt at any
one time outstanding shall not exceed the sum of (i) 65% of the book value
of the inventory of the Issuer or such Restricted Subsidiary and (ii) 90% of
the book value of the accounts receivable of the Issuer or such Restricted
Subsidiary, in each case as of the most recently ended quarter of the Issuer
for which financial statements of the Issuer have been provided to the
holders of the New Notes; PROVIDED, FURTHER, that the aggregate amount of
Debt Incurred pursuant to this clause (d), together with the aggregate
amount of Debt Incurred pursuant to clause (c) above shall not exceed the
Permitted Debt Amount at any one time outstanding;
(e) Debt in respect of Capital Lease Obligations and Purchase Money
Debt, PROVIDED that (i) the aggregate principal amount of such Debt does not
exceed the Fair Market Value (on the date of the Incurrence thereof) of the
Property acquired, constructed or leased and (ii) the aggregate principal
amount of all Debt Incurred and then outstanding pursuant to this clause (e)
(together with all outstanding Permitted Refinancing Debt Incurred in
respect of Debt previously Incurred pursuant to such clause (e)) does not
exceed $15.0 million;
(f) Debt of the Issuer owing to and held by any Restricted Subsidiary or
Debt of a Restricted Subsidiary owed to and held by the Issuer or another
Restricted Subsidiary; provided, however, that any subsequent transfer of
Capital Stock or other event that results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of any such
Debt (except to the Issuer or a Restricted Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Debt by the issuer thereof;
(g) Debt under Interest Rate Agreements entered into by the Issuer or a
Restricted Subsidiary for the purpose of limiting interest rate risk in the
ordinary course of the financial management of the Issuer or such Restricted
Subsidiary and not for speculative purposes, PROVIDED that the obligations
under such agreements are directly related to payment obligations on Debt
otherwise permitted by the terms of this covenant;
(h) Debt under Currency Exchange Protection Agreements entered into by
the Issuer or a Restricted Subsidiary for the purpose of limiting currency
exchange rate risks directly related to transactions entered into by the
Issuer or such Restricted Subsidiary in the ordinary course of business and
not for speculative purposes;
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(i) Debt Incurred in connection with cash pooling arrangements by and
among the Issuer and its Restricted Subsidiaries, PROVIDED that no liability
is required under GAAP to be reflected in the consolidated financial
statements of the Issuer with respect thereto;
(j) Debt outstanding on the Issue Date not otherwise described in
clauses (a) through (i) above;
(k) Debt (other than Debt permitted by the immediately preceding
paragraph or the other clauses of this paragraph) in an aggregate principal
amount not to exceed $25.0 million; and
(l) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (a) of the immediately preceding paragraph and clauses
(a) and (k) above.
Notwithstanding the two immediately foregoing paragraphs, the Issuer shall
not, and shall not permit any Restricted Subsidiary to, Incur any Debt pursuant
to such paragraphs if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations unless such Debt shall be subordinated to
the New Notes to at least the same extent as such Subordinated Obligations.
LIMITATION ON RESTRICTED PAYMENTS. The Issuer shall not make, and shall not
permit any Restricted Subsidiary to make, directly or indirectly, any Restricted
Payment if at the time of, and after giving pro forma effect to, such proposed
Restricted Payment,
(a) a Default or Event of Default shall have occurred and be continuing,
(b) the Issuer could not Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described
under "--Limitation on Debt" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of any
Restricted Payment, if made other than in cash, to be based upon Fair Market
Value) would exceed an amount equal to the sum of:
(i) 50% of the aggregate amount of Consolidated Net Income accrued
during the period (treated as one accounting period) from and after
November 1, 1997 to the end of the most recent fiscal quarter ending at
least 45 days prior to the date of such Restricted Payment (or if the
aggregate amount of Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit),
(ii) Capital Stock Sale Proceeds,
(iii) the amount by which Debt (other than Subordinated Obligations)
of the Issuer or any other Restricted Subsidiary is reduced on the
Issuer's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Issuer) subsequent to the Issue Date of any Debt of the
Issuer or any other Restricted Subsidiary convertible into or
exchangeable for Capital Stock (other than Disqualified Stock) of the
Issuer (less the amount of any cash or other Property distributed by the
Issuer or any Restricted Subsidiary upon such conversion or exchange),
(iv) an amount equal to the sum of (A) the net reduction in
Investments in any Person other than a Restricted Subsidiary resulting
from dividends, repayments of loans or advances or other transfers of
assets, in each case to the Issuer or any Restricted Subsidiary from such
Person, and (B) the portion (proportionate to the Issuer's equity
interest in such Unrestricted Subsidiary) of the Fair Market Value of the
net assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; PROVIDED, HOWEVER, that
the foregoing sum shall not exceed, in the case of any Person, the amount
of Investments previously made (and treated as a Restricted Payment) by
the Issuer or any Restricted Subsidiary in such Person, and
(v) $5.0 million.
Notwithstanding the foregoing limitation, the Issuer may:
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(a) pay dividends on its Capital Stock within 60 days of the declaration
thereof if, on said declaration date, such dividends could have been paid in
compliance with the Indenture; PROVIDED, HOWEVER, that such dividend shall
be included in the calculation of the amount of Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire for
value Capital Stock of the Issuer or Subordinated Obligations in exchange
for, or out of the proceeds of the substantially concurrent sale of, Capital
Stock of the Issuer (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of the Issuer or an employee stock
ownership plan or trust established by the Issuer or any of its Subsidiaries
for the benefit of their employees); PROVIDED, however, that (i) such
purchase, repurchase, redemption, legal defeasance, acquisition or
retirement shall be excluded in the calculation of the amount of Restricted
Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale
shall be excluded from the calculation pursuant to clause (c) (ii) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire for
value any Subordinated Obligations in exchange for, or out of the proceeds
of the substantially concurrent sale of, Permitted Refinancing Debt;
PROVIDED, HOWEVER, that such purchase, repurchase, redemption, legal
defeasance, acquisition or retirement shall be excluded in the calculation
of the amount of Restricted Payments;
(d) make Investments in an aggregate amount not to exceed $20.0 million;
PROVIDED, HOWEVER, that such Investments shall be excluded in the
calculation of the amount of Restricted Payments;
(e) repurchase shares of, or options to purchase shares of, common stock
of the Issuer or any of its Subsidiaries from employees or former employees
of the Issuer or any of its Subsidiaries, pursuant to the terms of
agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such individuals
purchase or sell, or are granted the option to purchase or sell, shares of
such common stock; PROVIDED, HOWEVER, that the aggregate amount of such
repurchases shall not exceed $2.0 million in any calendar year; PROVIDED
FURTHER, HOWEVER, that such repurchases shall be excluded in the calculation
of the amount of Restricted Payments;
(f) expend up to $10.0 million for Restricted Payments in addition to
the amounts in clauses (a) through (e); PROVIDED, HOWEVER, that, at the time
of, and after giving effect to any such expenditure, no Default or Event of
Default shall have occurred and be continuing and provided further, however,
that such expenditures shall be excluded from the calculation of the amount
of Restricted Payments; or
(g) make Restricted Payments required for any dissenters' rights
payments arising in connection with the Merger, but solely using up to $10.0
million of the net proceeds from the sale of the New Notes.
LIMITATION ON LIENS. The Issuer shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any
Lien (other than Permitted Liens) upon any of its Property (including Capital
Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, or any interest therein or any income or profits therefrom, unless it
has made or will make effective provision whereby the New Notes will be secured
by such Lien equally and ratably with (or prior to) all other Debt of the Issuer
or any Restricted Subsidiary secured by such Lien.
LIMITATION ON ASSET SALES. The Issuer shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
unless (a) the Issuer or such Restricted Subsidiary receives consideration at
the time of such Asset Sale at least equal to the Fair Market Value of the
Property subject to such Asset Sale; (b) at least 75% of the consideration paid
to the Issuer or such Restricted Subsidiary in connection with such Asset Sale
is in the form of cash or cash equivalents; and (c) the Issuer delivers an
Officers' Certificate to the Trustee certifying that such Asset Sale complies
with the foregoing clauses (a) and (b). For purposes of this covenant, the
following are deemed to be cash: (x) the amount of any liabilities (other than
liabilities that are by their terms subordinated to any other Debt
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of the Issuer or such Restricted Subsidiary, as the case may be) of the Issuer
or such Restricted Subsidiary (as shown on the Issuer's or such Restricted
Subsidiary's most recent balance sheet or in the New Notes thereto) that are
assumed by the transferee of any such assets or other property in such Asset
Sale, as a result of which the Issuer or the Restricted Subsidiaries are no
longer obligated with respect to such liabilities and (y) securities received by
the Issuer or any Restricted Subsidiary from the transferee that are immediately
converted by the Issuer or such Restricted Subsidiary into cash.
The Net Available Cash (or any portion thereof) from Asset Sales (or an
amount equal thereto) may be applied by the Issuer or a Restricted Subsidiary,
to the extent the Issuer or such Restricted Subsidiary elects (or is required by
the terms of any Debt): (a) to prepay, repay, legally defease or purchase Senior
Debt of the Issuer or Debt of any Restricted Subsidiary (excluding, in any such
case, any Debt owed to the Issuer or an Affiliate of the Issuer); or (b) to
reinvest in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary in an amount equal to such Net Available Cash
received by the Issuer or another Restricted Subsidiary); PROVIDED, HOWEVER,
that in connection with any prepayment, repayment, legal defeasance or purchase
of Debt pursuant to clause (a) above, the Issuer or such other Restricted
Subsidiary shall retire such Debt and shall cause the related loan commitment
(if any) to be permanently reduced by an amount equal to the principal amount so
prepaid, repaid, legally defeased or purchased.
In the event that any Net Available Cash from an Asset Sale (or an amount
equal thereto) is not applied in accordance with the preceding paragraph within
270 days from the date of the receipt of such Net Available Cash, such Net
Available Cash shall constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $5.0 million (taking into account income earned on such
Excess Proceeds, if any), the Issuer will be required to make an offer to
purchase (the "Prepayment Offer") the New Notes which offer shall be in the
amount of the Excess Proceeds, on a pro rata basis according to principal
amount, at a purchase price equal to 100% of the Accreted Value thereof plus
Liquidated Damages, if any, to the purchase date, if such purchase is prior to
July 15, 2003, or 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the purchase date, if such purchase
is on or after July 15, 2003 (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. To the extent that any portion of
the amount of Net Available Cash remains after compliance with the preceding
sentence and provided that all holders of New Notes have been given the
opportunity to tender their New Notes for purchase in accordance with the
Indenture, the Issuer may use such remaining amount for any purpose permitted by
the Indenture and the amount of Excess Proceeds will be reset to zero.
Within ten business days after the Issuer is obligated to make a Prepayment
Offer as described in the preceding paragraph, the Issuer shall send a written
notice, by first-class mail, to the holders of New Notes, accompanied by such
information regarding the Issuer and its Subsidiaries as the Issuer in good
faith believes will enable such holders to make an informed decision with
respect to such Prepayment Offer. Such notice shall state, among other things,
the purchase price and the purchase date, which shall be, subject to any
contrary requirements of applicable law, a business day no earlier than 30 days
nor later than 60 days from the date such notice is mailed.
The Issuer will comply, to the extent applicable, with the requirements of
Section 14 (e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of New Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the covenant described hereunder, the
Issuer will comply with the applicable securities laws and regulations and will
not be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.
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LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Issuer shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist any consensual restriction on the right of any Restricted Subsidiary to
(a) pay dividends, in cash or otherwise, or make any other distributions on or
in respect of its Capital Stock, or pay any Debt or other obligation owed, to
the Issuer or any other Restricted Subsidiary, except that any Debt owed by a
Restricted Subsidiary to the Issuer or any other Restricted Subsidiary may be
subordinated in right of payment to other Debt obligations of such Restricted
Subsidiary, (b) make any loans or advances to the Issuer or any other Restricted
Subsidiary, except that any repayment obligations of the Issuer or any other
Restricted Subsidiary in respect of such loans or advances may be subordinated
in right of payment to other Debt obligations of the Issuer or such other
Restricted Subsidiary or (c) transfer any of its Property to the Issuer or any
other Restricted Subsidiary. The foregoing limitations will not apply (i) with
respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue
Date, (B) relating to Debt of a Restricted Subsidiary and existing at the time
it became a Restricted Subsidiary if such restriction was not created in
connection with or in anticipation of the transaction or series of transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Issuer or (C) which result from the Refinancing of Debt
Incurred pursuant to an agreement referred to in the immediately preceding
clause (i) (A) or (B) above or in clause (ii) (A) or (B) below, PROVIDED such
restriction is not materially less favorable to the holders of New Notes than
those under the agreement evidencing the Debt so Refinanced, and (ii) with
respect to clause (c) only, to restrictions (A) relating to Debt that is
permitted to be Incurred and is not prohibited from being secured without also
securing the New Notes or pursuant to the covenants described under
"--Limitation on Debt" and "--Limitation on Liens" that limit the right of the
debtor to dispose of the Property securing such Debt, (B) encumbering Property
at the time such Property was acquired by the Issuer or any Restricted
Subsidiary, so long as such restriction relates solely to the Property so
acquired and was not created in connection with or in anticipation of such
acquisition, (C) resulting from customary provisions restricting subletting or
assignment of leases or customary provisions in other agreements that restrict
assignment of such agreements or rights thereunder, (D) customary restrictions
contained in asset sale or stock purchase agreements limiting the transfer of
such Property pending the closing of such transaction or (E) any restriction
imposed by applicable law.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Issuer shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of the Issuer (an "Affiliate Transaction"),
unless (a) the terms of such Affiliate Transaction are (i) set forth in writing
and (ii) no less favorable to the Issuer or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable arm's-length
transaction with a Person that is not an Affiliate of the Issuer, (b) if such
Affiliate Transaction involves aggregate payments or value in excess of $2.0
million, the Board of Directors (including a majority of the disinterested
members of the Board of Directors) approves such Affiliate Transaction and, in
its good faith judgment, believes that such Affiliate Transaction complies with
clause (a) (ii) of this paragraph as evidenced by a Board Resolution promptly
delivered to the Trustee and (c) if such Affiliate Transaction involves
aggregate payments or value in excess of $15.0 million, the Issuer obtains a
written opinion from an Independent Appraiser to the effect that the
consideration to be paid or received in connection with such Affiliate
Transaction is fair, from a financial point of view, to the Issuer or such
Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing limitation, the Issuer or any Restricted
Subsidiary may enter into or suffer to exist the following:
(1) any transaction or series of transactions between the Issuer and one
or more Restricted Subsidiaries or between two or more Restricted
Subsidiaries in the ordinary course of business, PROVIDED that no more than
5% of the total voting power of the Voting Stock (on a fully diluted basis)
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of any such Restricted Subsidiary is owned by an Affiliate of the Issuer
(other than a Restricted Subsidiary);
(2) any Restricted Payment permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments";
(3) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors and
employees of the Issuer or any of the Restricted Subsidiaries, so long as
the Board of Directors in good faith shall have approved the terms thereof
and deemed the services theretofore or thereafter to be performed for such
compensation to be fair consideration therefor; and
(4) the payment of reasonable fees to directors of the Issuer or such
Restricted Subsidiary (x) who are not employees of the Issuer or any
Restricted Subsidiary or (y) who are employees of the Issuer or any
Restricted Subsidiary, provided that such fees are consistent with the past
practices of the Issuer or such Restricted Subsidiary.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Issuer shall not, and
shall not permit any Restricted Subsidiary to, enter into any Sale and Leaseback
Transaction with respect to any Property unless (a) the Issuer or such
Restricted Subsidiary would be entitled to (i) Incur Debt in an amount equal to
the Attributable Debt with respect to such Sale and Leaseback Transaction
pursuant to the covenant described under "--Limitation on Debt" and (ii) create
a Lien on such Property securing such Attributable Debt without securing the New
Notes pursuant to the covenant described under "--Limitation on Liens" and (b)
such Sale and Leaseback Transaction is effected in compliance with the covenant
described under "--Limitation on Asset Sales."
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Board of
Directors may designate any Subsidiary of the Issuer to be an Unrestricted
Subsidiary if (a) the Subsidiary to be so designated does not own any Capital
Stock or Debt of, or own or hold any Lien on any Property of, the Issuer or any
other Restricted Subsidiary, (b) the Subsidiary to be so designated is not
obligated under any Debt, Lien or other obligation that, if in default, would
result (with the passage of time or notice or otherwise) in a default on any
Debt of the Issuer or of any Restricted Subsidiary and (c) either (i) the
Subsidiary to be so designated has total assets of $1,000 or less or (ii) such
designation is effective immediately upon such entity becoming a Subsidiary of
the Issuer. Unless so designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of the Issuer will be classified as a Restricted
Subsidiary; PROVIDED, HOWEVER, that such Subsidiary shall not be designated a
Restricted Subsidiary and shall be automatically classified as an Unrestricted
Subsidiary if either of the requirements set forth in clauses (x) and (y) of the
immediately following paragraph will not be satisfied after giving pro forma
effect to such classification. Except as provided in the first sentence of this
paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted
Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, (x) the Issuer could Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described under
"--Limitation on Debt" and (y) no Default or Event of Default shall have
occurred and be continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate (a)
certifying that such designation or redesignation complies with the foregoing
provisions and (b) giving the effective date of such designation or
redesignation, such filing with the Trustee to occur within 45 days after the
end of the fiscal quarter of the Issuer in which such designation or
redesignation is made (or, in the case of a designation or redesignation made
during the last fiscal quarter of the Issuer's fiscal year, within 90 days after
the end of such fiscal year).
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LIMITATION ON LINES OF BUSINESS
The Issuer and its Restricted Subsidiaries shall be prohibited from directly
or indirectly engaging to any substantial extent in any line or lines of
business activity other than that which, in the reasonable good faith judgment
of the Board of Directors, is a Related Business.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Issuer and its Restricted Subsidiaries shall be prohibited from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
MERGER, CONSOLIDATION AND SALE OF PROPERTY
The Issuer shall not merge, consolidate or amalgamate with or into any other
Person (other than a merger of a Wholly Owned Subsidiary into the Issuer) or
sell, transfer, assign, lease, convey or otherwise dispose of all or
substantially all its Property in any one transaction or series of transactions
unless: (a) the Issuer shall be the surviving Person (the "Surviving Person") or
the Surviving Person (if other than the Issuer) formed by such merger,
consolidation or amalgamation or to which such sale, transfer, assignment,
lease, conveyance or disposition is made shall be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia; (b) the Surviving Person (if other than the Issuer)
expressly assumes, by supplemental indenture in form satisfactory to the
Trustee, executed and delivered to the Trustee by such Surviving Person, the due
and punctual payment of the principal of, and premium, if any, and interest on,
all the New Notes, according to their tenor, and the due and punctual
performance and observance of all the covenants and conditions of the Indenture
to be performed by the Issuer; (c) in the case of a sale, transfer, assignment,
lease, conveyance or other disposition of all or substantially all the Property
of the Issuer, such Property shall have been transferred as an entirety or
virtually as an entirety to one Person; (d) immediately before and after giving
effect to such transaction or series of transactions on a pro forma basis (and
treating, for purposes of this clause (d) and clauses (e) and (f) below, any
Debt which becomes, or is anticipated to become, an obligation of the Surviving
Person or any Restricted Subsidiary as a result of such transaction or series of
transactions as having been Incurred by the Surviving Person or such Restricted
Subsidiary at the time of such transaction or series of transactions), no
Default or Event of Default shall have occurred and be continuing; (e)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis, the Issuer or the Surviving Person, as the case may be, would
be able to Incur at least $1.00 of additional Debt under clause (a) of the first
paragraph of the covenant described under "--Certain Covenants--Limitation on
Debt"; (f) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Surviving Person shall have a
Consolidated Net Worth in an amount which is not less than the Consolidated Net
Worth of the Issuer immediately prior to such transaction or series of
transactions; and (g) the Issuer shall deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each stating that such
transaction and the supplemental indenture, if any, in respect thereto comply
with this covenant and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of the Issuer under the Indenture, but the
predecessor Company in the case of a sale, transfer, assignment, lease,
conveyance or other disposition shall not be released from the obligation to pay
the principal of, and premium, if any, and interest on, the New Notes.
SEC REPORTS
Notwithstanding that the Issuer may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Issuer shall file
with the Commission and provide the Trustee and holders
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of New Notes with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and reports to be so filed and provided within 15 days after the times
specified for the filing of such information, documents and reports under such
Sections; PROVIDED, HOWEVER, that the Issuer shall not be so obligated to file
such information, documents and reports with the Commission if the Commission
does not permit such filings. The Issuer shall file with the Commission and
provide the Trustee and holders of New Notes with the information, documents and
reports described herein whether or not the Exchange Offer Registration
Statement (as defined under "Exchange Offer; Registration Rights") has been
filed or declared effective.
EVENTS OF DEFAULT
Events of Default in respect of the New Notes as set forth in the Indenture
include: (a) failure to make the payment of any interest on the New Notes when
the same becomes due and payable, and such failure continues for a period of 30
days; (b) failure to make the payment of any principal of, or premium, if any,
on, any of the New Notes when the same becomes due and payable at its Stated
Maturity, upon acceleration, redemption, optional redemption, required
repurchase or otherwise; (c) failure to comply with the covenant described above
under "--Merger, Consolidation and Sale of Property"; (d) failure to comply with
any other covenant or agreement in the New Notes or in the Indenture (other than
a failure which is the subject of the foregoing clause (a), (b) or (c)) and such
failure continues for 30 days after written notice is given to the Issuer as
provided below; (e) a default under any Debt by the Issuer or any Restricted
Subsidiary which results in acceleration of the maturity of such Debt, or
failure to pay any such Debt at maturity, in an aggregate amount greater than
$5.0 million (the "cross-acceleration provisions"); (f) any judgment or
judgments for the payment of money in an aggregate amount in excess of $5.0
million shall be rendered against the Issuer or any Restricted-Subsidiary and
shall not be waived, satisfied or discharged for any period of 30 consecutive
days during which a stay of enforcement shall not be in effect (the "judgment
default provisions"); (g) certain events involving bankruptcy, insolvency or
reorganization of the Issuer or any Significant Subsidiary (the "bankruptcy
provisions"); and (h) an event of default under a document governing a pledge of
Collateral.
A Default under clause (d) is not an Event of Default until the Trustee or
the holders of not less than 25% in principal amount of the New Notes then
outstanding notify the Issuer of the Default and the Issuer does not cure such
Default within the time specified after receipt of such notice. Such notice must
specify the Default, demand that it be remedied and state that such notice is a
"Notice of Default."
The Issuer shall deliver to the Trustee, within 30 days after the occurrence
thereof, written notice in the form of an Officers' Certificate of any event
which with the giving of notice and the lapse of time would become an Event of
Default, its status and what action the Issuer is taking or proposes to take
with respect thereto.
The Indenture provides that if an Event of Default with respect to the New
Notes (other than an Event of Default resulting from certain events involving
bankruptcy, insolvency or reorganization with respect to the Issuer or any
Significant Subsidiary) shall have occurred and be continuing, the Trustee or
the registered holders of not less than 25% in aggregate principal amount of the
New Notes then outstanding may declare to be immediately due and payable the
Accreted Value of all the New Notes then outstanding (if prior to July 15, 2003)
or the principal amount of all the New Notes then outstanding, plus accrued but
unpaid interest to the date of acceleration (if on or after July 15, 2003). In
case an Event of Default resulting from certain events of bankruptcy, insolvency
or reorganization with respect to the Issuer or any Significant Subsidiary shall
occur, such amount with respect to all the New Notes shall be due and payable
immediately without any declaration or other act on the part of the Trustee or
the holders of the New Notes. After any such acceleration, but before a judgment
or decree based on acceleration is obtained by the Trustee, the registered
holders of a majority in aggregate principal amount of the New Notes then
outstanding may, under certain circumstances, rescind and annul such
acceleration if all Events of Default,
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other than the nonpayment of accelerated principal, premium or interest, have
been cured or waived as provided in the Indenture.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders of the New Notes,
unless such holders shall have offered to the Trustee reasonable indemnity.
Subject to such provisions for the indemnification of the Trustee, the holders
of a majority in aggregate principal amount of the New Notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the New Notes.
No holder of New Notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or trustee, or
for any remedy thereunder, unless (a) such holder has previously given to the
Trustee written notice of a continuing Event of Default, (b) the registered
holders of at least 25% in aggregate principal amount of the New Notes then
outstanding have made written request and offered reasonable indemnity to the
Trustee to institute such proceeding as trustee and (c) the Trustee shall not
have received from the registered holders of a majority in aggregate principal
amount of the New Notes then outstanding a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of any
Discount Note for enforcement of payment of the principal of, and premium, if
any, or interest on, such Discount Note on or after the respective due dates
expressed in such Discount Note.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the registered holders of a majority in aggregate principal amount of the New
Notes then outstanding (including consents obtained in connection with a tender
offer or exchange offer for the New Notes) and any past default or compliance
with any provisions may also be waived (except a default in the payment of
principal, premium or interest and certain covenants and provisions of the
Indenture which cannot be amended without the consent of each holder of an
outstanding Discount Note) with the consent of the registered holders of at
least a majority in aggregate principal amount of the New Notes then
outstanding. However, without the consent of each holder of an outstanding
Discount Note, no amendment may, among other things, (a) reduce the amount of
New Notes whose holders must consent to an amendment or waiver, (b) reduce the
accretion rate or reduce the rate of or extend the time for payment of interest
on any Discount Note, (c) reduce the principal of or extend the Stated Maturity
of any Discount Note, (d) make any Discount Note payable in money other than
that stated in the Discount Note, (e) impair the right of any holder of the New
Notes to institute suit for the enforcement of any payment on or with respect to
such holder's New Notes, (f) subordinate the New Notes to any other obligation
of the Issuer, (g) release any security interest that may have been granted in
favor of the holders of the New Notes (except in accordance with the existing
Collateral release provisions of the Indenture), (h) reduce the premium payable
upon the redemption or repurchase of any Discount Note as described under
"--Optional Redemption," or "-- Repurchase at the Option of Holders Upon a
Change of Control," or (i) at any time after a Change of Control or Asset Sale
has occurred, change the time at which the Change of Control Offer or any
Prepayment Offer relating thereto must be made or at which the New Notes must be
repurchased pursuant to such Change of Control Offer or Prepayment Offer.
Without the consent of any holder of the New Notes, the Issuer and the
Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Issuer under the Indenture, to provide for uncertificated New
Notes in addition to or in place of certificated New Notes (provided that the
uncertificated New Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated New Notes are
described in Section 163(f) (2) (B) of the Code), to secure the New
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Notes, to add to the covenants of the Issuer for the benefit of the holders of
the New Notes or to surrender any right or power conferred upon the Issuer, to
make any change that does not adversely affect the rights of any holder of the
New Notes, or to comply with any requirement of the Commission in connection
with the qualification of the Indenture under the Trust Indenture Act.
The consent of the holders of the New Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuer is
required to mail to each registered holder of the New Notes at such holder's
address appearing in the Security Register a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the New
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
DEFEASANCE
The Issuer at any time may terminate all its obligations under or relating
to the New Notes, the Collateral and the Indenture ("legal defeasance"), except
for certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the New Notes, to replace
mutilated, destroyed, lost or stolen New Notes and to maintain a registrar and
paying agent in respect of the New Notes. The Issuer at any time may terminate
its obligations under the covenants described under "--Repurchase at the Option
of Holders Upon a Change of Control" and "--Certain Covenants," the operation of
the cross-acceleration provisions, the judgment default provisions, the
bankruptcy provisions with respect to Significant Subsidiaries, the Collateral
cross-default provisions described under "--Events of Default" above and the
limitations contained in clauses (d) (with respect to the covenants described
under "--Certain Covenants"), (e) and (f) under the first paragraph of
"--Merger, Consolidation and Sale of Property" above ("covenant defeasance").
Upon a covenant defeasance, any Collateral would be released. The Issuer may
exercise its legal defeasance option notwithstanding its prior exercise of its
covenant defeasance option.
If the Issuer exercises its legal defeasance option, payment of the New
Notes may not be accelerated because of an Event of Default with respect
thereto. If the Issuer exercises its covenant defeasance option, payment of the
New Notes may not be accelerated because of an Event of Default specified in
clause (d) (with respect to the covenants described under "--Certain Covenants",
(e), (f), (g) (with respect only to Significant Subsidiaries) or (h) under
"--Events of Default" above or because of the failure of the Issuer to comply
with clauses (d) (with respect to the covenants described under "--Certain
Covenants"), (e) and (f) under the first paragraph of "--Merger, Consolidation
and Sale of Property" above.
In order to exercise either defeasance option, the Issuer must, among other
things, irrevocably deposit in trust (the "defeasance trust") with the Trustee
money or U.S. Government Obligations for the payment of principal and interest
on the New Notes to maturity or redemption, as the case may be, and must comply
with certain other conditions, including delivery to the Trustee of an Opinion
of Counsel to the effect that holders of the New Notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such deposit and defeasance and will be subject to United States federal
income tax on the same amounts and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred (and,
in the case of legal defeasance only, such Opinion of Counsel must be based on a
ruling of the Internal Revenue Service ("IRS") or other change in applicable
United States federal income tax law).
GOVERNING LAW
The Indenture and the New Notes are governed by the internal laws of the
State of New York without reference to principles of conflicts of law.
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THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such of the rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"ACCRETED VALUE" means, as of any date of determination prior to July 15,
2003, the sum of (a) the initial offering price of each Discount Note and (b)
the portion of the excess of the principal amount of each Discount Note over
such initial offering price which shall have been accreted thereon through such
date, such amount to be so accreted on a daily basis at the rate of 12 3/4% per
annum of the initial offering price of the New Notes, compounded semi-annually
on each January 15 and July 15, commencing January 15, 1999, from the date of
issuance of the New Notes through the date of determination, computed on the
basis of a 360-day year of twelve 30-day months.
"ADDITIONAL ASSETS" means (a) any Property (other than cash, cash
equivalents and securities) to be owned by the Issuer or any Restricted
Subsidiary and used in a Related Business; (b) the costs of improving or
developing any Property owned by the Issuer or a Restricted Subsidiary which is
used in a Related Business; or (c) Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Issuer or another Restricted Subsidiary from any Person other than an
Affiliate of the Issuer; PROVIDED, HOWEVER, that, in the case of clause (c),
such Restricted Subsidiary is primarily engaged in a Related Business.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenant described under "--Certain Covenants--Limitation on
Transactions with Affiliates," "--Limitation on Asset Sales" and the definition
of "Additional Assets" only, "Affiliate" shall also mean any beneficial owner of
shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Issuer or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"ASSET SALE" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions)
(other than the grant of a security interest) by the Issuer or any Restricted
Subsidiary, including any disposition by means of a merger, consolidation or
similar transaction (each referred to for the purposes of this definition as a
"disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares) or (b) any other assets of the Issuer
or any Restricted Subsidiary outside of the ordinary course of business of the
Issuer or such Restricted Subsidiary (other than, in the case of clauses (a) and
(b) above, (i) any disposition by a Restricted Subsidiary to the Issuer or by
the Issuer or a Restricted Subsidiary to a Restricted Subsidiary, (ii) for
purposes of the covenant described under "--Certain Covenants--Limitation on
Asset Sales" only, any disposition that constitutes a Permitted Investment or
Restricted Payment permitted by the covenant
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described under "--Certain Covenants--Limitation on Restricted Payments," (iii)
any disposition effected in compliance with the first paragraph of the covenant
described under "--Merger, Consolidation and Sale of Property," (iv) any
disposition of Property or equipment that has become obsolete or otherwise
unsuitable for use in connection with the business of the Issuer or such
Restricted Subsidiary or (v) any disposition or series of related dispositions
of assets having a Fair Market Value and sale price of less than $500,000).
"ATTRIBUTABLE DEBT" in respect of a Sale and Leaseback Transaction means, at
any date of determination, (a) if such Sale and Leaseback Transaction is a
Capital Lease Obligation, the amount of Debt represented thereby according to
the definition of "Capital Lease Obligation" and (b) in all other instances, the
present value (discounted at the interest rate borne by the New Notes (whether
or not cash interest is then accruing), compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale and Leaseback Transaction (including any period for
which such lease has been extended).
"AVERAGE LIFE" means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the
product of the numbers of years (rounded to the nearest one-twelfth of one year)
from the date of determination to the dates of each successive scheduled
principal payment of such Debt or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of such payment by (b) the sum of
all such payments.
"BOARD OF DIRECTORS" means the Board of Directors of the Issuer or any
committee thereof duly authorized to act on behalf of such Board.
"CAPITAL LEASE OBLIGATIONS" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty. For purposes of
"--Certain Covenants--Limitation on Liens," a Capital Lease Obligation shall be
deemed secured by a Lien on the Property being leased.
"CAPITAL STOCK" means, with respect to any Person, any shares or other
equivalents (however designated) of corporate stock, partnership interests,
membership interests in limited liability companies or any other participations,
rights, warrants, options or other interests in the nature of an equity interest
in such Person, including Preferred Stock, but excluding any debt security
convertible or exchangeable into such equity interest.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate cash proceeds received by
the Issuer from the issuance or sale (other than to a Subsidiary of the Issuer
or an employee stock ownership plan or trust established by the Issuer or any of
its Subsidiaries for the benefit of their employees) by the Issuer of any class
of its Capital Stock (other than Disqualified Stock) after the Issue Date, net
of attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(a) if (i) any "Person" or "group" (as such terms are used in Sections
13(d) (3) and 14(d) (2) of the Exchange Act or any successor provisions to
either of the foregoing) becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act, except that a Person will be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of 35% or more of the voting power
of the Voting Stock of the Issuer and (ii) the Permitted Holders are
"beneficial owners" (as defined in Rule 13d-3 under the Exchange Act except
that a Person will be
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deemed to have "beneficial ownership" of all shares that any such Person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, in the aggregate of a
lesser percentage of the total voting power of all classes of the Voting
Stock of the Issuer than such other Person or group referred to in clause
(i) (for purposes of this clause (a), such Person or group, and the
Permitted Holders, shall be deemed to beneficially own any Voting Stock of a
corporation (the "specified corporation") held by any other corporation (the
"parent corporation") so long as such Person or group beneficially owns,
directly or indirectly, in the aggregate a majority of the voting power of
the Voting Stock of such parent corporation); or
(b) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly of all or substantially all the assets
of the Issuer and the Restricted Subsidiaries, considered as a whole (other
than a disposition of such assets as an entirety or virtually as an entirety
to a Wholly Owned Subsidiary) shall have occurred, or the Issuer merges,
consolidates or amalgamates with or into any other Person or any other
Person merges, consolidates or amalgamates with or into the Issuer, in any
such event pursuant to a transaction in which the outstanding Voting Stock
of the Issuer is reclassified into or exchanged for cash, securities or
other Property, other than any such transaction where (i) the outstanding
Voting Stock of the Issuer is reclassified into or exchanged for Voting
Stock of the surviving corporation and (ii) the holders of the Voting Stock
of the Issuer immediately prior to such transaction own, directly or
indirectly, not less than a majority of the Voting Stock of the surviving
corporation immediately after such transaction and in substantially the same
proportion as before the transaction; or
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election or appointment by such Board or whose
nomination for election by the shareholders of the Issuer was approved by a
vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors then in office; or
(d) the shareholders of the Issuer shall have approved any plan of
liquidation or dissolution of the Issuer.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED COVERAGE RATIO" means, as of any date of determination, the
ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive
fiscal quarters ending at least 45 days prior to such determination date to (b)
Consolidated Fixed Charges for such four fiscal quarters; PROVIDED, HOWEVER,
that (i) if the Issuer or any Restricted Subsidiary has Incurred any Debt since
the beginning of such period that remains outstanding or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Debt, or both, Consolidated Fixed Charges for such period shall be
calculated after giving effect on a pro forma basis to such Debt as if such Debt
had been Incurred on the first day of such period and the discharge of any other
Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Debt as if such discharge had occurred on the first day of such period,
(ii) if since the beginning of such period the Issuer or any Restricted
Subsidiary shall have made any Asset Sale or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an Asset Sale, or both,
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the Property which is the subject of such
Asset Sale for such period, or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period, in either case as if
such Asset Sale had occurred on the first day of such period, and Consolidated
Fixed Charges for such period shall be reduced by an amount equal to the
Consolidated Fixed Charges directly attributable to any Debt of the Issuer or
any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Issuer and its continuing Restricted Subsidiaries in
connection with such Asset Sale, as if such Asset Sale had occurred on the first
day of such period (or, if the Capital
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Stock of any Restricted Subsidiary is sold, by an amount equal to the
Consolidated Fixed Charges for such period directly attributable to the Debt of
such Restricted Subsidiary to the extent the Issuer and its continuing
Restricted Subsidiaries are no longer liable for such Debt after such sale),
(iii) if since the beginning of such period the Issuer shall have consummated a
Public Equity Offering following which there is a Public Market, Consolidated
Fixed Charges for such period shall be reduced by an amount equal to the
Consolidated Fixed Charges directly attributable to any Debt of the Issuer or
any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Issuer and its Restricted Subsidiaries in connection with
such Public Equity Offering for such period, (iv) if since the beginning of such
period the Issuer or any Restricted Subsidiary (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of Property, including any
acquisition of Property occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA and Consolidated Fixed Charges for such
period shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Debt) as if such Investment or acquisition occurred on the
first day of such period, (v) if since the beginning of such period any Person
that subsequently became a Restricted Subsidiary or was merged with or into the
Issuer or any Restricted Subsidiary since the beginning of such period shall
have made any Asset Sale, Investment or acquisition of Property that would have
required an adjustment pursuant to clause (ii), (iii) or (iv) above if made by
the Issuer or a Restricted Subsidiary during such period, EBITDA and
Consolidated Fixed Charges for such period shall be calculated after giving pro
forma effect thereto as if such Asset Sale, Investment or acquisition of
Property occurred on the first day of such period and (vi) if since the
beginning of such period any Restricted Subsidiary shall have obtained relief
from any limitation on the ability of such Restricted Subsidiary to pay
dividends to the Issuer, EBITDA and Consolidated Fixed Charges for such period
shall be calculated after giving pro forma effect thereto as if the ability of
such Restricted Subsidiary to pay dividends to the Issuer had not been so
limited from the first day of such period. For purposes of this definition, pro
forma calculations shall be determined in good faith by a responsible financial
or accounting Officer of the Issuer and as further contemplated by the
definition of the term "pro forma." If any Debt bears a floating rate of
interest and is being given pro forma effect, the interest expense on such Debt
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Debt if such Interest Rate Agreement has a
remaining term in excess of 12 months).
"CONSOLIDATED FIXED CHARGES" means, for any period, the sum (without
duplication) of (a) Consolidated Interest Expense for such period plus (b) all
Preferred Stock Dividends (other than to the Issuer or a Wholly Owned
Subsidiary, and other than Redeemable Dividends) paid, accrued, declared or
accumulated during such period.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense of the Issuer and its consolidated Restricted Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Issuer or its Restricted Subsidiaries, (a) interest expense attributable
to capital leases, (b) amortization of debt discount and debt issuance cost,
including commitment fees, (c) capitalized interest, (d) noncash interest
expenses, (e) to the extent required under GAAP to be reflected as interest
expense in the consolidated financial statements of the Issuer, commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers acceptance financing, (f) to the extent required under GAAP to be
reflected as an expense in the consolidated financial statements of the Issuer,
net costs associated with Hedging Obligations (including amortization of fees),
(g) Redeemable Dividends, (h) interest incurred in connection with Investments
in discontinued operations, (i) interest accruing on any Debt of any other
Person to the extent such Debt is Guaranteed by the Issuer or any of its
Restricted Subsidiaries and (j) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the Issuer)
in connection with Debt Incurred by such plan or trust.
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"CONSOLIDATED NET INCOME" means, for any period, the net income (loss) of
the Issuer and its consolidated Subsidiaries, less the aggregate amount of
recurring expenditures made by the Issuer and its consolidated Subsidiaries
during such period with respect to environmental matters which were not deducted
in determining such net income (loss) as a result of the adoption of American
Institute of Certified Public Accountants Statement of Position 96-1,
"Environmental Remediation Liabilities"; PROVIDED, HOWEVER, that there shall not
be included in such Consolidated Net Income (a) any net income (loss) of any
Person (other than the Issuer) if such Person is not a Restricted Subsidiary,
except that (i) subject to the exclusion contained in clause (d) below, the
Issuer's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
distributed by such Person during such period to the Issuer or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to the limitations
contained in clause (c) below) and (ii) the Issuer's equity in a net loss of any
such Person other than an Unrestricted Subsidiary for such period shall be
included in determining such Consolidated Net Income to the extent of the
Issuer's obligation to fund such net loss in cash, (b) any net income (loss) of
any Person acquired by the Issuer or any of its consolidated Subsidiaries in a
pooling of interests transaction for any period prior to the date of such
acquisition, (c) any net income (but not loss) of any Restricted Subsidiary, to
the extent that the payment of dividends or the making of distributions by such
Restricted Subsidiary to the Issuer is not at the time permitted, directly or
indirectly, without prior approval (that has not been obtained), pursuant to the
terms of its charter or any agreement, instrument (other than agreements and
instruments limiting dividends or distributions by the Company, and not any
other Restricted Subsidiary, to the stockholders of the Company or such other
Restricted Subsidiary) or any governmental regulation applicable to such
Restricted Subsidiary, (d) any gain (loss) realized upon the sale or other
disposition of any Property of the Issuer or any of its consolidated
Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business, (e) any
extraordinary gain or loss and (f) the cumulative effect of a change in
accounting principles. Notwithstanding the foregoing, for the purposes of the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income any
dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to the Issuer or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (c) (iv) thereof.
"CONSOLIDATED NET WORTH" means the total of the amounts shown on the
consolidated balance sheet of the Issuer and its Restricted Subsidiaries as of
the end of the most recent fiscal quarter of the Issuer ending at least 45 days
prior to the taking of any action for the purpose of which the determination is
being made, as (a) the par or stated value of all outstanding Capital Stock of
the Issuer plus (b) paid-in capital or capital surplus relating to such Capital
Stock plus (c) any retained earnings or earned surplus less (i) any accumulated
deficit and (ii) any amounts attributable to Disqualified Stock.
"CREDIT FACILITY" means one or more debt facilities with banks or other
institutional lenders (including pursuant to (a) the Loan Agreement dated April
14, 1997, as amended, by and among the Company, certain subsidiaries of the
Company named therein, BankBoston, N.A. and the other Banks party thereto, and
BankBoston, N.A. as agent for such Banks, (b) the Loan Agreement dated October
20, 1997, as amended, by and among GfE, certain of its subsidiaries and
BankBoston, N.A., Frankfurt Branch and (c) each of the Loan Documents (as
defined in such Loan Agreements) relating to such Loan Agreements) providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, foreign
exchange, bankers' acceptances or similar financial arrangements, in each case
as amended, restated, supplemented or modified and in effect from time to time,
together with any extensions, revisions, refinancings or replacements thereof by
a lender or syndicate of lenders.
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"CURRENCY EXCHANGE PROTECTION AGREEMENT" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
"DEBT" means, with respect to any Person on any date of determination
(without duplication), (a) the principal of and premium (if any) in respect of
(i) debt of such Person for money borrowed and (ii) debt evidenced by New Notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable; (b) all Capital Lease Obligations of such
Person and all Attributable Debt in aspect of Sale and Leaseback Transactions
entered into by such Person; (c) all obligations of such Person issued or
assumed as the deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and customer advance
payments or deposits arising in the ordinary course of business); (d) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (a) through (c) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (e) the amount of
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary of
such Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (f) all obligations of the type referred to in clauses (a) through
(e) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; (g) all obligations of the type referred to in clauses (a) through
(f) of other Persons secured by any Lien on any Property of such Person (whether
or not such obligation is assumed by such Person), the amount of such obligation
being deemed to be the lesser of the value of such Property or the amount of the
obligation so secured; and (h) to the extent not otherwise included in this
definition, Hedging Obligations of such Person. The amount of Debt of any Person
at any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date; PROVIDED that the amount outstanding at any time of any Debt issued
with OID is the face amount of such Debt less the remaining unamortized portion
of the OID of such Debt at such time as determined in accordance with GAAP.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DISQUALIFIED STOCK" means, with respect to any Person, Redeemable Stock of
such Person as to which (a) the maturity, (b) mandatory redemption or (c)
redemption, conversion or exchange at the option of the holder thereof occurs,
or may occur, on or prior to the first anniversary of the Stated Maturity of the
New Notes; PROVIDED, HOWEVER, that Redeemable Stock of such Person that would
not otherwise be characterized as Disqualified Stock under this definition shall
not constitute Disqualified Stock if such Redeemable Stock is convertible or
exchangeable into Debt or Disqualified Stock solely at the option of the issuer
thereof.
"EBITDA" means, for any period, an amount equal to, for the Issuer and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for
such period, plus the following to the extent reducing Consolidated Net Income
for such period: (i) the provision for taxes based on income or profits or
utilized in computing net loss, (ii) Consolidated Interest Expense, (iii)
depreciation, (iv) amortization of intangibles and (v) any other noncash items
(other than any such non-cash item to the extent that it represents an accrual
of or reserve for cash expenditures in any future period), minus (b) all
non-cash items increasing Consolidated Net Income for such period (other than
any such non-cash item to the extent that it will result in the receipt of cash
payments in any future period). Notwithstanding the
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foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization of, a Restricted Subsidiary shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Issuer by such
Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"EVENT OF DEFAULT" has the meaning set forth under "--Events of Default."
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, with respect to any Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (a) if such Property has a Fair Market
Value of less than $5.0 million, by any Officer of the Issuer or (b) if such
Property has a Fair Market Value in excess of $5.0 million, by a majority of the
Board of Directors and evidenced by a Board Resolution, dated within 30 days of
the relevant transaction, delivered to the Trustee.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth (a) in the opinions and
pronouncements of the Accounting Principles Board of the American institute of
Certified Public Accountants, (b) in the statements and pronouncements of the
Financial Accounting Standards Board, (c) in such other statements by such other
entity as approved by a significant segment of the accounting profession and (d)
the rules and regulations of the Commission governing the inclusion of financial
statements (including pro forma financial statements) in periodic reports
required to be filed pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the Commission.
"GFE" means GfE Gesellschaft fur Elektrometallurgie mbH.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in any
other manner the obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"HEDGING OBLIGATION" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement
or any other similar agreement or arrangement.
"INCUR" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise), extend,
assume, Guarantee or become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
obligation on the balance sheet of such Person (and "Incurrence" and "Incurred"
shall have meanings correlative to the foregoing); PROVIDED, HOWEVER, that a
change in GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt shall not be
deemed an Incurrence of such Debt; PROVIDED FURTHER, HOWEVER, that solely for
purposes of determining compliance with "--Certain Covenants--Limitation on
Debt," amortization of debt discount
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shall not be deemed to be the Incurrence of Debt, PROVIDED that in the case of
Debt sold at a discount, the amount of such Debt Incurred shall at all times be
the aggregate principal amount at Stated Maturity.
"INDEPENDENT APPRAISER" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of the Issuer.
"INTEREST RATE AGREEMENT" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect against fluctuations in interest rates.
"INVESTMENT" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account or
use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation
of, or purchase or acquisition of Capita Stock, bonds, notes, debentures or
other securities or evidence of Debt issued by, any other Person. For purposes
of the covenants described under "--Certain Covenants--Limitation on Restricted
Payments," "--Designation of Restricted and Unrestricted Subsidiaries" and the
definition of "Restricted Payment," "Investment" shall include the portion
(proportionate to the Issuer's equity interest in such Subsidiary) of the Fair
Market Value of the net assets of any Subsidiary of the Issuer at the time that
such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the
Issuer shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the
Issuer's "Investment" in such Subsidiary at the time of such redesignation less
(b) the portion (proportionate to the Issuer's equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the
time of such redesignation. In determining the amount of any Investment made by
transfer of any Property other than cash, such Property shall be valued at its
Fair Market Value at the time of such Investment.
"ISSUE DATE" means the date on which the New Notes are initially issued.
"LIEN" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
"LSM" means London & Scandinavian Metallurgical Co., Limited.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"NET AVAILABLE CASH" from any Asset Sale means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to the
Property that is the subject of such Asset Sale or received in any other noncash
form), in each case net of (a) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all United States federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Sale, whether paid or payable, (b)
all payments made on any Debt which is secured by any Property subject to such
Asset Sale, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such Property, or which must by its terms,
or in order to obtain a necessary consent to such Asset Sale, or by applicable
law, be repaid out of the proceeds from such Asset Sale, (c) all distributions
and other payments required to be made to minority interest holders
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in Subsidiaries or joint ventures as a result of such Asset Sale, and (d) the
deduction of appropriate amounts provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the Property
disposed in such Asset Sale and retained by the Issuer or any Restricted
Subsidiary after such Asset Sale.
"OFFICER" means the Chairman, President and Chief Executive Officer, the
Vice President, Finance and Chief Financial Officer or any Vice President of the
Issuer.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers of the
Issuer, at least one of whom shall be the principal executive officer or
principal financial officer of the Issuer, and delivered to the Trustee.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Issuer or the Trustee.
"PERMITTED HOLDERS" means (i) Safeguard International Fund, L.P., State of
Michigan Retirement Systems -- Safeguard Limited Partnership, Safeguard
Scientifics (Delaware), Inc., Dr. Heinz Schimmelbusch, Arthur R. Spector and
Michael Holly, or any Person of which any of the foregoing "beneficially owns"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act) voting securities
representing at least 51% of the voting power of all classes of Voting Stock of
such Person (exclusive of any matters as to which class voting rights exist) or
any Person which "beneficially owns" (as defined above) voting securities
representing at least 51% of the voting power of all classes of Voting Stock of
any of the foregoing (exclusive of any matters as to which class voting rights
exist); and (ii) any Person who beneficially owns Voting Stock of the Issuer on
the Issue Date so long as the Permitted Holders specified under clause (i) above
beneficially own in the aggregate at least 10% of the Voting Stock of the
Issuer.
"PERMITTED INVESTMENT" means any Investment by the Issuer or a Restricted
Subsidiary in (a) the Issuer, any Restricted Subsidiary or any Person that will,
upon the making of such Investment, become a Restricted Subsidiary, PROVIDED
that the primary business of such Restricted Subsidiary is a Related Business;
(b) any Person if as a result of such Investment such Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
Property to, the Issuer or a Restricted Subsidiary, PROVIDED that such Person's
primary business is a Related Business; (c) Temporary Cash Investments; (d)
receivables owing to the Issuer or a Restricted Subsidiary, if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; PROVIDED, HOWEVER, that such trade terms
may include such concessionary trade terms as the Issuer or such Restricted
Subsidiary deems reasonable under the circumstances; (e) payroll, travel and
similar advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (f) loans and advances to employees made in
the ordinary course of business consistent with past practices of the Issuer or
such Restricted Subsidiary, as the case may be, PROVIDED that such loans and
advances do not exceed $2.5 million at any one time outstanding; (g) stock,
obligations or other securities received in settlement of debts created in the
ordinary course of business and owing to the Issuer or a Restricted Subsidiary
or in satisfaction of judgments; and (h) any Person to the extent such
Investment represents the non-cash portion of the consideration received in
connection with an Asset Sale consummated in compliance with the covenant
described under "--Certain Covenants--Limitation on Asset Sales."
"PERMITTED LIENS" means:
(a) Liens to secure Debt permitted to be Incurred under clause (a) of
the first paragraph or clause (a), (c) or (d) of the second paragraph of the
covenant described under "--Certain Covenants--Limitation on Debt";
(b) Liens to secure Debt permitted to be Incurred under clause (e) of
the second paragraph of the covenant described under "--Certain
Covenants--Limitation on Debt," PROVIDED that any such Lien may not extend
to any Property of the Issuer or any Restricted Subsidiary, other than the
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Property acquired, constructed or leased with the proceeds of such Debt and
any improvements or accessions to such Property;
(c) Liens for taxes, assessments or governmental charges or levies on
the Property of the Issuer or any Restricted Subsidiary if the same shall
not at the time be delinquent or thereafter can be paid without penalty, or
are being contested in good faith and by appropriate proceedings promptly
instituted and diligently concluded, PROVIDED that any reserve or other
appropriate provision that shall be required in conformity with GAAP shall
have been made therefor;
(d) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, on the Property of the Issuer or any Restricted Subsidiary
arising in the ordinary course of business and securing payment of
obligations which are not more than 60 days past due or are being contested
in good faith and by appropriate proceedings;
(e) Liens on the Property of the Issuer or any Restricted Subsidiary
Incurred in the ordinary course of business to secure performance of
obligations with respect to statutory or regulatory requirements-performance
or return-of-money bonds, surety bonds or other obligations of a like nature
and Incurred in a manner consistent with industry practice, in each case
which are not incurred in connection with the borrowing of money, the
obtaining of advances or credit or the payment of the deferred purchase
price of Property and which do not in the aggregate impair in any material
respect the use of Property in the operation of the business of the Issuer
and the Restricted Subsidiaries taken as a whole;
(f) Liens on Property at the time the Issuer or any Restricted
Subsidiary acquired such Property, including any acquisition by means of a
merger or consolidation with or into the Issuer or any Restricted
Subsidiary; PROVIDED, HOWEVER, that any such Lien may not extend to any
other Property of the Issuer or any Restricted Subsidiary; PROVIDED FURTHER,
HOWEVER, that such Liens shall not have been Incurred in anticipation or in
connection with the transaction or series of transactions pursuant to which
such Property was acquired by the Issuer or any Restricted Subsidiary;
(g) Liens on the Property of a Person at the time such Person becomes a
Restricted Subsidiary; PROVIDED, HOWEVER, that any such Lien may not extend
to any other Property of the Issuer or any other Restricted Subsidiary which
is not a direct Subsidiary of such Person; PROVIDED FURTHER, HOWEVER, that
any such Lien was not Incurred in anticipation of or in connection with the
transaction or series of transactions pursuant to which such Person became a
Restricted Subsidiary;
(h) pledges or deposits by the Issuer or any Restricted Subsidiary under
workmen's compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Debt) or leases to which the Issuer
or any Restricted Subsidiary is party, or deposits to secure public or
statutory obligations of the Issuer, or deposits for the payment of rent, in
each case Incurred in the ordinary course of business;
(i) utility easements, building restrictions and such other encumbrances
or charges against real Property as are of a nature generally existing with
respect to properties of a similar character;
(j) Liens in favor of the Issuer;
(k) Liens existing on the Issue Date not otherwise described in clauses
(a) through (j) above;
(l) Liens on the Property of the Issuer or any Restricted Subsidiary to
secure any Refinancing, in whole or in part, of any Debt secured by Liens
referred to in clause (b), (f), (g) or (k) above; PROVIDED, HOWEVER, that
any such Lien shall be limited to all or part of the same Property that
secured the original Lien (together with improvements and accessions to such
Property) and the aggregate principal amount of Debt that is secured by such
Lien shall not be increased to an amount greater than the sum of (i) the
outstanding principal amount, or, if greater, the committed amount, of the
Debt secured by Liens described under clause (b), (f), (g) or (k) above, as
the case may be, at the time
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the original Lien became a Permitted Lien under the Indenture and (ii) an
amount necessary to pay any premiums, fees and other expenses incurred by
the Issuer or a Restricted Subsidiary in connection with such Refinancing;
or
(m) Liens not otherwise permitted by clauses (a) through (l) above
encumbering assets having an aggregate Fair Market Value not in excess of
$25.0 million.
"PERMITTED REFINANCING DEBT" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as (a) such Debt is in an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) not in excess of the sum of (i) the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding of the Debt being Refinanced and (ii) an amount
necessary to pay any fees and expenses, including premiums and defeasance costs,
related to such Refinancing, (b) the Average Life of such Debt is equal to or
greater than the Average Life of the Debt being Refinanced, (c) the Stated
Maturity of such Debt is no earlier than the Stated Maturity of the Debt being
Refinanced and (d) the new Debt shall not be senior in right of payment to the
Debt that is being Refinanced; PROVIDED, HOWEVER, that Permitted Refinancing
Debt shall not include (x) Debt of a Subsidiary that Refinances Debt of the
Issuer or (y) Debt of the Issuer or a Restricted Subsidiary that Refinances Debt
of an Unrestricted Subsidiary.
"PERSON" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any other class of
Capital Stock issued by such Person.
"PREFERRED STOCK DIVIDENDS" means for any dividend with respect to Preferred
Stock, the quotient of the dividend divided by the difference between one and
the maximum statutory United States federal income tax rate (expressed as a
decimal number between 1 and 0) then applicable to the issuer of such Preferred
Stock.
"PRO FORMA" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with the
independent certified public accountants of the Issuer, or otherwise a
calculation made in good faith by the Board of Directors after consultation with
the independent certified public accountants of the Issuer, as the case may be.
"PROPERTY" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the Indenture, the
value of any Property shall be its Fair Market Value.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of common
stock of the Issuer or the Company pursuant to an effective registration
statement under the Securities Act.
"PUBLIC MARKET" means any time after (a) a Public Equity Offering has been
consummated and (b) at least 10% of the total issued and outstanding common
stock of the Issuer or the Company, as the case may be, has been distributed by
means of an effective registration statement under the Securities Act or sales
pursuant to Rule 144 under the Securities Act.
"PURCHASE MONEY DEBT" means Debt (a) consisting of the deferred purchase
price of property, conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and obligations in respect
of industrial revenue bonds, in each case where the maturity of such
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Debt does not exceed the anticipated useful life of the asset being financed and
(b) Incurred to finance the acquisition (including costs of design and
installation) by the Issuer or a Restricted Subsidiary of such asset, including
additions and improvements; PROVIDED, HOWEVER, that such Debt is incurred within
180 days after such acquisition of such asset by the Issuer or a Restricted
Subsidiary.
"REDEEMABLE DIVIDEND" means, for any dividend with respect to Redeemable
Stock, the quotient of the dividend divided by the difference between one and
the maximum statutory United States federal income tax rate (expressed as a
decimal number between 1 and 0) then applicable to the issuer of such Redeemable
Stock.
"REDEEMABLE STOCK" means, with respect to any Person, any Capital Stock that
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable, in either case, at the option of the holder
thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (b) is or may become redeemable or
repurchaseable at the option of the holder thereof, in whole or in part, or (c)
is convertible or exchangeable at the option of the holder thereof for Debt or
Disqualified Stock.
"REFINANCE" means, in respect of any Debt, to refinance, extend, renew,
refund, replace, prepay, redeem, defease or retire, or to issue other Debt, in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
"RELATED BUSINESS" means any business that is related, ancillary or
complementary to the businesses of the Issuer and the Restricted Subsidiaries on
the Issue Date.
"RESTRICTED PAYMENT" means (a) any dividend or distribution (whether made in
cash, securities or other Property) declared or paid on or with respect to any
shares of Capital Stock of the Issuer or any Restricted Subsidiary (including
any payment in connection with any merger or consolidation with or into the
Issuer or any Restricted Subsidiary), except for any dividend or distribution
which is made solely to the Issuer or a Restricted Subsidiary (and, if such
Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other
shareholders of such Restricted Subsidiary on a pro rata basis or on a basis
that results in the receipt by the Issuer or a Restricted Subsidiary of
dividends or distributions of greater value than it would receive on a pro rata
basis) or any dividend or distribution payable solely in shares of Capital Stock
(other than Redeemable Stock) of the Issuer; (b) the purchase, repurchase,
redemption, acquisition or retirement for value of any Capital Stock of the
Issuer or any Affiliate of the Issuer (other than from the Issuer or a
Restricted Subsidiary) or any warrants, rights or options to directly or
indirectly purchase or acquire any such Capital Stock or any securities
exchangeable for or convertible into any such Capital Stock, including the
exercise of any option to exchange any Capital Stock (other than for or into
Capital Stock of the Issuer that is not Disqualified Stock); (c) the purchase,
repurchase, redemption, acquisition, defeasance or retirement for value, prior
to any scheduled maturity, scheduled sinking fund or mandatory redemption
payment, any Subordinated Obligation (other than the purchase, repurchase or
other acquisition of any Subordinated Obligation purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition); or (d) any
Investment (other than Permitted Investments) in any Person.
"RESTRICTED SUBSIDIARY" means (a) any Subsidiary of the Issuer unless such
Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries" and (b) an
Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as
permitted pursuant to the covenant described under "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries."
"S&P" means Standard & Poor's Ratings Service or any successor to the rating
agency business thereof.
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<PAGE>
"SALE AND LEASEBACK TRANSACTION" means any arrangement relating to Property
now owned or hereafter acquired whereby the Issuer or a Restricted Subsidiary
transfers such Property to another Person and the Issuer or a Restricted
Subsidiary leases it from such Person.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR DEBT" of the Issuer means (a) all obligations consisting of the
principal, premium, if any, and accrued and unpaid interest in respect of (i)
Debt of the Issuer for borrowed money and (ii) Debt of the Issuer evidenced by
notes, debentures, bonds or other similar instruments permitted under the
Indenture for the payment of which the Issuer is responsible or liable; (b) all
Capital Lease Obligations of the Issuer; (c) all obligations of the Issuer (i)
for the reimbursement of any obligor on any letter of credit, bankers'
acceptance or similar credit transaction, (ii) under Hedging Obligations or
(iii) issued or assumed as the deferred purchase price of Property and all
conditional sale obligations of the Issuer and all obligations under any title
retention agreement permitted under the Indenture and (d) all obligations of
other Persons of the type referred to in clauses (a), (b) and (c) for the
payment of which the Issuer is responsible or liable as Guarantor; PROVIDED,
HOWEVER, that Senior Debt shall not include (a) Debt of the Issuer that is by
its terms subordinate in right of payment to the New Notes; (B) any Debt
Incurred in violation of the provisions of the Indenture; (C) accounts payable
or any other obligations of the Issuer to trade creditors created or assumed by
the Issuer in the ordinary course of business in connection with the obtaining
of materials or services (including Guarantees thereof or instruments evidencing
such liabilities); (D) any liability for United States federal, state, local or
other taxes owed or owing by the Issuer; (E) any obligation of the Issuer to any
Subsidiary; or (F) any obligations with respect to any Capital Stock of the
Issuer.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Issuer within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"SUBORDINATED OBLIGATION" means any Debt of the Issuer (whether outstanding
on the Issue Date or thereafter Incurred) which is subordinate or junior in
right of payment to the New Notes pursuant to a written agreement to that
effect.
"SUBSIDIARY" means, in respect of any Person, any corporation, company,
association, partnership, joint venture or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled directly or indirectly, by (i) such
Person, (ii) such Person and one or more Subsidiaries of such Person or (iii)
one or more Subsidiaries of such Person.
"TEMPORARY CASH INVESTMENTS" means any of the following: (a) Investments in
U.S. Government Obligations maturing within one year of the date of acquisition
thereof; (b) Investments in time deposit accounts, certificates of deposit and
money market deposits maturing within one year of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America or any state thereof or any foreign country
recognized by the United States having capital, surplus and undivided profits
aggregating in excess of $500.0 million (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A-3" or "A-" or higher according to
Moody's or S&P (or such similar equivalent rating by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under the
Securities Act)); (c) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (a) entered into
with a bank meeting the qualifications described in clause (b) above; and (d)
Investments in commercial paper,
98
<PAGE>
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Issuer) organized and in existence
under the laws of the United States of America with a rating at the time as of
which any Investment therein is made of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as defined in
Rule 436 under the Securities Act)).
"UNRESTRICTED SUBSIDIARY" means (a) any Subsidiary of the Issuer that is
designated after the Issue Date as an Unrestricted Subsidiary as permitted
pursuant to the covenant described under "--Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries" and not thereafter redesignated as a
Restricted Subsidiary as permitted pursuant thereto and (b) any Subsidiary of an
Unrestricted Subsidiary.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"VOTING STOCK" of any Person means all shares or other equivalents of
Capital Stock of such Person then outstanding and normally entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof.
"WHOLLY OWNED SUBSIDIARY" means, at any time, a Restricted Subsidiary all
the Voting Stock of which (except directors' qualifying shares and shares held
by third parties which, in the aggregate, represent no more than 2% of the
outstanding Voting Stock of such Restricted Subsidiary) is at such time owned,
directly or indirectly, by the Issuer and its other Wholly Owned Subsidiaries.
BOOK-ENTRY SYSTEM
The certificates representing the New Notes will be issued in fully
registered form. The New Notes initially will be represented by a single,
permanent global New Note, in definitive, fully registered form without interest
coupons (the "Global Note") and will be deposited with the Trustee as custodian
for DTC and registered in the name of Cede & Co., as DTC's nominee.
Upon the issuance of a Global Note, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts of
the New Notes represented by such Global Note purchased by such Persons in the
Offering. Such accounts shall be designated by the Initial Purchaser. Ownership
of beneficial interests in a Global Note will be limited to Persons that have
accounts with DTC ("participants") or Persons that may hold interests through
participants. Any Person acquiring an interest in a Global Note through an
offshore transaction in reliance on Regulation S of the Securities Act may hold
such interest through Cedel or Euroclear. Ownership of beneficial interests in a
Global Note will be shown on, and the transfer of that ownership interest will
be effected only through, records maintained by DTC (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in such Global Note other than participants). The laws of
some jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Note.
Payment of principal of and interest on New Notes represented by a Global
Note will be made in immediately available funds to DTC or its nominee, as the
case may be, as the sole registered owner and the sole holder of the New Notes
represented thereby for all purposes under the Indenture. The Issuer has been
advised by DTC that upon receipt of any payment of principal of or interest on
any Global Note, DTC will immediately credit, on its book-entry registration and
transfer system, the accounts of participants with payments in amounts
proportionate to their respective beneficial interests in the principal or face
amount of such Global Note as shown on the records of DTC. Payments by
participants to owners of beneficial interests in a Global Note held through
such participants will be governed by standing
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<PAGE>
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Note may not be transferred except as a whole by DTC or a nominee
of DTC to a nominee of DTC or to DTC. A Global Note is exchangeable for
certificated New Notes only if (a) DTC notifies the Issuer that it is unwilling
or unable to continue as a depositary for such Global Note or if at any time DTC
ceases to be a clearing agency registered under the Exchange Act, (b) the Issuer
in its discretion at any time determines not to have all the New Notes
represented by such Global Note, or (c) there shall have occurred and be
continuing a Default or an Event of Default with respect to the New Notes
represented by such Global Note. Any Global Note that is exchangeable for
certificated New Notes pursuant to the preceding sentence will be exchanged for
certificated New Notes in authorized denominations and registered in such names
as DTC or any successor depositary holding such Global Note may direct. Subject
to the foregoing, a Global Note is not exchangeable, except for a Global Note of
like denomination to be registered in the name of DTC or any successor
depositary or its nominee. In the event that a Global Note becomes exchangeable
for certificated New Notes, (a) certificated New Notes will be issued only in
fully registered form in denominations of $1,000 or integral multiples thereof,
(b) payment of principal of, and premium, if any, and interest on, the
certificated New Notes will be payable, and the transfer of the certificated New
Notes will be registerable, at the office or agency of the Issuer maintained for
such purposes and (c) no service charge will be made for any registration of
transfer or exchange of the certificated New Notes, although the Issuer may
require payment of a sum sufficient to cover any tax or governmental charge
imposed in connection therewith.
So long as DTC or any successor depositary for a Global Note, or any
nominee, is the registered owner of such Global Note, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the New Notes represented by such Global Note for all purposes under
the Indenture and the New Notes. Except as set forth above, owners of beneficial
interests in a Global Note will not be entitled to have the New Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of certificated New Notes in definitive
form and will not be considered to be the owners or holders of any New Notes
under such Global Note. Accordingly, each Person owning a beneficial interest in
a Global Note must rely on the procedures of DTC or any successor depositary,
and, if such Person is not a participant, on the procedures of the participant
through which such Person owns its interest, to exercise any rights of a holder
under the Indenture. The Issuer understands that under existing industry
practices, in the event that the Issuer requests any action of holders or that
an owner of a beneficial interest in a Global Note desires to give or take any
action which a holder is entitled to give or take under the Indenture, DTC or
any successor depositary would authorize the participants holding the relevant
beneficial interest to give or take such action and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised the Issuer that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchaser), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform
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<PAGE>
such procedures, and such procedures may be discontinued at any time. None of
the Issuer, the Trustee or the Initial Purchaser will have any responsibility
for the performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that, starting on the Expiration Date
and ending on the close of business on the first anniversary following the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until January 21, 1999, all dealers effecting transactions in the
Exchange Securities may be required to deliver a Prospectus.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the Old
Notes) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Issuer by Rogers & Wells LLP, New York, New York.
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<PAGE>
EXPERTS
The consolidated financial statements of Metallurg as of and for the three
quarters ended January 31, 1998, as of and for the quarter ended March 31, 1997,
and as of December 31, 1996 and for each of the two years in the period ended
December 31, 1996 and the related financial statement schedule included in this
Prospectus and Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and are
included in reliance upon such report given upon their authority as experts in
accounting and auditing.
The consolidated balance sheet of the Issuer at June 29, 1998, included in
this Prospectus and Registration Statement has been audited by Arthur Andersen
LLP, independent auditors, as indicated in their report with respect thereto,
and is included herein in reliance upon the authority of said firm as experts in
giving said report.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS OF METALLURG, INC.:
Independent Auditors' Report............................................................................. F-2
Statements of Consolidated Operations for the Three Quarters Ended January 31, 1998, the Quarter Ended
March 31, 1997 and the Years Ended December 31, 1996 and 1995.......................................... F-3
Consolidated Balance Sheets at January 31, 1998, March 31, 1997 and December 31, 1996.................... F-4
Statements of Consolidated Cash Flows for the Three Quarters Ended January 31, 1998, the Quarter Ended
March 31, 1997 and the Years Ended December 31, 1996 and 1995.......................................... F-5
Notes to Consolidated Financial Statements for the Three Quarters Ended January 31, 1998, the Quarter
Ended March 31, 1997 and the Years Ended December 31, 1996 and 1995.................................... F-7
AUDITED FINANCIAL STATEMENT SCHEDULE OF METALLURG, INC.:
Schedule VIII--Valuation and Qualifying Accounts and Reserves............................................ F-43
UNAUDITED FINANCIAL STATEMENTS OF METALLURG, INC.:
Condensed Statements of Consolidated Operations for the Quarter and the Two Quarters Ended July 31, 1998
and the Quarters Ended July 31, 1997 and March 31, 1997................................................ F-44
Condensed Statements of Consolidated Comprehensive Income for the Quarter and the Two Quarters Ended July
31, 1998 and the Quarters Ended July 31, 1997 and March 31, 1997....................................... F-45
Condensed Consolidated Balance Sheets at July 31, 1998 and January 31, 1998.............................. F-46
Condensed Statements of Consolidated Cash Flows for the Two Quarters Ended July 31, 1998 and the Quarters
Ended July 31, 1997 and March 31, 1997................................................................. F-47
Notes to the Condensed Unaudited Consolidated Financial Statements....................................... F-48
AUDITED FINANCIAL STATEMENTS OF METALLURG HOLDINGS, INC.:
Report of Independent Public Accountants................................................................. F-56
Consolidated Balance Sheet of the Issuer at June 29, 1998................................................ F-57
Notes to Consolidated Balance Sheet...................................................................... F-58
UNAUDITED FINANCIAL STATEMENTS OF METALLURG HOLDINGS, INC.:
Condensed Statement of Consolidated Operations for the Period June 10, 1998 (inception) to July 31,
1998................................................................................................... F-59
Condensed Statement of Consolidated Comprehensive Income for the Period June 10, 1998 (inception) to July
31, 1998............................................................................................... F-60
Condensed Consolidated Balance Sheet at July 31, 1998.................................................... F-61
Condensed Statement of Consolidated Cash Flows for the Period June 10, 1998 (inception) to July 31,
1998................................................................................................... F-62
Notes to Condensed Consolidated Financial Statements..................................................... F-63
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Metallurg, Inc.:
We have audited the accompanying consolidated balance sheets of Metallurg,
Inc. and consolidated subsidiaries as of January 31, 1998 and March 31, 1997
(Reorganized Company balance sheets) and December 31, 1996 (Predecessor Company
balance sheet) and the related statements of consolidated operations and of
consolidated cash flows for the three quarters ended January 31, 1998
(Reorganized Company operations), the quarter ended March 31, 1997 and for each
of the two years in the period ended December 31, 1996 (Predecessor Company
operations). Our audits also included the financial statement schedule, Schedule
VIII--Valuation and Qualifying Accounts and Reserves, appearing on page F-42.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 2 to the consolidated financial statements, on
April 14, 1997, the U.S. Bankruptcy Court for the Southern District of New York
entered an order confirming the Company's plan of reorganization which became
effective after the close of business on that day. Accordingly, the accompanying
consolidated balance sheets as of January 31, 1998 and March 31, 1997 and the
statements of consolidated operations and of consolidated cash flows for the
three quarters ended January 31, 1998 have been prepared in conformity with the
American Institute of Certified Public Accountants Statement of Position No.
90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy
Code," for the Company as a new entity with assets, liabilities, and a capital
structure having carrying values not comparable with prior periods as described
in Notes 1 and 2.
In our opinion, the Reorganized Company's balance sheets present fairly, in
all material respects, the financial position of Metallurg, Inc. and
consolidated subsidiaries at January 31, 1998 and March 31, 1997 and the results
of their consolidated operations and their consolidated cash flows for the three
quarters ended January 31, 1998, and the Predecessor Company consolidated
financial statements, referred to above, present fairly, in all material
respects, the consolidated financial position at December 31, 1996 and the
results of their consolidated operations and their consolidated cash flows for
the quarter ended March 31, 1997 and for each of the two years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1996, the Company elected early adoption of the American Institute of
Certified Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities."
DELOITTE & TOUCHE LLP
New York, New York
April 1, 1998
F-2
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
----------- -----------------------------------
THREE YEAR YEAR
QUARTERS QUARTER ENDED ENDED
ENDED ENDED DECEMBER DECEMBER
JANUARY 31, MARCH 31, 31, 31,
NOTES 1998 1997 1996 1995
--------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Gross volume.......................... 1 $ 499,998 $ 162,337 $ 695,095 $ 755,927
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Sales................................. 1 $ 476,426 $ 155,427 $ 648,816 $ 688,002
Commission income..................... 1 541 160 1,186 1,362
----------- --------- ----------- -----------
Total revenue....................... 476,967 155,587 650,002 689,364
Cost of sales......................... 1 410,033 134,060 566,538 603,535
----------- --------- ----------- -----------
Gross margin........................ 66,934 21,527 83,464 85,829
Selling, general and administrative
expenses............................ 43,563 15,046 57,103 52,842
Environmental expenses................ 1 -- -- 37,582 5,624
Restructuring charges................. 1 -- -- -- 11,658
----------- --------- ----------- -----------
Operating income (loss)............. 23,371 6,481 (11,221) 15,705
Other:
Other income (expense), net......... 13 1,805 3,179 (6,759) 7
Interest income (expense), net...... 2, 9 (5,653) (245) 1,473 (1,949)
Reorganization expense.............. 2 -- (2,663) (3,535) (3,927)
Fresh-start revaluation............. 2 -- 5,107 -- --
----------- --------- ----------- -----------
Income (loss) before income tax
provision and extraordinary item.... 19,523 11,859 (20,042) 9,836
Income tax provision (benefit)........ 1, 11 12,459 (3,063) 8,453 8,171
----------- --------- ----------- -----------
Income (loss) before extraordinary
item................................ 7,064 14,922 (28,495) 1,665
Extraordinary item, net of tax........ 2 (792) 43,032 -- --
----------- --------- ----------- -----------
Net income (loss)..................... 6,272 57,954 (28,495) 1,665
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment........................ 12 673 (1,224) 4,268 (1,056)
----------- --------- ----------- -----------
Comprehensive income (loss)........... $ 6,945 $ 56,730 $ (24,227) $ 609
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Common shares and common share
equivalents......................... 1 4,956
-----------
-----------
Basic and diluted earnings per share:
Income before extraordinary item.... $ 1.43
Extraordinary item, net of tax...... (.16)
-----------
Net income.......................... $ 1.27
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
------------------------ -------------
JANUARY 31, MARCH 31, DECEMBER 31,
NOTES 1998 1997 1996
----- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS (Note 2)
Current Assets:
Cash and cash equivalents........................................ 1 $ 43,003 $ 30,340 $ 63,274
Trade receivables, less allowance for doubtful accounts (1998:
$1,700; 1997: $-0-; 1996: $4,303).............................. 1 83,931 94,150 88,595
Inventories...................................................... 1, 5 117,589 109,258 106,363
Prepaid expenses and other current assets........................ 14,239 16,312 14,315
Assets held for sale............................................. 1 -- 1,180 1,843
----------- ----------- -------------
Total current assets........................................... 258,762 251,240 274,390
Investments in affiliates.......................................... 1 1,610 1,461 2,938
Property, plant and equipment, net................................. 1, 6 41,502 38,907 47,885
Other assets....................................................... 14 17,912 14,096 6,413
----------- ----------- -------------
Total.......................................................... $ 319,786 $ 305,704 $ 331,626
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term debt.................................................. 9 $ 2,836 $ 13,500 $ 13,468
Current portion of long-term debt................................ 9 1,180 1,277 1,352
Trade payables................................................... 51,308 55,947 48,264
Accrued expenses................................................. 24,022 25,351 21,599
Current portion of environmental liabilities..................... 1, 14 6,553 5,270 9,374
Taxes payable.................................................... 11 5,106 6,579 6,599
----------- ----------- -------------
Total current liabilities...................................... 91,005 107,924 100,656
----------- ----------- -------------
Long-term Liabilities:
Long-term debt................................................... 9 103,133 51,711 5,049
Accrued pension liabilities...................................... 1, 8 38,351 41,090 43,926
Environmental liabilities, net................................... 1, 14 38,527 42,865 34,637
Other liabilities................................................ 6,999 12,114 9,640
----------- ----------- -------------
Total long-term liabilities.................................... 187,010 147,780 93,252
----------- ----------- -------------
Liabilities Subject to Compromise.................................. 7 -- -- 179,897
----------- ----------- -------------
Total liabilities.............................................. 278,015 255,704 373,805
----------- ----------- -------------
Commitments and Contingencies...................................... 15 -- -- --
Shareholders' Equity (Deficit):
Common stock--1998 and 1997: par value $.01 per share, authorized
15,000,000 shares, issued and outstanding 4,956,406 shares; 1996:
stated value $10 per share, authorized 10,000 shares, issued and
outstanding 2,005 shares......................................... 12 50 50 20
Preferred stock--1996: par value $100 per share, authorized 300,000
shares, no shares issued and outstanding......................... 12 -- -- --
Additional paid-in capital......................................... 12 40,209 49,950 --
Accumulated other comprehensive income ............................ 12 673 -- 15,755
Retained earnings (deficit)........................................ 839 -- (57,954 )
----------- ----------- -------------
Total shareholders' equity (deficit)........................... 41,771 50,000 (42,179 )
----------- ----------- -------------
Total........................................................ $ 319,786 $ 305,704 $ 331,626
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
------------- PREDECESSOR COMPANY
THREE -----------------------------------
QUARTERS QUARTER YEARS ENDED
ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 6,272 $ 57,954 $ (28,495) $ 1,665
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Executive stock awards.................. 1,250 500 -- --
Extraordinary item, net of taxes........ -- (43,032) -- --
Fresh-start revaluation................. -- (5,107) -- --
Depreciation and amortization........... 5,320 2,143 10,688 15,296
Gain on sales of assets................. (1,848) (3,266) (3,597) (1,971)
Reorganization expense, net of
payments.............................. (4,298) 1,538 894 (609)
Deferred income taxes................... 5,338 (3,767) (51) (229)
Provision for doubtful accounts......... 1,100 162 696 1,669
Provision for environmental costs, net
of payments........................... (2,468) (256) 32,473 783
Provision for restructuring costs....... -- -- -- 11,658
Provision for allowed claims............ -- -- 10,547 --
Other, net.............................. 3,659 3,057 5,961 (9,032)
------------- ------------- --------- ---------
Total................................. 14,325 9,926 29,116 19,230
Changes in operating assets and
liabilities:
Decrease (increase) in trade
receivables........................... 8,791 (20,272) 9,916 (1,917)
(Increase) decrease in inventories...... (14,853) (6,120) 14,308 (10,517)
Decrease (increase) in other current
assets................................ 1,961 (355) (1,210) 5,850
(Decrease) increase in trade payables
and accrued expenses.................. (5,650) 18,895 1,412 2,857
Decrease in prepetition liabilities..... -- (39) (189) (263)
Receipt from environmental trust, net... -- 5,928 -- --
Other assets and liabilities, net....... (4,920) (1,547) (5,688) (9,582)
------------- ------------- --------- ---------
Net cash (used in) provided by
operating activities................ (346) 6,416 47,665 5,658
------------- ------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment............................... (9,447) (2,774) (9,531) (6,712)
Proceeds from asset sales................. 3,747 4,966 5,806 2,663
Other, net................................ 14 (25) (1,294) 104
------------- ------------- --------- ---------
Net cash (used in) provided by
investing activities................ (5,686) 2,167 (5,019) (3,945)
------------- ------------- --------- ---------
</TABLE>
F-5
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
------------- PREDECESSOR COMPANY
THREE -----------------------------------
QUARTERS QUARTER YEARS ENDED
ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING AND
REORGANIZATION ACTIVITIES:
Cash distribution pursuant to Plan of
Reorganization.......................... -- (59,366) -- --
Drawdown of prepetition letters of
credit.................................. -- 9,700 -- 8,000
Proceeds from long-term debt.............. 100,000 8,100 -- --
Fees paid to issue long-term debt......... (4,000) -- -- --
Net borrowing (repayment) of short-term
debt.................................... (9,313) 1,062 (14,709) 420
Repayment of long-term debt............... (48,309) (487) (1,408) (2,238)
Payment of dividends...................... (19,330) -- -- --
------------- ------------- --------- ---------
Net cash provided by (used in) financing
and reorganization activities......... 19,048 (40,991) (16,117) 6,182
------------- ------------- --------- ---------
Effects of exchange rate changes on cash
and cash equivalents.................... (353) (526) (83) 774
------------- ------------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 12,663 (32,934) 26,446 8,669
Cash and cash equivalents--beginning of
period.................................. 30,340 63,274 36,828 28,159
------------- ------------- --------- ---------
Cash and cash equivalents--end of
period.................................. $ 43,003 $ 30,340 $ 63,274 $ 36,828
------------- ------------- --------- ---------
------------- ------------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes................ $ 6,859 $ 1,524 $ 5,817 $ 6,031
------------- ------------- --------- ---------
------------- ------------- --------- ---------
Cash paid for interest.................... $ 6,715 $ 619 $ 3,021 $ 4,777
------------- ------------- --------- ---------
------------- ------------- --------- ---------
Cash paid for reorganization expense...... $ 5,423 $ 1,125 $ 2,641 $ 4,536
------------- ------------- --------- ---------
------------- ------------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Quarters Ended January 31, 1998,
the Quarter Ended March 31, 1997
and the Years Ended December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION--The consolidated financial
statements include the accounts of Metallurg, Inc. ("Metallurg") and its
majority-owned subsidiaries (collectively, the "Company"). All intercompany
transactions and balances have been eliminated in consolidation. The accounts of
foreign subsidiaries have been translated into U.S. dollars in accordance with
SFAS No. 52.
On February 26, 1997, the Fourth Amended and Restated Joint Plan of
Reorganization (the "Plan") of Metallurg and one of its subsidiaries,
Shieldalloy Metallurgical Corporation (together, the "Debtors"), was confirmed
by the U.S. Bankruptcy Court for the Southern District of New York. Transactions
contemplated by the Plan were consummated on April 14, 1997 (the "Effective
Date"). For financial reporting purposes, the Company has reflected the effects
of the Plan consummation as of March 31, 1997. As a result of the consummation
of the Plan and the adoption of fresh-start reporting under the American
Institute of Certified Public Accountants' SOP No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," the Company was required
to report its financial results for the period ending January 31, 1998 in two
separate periods. One period contains financial statements for the quarter ended
March 31, 1997, which includes the effects of the adoption of fresh-start
reporting and consummation of the Plan and is referred to as the "Predecessor
Company." The other period contains financial statements for the three quarters
ended January 31, 1998 for the reorganized Company. The financial statements of
the Company after consummation of the Plan are not comparable to the Company's
financial statements of prior periods and accordingly, a black line has been
used to separate the periods.
Effective April 1, 1997, the Company changed the reporting period of
Metallurg from a calendar year ending December 31 to a fiscal year ending
January 31 and began reporting the results of its operating subsidiaries on a
one-month lag. Accordingly, the three quarters ended January 31, 1998 include
nine months (April 1, 1997 through December 31, 1997) of worldwide operating
results plus, in this transitional period, an additional month (January 1998) of
results of operations of Metallurg in the amount of a $1,221,000 loss.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
instruments maturing within 30 days or less when purchased to be cash
equivalents.
INVENTORIES--Inventories are stated at the lower of cost or market. The cost
of inventories is determined using principally the average cost and specific
identification methods.
ASSETS HELD FOR SALE--Assets held for sale are stated at the lower of cost
or estimated net realizable value which, for long-lived assets, is calculated in
accordance with SFAS No. 121. At March 31, 1997, an office building owned by the
Company's United Kingdom subsidiary, valued at approximately $1,180,000 was held
for sale. At December 31, 1996, Metallurg's investments in a joint venture and a
building were held for sale in the amounts of $1,200,000 and $643,000,
respectively.
F-7
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN AFFILIATES--Investments in affiliates in which the Company
has a 20% to 50% ownership interest and exercises significant management
influence are accounted for in accordance with the equity method.
PROPERTY AND DEPRECIATION--In accordance with fresh-start reporting,
property, plant and equipment previously stated at cost have been restated to
the estimated fair value as of March 31, 1997 and historical accumulated
depreciation has been eliminated. Major renewals and improvements are
capitalized, while maintenance and repairs are expensed when incurred.
Depreciation is computed using the straight-line and declining-balance methods
over the estimated useful lives of the assets. Upon sale or retirement, the
costs and related accumulated depreciation are eliminated from the respective
accounts and any resulting gain or loss is included in income.
GROSS VOLUME AND SALES--Sales represent amounts invoiced to customers by the
Company and such revenue is recognized when the product is shipped and title to
the product passes to the customer. In certain instances, the Company arranges
sales for which the supplier invoices the customer directly ("agency sales"). In
such cases, the Company receives commission income which is recognized when the
supplier passes title to the customer. Gross volume represents the sum of sales
and agency sales. The Company sells manufactured and merchanted products
primarily to the steel, aluminum, superalloy, hard metal and foundry industries.
ENVIRONMENTAL REMEDIATION COSTS--In 1996, the Company elected early adoption
of SOP No. 96-1, "Environmental Remediation Liabilities." Losses associated with
environmental remediation obligations are accrued when such losses are deemed
probable and reasonably estimable. Such accruals generally are recognized no
later than the completion of the remedial feasibility study and are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are generally not
discounted to their present value.
IMPAIRMENT OF ASSETS--In 1995, the Company implemented SFAS No. 121, which
prescribes the method of asset impairment evaluation for long-lived assets and
certain identifiable intangibles that are either held and used or to be disposed
of. Such impairment losses have been included in restructuring charges for the
respective periods.
RESTRUCTURING CHARGES--During 1995, the Brazilian operating subsidiary
adopted a plan to restructure mining and certain other operations. Analysis of
remaining ore deposits indicated that such ore deposits contained insufficient
material to provide continued economic feasibility and therefore a restructuring
charge of $5,250,000 was recorded. This charge related primarily to severance
and employee benefit costs ($1,020,000) and the write-down to fair value of
assets to be disposed of, made obsolete or redundant ($4,230,000). Severance and
employee benefit costs of $309,000 and $641,000 were paid in the quarter ended
March 31, 1997 and the year ended December 31, 1996, respectively, and related
to the elimination of approximately 145 positions. At January 31, 1998, March
31, 1997 and December 31, 1996, the carrying amount of assets to be disposed of
totaled $723,000, $1,900,000 and $1,946,000, respectively. The Company will not
depreciate any of the fixed assets while they are held for sale. The Company
anticipates completing these restructuring efforts in the next two years.
Also during 1995, the principal German subsidiary adopted a plan to
restructure the company into separate business units and to exit certain
unprofitable manufacturing processes. The restructuring charge of $6,408,000
primarily reflects severance for workforce reductions of approximately 28
employees ($697,000), impairment losses on assets that are no longer expected to
be used in the company's operations ($4,458,000) and the cost to dispose of
solid wastes that were generated by exited operations ($1,253,000).
F-8
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In addition, in connection with the restructuring of the German operations and
pursuant to local environmental regulations, the company became obligated to
remediate contaminated areas surrounding the exited operations in order to
restore the site to acceptable environmental condition. The estimated cost of
such remediation actions ($3,552,000) is reflected in environmental expenses on
the Statements of Consolidated Operations. In 1996, approximately $601,700 of
severance costs was paid and the remaining accrual was reversed. In 1997,
$408,000 of site restoration costs were paid and the remaining accrual
represents estimated future cash outflows expected to be paid over the next
three to five years.
INCOME TAXES--The Company uses the liability method whereby deferred income
taxes are provided for the temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities. The Company
does not provide for U.S. federal income taxes on the accumulated earnings
considered permanently reinvested in certain of its foreign subsidiaries which
approximated $37,000,000, $38,000,000 and $53,000,000 at January 31, 1998, March
31, 1997 and December 31, 1996, respectively. These earnings have been invested
in facilities and other assets and have been subject to substantial foreign
income taxes, which may or could offset a major portion of any tax liability
resulting from their inclusion in U.S. taxable income.
RETIREMENT PLANS--Pension costs of Metallurg and its domestic consolidated
subsidiaries are funded or accrued currently. The Company's foreign subsidiaries
maintain separate pension plans for their employees. Such foreign plans are
either funded currently or accruals are recorded in the respective balance
sheets to reflect pension plan liabilities.
STOCK-BASED COMPENSATION--The Company accounts for stock-based compensation
using the intrinsic value method, in accordance with Accounting Principles Board
Opinion No. 25. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the market price of the Company's common stock at the
date of grant over the amount an employee must pay to acquire the stock.
Disclosures required with respect to alternative fair value measurement and
recognition methods prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation" are presented in Note 12.
FOREIGN EXCHANGE GAINS AND LOSSES--Foreign exchange gains (losses) of
$987,000, $712,000, $1,853,000 and $(904,000) were recorded for the three
quarters ended January 31, 1998, the quarter ended March 31, 1997 and the years
ended December 31, 1996 and 1995, respectively. Such amounts usually arise from
foreign currency hedging programs designed to minimize the negative effects of
changes in exchange rates on operations and are therefore included in cost of
sales.
FINANCIAL INSTRUMENTS--The Company enters into foreign exchange contracts in
the regular course of business to manage exposure against fluctuations on sales
and raw material purchase transactions denominated in currencies other than the
functional currencies of its businesses. Unrealized gains and losses are
deferred and recognized in income or as adjustments of carrying amounts when the
hedged transactions are included in income. Gains and losses on unhedged foreign
currency transactions are included in income. The Company does not hold or issue
financial instruments for trading purposes. The counterparties to these
contractual arrangements are a diverse group of major financial institutions
with which the Company also has other financial relationships. The Company is
exposed to credit risk generally limited to unrealized gains in such contracts
in the event of nonperformance by counterparties to those financial instruments,
but it does not expect any counterparties to fail to meet their obligations
given their high credit ratings.
F-9
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXTRAORDINARY ITEM--In November 1997, the Company recognized an
extraordinary after-tax charge of $792,000 as a result of the early retirement
of the Company's 12% senior-secured notes due 2007 and the United Kingdom
subsidiary's term loan due 2000. The notes were redeemed at 103% and 101% of
principal amount, respectively, with accrued interest to the date of redemption.
In the quarter ended March 31, 1997, the Company recognized an extraordinary
gain, net of tax, of $43,032,000 relating to the discharge of indebtedness at
the consummation of the Plan of Metallurg and Shieldalloy.
EARNINGS PER SHARE--The Company adopted SFAS No. 128, "Earnings Per Share"
as of January 31, 1998. Basic earnings per share (EPS) amounts are computed by
dividing net income by the average number of common shares outstanding. Diluted
EPS amounts assume the issuance of common stock for all potentially dilutive
common stock equivalents. No options were exercised, nor assumed exercised for
purposes of the diluted EPS calculation, in the three quarters ended January 31,
1998, as the exercise price of the options exceeded the fair market value of the
common stock. Earnings per share for periods prior to April 1, 1997 are not
presented because such presentation would not be meaningful due to fresh-start
reporting and the recapitalization of the Company in connection with the Plan as
of March 31, 1997.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--The Company adopted SFAS No. 130,
"Reporting Comprehensive Income" and has restated all comparative financial
statements provided for earlier periods. This standard requires the display of
comprehensive income and its components in the financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined what additional disclosures may be
required in connection with adopting SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Postretirement Benefits." SFAS No. 132 changes current
financial disclosure requirements from those that were required under SFAS No.
87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlement and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company is required to adopt
this standard in 1998 and management is currently evaluating what additional
disclosures may be required in connection with adopting SFAS No. 132.
RECLASSIFICATION--Certain amounts in previously issued financial statements
were reclassified to conform to 1997 presentations.
2. PLAN OF REORGANIZATION AND FRESH-START REPORTING
Costs of administration of the Chapter 11 proceedings approximating
$2,663,000, $3,535,000 and $3,927,000 were recorded by the Debtors during the
quarter ended March 31, 1997 and the years ended December 31, 1996 and 1995,
respectively, and have been included as reorganization expense in the Statements
of Consolidated Operations. Those expenses consisted primarily of legal,
administration, consulting and other similar expenses.
F-10
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PLAN OF REORGANIZATION AND FRESH-START REPORTING (CONTINUED)
Condensed financial statements for the Debtors follow (in thousands):
METALLURG, INC. AND SHIELDALLOY METALLURGICAL CORP.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
QUARTER FOR THE YEARS ENDED
ENDED DECEMBER 31,
MARCH 31, ----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Total revenue................................................................. $ 56,858 $ 224,572 $ 228,593
----------- ---------- ----------
Operating costs and expenses:
Cost of sales............................................................... 51,630 208,733 207,207
Selling, general and administrative expenses................................ 4,942 14,440 13,421
Environmental expenses...................................................... -- 35,176 1,657
----------- ---------- ----------
Total operating costs and expenses............................................ 56,572 258,349 222,285
----------- ---------- ----------
Operating income (loss)....................................................... 286 (33,777) 6,308
Other:
Other income (expense), net................................................. (7,269) (21,778) 931
Interest (expense) income, net.............................................. (239) 2,775 1,926
Reorganization expense...................................................... (2,663) (3,535) (3,927)
Fresh-start revaluation..................................................... 1,050 -- --
Equity in earnings (losses) of subsidiaries................................. 19,367 28,012 (4,190)
----------- ---------- ----------
Income (loss) before income tax provision and extraordinary item.............. 10,532 (28,303) 1,048
Income tax (benefit) provision................................................ (211) 192 (617)
----------- ---------- ----------
Income (loss) before extraordinary item....................................... 10,743 (28,495) 1,665
Extraordinary item, net of tax................................................ 47,211 -- --
----------- ---------- ----------
Net income (loss)............................................................. 57,954 (28,495) 1,665
Other comprehensive income, net of tax:
Foreign currency translation adjustment..................................... (1,224) 4,268 (1,056)
----------- ---------- ----------
Comprehensive income (loss)................................................... $ 56,730 $ (24,227) $ 609
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-11
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PLAN OF REORGANIZATION AND FRESH-START REPORTING (CONTINUED)
METALLURG, INC. AND SHIELDALLOY METALLURGICAL CORP.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 9,991 $ 41,729 $ 25,458
Accounts and notes receivable, net......................................... 40,796 52,471 68,116
Inventories................................................................ 36,200 35,547 37,500
Other assets............................................................... 4,643 6,080 4,762
---------- ---------- ----------
Total current assets..................................................... 91,630 135,827 135,836
Property, plant and equipment, net........................................... 9,375 11,410 14,632
Investments--intergroup...................................................... 64,773 54,484 22,979
Investments--other........................................................... 244 1,530 2,459
Other assets................................................................. (4,177) 1,622 4,159
---------- ---------- ----------
Total.................................................................. $ 161,845 $ 204,873 $ 180,065
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade payables............................................................. $ 15,326 $ 14,394 $ 9,077
Accrued expenses........................................................... 16,006 17,644 8,587
Other current liabilities.................................................. 565 536 181
---------- ---------- ----------
Total current liabilities................................................ 31,897 32,574 17,845
---------- ---------- ----------
Long-term Liabilities:
Long-term debt............................................................. 39,461 -- --
Accrued pension liabilities................................................ 2,143 1,441 1,676
Environmental liabilities, net............................................. 36,949 28,213 3,856
Other liabilities.......................................................... 1,395 -- 28
---------- ---------- ----------
Total long-term liabilities.............................................. 79,948 29,654 5,560
---------- ---------- ----------
Liabilities Subject to Compromise............................................ -- 184,824 174,612
---------- ---------- ----------
Total liabilities...................................................... 111,845 247,052 198,017
---------- ---------- ----------
Shareholders' Equity (Deficit):
Common stock outstanding................................................... 50 20 20
Additional paid-in capital................................................. 49,950 -- --
Accumulated other comprehensive income..................................... -- 15,755 11,487
Deficit.................................................................... -- (57,954) (29,459)
---------- ---------- ----------
Total shareholders' equity (deficit)..................................... 50,000 (42,179) (17,952)
---------- ---------- ----------
Total.................................................................. $ 161,845 $ 204,873 $ 180,065
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-12
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PLAN OF REORGANIZATION AND FRESH-START REPORTING (CONTINUED)
METALLURG, INC. AND SHIELDALLOY METALLURGICAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE QUARTER DECEMBER 31,
ENDED --------------------
MARCH 31, 1997 1996 1995
--------------- --------- ---------
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:.................................. $ 5,891 $ 11,723 $ (4,256)
------- --------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment............................... (1,022) (679) (1,577)
Proceeds from asset sales................................................ 4,215 493 994
Other, net............................................................... -- (6,192) --
------- --------- ---------
Net cash provided by (used in) investing activities.................... 3,193 (6,378) (583)
------- --------- ---------
Cash Flows from Financing and Reorganization Activities:
Cash distribution pursuant to Plan of Reorganization..................... (59,366) -- --
Drawdown of prepetition letters of credit................................ 9,700 -- 8,000
Intergroup borrowings (repayments)....................................... (579) 5,835 1,068
Dividends received....................................................... 9,423 5,091 6,407
------- --------- ---------
Net cash (used in) provided by financing and reorganization activities... (40,822) 10,926 15,475
------- --------- ---------
Net (decrease) increase in cash and cash equivalents....................... (31,738) 16,271 10,636
Cash and cash equivalents--beginning of period............................. 41,729 25,458 14,822
------- --------- ---------
Cash and cash equivalents--end of period................................... $ 9,991 $ 41,729 $ 25,458
------- --------- ---------
------- --------- ---------
</TABLE>
On the Effective Date, claims related to prepetition liabilities and
administrative expenses were discharged through distributions of $59,366,000 in
cash, the issuance of $39,461,000 of senior-secured notes and 4,706,406 shares
of new common stock. The value of the cash and securities distributed was less
than the recorded liabilities and the resultant net gain of $47,211,000 was
recorded as an extraordinary item, net of tax effects of nil due to statutory
exemption and utilization of net operating loss carryforwards. Such net
operating loss carryforwards had previously been offset in full by a valuation
allowance.
The Company was required to adopt fresh-start reporting because the holders
of the existing voting shares immediately prior to filing and confirmation of
the Plan received less than 50% of the voting shares of the emerging entity and
its reorganization value was less than the total of its post-petition
liabilities and allowed claims. SOP 90-7 required the Company to revalue its
assets and liabilities to their estimated fair value and to recognize as a
reduction of long-term assets the excess of the fair value of its identifiable
assets over the total reorganization value of its assets as of the Effective
Date. Accordingly, the Company's property, plant and equipment and other
noncurrent assets were reduced by approximately $5,520,000. In addition, the
Company's accumulated equity of approximately $4,733,000 and cumulative foreign
currency translation adjustment of approximately $14,587,000 were eliminated. As
a result of the adjustments made to reflect fresh-start reporting, a pre-tax
revaluation credit of $5,107,000 is included in the Company's results of
operations for the quarter ended March 31, 1997.
The total reorganization value assigned to the Company's assets was
estimated by calculating projected cash flows before debt service requirements
for a three-year period, plus an estimated terminal value of the Company
calculated using an estimate of normalized operating performance and discount
rates ranging from 13.5% to 16.5%. This amount was increased by (i) the
estimated net realizable value of assets to be sold and (ii) estimated cash in
excess of normal operating requirements.
F-13
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PLAN OF REORGANIZATION AND FRESH-START REPORTING (CONTINUED)
The effect of the Plan and the implementation of fresh-start reporting on the
Company's consolidated balance sheet as of March 31, 1997 was as follows (in
thousands):
<TABLE>
<CAPTION>
EFFECTS
PRIOR TO OF ADOPTION OF OPENING
JOINT PLAN JOINT PLAN FRESH-START BALANCE
EFFECTIVENESS (A) REPORTING SHEET
------------ ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 66,670 $ (36,330) $ 30,340
Trade receivables, less allowance for doubtful accounts.... 94,255 (105) 94,150
Inventories................................................ 109,258 -- 109,258
Prepaid expenses and other current assets.................. 16,382 180 $ (250)(b) 16,312
Assets held for sale....................................... 341 -- 839(b) 1,180
------------ ------------- ----------- ---------
Total current assets..................................... 286,906 (36,255) 589 251,240
Investments in affiliates.................................... 2,779 -- (1,318)(c) 1,461
Property, plant and equipment, net........................... 42,348 -- (3,441)(c) 38,907
Other assets................................................. 14,243 614 (761)(c) 14,096
------------ ------------- ----------- ---------
Total.................................................... $ 346,276 $ (35,641) $ (4,931) $ 305,704
------------ ------------- ----------- ---------
------------ ------------- ----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term debt............................................ $ 13,500 $ 13,500
Current portion of long-term debt.......................... 1,277 1,277
Trade payables............................................. 55,947 55,947
Accrued expenses........................................... 22,736 $ 2,338 $ 277(b) 25,351
Current portion of environmental liabilities............... 5,270 -- -- 5,270
Taxes payable.............................................. 7,136 (557) -- 6,579
------------ ------------- ----------- ---------
Total current liabilities................................ 105,866 1,781 277 107,924
------------ ------------- ----------- ---------
Long-term Liabilities:
Long-term debt............................................. 4,248 47,463 -- 51,711
Accrued pension liabilities................................ 39,610 (1,345) 2,825(b) 41,090
Environmental liabilities, net............................. 37,495 5,370 -- 42,865
Other liabilities.......................................... 10,293 -- 1,821(b) 12,114
------------ ------------- ----------- ---------
Total long-term liabilities.............................. 91,646 51,488 4,646 147,780
------------ ------------- ----------- ---------
Liabilities Subject to Compromise............................ 180,247 (180,247) -- --
------------ ------------- ----------- ---------
Total liabilities........................................ 377,759 (126,978) 4,923 255,704
------------ ------------- ----------- ---------
Commitments and Contingencies................................
Shareholders' Equity (Deficit):
Common stock............................................... 20 30 -- 50
Additional paid-in capital................................. -- 49,950 -- 49,950
Accumulated other comprehensive income..................... 14,531 56 (14,587)(d) --
Retained (deficit) earnings................................ (46,034) 41,301 4,733(d) --
------------ ------------- ----------- ---------
Total shareholders' equity (deficit)..................... (31,483) 91,337 (9,854) 50,000
------------ ------------- ----------- ---------
Total.................................................. $ 346,276 $ (35,641) $ (4,931) $ 305,704
------------ ------------- ----------- ---------
------------ ------------- ----------- ---------
</TABLE>
- ------------------------
(a) To record the distribution of cash and securities, the settlement of
liabilities subject to compromise and other transactions in accordance with
the Plan.
(b) To adjust assets and liabilities to their estimated fair value.
(c) To reduce long-term assets for the excess of the fair value of identifiable
net assets over the total reorganization value as of the Effective Date.
(d) To eliminate the accumulated deficit and cumulative foreign currency
translation adjustment in accordance with fresh-start reporting.
F-14
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GEOGRAPHIC DATA
The Company operates in one significant industry segment, the manufacture
and sale of ferrous and non-ferrous metals and alloys. Data by geographic area
is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JANUARY 31, MARCH 31, ----------------------
1998 1997 1996 1995
--------------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
Identifiable assets:
North America......................................... $ 133,101 $ 107,254 $ 148,719 $ 150,281
Foreign............................................... 221,249 228,668 214,953 219,460
Eliminations.......................................... (34,564) (30,218) (32,046) (27,131)
--------------- --------------- ---------- ----------
Total............................................... $ 319,786 $ 305,704 $ 331,626 $ 342,610
--------------- --------------- ---------- ----------
--------------- --------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE QUARTER FOR THE YEARS ENDED
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, ----------------------
1998 1997 1996 1995
--------------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenue from unaffiliated customers:
North America......................................... $ 206,346 $ 68,540 $ 294,843 $ 300,200
Foreign............................................... 270,621 87,047 355,159 389,164
--------------- --------------- ---------- ----------
Total............................................... $ 476,967 $ 155,587 $ 650,002 $ 689,364
--------------- --------------- ---------- ----------
--------------- --------------- ---------- ----------
Net income (loss):
North America......................................... $ 1,332 $ 48,262 $ (56,506) $ 8,160
Foreign............................................... 4,940 9,692 28,011 (6,495)
--------------- --------------- ---------- ----------
Total............................................... $ 6,272 $ 57,954 $ (28,495) $ 1,665
--------------- --------------- ---------- ----------
--------------- --------------- ---------- ----------
</TABLE>
4. INVESTMENT ACTIVITIES
In 1997, Metallurg sold its 50% interest in AMPAL for proceeds approximating
book value of $1,200,000. In 1996, the Company purchased approximately 5% of the
outstanding stock of Solikamsk Magnesium Works ("SMW"), a Russian magnesium
metal producer, for approximately $1,000,000. Also in 1996, Shieldalloy sold its
wholly owned subsidiary, Frankel Metal Company ("FMC"), a processor of titanium
scrap, to FMC's management and recorded a net loss on the sale of $460,000.
5. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Raw materials............................................................. $ 32,938 $ 21,769 $ 25,181
Work in process........................................................... 1,981 2,330 2,237
Finished goods............................................................ 77,473 80,500 75,478
Other..................................................................... 5,197 4,659 3,467
----------- ---------- ------------
Total................................................................... $ 117,589 $ 109,258 $ 106,363
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
F-15
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31, ESTIMATED
1998 1997 1996 LIVES
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS) (IN YEARS)
Land........................................................... $ 2,899 $ 3,019 $ 6,177
Buildings and leasehold improvements........................... 13,766 13,205 43,826 10-32
Machinery...................................................... 22,388 17,729 181,172 3-17
Office furniture and equipment................................. 2,797 2,046 6,940 3-17
Transportation equipment....................................... 1,844 1,588 6,992 3-5
Construction in progress....................................... 3,106 1,320 1,142
----------- ----------- ------------
Total...................................................... 46,800 38,907 246,249
Less: accumulated depreciation................................. 5,298 -- 198,364
----------- ----------- ------------
Property, plant and equipment, net............................. $ 41,502 $ 38,907 $ 47,885
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
Depreciation expense related to property, plant and equipment charged to
operations for the three quarters ended January 31, 1998, the quarter ended
March 31, 1997 and the years ended December 31, 1996 and 1995 was $5,320,000,
$2,126,000, $10,621,000 and $15,227,000, respectively.
7. LIABILITIES SUBJECT TO COMPROMISE
Pursuant to the provisions of the Bankruptcy Code, certain liabilities
attributable to the period prior to the Petition Date could not be paid without
prior approval of the Bankruptcy Court and were reclassified to liabilities
subject to compromise. Substantially all of these claims were settled at the
Effective Date in accordance with the Plan of Reorganization. The liabilities
subject to compromise at December 31, 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Long-term debt...................................................................................... $ 112,158
Trade payables and other accrued liabilities........................................................ 22,520
Prepetition environmental liabilities............................................................... 4,070
Accrued pension liabilities......................................................................... 12,030
Accrued interest payable............................................................................ 3,412
Liabilities to former shareholders.................................................................. 25,707
------------
Total liabilities subject to compromise......................................................... $ 179,897
------------
------------
</TABLE>
8. RETIREMENT PLANS
DEFINED BENEFIT PLANS
Metallurg and its domestic consolidated subsidiaries have defined benefit
pension plans covering substantially all salaried and certain hourly paid
employees. The plans generally provide benefit payments using a formula based on
an employee's compensation and length of service. These plans are funded in
amounts equal to the minimum funding requirements of the Employee Retirement
Income Security Act. Substantially all plan assets are invested in cash and
short-term investments or listed stocks and bonds.
F-16
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS (CONTINUED)
Net periodic pension cost for the domestic defined benefit plans included
the following components (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE THREE FOR THE QUARTER
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
--------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the period............. $ 360 $ 107 $ 493 $ 476
Interest cost on projected benefit obligation............... 844 280 964 939
Return on plan assets....................................... (3,608) (309) (1,074) (862)
Net amortization and deferral............................... 2,676 32 (18) 180
------ ----- --------- ---------
Net periodic pension cost............................... $ 272 $ 110 $ 365 $ 733
------ ----- --------- ---------
------ ----- --------- ---------
</TABLE>
Assumptions used to calculate pension costs and projected benefit
obligations are as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE QUARTER FOR THE YEARS ENDED
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------------
1998 1997 1996 1995
--------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Discount rate...................................... 7.0% 7.0% 7.0% 7.0%
Rate of increase in future compensation levels..... 4.0% 4.0% 4.0% 4.0%
Expected long-term rate of return on plan assets... 7.5%-9.0% 7.5%-9.0% 7.5%-9.0% 7.5%-9.0%
</TABLE>
A reconciliation of the funded status to the amounts recorded in the balance
sheet is set forth below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Vested benefit obligation................................................. $ (15,608) $ (15,037) $ (13,166)
Nonvested benefit obligation.............................................. (441) (396) (912)
----------- ---------- ------------
Accumulated benefit obligation.......................................... (16,049) (15,433) (14,078)
Effect of projected future compensation................................... (1,022) (1,056) (767)
----------- ---------- ------------
Projected benefit obligation............................................ (17,071) (16,489) (14,845)
Plan assets at fair value................................................. 17,543 14,346 14,284
----------- ---------- ------------
Funded status........................................................... 472 (2,143) (561)
Unrecognized net transition obligation.................................... -- -- 7
Unrecognized prior service cost........................................... -- -- 128
Unrecognized net (gain) loss.............................................. (2,555) -- 211
----------- ---------- ------------
Accrued pension cost recorded......................................... $ (2,083) $ (2,143) $ (215)
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
F-17
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS (CONTINUED)
The Company's United Kingdom subsidiary maintains a defined benefit pension
plan covering all eligible employees. The net periodic pension cost for the
defined benefit plan included the following components (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE QUARTER FOR THE YEARS ENDED
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
--------------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the period............ $ 792 $ 250 $ 954 $ 918
Interest cost on projected benefit obligation.............. 2,580 839 3,004 2,781
Return on plan assets...................................... (7,195) (1,669) (4,586) (5,174)
Net amortization and deferral.............................. 4,131 286 1,093 2,120
------- ------- --------- ---------
Net periodic pension cost (credit)..................... $ 308 $ (294) $ 465 $ 645
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>
Assumptions used to calculate pension costs and projected benefit
obligations are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE THREE FOR THE QUARTER
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
--------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
Discount rate............................................... 7.5% 8.5% 8.5% 8.5%
Rate of increase in future compensation levels.............. 6.0% 6.5% 6.5% 6.5%
Expected long-term rate of return on plan assets............ 8.75% 8.5% 8.5% 8.5%
</TABLE>
A reconciliation of the funded status to the amounts recorded in the balance
sheet is set forth below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Vested benefit obligation................................................. $ (50,005) $ (39,869) $ (37,238)
Nonvested benefit obligation.............................................. -- -- --
----------- ---------- ------------
Accumulated benefit obligation.......................................... (50,005) (39,869) (37,238)
Effect of projected future compensation................................... (3,326) (4,153) (3,879)
----------- ---------- ------------
Projected benefit obligation............................................ (53,331) (44,022) (41,117)
Plan assets at fair value................................................. 59,673 51,677 48,479
----------- ---------- ------------
Funded status........................................................... 6,342 7,655 7,362
Unrecognized net transition asset......................................... -- -- (1,361)
Unrecognized net loss (gain).............................................. 1,896 -- (3,244)
----------- ---------- ------------
Prepaid pension cost recorded........................................... $ 8,238 $ 7,655 $ 2,757
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
The Company's German subsidiaries maintain unfunded defined benefit pension
plans covering substantially all eligible employees. The plans were amended in
1992 in a manner that terminated any credit for future service. Pension expense,
therefore, is related primarily to interest cost on the projected benefit
obligation and approximated $1,706,000, $591,000, $2,531,000 and $2,991,000 in
the three quarters ended January 31, 1998, the quarter ended March 31, 1997 and
the years ended December 31, 1996 and
F-18
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS (CONTINUED)
1995, respectively. Assumptions used to calculate pension costs and projected
benefit obligations included discount rates of 6.0% in the three quarters ended
January 31, 1998, the quarter ended March 31, 1997 and the year ended December
31, 1996 and 6.5% for the year ended December 31, 1995. Increases in future
compensation levels were assumed at a rate of 3% for all periods presented.
A reconciliation of the funded status to the amounts recorded in the balance
sheet is set forth below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Vested benefit obligation................................................. $ (34,382) $ (37,014) $ (39,855)
Nonvested benefit obligation.............................................. -- -- --
----------- ---------- ------------
Accumulated benefit obligation.......................................... (34,382) (37,014) (39,855)
Effect of projected future compensation................................... (1,501) (1,514) (2,025)
----------- ---------- ------------
Projected benefit obligation............................................ (35,883) (38,528) (41,880)
Unrecognized net loss..................................................... -- -- 942
----------- ---------- ------------
Accrued pension cost recorded........................................... $ (35,883) $ (38,528) $ (40,938)
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
OTHER BENEFIT PLANS
Metallurg maintains a discretionary defined contribution profit sharing plan
covering substantially all of the salaried employees of Metallurg and its
domestic consolidated subsidiaries. The related expense was $165,000, $62,000,
$229,000 and $208,000 in the three quarters ended January 31, 1998, the quarter
ended March 31, 1997 and the years ended December 31, 1996 and 1995,
respectively.
Balance sheet accruals for pension plans of the Company's other foreign
subsidiaries approximate or exceed the related actuarially computed value of
accumulated benefit obligations. Pension expense relating to the Company's other
foreign subsidiaries' pension plans was $353,000, $96,000, $228,000 and $209,000
for the three quarters ended January 31, 1998, the quarter ended March 31, 1997
and the years ended December 31, 1996 and 1995, respectively.
The Company maintained certain non-qualified retirement benefit arrangements
for certain individuals which, as of the Petition Date, were reflected as
liabilities subject to compromise. Pension expense relating to certain of those
arrangements was $300,000 and $509,000 in the years ended December 31, 1996 and
1995. No expense was recorded for these arrangements subsequent to 1996.
F-19
<PAGE>
METALLURG INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BORROWINGS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Parent company and domestic subsidiaries:
Senior Notes............................................................ $ 100,000
12% senior-secured notes................................................ -- $ 39,461
----------- -----------
Subtotal.............................................................. 100,000 39,461
----------- -----------
Foreign subsidiaries:
Germany................................................................. 4,123 5,133 $ 6,061
United Kingdom.......................................................... -- 8,100 --
Other................................................................... 190 294 340
----------- ----------- ------
Subtotal.............................................................. 4,313 13,527 6,401
----------- ----------- ------
Less: amounts due within one year......................................... 1,180 1,277 1,352
----------- ----------- ------
Total long-term debt.................................................... $ 103,133 $ 51,711 $ 5,049
----------- ----------- ------
----------- ----------- ------
</TABLE>
PARENT COMPANY AND DOMESTIC SUBSIDIARIES
In November 1997, Metallurg sold $100,000,000 of its Senior Notes to Salomon
Brothers Inc and BancBoston Securities Inc. (the "Senior Notes Initial
Purchasers"), who resold the Senior Notes to qualified institutional buyers and
accredited investors. These Senior Notes mature in 2007 and accrue interest at a
rate of 11% per annum, payable semi-annually commencing in June 1998. The Senior
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after December 2002. Prior to December 1, 2000, a maximum of 34% of
the Senior Notes may be redeemed with net proceeds of one or more public equity
offerings of the Company. The Senior Notes are fully and unconditionally
guaranteed by the U.S. subsidiaries of Metallurg on a senior unsecured basis.
The Senior Note Indenture contains limitations on, among other things, the
ability of the Company to incur indebtedness and enter into certain mergers,
consolidations or asset sales. In addition, the Company is generally prohibited
from making dividends in an amount greater than the sum of the net proceeds from
certain equity offerings and 50% of its net income under terms of the Senior
Note Indenture. Approximately $12,000,000 principal amount of the Senior Notes
are held by related parties.
The proceeds received by the Company from the issuance of the Senior Notes
were used to fund an overall recapitalization of the Company, pursuant to which
the Company retired the 12% senior-secured notes, repaid the outstanding balance
on its German short-term borrowings, retired the United Kingdom subsidiary's
term loan and paid a cash dividend and dividend equivalents (aggregating
approximately $20,000,000) to the holders of Metallurg's common stock and stock
options. The balance of the net proceeds will be used for general corporate
purposes.
On March 13, 1998, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-4 with respect to an offer to
exchange the Senior Notes for notes of the Company with substantially identical
terms pursuant to a Registration Agreement entered into on November 20, 1997
among the Company, the Guarantors and the Senior Notes Initial Purchasers.
F-20
<PAGE>
METALLURG INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BORROWINGS (CONTINUED)
Pursuant to the Plan, Metallurg and Shieldalloy (the "Borrowers") entered
into an agreement with BankBoston, N.A. for a revolving credit facility (the
"Revolving Credit Facility"), in the amount of $40,000,000, to provide working
capital and to finance other general corporate purposes. In October 1997, this
facility was increased to $50,000,000 and the German Subfacility (as discussed
below) was established. Borrowings under this facility bear interest at a rate
per annum equal to (i) the Base Rate plus 1% per annum (the Base Rate is the
greater of BankBoston N.A.'s base rate or the Federal Funds Effective Rate plus
0.5%) or (ii) the reserve adjusted Eurodollar rate plus 2.5% for interest
periods of one, two or three months. The Company is required to pay a fee of
0.375% per annum on the unused portion of the commitment. The total amount the
Borrowers may borrow at any time is limited to a borrowing base calculation
which includes accounts receivable, inventory and fixed assets. The revolving
credit agreement, which expires on April 14, 2000, prohibits the Company from
making dividends and requires the Borrowers to comply with various covenants,
including the maintenance of minimum levels of earnings before interest, taxes,
depreciation and amortization. Substantially all assets of the Borrowers are
pledged as collateral under this agreement. At January 31, 1998, there were no
borrowings under this facility; however, outstanding letters of credit
approximated $27,129,000.
At the Petition Date, the Debtors were in default of certain provisions of
certain debt agreements. With minor exceptions, repayment of the amounts
outstanding at that date had been deferred pursuant to the Chapter 11
proceedings. Subsequent to the Chapter 11 filings, the Debtors did not accrue
interest on any of these obligations, except for secured debt, incurred on or
before the Petition Date. Contractual interest on these unsecured obligations
approximated $2,136,000, $8,600,000 and $9,200,000 in excess of interest expense
reflected in the Statements of Consolidated Operations for the quarter ended
March 31, 1997 and the years ended December 31, 1996 and 1995, respectively.
FOREIGN SUBSIDIARIES
Pursuant to the Revolving Credit Facility, BankBoston, N.A. through its
London office, is providing to GfE and its subsidiaries, up to DM 20,500,000
(approximately $11,400,000) of financing (the "German Subfacility"). The German
Subfacility is guaranteed by Metallurg and the other U.S. borrowers and
outstanding obligations are limited to a borrowing base based on eligible
accounts receivable, eligible inventory and certain equipment. The German
Subfacility contains various covenants that restrict, among other things, the
payment of dividends, share repurchases, capital expenditures, investments in
subsidiaries and borrowings. All accounts receivable, inventory, the stock of
GfE's subsidiaries and certain other assets are pledged to secure the German
Subfacility. The Company used a portion of the proceeds from the Senior Notes to
repay outstanding loans under the German Subfacility, but not to reduce the
related commitment thereunder. At January 31, 1998, there was DM 1,792,000
(approximately $1,000,000) of borrowings under the German Subfacility. The GfE
group also has term loans approximating DM 4,200,000 (approximately $2,350,000)
maturing through 2004 and bearing interest at a weighted average rate of 6.0%.
LSM, a United Kingdom subsidiary, has several credit facilities which
provide LSM and its subsidiaries with up to L7,000,000 (approximately
$11,600,000) of borrowings, up to L3,300,000 (approximately $5,400,000) of
foreign exchange exposure and up to L2,300,000 (approximately $3,800,000) for
other ancillary banking arrangements, including bank guarantees (the "LSM Credit
Facility"). The facility expires in 2000 and bears interest at the lender's base
rate plus 1.0%. The facility is unsecured and contains restrictions on
dividends. In 1997, LSM entered into a L2,000,000 (approximately $3,300,000)
facility for
F-21
<PAGE>
METALLURG INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BORROWINGS (CONTINUED)
borrowings and foreign exchange exposure. This facility is unsecured and
borrowings bear interest at a rate of 1% over the bank's base rate. At January
31, 1998, there were no borrowings under these facilities. In March 1997, LSM
borrowed L5,000,000 (approximately $8,100,000) which funded a dividend in
connection with the Plan. In November 1997, proceeds of the 11% Senior Notes
were used to retire this term loan.
EWW, a German subsidiary, has committed lines of credit with several banks
in the aggregate amount of DM 15,000,000 (approximately $8,300,000). The credit
facilities decrease by DM 3,000,000 per year beginning in 1999 and currently
bear interest at rates from 7.5% to 8.5%. The credit agreements require EWW to
pledge certain assets, which include accounts receivable, inventory and fixed
assets. At January 31, 1998, there were DM 530,000 (approximately $300,000) of
borrowings under these agreements. EWW also has a term loan of DM 3,200,000
(approximately $1,800,000) maturing in 2001. The term loan is secured by a
mortgage on certain real property and bears interest at 4.5%.
The Company's other foreign subsidiaries maintain short-term secured and
unsecured borrowing arrangements, generally in local currencies, with various
banks. Borrowings under these arrangements aggregated $190,000 at January 31,
1998 at a weighted average interest rate of 12.0%.
Interest expense totaled $8,270,000, $1,706,000, $3,043,000 and $4,851,000
for the three quarters ended January 31, 1998, the quarter ended March 31, 1997
and the years ended December 31, 1996 and 1995.
The scheduled maturities of long-term debt during the next five years are
$1,180,000 in 1998, $995,000 in 1999, $864,000 in 2000, $794,000 in 2001,
$280,000 in 2002 and $100,200,000 thereafter.
10. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, other
current assets, accounts payable and accrued liabilities approximate fair value
due to the short-term maturities of these assets and liabilities.
Investments in affiliates are accounted for by both the cost and equity
methods and pertain to minor equity investments in companies for which fair
values are not readily available but are believed to exceed carrying amounts.
The aggregate fair value of short-term bank debt approximates its carrying
amount because of recent and frequent re-pricing based on market conditions.
The fair value of the Company's $100,000,000 Senior Notes, issued in
November 1997, approximates $103,700,000, based on quoted market prices. The
carrying amount of other long-term debt approximates fair value.
The Company enters into foreign exchange contracts in the regular course of
business to manage exposure against fluctuations on sales and raw material
purchase transactions denominated in currencies other than the functional
currencies of its businesses. The contracts generally mature within 12 months
and are principally unsecured foreign exchange contracts with carefully selected
banks. The aggregate notional amount of the contracts outstanding as of January
31, 1998 was approximately $44,200,000. The notional values provide an
indication of the extent of the Company's involvement in such instruments but do
not represent its exposure to market risk, which is essentially limited to risk
related to currency rate movements. Unrealized gains on these contracts at
January 31, 1998 were approximately $231,000.
F-22
<PAGE>
METALLURG INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
For financial reporting purposes, income (loss) before income tax provision
and extraordinary item includes the following components (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE QUARTER FOR THE YEARS ENDED
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, ---------------------
1998 1997 1996 1995
--------------- --------------- ---------- ---------
<S> <C> <C> <C> <C>
United States............................................. $ 3,871 $ 1,472 $ (45,882) $ 7,158
Foreign................................................... 15,652 10,387 25,840 2,678
------- ------- ---------- ---------
Total................................................... $ 19,523 $ 11,859 $ (20,042) $ 9,836
------- ------- ---------- ---------
------- ------- ---------- ---------
</TABLE>
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective tax rate is as
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE QUARTER FOR THE YEARS ENDED DECEMBER 31,
QUARTERS ENDED ENDED -------------------------------------
JANUARY 31, MARCH 31,
1998 1997 1996 1995
------------------------ ------------------------ ------------------------ -----------
TAX TAX TAX TAX
PROVISION PROVISION PROVISION PROVISION
(BENEFIT) PERCENT (BENEFIT) PERCENT (BENEFIT) PERCENT (BENEFIT)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income tax provision at
statutory rate................ $ 6,833 35.0% $ 4,032 34.0% $ (6,814) 34.0% $ 3,344
State and local income taxes,
net of federal income tax
effect........................ 163 0.8 86 0.7 280 (1.4) 98
Effective increase of foreign
valuation allowances and
differences between U.S. and
foreign rates................. 5,190 26.6 (6,886) (58.1) (757) 3.8 7,061
Foreign dividends, less benefit
of foreign tax credit......... 185 0.9 -- -- -- -- --
Changes in domestic valuation
allowance..................... -- -- (500) (4.2) 15,600 (77.8) (2,434)
Other........................... 88 0.5 205 1.7 144 (0.7) 102
----------- --- ----------- ----- ----------- ----- -----------
Total......................... $ 12,459 63.8% $ (3,063) (25.9%) $ 8,453 (42.1%) $ 8,171
----------- --- ----------- ----- ----------- ----- -----------
----------- --- ----------- ----- ----------- ----- -----------
<CAPTION>
PERCENT
-----------
<S> <C>
Income tax provision at
statutory rate................ 34.0%
State and local income taxes,
net of federal income tax
effect........................ 1.0
Effective increase of foreign
valuation allowances and
differences between U.S. and
foreign rates................. 71.8
Foreign dividends, less benefit
of foreign tax credit......... --
Changes in domestic valuation
allowance..................... (24.7)
Other........................... 1.0
-----
Total......................... 83.1%
-----
-----
</TABLE>
F-23
<PAGE>
METALLURG INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The income tax provision (benefit) represents the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE THREE FOR THE QUARTER
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
--------------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Current:
U.S........................................................ $ 600
Foreign.................................................... 6,270 $ 573 $ 8,080 $ 8,251
State and local............................................ 251 131 424 149
------- ------- --------- ---------
Total current............................................ 7,121 704 8,504 8,400
------- ------- --------- ---------
Deferred:
U.S........................................................ 940 160 -- 50
Foreign.................................................... 4,398 (3,927) (51) (279)
------- ------- --------- ---------
Total deferred........................................... 5,338 (3,767) (51) (229)
------- ------- --------- ---------
Total income tax provision (benefit)..................... $ 12,459 $ (3,063) $ 8,453 $ 8,171
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>
The Internal Revenue Service has completed the examination of the
consolidated U.S. federal tax returns for years through 1994. U.S. federal
income tax refunds receivable of $2,070,000 at January 31, 1998 and $1,043,000
at March 31, 1997 and December 31, 1996, relating primarily to the carryback
effect of environmental expenses and net operating losses, are reflected in
prepaid expenses in the accompanying Consolidated Balance Sheets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax
F-24
<PAGE>
METALLURG INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Deferred Tax Assets:
NOL and other credit carryforwards...................................... $ 37,295 $ 39,160 $ 47,996
Retirement benefits..................................................... 17,193 18,359 25,950
Environmental liabilities............................................... 16,090 16,976 20,139
Goodwill................................................................ 6,574 7,188 9,570
Allowance for doubtful accounts......................................... 3,646 2,762 445
Fixed assets............................................................ 309 1,848 --
Other................................................................... 1,393 3,907 1,800
----------- ----------- ------------
Total deferred assets................................................. 82,500 90,200 105,900
Deferred tax asset valuation allowance.................................. (72,300) (76,400) (95,100)
----------- ----------- ------------
Net deferred tax assets............................................... 10,200 13,800 10,800
----------- ----------- ------------
Deferred Tax Liabilities:
Fixed assets............................................................ (2,827) (2,088) (2,785)
Pension credits......................................................... (2,549) (2,968) (128)
Tax writeoffs and reserves.............................................. (1,790) (3,339) (3,329)
Inventories............................................................. (1,461) (712) (316)
Earnings of foreign subsidiaries expected to be remitted................ -- (558) (5,851)
Other................................................................... (1,673) (1,835) (691)
----------- ----------- ------------
Total deferred tax liabilities........................................ (10,300) (11,500) (13,100)
----------- ----------- ------------
Net deferred tax (liability) asset.................................. $ (100) $ 2,300 $ (2,300)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
At January 31, 1998, the Company has net operating loss carryforwards
relating to domestic operations of approximately $2,125,000 (subject to certain
limitations relative to utilization) which expire through 2009 and Alternative
Minimum Tax Credit carryforwards of approximately $700,000 which can be carried
forward indefinitely. The Company's consolidated foreign subsidiaries have
income tax loss carryforwards aggregating approximately $70,200,000, a
substantial portion of which relates to certain Brazilian and German operations
which do not expire under current regulations. Due to significant uncertainties
surrounding the realization of certain loss carryforwards, the related deferred
tax assets have been substantially provided for in the valuation allowances at
January 31, 1998. However, during the period ended March 31, 1997, the Company
determined that a German subsidiary had sufficiently demonstrated the ability to
generate earnings and the valuation allowance of $6,032,000 relating to that
subsidiary was appropriately reversed. Such benefit from a reduction in
valuation allowance was partly offset by a deferred tax provision relating to an
adjustment of U.K. pension liabilities. For the three quarters ended January 31,
1998, approximately $5,200,000 of the deferred tax provision will not result in
cash payments in future periods. The non-cash portion of the deferred tax
provision reflects the deferred tax effects of certain deferred tax assets for
which a corresponding credit has been recorded to "Additional paid-in capital"
approximating $2,900,000 and the deferred tax effects of certain deferred tax
assets, primarily foreign net operating losses, for which a benefit had
previously been recognized in the amount of $2,300,000.
The adoption of fresh-start reporting results in an increase of additional
paid-in capital, rather than an income tax benefit, as the benefits relating to
existing deferred tax assets are recognized.
F-25
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIT)
Shareholders' Equity consists of the following (in thousands):
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
ADDITIONAL CURRENCY RETAINED SHAREHOLDERS'
COMMON PAID-IN TRANSLATION EARNINGS EQUITY
STOCK CAPITAL ADJUSTMENT(A) (DEFICIT) (DEFICIT)
------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994....................... $ 20 $ 12,543 $ (31,124) $ (18,561)
Net income..................................... -- -- 1,665 1,665
Change in translation adjustment............... -- (1,056) -- (1,056)
--- ------------- ---------- -------------
Balance at December 31, 1995..................... 20 11,487 (29,459) (17,952)
Net loss....................................... -- -- (28,495) (28,495)
Change in translation adjustment............... -- 4,268 -- 4,268
--- ------------- ---------- -------------
Balance at December 31, 1996..................... 20 15,755 (57,954) (42,179)
Net income (excluding effects of the
consummation)................................ -- -- 11,920 11,920
Change in translation adjustment............... -- (1,224) -- (1,224)
Issuance of new common stock and consummation
adjustments.................................. 30 $ 49,950 (14,531) 46,034 81,483
--- ----------- ------------- ---------- -------------
Balance at March 31, 1997........................ 50 49,950 -- -- 50,000
Net income..................................... -- -- -- 6,272 6,272
Change in translation adjustment............... -- -- 673 -- 673
Amortization of stock awards................... -- 1,250 -- -- 1,250
Deferred tax effects of fresh-start
adjustments, certain deferred tax assets and
NOL carryforwards............................ -- 2,906 -- -- 2,906
Dividends paid................................. -- (13,897) -- (5,433) (19,330)
--- ----------- ------------- ---------- -------------
Balance at January 31, 1998...................... $ 50 $ 40,209 $ 673 $ 839 $ 41,771
--- ----------- ------------- ---------- -------------
--- ----------- ------------- ---------- -------------
</TABLE>
- ------------------------
(a) The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
Effective April 14, 1997, the Certificate of Incorporation of the Company
was amended, whereby the authorized number of shares of common stock was
increased to 15,000,000 shares with a par value of $.01 per share, and each
original outstanding share of common stock of the Company was canceled. In
addition, in accordance with the Plan, 4,706,406 shares were issued to
prepetition unsecured claimholders. The Company was subsequently merged into a
new corporation, organized under the laws of the State of Delaware, and all
common shares then outstanding were exchanged on a one-for-one basis for shares
in the new corporation.
On the Effective Date, the Company adopted the SASOP, which is to be
administered by the Compensation Committee of the Board of Directors for a term
of 10 years. Under the terms of the SASOP, the Board may grant stock awards and
stock options (including incentive stock options, nonqualified stock options or
a combination of both) to officers and key employees of the Company. Under the
SASOP, 500,000 shares of common stock were made available for stock awards and
stock options. Pursuant to the Plan, the Board granted to eligible executives
250,000 shares of common stock (the "Initial Stock
F-26
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Awards"). Twenty percent of each Initial Stock Award was transferable on the
date of grant and 40 percent will become transferable on the first and second
anniversary of the date of grant. Additionally, the Board granted to eligible
employees options to purchase 167,000 shares of common stock at $11.38 (fair
market value on the date of grant), effective as of September 1, 1997. Such
options vest 33 1/3% on the date of grant and 33 1/3% will vest on the first and
second anniversary of the date of grant.
The Company accounts for the SASOP using the intrinsic value method in
accordance with APB No. 25. Accordingly, compensation expense related to the
Initial Stock Awards of $1,250,000 and $500,000 was recognized in the three
quarters ended January 31, 1998 and the quarter ended March 31, 1997,
respectively, and no compensation expense was recognized for the stock options
granted. The Company elected the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Had the Company used the fair value
method at the date of grant of the stock options, additional compensation
expense would have been recorded, resulting in the following pro forma amounts
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE QUARTERS
ENDED
JANUARY 31, 1998
-----------------
<S> <C>
Pro forma net income:
Earnings before extraordinary item............................................................. $ 6,818
Extraordinary item, net of tax................................................................. (792)
------
Net income..................................................................................... $ 6,026
------
------
Pro forma basic and diluted earnings per share:
Earnings before extraordinary item............................................................. $ 1.38
Extraordinary item, net of tax................................................................. (0.16)
------
Net income..................................................................................... $ 1.22
------
------
</TABLE>
The weighted average fair value of options granted was $1.47 per share. This
fair value was estimated at the grant date using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<S> <C>
Expected volatility... 13%
Expected dividend Not applicable
yield...............
Expected life......... 24 months
Risk-free interest 5.25%
rate................
</TABLE>
At December 31, 1996, 10,000 shares of common stock were authorized, of
which 2,005 shares were outstanding. This stock had no par value and a stated
value of $10 per share. In addition, 300,000 shares of preferred stock were
authorized, having a par value of $100 per share, of which no shares were
outstanding at December 31, 1996.
F-27
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE THREE FOR THE QUARTER
QUARTERS ENDED ENDED DECEMBER 31,
JANUARY 31, MARCH 31, --------------------
1998 1997 1996 1995
--------------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Net gain on asset sales..................................... $ 1,888 $ 3,266 $ 3,597 $ 1,971
Additional institutional claims............................. -- -- (1,706) --
District 65 Pension Plan claims............................. -- -- (5,050) --
Prepetition environmental claims............................ -- -- (3,791) --
Other, net.................................................. (83) (87) 191 (1,964)
------ ------ --------- ---------
Total..................................................... $ 1,805 $ 3,179 $ (6,759) $ 7
------ ------ --------- ---------
------ ------ --------- ---------
</TABLE>
In the three quarters ended January 31, 1998, one of the Company's German
subsidiaries sold certain plant assets no longer in productive use and recorded
a gain of approximately $1,700,000.
During 1997 and 1995, Metallurg sold two of its commercial real estate
properties located in New York City in contemplation of the Plan. Gains of
$2,747,000 and $765,000 are reflected in other income in the quarter ended March
31, 1997 and the year ended December 31, 1995, respectively.
Upon reaching settlement in 1996 with various prepetition creditors, the
District 65 Pension Plan and certain environmental regulatory authorities, the
Debtors recorded additional expenses of approximately $10,500,000.
In 1995, Turk Maadin Sirketi A.S., a Turkish chrome ore mining operation,
entered into an agreement to sell a parcel of land no longer in productive use
in an installment sale arrangement. As a result, gains on this transaction of
$3,787,000 in 1996 and $960,000 in 1995 have been reflected in other income.
14. ENVIRONMENTAL LIABILITIES
Shieldalloy operates manufacturing facilities in Newfield, New Jersey and
Cambridge, Ohio which produce alloys and other specialty products. The
historical manufacture of several products at the two facilities has resulted in
the production of various by-products which Shieldalloy is obligated to clean up
under federal and state environmental laws and regulations. These clean-up
obligations are under the jurisdiction of the United States Environmental
Protection Agency, the New Jersey Department of Environmental Protection, the
Ohio Environmental Protection Agency, the United States Nuclear Regulatory
Commission ("NRC"), the United States Department of Interior and the Ohio
Department of Health. The Company has also provided for certain estimated costs
associated with its sites in Germany and Brazil.
F-28
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ENVIRONMENTAL LIABILITIES (CONTINUED)
Total environmental liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31, DECEMBER 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Domestic:
Shieldalloy--New Jersey................................................. $ 30,925 $ 32,584 $ 33,540
Shieldalloy--Ohio....................................................... 11,797 12,264 12,600
----------- ----------- ------------
42,722 44,848 46,140
Foreign................................................................... 5,201 6,086 6,598
----------- ----------- ------------
Total environmental liabilities......................................... 47,923 50,934 52,738
Less: trust funds......................................................... 2,843 2,799 8,727
----------- ----------- ------------
Net environmental liabilities........................................... 45,080 48,135 44,011
Less: current portion..................................................... 6,553 5,270 9,374
----------- ----------- ------------
Environmental liabilities............................................... $ 38,527 $ 42,865 $ 34,637
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
Shieldalloy entered into Administrative Consent Orders ("ACO's") with the
State of New Jersey, dated October 5, 1988 and September 5, 1984, under which
Shieldalloy, as required, has conducted a remedial investigation and feasibility
study ("RI/FS") of alternatives to remedy groundwater contamination at the
Newfield facility. The ACO's also require Shieldalloy to evaluate, and where
appropriate, remediate certain additional environmental conditions pursuant to
state laws and regulations. These activities include the closure of nine
wastewater lagoons, soil remediation, surface water and sediment cleanup, as
well as miscellaneous operation and maintenance activities and onsite controls.
The Company accrued its best estimate of the associated costs with respect to
remedial activities at the site which it expects to disburse over the next
fifteen years. During 1995, $8,000,000 in a prepetition letter of credit was
drawn upon and deposited in a trust fund. During the quarter ended March 31,
1997, remaining prepetition letters of credit, in the amount of $8,200,000, were
drawn upon and deposited in a trust fund. Subsequently, pursuant to an agreement
with the State of New Jersey, the Company was permitted to withdraw cash from
the environmental trust and substitute letters of credit in an equivalent dollar
amount. At January 31, 1998, outstanding letters of credit issued as financial
assurances in favor of various environmental agencies total $21,419,000. The
costs of providing financial assurance over the term of the remediation
activities have been contemplated in the accrued amounts.
As a result of NRC-regulated manufacturing activities, slag piles have
accumulated at the Cambridge and Newfield sites which contain low levels of
naturally occurring radioactivity. As related production has ceased at the
Cambridge location, Shieldalloy is required to decommission the slag piles.
Shieldalloy obtained approval from the State of Ohio and is currently awaiting
approval from the NRC to stabilize and cap the slag piles in situ. As long as
production continues at the Newfield location, the NRC will allow the slag pile
to remain in place, subject to submission of a conceptual decommissioning plan
and financial assurance for implementation of that plan. The Company's
obligation for decommissioning costs for these sites is partially assured by
cash funds held in trust. As a condition precedent to consummation of the Plan,
$1,500,000 in a prepetition letter of credit, relating to both the Newfield and
Cambridge facilities, was drawn upon and deposited in a trust fund.
In 1987, Shieldalloy purchased the Cambridge manufacturing facility from
Foote Mineral Company. Cyprus Foote Mineral Company ("Cyprus Foote") is the
successor in interest to Foote. During 1995,
F-29
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ENVIRONMENTAL LIABILITIES (CONTINUED)
Shieldalloy, Cyprus Foote and the State of Ohio entered into a Consent Order for
Permanent Injunction (the "Consent Order") under which Shieldalloy and Cyprus
Foote agreed to conduct an RI/FS of the Cambridge site and the State of Ohio
agreed to review such information on an expedited basis and issue a Preferred
Plan setting forth a final remedy for the site. On December 16, 1996, the State
of Ohio issued its Preferred Plan and, subsequently, Shieldalloy and Cyprus
Foote agreed to perform remedial design and remedial action at the site. These
activities include remediation of slag piles, clean up of wetland soils and
clean up of on-site and off-site sediments. Pursuant to the Consent Order,
Shieldalloy and Cyprus Foote are jointly and severally liable to the State of
Ohio in respect of these obligations. However, Shieldalloy has agreed with
Cyprus Foote that it shall perform and be liable for the performance of these
remedial obligations. Therefore, the Company has accrued its best estimate of
associated costs which it expects to substantially disburse over the next six
years. With respect to the financial assurance obligations to the State of Ohio,
Cyprus Foote has agreed to provide financial assurance of approximately
$9,000,000 as required by the State of Ohio and Shieldalloy has purchased an
annuity contract which will provide for future payments into the trust fund to
cover certain of the estimated operation and maintenance costs over the next 100
years.
The Company's German subsidiaries have accrued environmental liabilities in
the amounts of $4,827,000, $5,611,000 and $5,918,000 at January 31, 1998, March
31, 1997 and December 31, 1996, respectively, to cover the costs of closing an
off-site dump and for certain environmental conditions at a subsidiary's
Nuremberg site. In Brazil, costs of $374,000, $475,000 and $506,000 have been
accrued at January 31, 1998, March 31, 1997 and December 31, 1996, respectively,
to cover reclamation costs of the closed mine sites.
15. CONTINGENT LIABILITIES
In addition to environmental matters which are discussed in Note 13, the
Company continues defending various claims and legal actions arising in the
normal course of business. Management believes, based on the advice of counsel,
that the outcome of such litigation will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
16. LEASES
The Company leases office space, facilities and equipment. The leases
generally provide that the Company pay the tax, insurance and maintenance
expenses related to the leased assets. At January 31, 1998, future minimum lease
payments required under non-cancelable operating leases having remaining lease
terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
- -------------------------------------------------------------------------------------
<S> <C>
1999................................................................................. $ 1,431
2000................................................................................. 1,322
2001................................................................................. 1,074
2002................................................................................. 945
2003................................................................................. 715
Thereafter........................................................................... 3,626
---------
Total.............................................................................. $ 9,113
---------
---------
</TABLE>
F-30
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEASES (CONTINUED)
Rent expense under operating leases for the three quarters ended January 31,
1998, the quarter ended March 31, 1997 and the years ended December 31, 1996 and
1995 was $938,000, $511,000, $868,000 and $815,000, respectively.
In December 1996, Metallurg entered into a fifteen year lease for its new
headquarters location. No rent payments are required for the first 15 months of
the lease. Such rental concessions are being amortized over the lease term on a
straight-line basis.
17. SUBSEQUENT EVENTS
During February 1998, the Company purchased an additional 5% interest in
SMW, a Russian magnesium metal producer, for approximately $2,000,000. Also
during March 1998, the Company sold its minority investment in Compagnie des
Mines et Metaux S.A., a Luxembourg affiliate, for proceeds of approximately
$1,100,000, resulting in a gain of approximately $900,000.
18. SUPPLEMENTAL GUARANTOR INFORMATION
Under the terms of the Senior Notes, Shieldalloy, Metallurg Holdings
Corporation, Metallurg Services, Inc. and MIR (China), Inc. (collectively, the
"Guarantors"), wholly owned domestic subsidiaries of the Company, will fully and
unconditionally guarantee on a joint and several basis the Company's obligations
to pay principal, premium and interest in respect of the Senior Notes due 2007.
Management has determined that separate, full financial statements of the
Guarantors would not be material to potential investors and, accordingly, such
financial statements are not provided. Supplemental financial information of the
Guarantors is presented below:
F-31
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE QUARTERS ENDED JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue..................................... $ 43,047 $ 150,569 $ 364,611 $ (81,260) $ 476,967
------- ----------- -------------- ------------ ------------
Operating costs and expenses:
Cost of sales................................... 39,279 134,990 315,954 (80,190) 410,033
Selling, general and
administrative expenses....................... 7,187 7,552 28,824 -- 43,563
------- ----------- -------------- ------------ ------------
Total operating costs and expenses................ 46,466 142,542 344,778 (80,190) 453,596
------- ----------- -------------- ------------ ------------
Operating income (loss)........................... (3,419) 8,027 19,833 (1,070) 23,371
Other:
Other income (expense), net..................... (28) 158 1,675 -- 1,805
Interest income (expense), net.................. (4,639) 605 (1,619) -- (5,653)
Equity in earnings of subsidiaries.............. 13,903 2,530 -- (16,433) --
------- ----------- -------------- ------------ ------------
Income before income tax provision and
extraordinary item............................... 5,817 11,320 19,889 (17,503) 19,523
Income tax (benefit) provision.................... (1,165) 2,910 10,714 -- 12,459
------- ----------- -------------- ------------ ------------
Net income before extraordinary item.............. 6,982 8,410 9,175 (17,503) 7,064
Extraordinary item, net of tax.................... (710) -- (82) -- (792)
------- ----------- -------------- ------------ ------------
Net income........................................ 6,272 8,410 9,093 (17,503) 6,272
Other comprehensive income, net of tax:
Foreign currency translation adjustment......... 673 1,109 682 (1,791) 673
------- ----------- -------------- ------------ ------------
Comprehensive income.............................. $ 6,945 $ 9,519 $ 9,775 $ (19,294) $ 6,945
------- ----------- -------------- ------------ ------------
------- ----------- -------------- ------------ ------------
</TABLE>
F-32
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 15,883 $ 724 $ 26,396 $ 43,003
Accounts and notes receivable, net.............. 31,713 43,665 67,403 $ (58,850) 83,931
Inventories..................................... 6,122 39,823 75,389 (3,745) 117,589
Other assets.................................... 6,400 230 7,609 -- 14,239
-------------- ----------- -------------- ------------ ------------
Total current assets........................ 60,118 84,442 176,797 (62,595) 258,762
Investments--intergroup........................... 91,464 50,666 -- (142,130) --
Investments--other................................ 244 -- 1,366 -- 1,610
Property, plant and equipment, net................ 1,024 6,805 33,673 -- 41,502
Other assets...................................... 13,790 4 12,666 (8,548) 17,912
-------------- ----------- -------------- ------------ ------------
Total....................................... $ 166,640 $ 141,917 $ 224,502 $ (213,273) $ 319,786
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt and current portion of long-term
debt.......................................... $ 4,016 $ 4,016
Trade payables.................................. $ 964 $ 18,198 51,075 $ (18,929) 51,308
Accrued expenses................................ 4,543 4,022 15,457 -- 24,022
Loans payable--intergroup....................... 17,175 3,925 28,820 (49,920) --
Other current liabilities....................... 400 5,165 6,094 -- 11,659
-------------- ----------- -------------- ------------ ------------
Total current liabilities................... 23,082 31,310 105,462 (68,849) 91,005
-------------- ----------- -------------- ------------ ------------
Long-term Liabilities
Long-term debt.................................. 100,000 -- 3,133 -- 103,133
Accrued pension liabilities..................... 392 1,691 36,268 -- 38,351
Environmental liabilities, net.................. -- 35,179 3,348 -- 38,527
Other liabilities............................... 1,395 -- 14,153 (8,549) 6,999
-------------- ----------- -------------- ------------ ------------
Total long-term liabilities................. 101,787 36,870 56,902 (8,549) 187,010
-------------- ----------- -------------- ------------ ------------
Total liabilities........................... 124,869 68,180 162,364 (77,398) 278,015
-------------- ----------- -------------- ------------ ------------
Shareholders' Equity:
Common stock.................................... 50 1,227 80,358 (81,585) 50
Additional paid-in capital...................... 40,209 90,867 1,104 (91,971) 40,209
Accumulated other comprehensive income.......... 673 1,109 22,386 (23,495) 673
Retained earnings (deficit)..................... 839 (19,466) (41,710) 61,176 839
-------------- ----------- -------------- ------------ ------------
Shareholder's equity.......................... 41,771 73,737 62,138 (135,875) 41,771
-------------- ----------- -------------- ------------ ------------
Total....................................... $ 166,640 $ 141,917 $ 224,502 $ (213,273) $ 319,786
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
</TABLE>
F-33
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE QUARTERS ENDED JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities.................. $ (13,977) $ (1,263) $ 14,894 $ (346)
-------------- ----------- ------- ------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.......... (330) (1,086) (8,031) (9,447)
Proceeds from asset sales........................... 9 106 3,632 3,747
Other, net.......................................... 77 -- (63) 14
-------------- ----------- ------- ------------
Net cash (used in) provided by investing activities... (244) (980) (4,462) (5,686)
-------------- ----------- ------- ------------
Cash Flows from Financing Activities:
Intergroup borrowings (repayments).................. (21,053) 1,322 20,544 813
Proceeds from long-term debt........................ 100,000 -- -- 100,000
Fees paid to issue long-term debt................... (4,000) -- -- (4,000)
Net repayment of short-term debt.................... -- -- (10,126) (10,126)
Repayment of long-term debt......................... (39,461) -- (8,848) (48,309)
Intergroup dividends received (paid)................ 5,585 -- (5,585) --
Dividends paid...................................... (19,330) -- -- (19,330)
-------------- ----------- ------- ------------
Net financing provided by (used in) financing
activities........................................... 21,741 1,322 (4,015) 19,048
-------------- ----------- ------- ------------
Effects of exchange rate changes on cash and cash
equivalents.......................................... -- -- (353) (353)
-------------- ----------- ------- ------------
Net increase (decrease) in cash and cash
equivalents.......................................... 7,520 (921) 6,064 12,663
Cash and cash equivalents--beginning of period........ 8,363 1,645 20,332 30,340
-------------- ----------- ------- ------------
Cash and cash equivalents--end of period.............. $ 15,883 $ 724 $ 26,396 $ 43,003
-------------- ----------- ------- ------------
-------------- ----------- ------- ------------
</TABLE>
F-34
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue..................................... $ 10,578 $ 52,475 $ 117,652 $ (25,118) $ 155,587
------- ----------- -------------- ------------ ------------
Operating costs and expenses:
Cost of sales................................... 10,219 47,590 100,709 (24,458) 134,060
Selling, general and administrative expenses.... 2,662 2,118 10,266 -- 15,046
------- ----------- -------------- ------------ ------------
Total operating costs and expenses................ 12,881 49,708 110,975 (24,458) 149,106
------- ----------- -------------- ------------ ------------
Operating (loss) income........................... (2,303) 2,767 6,677 (660) 6,481
Other:
Other (expense) income, net..................... (7,041) 9,903 317 -- 3,179
Interest (expense) income, net.................. (795) 554 (4) -- (245)
Reorganization expense.......................... (1,698) (965) -- -- (2,663)
Fresh-start revaluation......................... 11,652 (6,305) (240) -- 5,107
Equity in earnings of subsidiaries.............. (6,216) -- -- 6,216 --
------- ----------- -------------- ------------ ------------
Income before income tax provision and
extraordinary item.............................. (6,401) 5,954 6,750 5,556 11,859
Income tax provision (benefit).................... (241) 30 (2,852) -- (3,063)
------- ----------- -------------- ------------ ------------
Income (loss) before extraordinary item........... (6,160) 5,924 9,602 5,556 14,922
Extraordinary item, net of tax.................... 64,114 (17,036) (4,046) -- 43,032
------- ----------- -------------- ------------ ------------
Net income........................................ 57,954 (11,112) 5,556 5,556 57,954
Other comprehensive income, net of tax:
Foreign currency translation adjustment......... (1,224) -- (1,224) 1,224 (1,224)
------- ----------- -------------- ------------ ------------
Comprehensive income (loss)....................... $ 56,730 $ (11,112) $ 4,332 $ 6,780 $ 56,730
------- ----------- -------------- ------------ ------------
------- ----------- -------------- ------------ ------------
</TABLE>
F-35
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 8,363 $ 1,645 $ 20,332 $ 30,340
Accounts and notes receivable, net.... 16,664 43,011 79,068 $ (44,593) 94,150
Inventories........................... 4,300 31,900 75,733 (2,675) 109,258
Other assets.......................... 4,342 308 11,662 -- 16,312
Assets held for sale.................. -- -- 1,180 -- 1,180
-------------- ----------- -------------- ------------ ------------
Total current assets................ 33,669 76,864 187,975 (47,268) 251,240
Investments--intergroup................. 78,591 49,632 -- (128,223) --
Investments--other...................... 244 -- 1,217 -- 1,461
Property, plant and equipment, net...... 828 6,967 31,112 -- 38,907
Other assets............................ 1,663 -- 12,433 -- 14,096
-------------- ----------- -------------- ------------ ------------
Total............................... $ 114,995 $ 133,463 $ 232,737 $ (175,491) $ 305,704
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt and current portion of
long-term debt...................... $ 14,777 $ 14,777
Trade payables........................ $ 16,992 $ 17,708 56,386 $ (35,139) 55,947
Accrued expenses...................... 6,389 4,517 14,445 -- 25,351
Loans payable--intergroup............. -- 1,353 18,101 (19,454) --
Other current liabilities............. 236 5,429 6,184 -- 11,849
-------------- ----------- -------------- ------------ ------------
Total current liabilities........... 23,617 29,007 109,893 (54,593) 107,924
-------------- ----------- -------------- ------------ ------------
Long-term Liabilities:
Long-term debt........................ 39,461 -- 12,250 -- 51,711
Accrued pension liabilities........... 522 1,621 38,947 -- 41,090
Environmental liabilities, net........ -- 36,949 5,916 -- 42,865
Other liabilities..................... 1,395 -- 10,772 (53) 12,114
-------------- ----------- -------------- ------------ ------------
Total long-term liabilities......... 41,378 38,570 67,885 (53) 147,780
-------------- ----------- -------------- ------------ ------------
Total liabilities................... 64,995 67,577 177,778 (54,646) 255,704
-------------- ----------- -------------- ------------ ------------
Shareholders' Equity:
Common stock.......................... 50 1,227 80,226 (81,453) 50
Additional paid-in capital............ 49,950 90,867 222 (91,089) 49,950
Accumulated other comprehensive
income.............................. -- -- 21,704 (21,704) --
Regained earnings (deficit)........... -- (26,208) (47,193) 73,401 --
-------------- ----------- -------------- ------------ ------------
Shareholders' equity................ 50,000 65,886 54,959 (120,845) 50,000
-------------- ----------- -------------- ------------ ------------
Total............................. $ 114,995 $ 133,463 $ 232,737 $ (175,491) $ 305,704
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
</TABLE>
F-36
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities.................. $ (1,796) $ 7,677 $ 535 $ 6,416
------- ----------- -------------- ------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.......... (711) (311) (1,752) (2,774)
Proceeds from asset sales........................... 4,215 -- 751 4,966
Other, net.......................................... -- -- (25) (25)
------- ----------- -------------- ------------
Net cash provided by (used in) investing activities... 3,504 (311) (1,026) 2,167
------- ----------- -------------- ------------
Cash Flows from Financing and Reorganization
Activities:
Cash distribution pursuant to Plan of
Reorganization.................................... (55,865) (3,501) -- (59,366)
Drawdown of prepetition letter of credit............ 9,700 -- -- 9,700
Intergroup borrowings (repayments).................. 2,088 (2,652) 564 --
Proceeds from long-term debt........................ -- -- 8,100 8,100
Net short-term borrowing............................ -- -- 1,062 1,062
Repayment of long-term debt......................... -- -- (487) (487)
Dividends received (paid)........................... 9,423 -- (9,423) --
------- ----------- -------------- ------------
Net cash used in financing and reorganization
activities.......................................... (34,654) (6,153) (184) (40,991)
------- ----------- -------------- ------------
Effects of exchange rate changes on cash and cash
equivalents......................................... -- -- (526) (526)
------- ----------- -------------- ------------
Net (decrease) increase in cash and cash
equivalents......................................... (32,946) 1,213 (1,201) (32,934)
Cash and cash equivalents--beginning of quarter....... 41,309 432 21,533 63,274
------- ----------- -------------- ------------
Cash and cash equivalents--end of quarter............. $ 8,363 $ 1,645 $ 20,332 $ 30,340
------- ----------- -------------- ------------
------- ----------- -------------- ------------
</TABLE>
F-37
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue................................. $ 35,536 $ 199,864 $ 489,110 $ (74,508) $ 650,002
-------------- ----------- -------------- ------------ ------------
Operating costs and expenses:
Cost of sales............................... 33,640 185,827 420,929 (73,858) 566,538
Selling, general and
administrative expenses................... 5,150 9,363 42,590 -- 57,103
Environmental expenses...................... -- 35,176 2,406 -- 37,582
-------------- ----------- -------------- ------------ ------------
Total operating costs and
expenses.................................... 38,790 230,366 465,925 (73,858) 661,223
-------------- ----------- -------------- ------------ ------------
Operating income (loss)....................... (3,254) (30,502) 23,185 (650) (11,221)
Other:
Other income (expense), net................. (11,881) (9,897) 11,200 3,819 (6,759)
Interest income (expense), net.............. 1,254 1,517 (1,298) -- 1,473
Reorganization expense...................... (1,500) (2,035) -- -- (3,535)
Equity in earnings (losses)
of subsidiaries........................... (13,041) 231 -- 12,810 --
-------------- ----------- -------------- ------------ ------------
Income (loss) before income
tax provision............................... (28,422) (40,686) 33,087 15,979 (20,042)
Income tax provision (benefit)................ 73 128 8,252 -- 8,453
-------------- ----------- -------------- ------------ ------------
Net income.................................... (28,495) (40,814) 24,835 15,979 (28,495)
Other comprehensive income, net of tax:
Foreign currency translation adjustment..... 4,268 -- 4,282 (4,282) 4,268
-------------- ----------- -------------- ------------ ------------
Comprehensive income (loss)................... $ (24,227) $ (40,814) $ 29,117 $ 11,697 $ (24,227)
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
</TABLE>
F-38
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 41,309 $ 432 $ 21,533 $ 63,274
Accounts and notes receivable, net.... 40,613 60,521 75,135 $ (87,674) 88,595
Inventories........................... 6,392 29,155 72,831 (2,015) 106,363
Other assets.......................... 3,996 255 10,064 -- 14,315
Assets held for sale.................. 1,843 -- -- -- 1,843
-------------- ----------- -------------- ------------ ------------
Total current assets................ 94,153 90,363 179,563 (89,689) 274,390
Investments--intergroup................. 52,622 -- -- (52,622) --
Investments--other...................... 1,530 -- 1,408 -- 2,938
Property, plant and equipment, net...... 364 11,053 36,468 -- 47,885
Other assets............................ 10,030 4,699 4,841 (13,157) 6,413
-------------- ----------- -------------- ------------ ------------
Total............................... $ 158,699 $ 106,115 $ 222,280 $ (155,468) $ 331,626
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term debt and current portion of
long-term debt...................... $ 14,820 $ 14,820
Trade payables........................ $ 22,296 $ 16,249 48,405 $ (38,686) 48,264
Accrued expenses...................... 4,913 3,531 13,155 -- 21,599
Loans payable--intergroup............. -- 10,101 17,268 (27,369) --
Other current liabilities............. 235 9,501 7,237 (1,000) 15,973
-------------- ----------- -------------- ------------ ------------
Total current liabilities........... 27,444 39,382 100,885 (67,055) 100,656
-------------- ----------- -------------- ------------ ------------
Long-term Liabilities:
Long-term debt........................ -- -- 5,049 -- 5,049
Accrued pension liabilities........... 1,441 -- 42,485 -- 43,926
Environmental liabilities, net........ -- 28,213 6,424 -- 34,637
Other liabilities..................... -- 8,727 9,690 (8,777) 9,640
-------------- ----------- -------------- ------------ ------------
Total long-term liabilities......... 1,441 36,940 63,648 (8,777) 93,252
-------------- ----------- -------------- ------------ ------------
Liabilities Subject to Compromise....... 171,993 42,902 -- (34,998) 179,897
-------------- ----------- -------------- ------------ ------------
Total liabilities................... 200,878 119,224 164,533 (110,830) 373,805
-------------- ----------- -------------- ------------ ------------
Shareholders' Equity (Deficit):
Common stock.......................... 20 1,987 80,424 (82,411) 20
Accumulated other comprehensive
income.............................. 15,755 -- 21,816 (21,816) 15,755
Retained earnings (deficit)........... (57,954) (15,096) (44,493) 59,589 (57,954)
-------------- ----------- -------------- ------------ ------------
Shareholders' equity (deficit)........ (42,179) (13,109) 57,747 (44,638) (42,179)
-------------- ----------- -------------- ------------ ------------
Total............................... $ 158,699 $ 106,115 $ 222,280 $ (155,468) $ 331,626
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
</TABLE>
F-39
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities.................. $ 1,922 $ 9,748 $ 35,995 $ 47,665
------- ----------- ------- ------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.......... (90) (599) (8,842) (9,531)
Proceeds from asset sales........................... -- 493 5,313 5,806
Other, net.......................................... (6,192) 25 4,873 (1,294)
------- ----------- ------- ------------
Net cash (used in) provided by investing activities... (6,282) (81) 1,344 (5,019)
------- ----------- ------- ------------
Cash Flows from Financing Activities:
Intergroup borrowings (repayments).................. 16,108 (10,223) (5,885) --
Net repayment of short-term debt.................... -- -- (14,709) (14,709)
Repayment of long-term debt......................... -- -- (1,408) (1,408)
Dividends received (paid)........................... 5,091 -- (5,091) --
------- ----------- ------- ------------
Net cash provided by (used in) financing activities... 21,199 (10,223) (27,093) (16,117)
------- ----------- ------- ------------
Effects of exchange rate changes on cash and cash
equivalents......................................... -- -- (83) (83)
------- ----------- ------- ------------
Net increase (decrease) in cash and cash
equivalents......................................... 16,839 (556) 10,163 26,446
Cash and cash equivalents--beginning of year.......... 24,470 988 11,370 36,828
------- ----------- ------- ------------
Cash and cash equivalents--end of year................ $ 41,309 $ 432 $ 21,533 $ 63,274
------- ----------- ------- ------------
------- ----------- ------- ------------
</TABLE>
F-40
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue........................... $ 40,858 $ 190,417 $ 534,687 $ (76,598) $ 689,364
------- ----------- -------------- ------------ ------------
Operating costs and expenses:
Cost of sales......................... 39,385 170,504 470,244 (76,598) 603,535
Selling, general and administrative
expenses............................ 4,600 8,745 39,497 -- 52,842
Environmental expenses................ -- 1,657 3,967 -- 5,624
Restructuring charges................. -- -- 11,658 -- 11,658
------- ----------- -------------- ------------ ------------
Total operating costs and expenses...... 43,985 180,906 525,366 (76,598) 673,659
------- ----------- -------------- ------------ ------------
Operating income (loss)................. (3,127) 9,511 9,321 -- 15,705
Other:
Other income (expense), net........... 1,270 (339) (924) -- 7
Interest income (expense), net........ 900 1,026 (3,875) -- (1,949)
Reorganization expense................ (1,615) (2,312) -- -- (3,927)
Equity in earnings of subsidiaries.... 3,312 1,203 -- (4,515) --
------- ----------- -------------- ------------ ------------
Income before income tax provision...... 740 9,089 4,522 (4,515) 9,836
Income tax provision (benefit).......... (925) 308 8,788 -- 8,171
------- ----------- -------------- ------------ ------------
Net income (loss)....................... 1,665 8,781 (4,266) (4,515) 1,665
Other comprehensive income, net of tax:
Foreign currency translation
adjustment.......................... (1,056) -- (1,059) 1,059 (1,056)
------- ----------- -------------- ------------ ------------
Comprehensive income (loss)............. $ 609 $ 8,781 $ (5,325) $ (3,456) $ 609
------- ----------- -------------- ------------ ------------
------- ----------- -------------- ------------ ------------
</TABLE>
F-41
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities.................. $ (2,571) $ (1,685) $ 9,914 $ 5,658
-------------- ----------- ------- ------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.......... (116) (1,461) (5,135) (6,712)
Proceeds from asset sales........................... 940 54 1,669 2,663
Other, net.......................................... -- -- 104 104
-------------- ----------- ------- ------------
Net cash provided by (used in) investing activities... 824 (1,407) (3,362) (3,945)
-------------- ----------- ------- ------------
Cash Flow from Financing Activities:
Drawdown of prepetition letter of credit............ 8,000 -- -- 8,000
Intergroup borrowings (repayments).................. (1,107) 2,175 (1,068) --
Net short-term borrowing............................ -- -- 420 420
Repayment of long-term debt......................... -- -- (2,238) (2,238)
Dividends received (paid)........................... 6,407 -- (6,407) --
-------------- ----------- ------- ------------
Net cash provided by (used in) financing activities... 13,300 2,175 (9,293) 6,182
-------------- ----------- ------- ------------
Effects of exchange rate changes on cash and cash
equivalents......................................... -- -- 774 774
-------------- ----------- ------- ------------
Net increase (decrease) in cash and cash
equivalents......................................... 11,553 (917) (1,967) 8,669
Cash and cash equivalents--beginning of year.......... 12,917 1,905 13,337 28,159
-------------- ----------- ------- ------------
Cash and cash equivalents--end of year................ $ 24,470 $ 988 $ 11,370 $ 36,828
-------------- ----------- ------- ------------
-------------- ----------- ------- ------------
</TABLE>
F-42
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END
DESCRIPTION OF PERIOD EXPENSES --DESCRIBE-- --DESCRIBE-- OF PERIOD
- ---------------------------------------------- ----------- ----------- ------------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Accounts receivable allowance for doubtful
accounts.................................... $ 5,513 $ 1,669 -- $ (3,187)(a) $ 3,995
YEAR ENDED DECEMBER 31, 1996:
Accounts receivable allowance for doubtful
accounts.................................... $ 3,995 $ 696 -- $ (388)(a) $ 4,303
QUARTER ENDED MARCH 31, 1997:
Accounts receivable allowance for doubtful
accounts.................................... $ 4,303 $ 162 -- $ (4,465)(b) $ --
THREE QUARTERS ENDED JANUARY 31, 1998:
Accounts receivable allowance for doubtful
accounts.................................... $ -- $ 1,700 -- -- $ 1,700
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C>
(a) Uncollectible accounts written
off, less recoveries.
(b) Uncollectible accounts written
off, less recoveries............ $ (376)
Elimination of historical
allowance account upon
revaluation of assets to fair
value in accordance with
fresh-start reporting at March
31, 1997........................ (4,089)
---------
$ (4,465)
---------
---------
</TABLE>
F-43
<PAGE>
UNAUDITED FINANCIAL STATEMENTS
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR
--------------------------------- COMPANY
TWO -----------
QUARTER QUARTERS QUARTER QUARTER
ENDED ENDED ENDED ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1998 1998 1997 1997
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Total revenue.................................... $ 170,013 $ 337,843 $ 166,879 $ 155,587
--------- ----------- --------- -----------
Operating costs and expenses:
Cost of sales.................................. 142,671 281,679 142,135 134,060
Selling, general and administrative expenses... 15,147 29,908 14,427 15,046
Merger costs................................... 4,416 4,416 -- --
--------- ----------- --------- -----------
Total operating costs and expenses............. 162,234 316,003 156,562 149,106
--------- ----------- --------- -----------
Operating income............................. 7,779 21,840 10,317 6,481
Other income (expense):
Other income (expense), net.................... (333) 545 (76) 3,179
Interest expense, net.......................... (2,544) (4,616) (1,479) (245)
Reorganization expense......................... -- -- -- (2,663)
Fresh-start revaluation........................ -- -- -- 5,107
--------- ----------- --------- -----------
Income before income tax provision and
extraordinary item............................. 4,902 17,769 8,762 11,859
Income tax provision (benefit)................... 3,404 9,481 5,111 (3,063)
--------- ----------- --------- -----------
Net income before extraordinary item............. 1,498 8,288 3,651 14,922
Extraordinary item............................... -- -- -- 43,032
--------- ----------- --------- -----------
Net income....................................... $ 1,498 $ 8,288 $ 3,651 $ 57,954
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
F-44
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
--------------------------------------- -------------
QUARTER QUARTER QUARTER
ENDED TWO QUARTERS ENDED ENDED
JULY 31, ENDED JULY 31, MARCH 31,
1998 JULY 31, 1998 1997 1997
----------- ------------- ----------- -------------
Net income................................. $ 1,498 $ 8,288 $ 3,651 $ 57,954
<S> <C> <C> <C> <C>
Other comprehensive income (loss):
Foreign currency translation
adjustments (a)........................ (1,152) (1,076) 1,245 (1,224)
----------- ------ ----------- -------------
Comprehensive income....................... $ 346 $ 7,212 $ 4,896 $ 56,730
----------- ------ ----------- -------------
----------- ------ ----------- -------------
</TABLE>
- ------------------------
(a) The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
See notes to condensed unaudited consolidated financial statements.
F-45
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
-----------------------
<S> <C> <C>
JULY 31, JANUARY 31,
1998 1998
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 44,423 $ 43,003
Accounts and notes receivable, net..................................................... 95,192 83,931
Inventories............................................................................ 121,651 117,589
Other assets........................................................................... 15,708 14,239
---------- -----------
Total current assets................................................................. 276,974 258,762
Property, plant and equipment, net....................................................... 43,851 41,502
Other assets............................................................................. 20,505 19,522
---------- -----------
TOTAL............................................................................ $ 341,330 $ 319,786
---------- -----------
---------- -----------
LIABILITIES
Current liabilities:
Short-term debt and current portion of long-term debt.................................. $ 1,868 $ 4,016
Trade payables......................................................................... 59,226 51,308
Accrued expenses....................................................................... 31,559 30,575
Other current liabilities.............................................................. 9,262 5,106
---------- -----------
Total current liabilities............................................................ 101,915 91,005
---------- -----------
Long-term liabilities:
Long-term debt......................................................................... 102,641 103,133
Accrued pension liabilities............................................................ 38,134 38,351
Environmental liabilities, net......................................................... 37,161 38,527
Other liabilities...................................................................... 6,618 6,999
---------- -----------
Total long-term liabilities.......................................................... 184,554 187,010
---------- -----------
Total liabilities.................................................................... 286,469 278,015
---------- -----------
SHAREHOLDERS' EQUITY
Common stock............................................................................. -- 50
Additional paid-in capital............................................................... 46,137 40,209
Accumulated other comprehensive income (loss)............................................ (403) 673
Retained earnings........................................................................ 9,127 839
---------- -----------
Total shareholders' equity........................................................... 54,861 41,771
---------- -----------
TOTAL............................................................................ $ 341,330 $ 319,786
---------- -----------
---------- -----------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
F-46
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
---------------------- PREDECESSOR
TWO COMPANY
QUARTERS QUARTER -----------
ENDED ENDED QUARTER
JULY 31, JULY 31, ENDED MARCH
1998 1997 31, 1997
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 8,288 $ 3,651 $ 57,954
Adjustments to reconcile net income to net cash provided by
operating activities:...............................................
Executive stock awards............................................ 750 500 500
Extraordinary item................................................ -- -- (43,032)
Fresh-start revaluation........................................... -- -- (5,107)
Depreciation and amortization..................................... 4,282 1,962 2,143
Gain on sale of assets............................................ (592) (6) (3,266)
Reorganization expense, net of payments........................... (144) (3,989) 1,538
Deferred income taxes............................................. 2,029 1,661 (3,767)
Provision for doubtful accounts................................... 606 61 162
Provision for environmental costs, net of payments................ (1,006) (393) (256)
Other, net........................................................ 2,791 1,628 3,057
----------- --------- -----------
Total........................................................... 17,004 5,075 9,926
Change in operating assets and liabilities:
(Increase) decrease in trade receivables.......................... (12,596) 8,032 (20,272)
Increase in inventories........................................... (5,774) (8,953) (6,120)
Decrease (increase) in other current assets....................... 1,586 1,769 (355)
Increase (decrease) in trade payables and accrued expenses........ 16,542 (2,890) 18,895
Decrease in prepetition liabilities............................... -- -- (39)
Receipt from environmental trust, net............................. -- -- 5,928
Other assets and liabilities, net................................. (8,270) (523) (1,547)
----------- --------- -----------
Net cash provided by operating activities....................... 8,492 2,510 6,416
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment........................ (6,998) (3,309) (2,774)
Proceeds from asset sales......................................... 1,286 1,205 4,966
Other, net........................................................ (2,254) 33 (25)
----------- --------- -----------
Net cash (used in) provided by investing activities............. (7,966) (2,071) 2,167
----------- --------- -----------
CASH FLOWS FROM FINANCING, MERGER AND REORGANIZATION ACTIVITIES:
Capital contribution from Safeguard............................... 3,541 -- --
Cash distribution pursuant to plan of reorganization.............. -- -- (59,366)
Drawdown of prepetition letters of credit......................... -- -- 9,700
Proceeds from long-term debt, net................................. -- -- 8,100
Net short-term borrowings......................................... (1,851) (1,608) 1,062
Repayment of long-term debt....................................... (548) (83) (487)
----------- --------- -----------
Net cash provided by (used in) financing, merger and
reorganization activities..................................... 1,142 (1,691) (40,991)
----------- --------- -----------
Effects of exchange rate changes on cash and cash equivalents....... (248) 75 (526)
----------- --------- -----------
Net increase (decrease) in cash and cash equivalents................ 1,420 (1,177) (32,934)
Cash and cash equivalents--beginning of period...................... 43,003 30,340 63,274
----------- --------- -----------
Cash and cash equivalents--end of period............................ $ 44,423 $ 29,163 $ 30,340
----------- --------- -----------
----------- --------- -----------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
F-47
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed unaudited consolidated financial statements
include the accounts of Metallurg, Inc. ("Metallurg") and its majority-owned
subsidiaries (collectively, the "Company"). These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to Accounting Principles Board Opinion No. 28.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The condensed consolidated balance sheet as of January 31, 1998 and the
condensed statements of consolidated operations and of consolidated cash flows
for the quarter ended March 31, 1997 were derived from audited financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the interim periods presented are not
necessarily indicative of the results to be expected for a full year.
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led
by Safeguard International Fund, L.P. ("Safeguard"). The acquisition was
accomplished by Metallurg Acquisition Corp., a wholly owned subsidiary of
Metallurg Holdings, Inc. ("Metallurg Holdings"), a Delaware corporation, merging
with and into Metallurg with Metallurg being the surviving company and Metallurg
Holdings becoming the sole parent of Metallurg (the "Merger"). Metallurg
Holdings was formed on June 10, 1998 and is a wholly owned subsidiary of
Safeguard, an international private equity fund that invests primarily in equity
securities of companies in process industries. At the time of the Merger, each
outstanding share of Metallurg common stock was converted into the right to
receive $30 in cash. In connection with the Merger, Metallurg received the
consents of 100% of the registered holders of its Senior Notes to a one-time
waiver of the change of control provisions of the Senior Note Indenture to make
such provisions inapplicable to the Merger and to amend the definition of
"Permitted Holders" under the Senior Note Indenture to reflect the post-merger
ownership of Metallurg. As of July 13, 1998, in connection with the Merger, all
of the then outstanding shares of common stock of Metallurg were cancelled and
100 shares of common stock, $0.01 par value, were issued to Metallurg Holdings.
On February 26, 1997, the Fourth Amended and Restated Joint Plan of
Reorganization (the "Plan") of Metallurg and one of its subsidiaries,
Shieldalloy Metallurgical Corporation ("Shieldalloy"), was confirmed by the U.S.
Bankruptcy Court for the Southern District of New York. Transactions
contemplated by the Plan were consummated on April 14, 1997 (the "Effective
Date"). For financial reporting purposes, the Company has reflected the effects
of the Plan consummation as of March 31, 1997. As a result of the consummation
of the Plan and the adoption of fresh-start reporting under the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code",
financial statements for the quarter ended March 31, 1997, which includes the
effects of the adoption of fresh-start reporting and consummation of the Plan
are referred to as the "Predecessor Company". Financial statements for periods
subsequent to March 31, 1997 are referred to as the "Reorganized Company". The
financial statements of the Company after consummation of the Plan are not
comparable to the Company's financial statements of prior periods and
accordingly, a black line has been used to separate the periods.
For further information, see the financial statements and footnotes thereto
included in the Company's audited consolidated financial statements for the
three quarters ended January 31, 1998 and the quarter ended March 31, 1997.
Effective April 1, 1997, the company changed the reporting period of
Metallurg from a calendar year ending December 31 to a fiscal year ending
January 31 and began reporting the results of its operating
F-48
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
subsidiaries on a one-month lag. Accordingly, the two quarters ended July 31,
1998 include worldwide operating results for the six months ended June 30, 1998
and operating results of Metallurg, the parent holding company, for the six
months ended July 31, 1998. Balance sheet data at July 31, 1998 reflect the
financial position of Metallurg at July 31, 1998 and of its subsidiaries at June
30, 1998.
2. CHANGE OF CONTROL
Pursuant to existing employment agreements between Metallurg and Michael A.
Standen, J. Richard Budd, Michael A. Banks, Barry C. Nuss and Eric L. Schondorf,
each of these individuals is, in certain circumstances, entitled to payments of
$1.2 million, $474,300, $321,300, $321,300 and $313,650, respectively, if their
employment is terminated by them or by the Surviving Corporation in accordance
with the terms of their respective employment agreements following the Merger.
See Metallurg's Annual Report on Form 10-K for the year ended January 31, 1998
which has been filed with the Securities and Exchange Commission for a
discussion of these employment agreements and of certain other benefits to which
these employees may become entitled in the event of their termination.
As of August 10, 1998, Mr. Standen resigned as Metallurg's President and
chief executive officer and therefore became entitled to the payments set forth
in his contract, including the payments described above. No other member of
management has agreed to waive his right to receive the payments described above
and, therefore additional payments may need to be made under existing
contractual arrangements as described above.
3. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
---------- -----------
<S> <C> <C>
Raw materials........................................................ $ 29,751 $ 32,938
Work in process...................................................... 2,551 1,981
Finished goods....................................................... 84,523 77,473
Other................................................................ 4,826 5,197
---------- -----------
Total.............................................................. $ 121,651 $ 117,589
---------- -----------
---------- -----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company continues defending various claims and legal actions arising in
the normal course of business, including those relating to environmental
matters. Management believes, based on the advice of counsel, that the outcome
of such litigation will not have a material adverse effect on the Company's
consolidated financial statements.
5. EARNINGS PER COMMON SHARE
The presentation of earnings per share is not meaningful since the Company
is a wholly owned subsidiary of Metallurg Holdings.
F-49
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", as of
February 1, 1998. This standard requires the display of comprehensive income and
its components in the financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. The Company will adopt this standard in the fourth quarter of 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Postretirement Benefits". SFAS No. 132 changes current
financial disclosure requirements from those that were required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlement and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Company will adopt this
standard in the fourth quarter of 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently evaluating the impact SFAS No. 133
will have on its financial statements.
7. SUPPLEMENTAL GUARANTOR INFORMATION
In November 1997, the Company sold $100 million principal amount of 11%
senior notes due 2007 (the "Senior Notes"). Under the terms of the Senior Notes,
Shieldalloy, Metallurg Holdings Corporation, Metallurg Services, Inc. and MIR
(China), Inc. (collectively, the "Guarantors"), wholly owned subsidiaries of the
Company, will fully and unconditionally guarantee on a joint and several basis
the Company's obligations to pay principal, premium and interest relative to the
Senior Notes. Management has determined that separate, full financial statements
of the Guarantors would not be material and, accordingly, such financial
statements are not provided. Supplemental financial information of the
Guarantors is presented below.
F-50
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue.................................. $ 14,513 $ 57,205 $ 121,775 $ (23,480) $ 170,013
------- ----------- -------------- ------------ ------------
Operating costs and expenses:
Cost of sales................................ 14,009 47,264 104,878 (23,480) 142,671
Selling, general and administrative
expenses................................... 2,009 2,718 10,420 -- 15,147
Merger costs................................. 4,416 -- -- -- 4,416
------- ----------- -------------- ------------ ------------
Total operating costs and expenses............. 20,434 49,982 115,298 (23,480) 162,234
------- ----------- -------------- ------------ ------------
Operating income (loss)........................ (5,921) 7,223 6,477 -- 7,779
Other income (expense):
Other income (expense), net.................. -- (7) (326) -- (333)
Interest income (expense), net............... (2,382) 316 (478) -- (2,544)
Equity in earnings of subsidiaries........... 7,870 3,148 -- (11,018) --
------- ----------- -------------- ------------ ------------
Income before income tax provision............. (433) 10,680 5,673 (11,018) 4,902
Income tax provision (benefit)................. (1,931) 3,114 2,471 (250) 3,404
------- ----------- -------------- ------------ ------------
Net income..................................... $ 1,498 $ 7,566 $ 3,202 $ (10,768) $ 1,498
------- ----------- -------------- ------------ ------------
------- ----------- -------------- ------------ ------------
</TABLE>
F-51
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue........................... $ 26,309 $ 112,752 $ 247,902 $ (49,120) $ 337,843
------- ----------- -------------- ------------ ------------
Operating costs and expenses:
Cost of sales......................... 24,340 92,867 213,092 (48,620) 281,679
Selling, general and administrative
expenses............................ 4,014 5,246 20,648 -- 29,908
Merger costs.......................... 4,416 -- -- -- 4,416
------- ----------- -------------- ------------ ------------
Total operating costs and expenses...... 32,770 98,113 233,740 (48,620) 316,003
------- ----------- -------------- ------------ ------------
Operating income (loss)................. (6,461) 14,639 14,162 (500) 21,840
Other income (expense):
Other income (expense), net........... 878 (7) (326) -- 545
Interest income (expense), net........ (4,559) 554 (611) -- (4,616)
Equity in earnings of subsidiaries.... 16,033 5,752 -- (21,785) --
------- ----------- -------------- ------------ ------------
Income before income tax provision...... 5,891 20,938 13,225 (22,285) 17,769
Income tax provision (benefit).......... (2,397) 6,280 5,848 (250) 9,481
------- ----------- -------------- ------------ ------------
Net income.............................. $ 8,288 $ 14,658 $ 7,377 $ (22,035) $ 8,288
------- ----------- -------------- ------------ ------------
------- ----------- -------------- ------------ ------------
</TABLE>
F-52
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE QUARTER ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
METALLURG, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income.............................. $ 1,498 $ 7,566 $ 3,202 $ (10,768) $ 1,498
Other comprehensive income (loss):
Foreign currency translation
adjustment.......................... (1,152) (841) (1,163) 2,004 (1,152)
------ ----------- ------ ------------ ------
Comprehensive income.................... $ 346 $ 6,725 $ 2,039 $ (8,764) $ 346
------ ----------- ------ ------------ ------
------ ----------- ------ ------------ ------
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
METALLURG, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income.............................. $ 8,288 $ 14,658 $ 7,377 $ (22,035) $ 8,288
Other comprehensive income (loss):
Foreign currency translation
adjustment.......................... (1,076) (401) (1,087) 1,488 (1,076)
------ ----------- ------ ------------ ------
Comprehensive income.................... $ 7,212 $ 14,257 $ 6,290 $ (20,547) $ 7,212
------ ----------- ------ ------------ ------
------ ----------- ------ ------------ ------
</TABLE>
F-53
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 17,775 $ 2,432 $ 24,216 $ 44,423
Accounts and notes receivable, net.... 39,557 64,565 69,219 $ (78,149) 95,192
Inventories........................... 7,347 43,287 75,262 (4,245) 121,651
Other assets.......................... 8,302 97 7,059 250 15,708
-------------- ----------- -------------- ------------ ------------
Total current assets................ 72,981 110,381 175,756 (82,144) 276,974
Investments - intergroup................ 104,625 54,766 -- (159,391) --
Investments - other..................... 250 -- 3,351 -- 3,601
Property, plant and equipment, net...... 982 6,866 36,003 -- 43,851
Other assets............................ 5,851 3 11,089 (39) 16,904
-------------- ----------- -------------- ------------ ------------
Total............................... $ 184,689 $ 172,016 $ 226,199 $ (241,574) $ 341,330
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
LIABILITIES
Current liabilities:
Short-term debt and current portion of
long-term debt...................... $ 1,868 $ 1,868
Trade payables........................ $ 2,599 $ 16,828 52,927 $ (13,128) 59,226
Accrued expenses...................... 3,429 9,432 18,698 -- 31,559
Loans payable - intergroup............ 22,063 16,524 36,435 (75,022) --
Other current liabilities............. -- 6,099 3,163 -- 9,262
-------------- ----------- -------------- ------------ ------------
Total current liabilities........... 28,091 48,883 113,091 (88,150) 101,915
-------------- ----------- -------------- ------------ ------------
Long-term liabilities:
Long-term debt........................ 100,000 -- 2,641 -- 102,641
Accrued pension liabilities........... 342 1,834 35,958 -- 38,134
Environmental liabilities, net........ -- 34,196 2,965 -- 37,161
Other liabilities..................... 1,395 -- 5,262 (39) 6,618
-------------- ----------- -------------- ------------ ------------
Total long-term liabilities......... 101,737 36,030 46,826 (39) 184,554
-------------- ----------- -------------- ------------ ------------
Total liabilities................... 129,828 84,913 159,917 (88,189) 286,469
-------------- ----------- -------------- ------------ ------------
SHAREHOLDERS' EQUITY:
Common stock outstanding.............. -- 1,227 80,358 (81,585) --
Additional paid-in capital............ 46,137 90,867 1,104 (91,971) 46,137
Accumulated other comprehensive
income.............................. (403) 708 21,299 (22,007) (403)
Retained earnings (deficit)........... 9,127 (5,699) (36,479) 42,178 9,127
-------------- ----------- -------------- ------------ ------------
Shareholders' equity.................. 54,861 87,103 66,282 (153,385) 54,861
-------------- ----------- -------------- ------------ ------------
Total............................... $ 184,689 $ 172,016 $ 226,199 $ (241,574) $ 341,330
-------------- ----------- -------------- ------------ ------------
-------------- ----------- -------------- ------------ ------------
</TABLE>
F-54
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWO QUARTERS ENDED JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
METALLURG, GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES.............. $ (12,319) $ 8,155 $ 12,656 $ 8,492
-------------- ----------- ------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.......... (49) (786) (6,163) (6,998)
Proceeds from asset sales........................... 1,122 109 55 1,286
Other, net.......................................... (212) -- (2,042) (2,254)
-------------- ----------- ------- ------------
Net cash provided by (used in) investing activities... 861 (677) (8,150) (7,966)
-------------- ----------- ------- ------------
CASH FLOWS FROM FINANCING AND MERGER ACTIVITIES:
Capital contribution from Safeguard................. 3,541 -- -- 3,541
Intergroup borrowings (repayments).................. 6,691 (5,770) (921) --
Net short-term borrowings........................... -- -- (1,851) (1,851)
Repayment of long-term debt......................... -- -- (548) (548)
Dividends received (paid)........................... 3,118 -- (3,118) --
-------------- ----------- ------- ------------
Net cash provided by (used in) financing activities... 13,350 (5,770) (6,438) 1,142
-------------- ----------- ------- ------------
Effects of exchange rate changes on cash and cash
equivalents......................................... -- -- (248) (248)
-------------- ----------- ------- ------------
Net increase (decrease) in cash and cash
equivalents......................................... 1,892 1,708 (2,180) 1,420
Cash and cash equivalents -- beginning of period...... 15,883 724 26,396 43,003
-------------- ----------- ------- ------------
Cash and cash equivalents -- end of period............ $ 17,775 $ 2,432 $ 24,216 $ 44,423
-------------- ----------- ------- ------------
-------------- ----------- ------- ------------
</TABLE>
F-55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Metallurg Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Metallurg
Holdings, Inc. (a Delaware corporation) and its subsidiary as of June 29, 1998.
This consolidated balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Metallurg Holdings,
Inc. and its subsidiary as of June 29, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
New York, New York
June 29, 1998
F-56
<PAGE>
METALLURG HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 29, 1998
ASSETS
<TABLE>
<CAPTION>
Cash............................................................. $ 35
<S> <C>
---------
Total assets................................................. $ 35
---------
---------
</TABLE>
SHAREHOLDER'S EQUITY
<TABLE>
<S> <C>
Common stock, $.01 par value; 1,000 shares authorized; 350 shares
issued and outstanding.......................................... $ 35
---------
Total shareholder's equity................................... $ 35
---------
---------
</TABLE>
F-57
<PAGE>
METALLURG HOLDINGS, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
Metallurg Holdings, Inc. ( the "Issuer") was incorporated under the laws of
the State of Delaware on June 10, 1998. The Issuer was formed by Safeguard
International Fund, L.P. ("Safeguard International") and certain limited
partners of Safeguard International (the "Investor Group") to enter into an
agreement and plan of merger whereby Metallurg Acquisition Corp. ("Acquisition
Corp."), a wholly owned subsidiary of the Issuer, will merge with and into
Metallurg, Inc. ("Metallurg"), with Metallurg being the surviving corporation.
The Issuer will become the holding company for Metallurg. The cash purchase
price will be $30 per share of Metallurg common stock or an aggregate cash
purchase price of approximately $152.2 million (including payments for
cancellation of compensatory options). For the three quarters ended January 31,
1998, Metallurg had $477.0 million of revenues and net income of $6.3 million.
In order to finance the Merger, (i) Safeguard International and the Investor
Group will contribute approximately $97.0 million of capital to the Issuer; and
(ii) the Issuer will consummate an offering of approximately $121.0 million
principal amount at maturity of Senior Discount Notes due 2008. Reference is
made to risk factors in the Prospectus on pages 20 to 26.
EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On July 13, 1998, Acquisition Corp. merged with and into Metallurg, with
Metallurg being the surviving company and the Issuer becoming the holding
company for Metallurg. The cash purchase price was $30 per share, representing
an aggregate cash purchase price of approximately $152.2 million (including
payments for cancellation of compensatory options). For the three quarters ended
January 31, 1998, Metallurg had $477.0 million of revenues, operating income of
$23.4 million and net income of $6.3 million which includes a $0.8 million
extraordinary loss on early extinguishment of debt.
On July 13, 1998, the Senior Discount Notes were sold. On this date, the
Issuer issued 5202.335 Series A Voting Convertible Preferred Stock, $.01 par
value ("Series A") and 4,500 shares of Series B ("Series B") Non-Voting
Convertible Preferred Stock, $.01 par value. Series A and Series B shares'
liquidation value is $10,000 per share.
F-58
<PAGE>
UNAUDITED FINANCIAL STATEMENTS
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
JUNE 10, 1998
(INCEPTION)
TO
JULY 31, 1998
-------------
<S> <C>
Total revenue...................................................................................... $ 2,274
-------------
Operating costs and expenses:
Cost of sales.................................................................................. 2,174
Selling, general and administrative expenses................................................... 964
Merger costs................................................................................... 4,416
-------------
Total operating costs and expenses............................................................. 7,554
-------------
Operating loss............................................................................... (5,280)
Interest expense, net.............................................................................. 833
-------------
Loss before income tax provision................................................................... (6,113)
Income tax benefit................................................................................. 1,497
-------------
Net loss........................................................................................... $ (4,616)
-------------
-------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
F-59
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
JUNE 10, 1998
(INCEPTION)
TO
JULY 31, 1998
-------------
<S> <C>
Net loss........................................................................................... $ (4,616)
Other comprehensive income......................................................................... --
-------------
Comprehensive loss................................................................................. $ (4,616)
-------------
-------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
F-60
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31,
1998
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................... $ 46,482
Accounts and notes receivable, net.................................................................. 95,192
Inventories......................................................................................... 121,651
Other assets........................................................................................ 16,055
----------
Total current assets............................................................................ 279,380
Property, plant and equipment, net.................................................................... 43,851
Goodwill.............................................................................................. 99,015
Other assets.......................................................................................... 23,609
----------
TOTAL......................................................................................... $ 445,855
----------
----------
LIABILITIES
Current liabilities:
Short-term debt and current portion of long-term debt............................................... $ 1,868
Trade payables...................................................................................... 59,226
Accrued expenses.................................................................................... 32,945
Other current liabilities........................................................................... 9,262
----------
Total current liabilities....................................................................... 103,301
----------
Long-term debt...................................................................................... 168,234
Accrued pension liabilities......................................................................... 38,134
Environmental liabilities, net...................................................................... 37,161
Other liabilities................................................................................... 6,618
----------
Total long-term liabilities..................................................................... 250,147
----------
Total liabilities............................................................................... 353,448
----------
SHAREHOLDERS' EQUITY
Common and preferred stock............................................................................ --
Additional paid-in capital............................................................................ 97,023
Retained earnings (deficit)........................................................................... (4,616)
----------
Total shareholders' equity...................................................................... 92,407
----------
TOTAL......................................................................................... $ 445,855
----------
----------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
F-61
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 10, 1998
(INCEPTION) TO
JULY 31, 1998
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................................... $ (4,616)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of executive stock awards.......................................................... 354
Depreciation and amortization................................................................... 221
Interest accretion on Discount Notes............................................................ 416
Equity in undistributed earnings of subsidiaries................................................ 3,962
--------------
Total......................................................................................... 337
Change in operating assets and liabilities:
Increase in trade receivables................................................................... (1,719)
Increase in trade payables and accrued expenses................................................. 1,386
--------------
Net cash provided by operating activities..................................................... 4
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment...................................................... (3)
Cash paid for acquisition of Metallurg, Inc., net of cash acquired.............................. (103,644)
--------------
Net cash used in investing activities......................................................... (103,647)
--------------
CASH FLOWS FROM FINANCING AND MERGER ACTIVITIES:
Capital contribution............................................................................ 97,023
Proceeds from long-term debt, net............................................................... 62,895
Payment for cancellation of compensatory options................................................ (3,541)
Payment of fees associated with the solicitation of consents from Senior Note holders........... (625)
Payment of merger costs......................................................................... (5,627)
--------------
Net cash provided by financing and merger activities.......................................... 150,125
--------------
Net increase in cash and cash equivalents......................................................... 46,482
Cash and cash equivalents--beginning of period.................................................... --
--------------
Cash and cash equivalents--end of period.......................................................... 46,482
--------------
--------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
F-62
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Metallurg Holdings, Inc.'s ("Metallurg Holdings") accompanying condensed
unaudited consolidated financial statements as of July 31, 1998 and for the
period ended July 31, 1998 include the accounts of Metallurg Holdings and its
majority-owned subsidiaries (collectively, the "Company"). These financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information pursuant to Accounting Principles
Board ("APB") Opinion No. 28. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the interim periods
presented are not necessarily indicative of the results to be expected for a
full year.
Metallurg Holdings and Metallurg, two holding companies, report on a fiscal
year ending January 31. The operating subsidiaries report on a one-month lag.
Accordingly, the period ended July 31, 1998 includes (i) the results of
Metallurg Holdings from its inception (June 10, 1998) to July 31, 1998 (a loss
of $654,000) and (ii) the results of Metallurg, Inc., the holding company, for
the period subsequent to the Merger, as defined below (a loss of $3,962,000).
The results of Metallurg's operating subsidiaries are not included in these
results. The consolidated balance sheet at July 31, 1998 reflects the positions
of Metallurg Holdings and Metallurg, Inc. at July 31, 1998 and of Metallurg's
operating subsidiaries at June 30, 1998.
2. THE ACQUISITION TRANSACTIONS
Metallurg Holdings, a Delaware corporation formed on June 10, 1998, is a
wholly owned subsidiary of a group of investors led by and including Safeguard
International Fund, L.P. ("Safeguard"), an international private equity fund
that invests primarily in equity securities of companies in process industries.
On July 13, 1998, Metallurg Acquisition Corp., a wholly owned subsidiary of
Metallurg Holdings, merged with and into Metallurg, Inc., with Metallurg, Inc.
being the surviving company and Metallurg Holdings becoming the sole parent of
Metallurg, Inc. (the "Merger"). Metallurg, founded in 1911, is a leading
international producer and seller of high-quality metal alloys and specialty
metals used by manufacturers of steel, aluminum, superalloys and chemicals and
other metal consuming industries.
At the time of the Merger, each outstanding share of Metallurg common stock,
par value $0.01 per share, was converted into the right to receive $30 in cash,
representing an aggregate cash price of approximately $152.2 million (including
payments for cancellation of compensatory options). Metallurg Holding's purchase
of Metallurg was recorded under the purchase method of accounting in accordance
with APB Opinion No. 16, "Business Combinations". The total value of the
transaction, including existing indebtedness and environmental, pension and
other liabilities, net of cash, was approximately $300 million. The excess of
the purchase price over the fair value of the net assets acquired is
approximately $99.2 million and is being amortized over a period of 20 years.
In order to finance the Merger, (i) Safeguard and certain of its limited
partners contributed approximately $97.0 million of capital to Metallurg
Holdings (the "Equity Contribution"); and (ii) Metallurg Holdings received
approximately $62.9 million net proceeds upon consummation of the offering of
$121.0 million aggregate principal amount at maturity of 12 3/4% Senior Discount
Notes due 2008 (the "Discount Notes") in a Rule 144A private placement to
qualified institutional investors (the "Offering"). As used herein, the term
"Acquisition Transactions" means the Equity Contribution, the Offering, the
Merger, the Consent Solicitation (as defined herein) and the execution of a
supplemental indenture to the indenture governing Metallurg, Inc.'s 11% Senior
Notes due 2007 (the "Senior Notes").
F-63
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. THE ACQUISITION TRANSACTIONS (CONTINUED)
In connection with the Merger, Metallurg received the consents (the "Consent
Solicitation") of 100% of the registered holders of its Senior Notes to a
one-time waiver of the change of control provisions of the Senior Note Indenture
to make such provisions inapplicable to the Merger and to amend the definition
of "Permitted Holders" under the Senior Note Indenture to reflect the
post-Merger ownership of Metallurg.
For further information, see the financial statements and footnotes thereto
included in Metallurg, Inc.'s Form 10-Q for the quarter ended July 31, 1998 and
report on Form 10-K for the period ended January 31, 1998.
3. CHANGE OF CONTROL
Pursuant to existing employment agreements between Metallurg and Michael A.
Standen, J. Richard Budd, Michael A. Banks, Barry C. Nuss and Eric L. Schondorf,
each of these individuals is, in certain circumstances, entitled to payments of
$1.2 million, $474,300, $321,300, $321,300 and $313,650, respectively, if their
employment is terminated by them or by the surviving company in accordance with
the terms of their respective employment agreements following the Merger. See
Metallurg's Annual Report on Form 10-K for the year ended January 31, 1998 which
has been filed with the Securities and Exchange Commission for a discussion of
these employment agreements and of certain other benefits to which these
employees may become entitled in the event of their termination.
As of August 10, 1998, Mr. Standen resigned as Metallurg's President and
chief executive officer and therefore became entitled to the payments set forth
in his contract, including the payments described above. No other member of
management has agreed to waive his right to receive the payments described above
and, therefore additional payments may need to be made under existing
contractual arrangements as described above.
4. CAPITALIZATION
The total number of shares of all classes of stock which Metallurg Holdings
is authorized to issue is 50,000 shares, of which 30,000 shares shall be Common
Stock, $.01 par value ("Common Stock"), 10,000 shares shall be Series A Voting
Convertible Preferred Stock, $.01 par value ("Series A Preferred Stock") and
10,000 shares shall be Series B Non-Voting Preferred Stock, $.01 par value
("Series B Preferred Stock"). At July 31, 1998, no Common Stock was issued and
outstanding; however, 5,202.335 shares of Series A Preferred Stock and 4,500
shares of Series B Preferred Stock were issued and outstanding.
5. EARNINGS PER SHARE
The presentation of earnings per share is not meaningful since 100% of the
capital stock of the Company is owned by a group of investors led by and
including Safeguard.
F-64
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<TABLE>
<CAPTION>
METALLURG
HOLDINGS
----------
<S> <C>
JULY 31,
1998
----------
Raw materials..................................................................... $ 29,751
Work in process................................................................... 2,551
Finished goods.................................................................... 84,523
Other............................................................................. 4,826
----------
Total........................................................................... $ 121,651
----------
----------
</TABLE>
7. PRO FORMA RESULTS
The pro forma information presented here is based upon the historical
financial statements of Metallurg included elsewhere herein. The pro forma
information illustrate the estimated effects of (i) the adoption of fresh-start
reporting following the consummation of the Plan, (ii) the issuance of the
Senior Notes of Metallurg due 2007 and the application of the proceeds related
thereto, (iii) the issuance of the 12 3/4% Senior Discount Notes of Metallurg
Holdings due 2008 and (iv) the Merger and the transactions related thereto
(collectively, the "Pro Forma Transactions"), as if each of the listed
transactions had occurred as of January 1, 1997.
<TABLE>
<CAPTION>
TWO QUARTERS QUARTER QUARTER
ENDED ENDED ENDED
JULY 31, JULY 31, MARCH 31,
1998 1997 1997
------------ ---------- ----------
<S> <C> <C> <C>
Revenues............................................... $ 337,843 $ 166,879 $ 155,587
Operating income....................................... $ 24,007 $ 8,594 $ 6,056
Net income (loss)...................................... $ 5,846 $ (2,258) $ 2,713
</TABLE>
The pro forma financial information presented is not necessarily indicative
of either the results of operations that would have occurred had the Pro Forma
Transactions taken place at the beginning of the respective periods or the
future operating results of the Company.
This Merger has been accounted for under the purchase method of accounting
and accordingly, the results of operations of Metallurg have been included in
the accompanying consolidated financial statements since the date of the Merger.
The cost of the Merger was allocated on the basis of the estimated fair market
value of the assets acquired and liabilities assumed. The purchase price
allocation has been completed on a preliminary basis. Management does not
believe that changes in the purchase price allocation will be material.
The pro forma adjustments include the amortization of goodwill over 20
years, interest expense due to the issuance of the Discount Notes and the
retirement of certain debt, certain overhead expenses and the tax effect of the
pro forma adjustments.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FSAB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related
F-65
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Information". SFAS No. 131 requires the reporting of profit and loss, specific
revenue and expense items and assets for reportable segments. It also requires
the reconciliation of total segment revenues, total segment profit or loss,
total segment assets and other amounts disclosed for segments to the
corresponding amounts in the general purpose financial statements. The Company
will adopt this standard in the fourth quarter of 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Postretirement Benefits". SFAS No. 132 changes current
financial disclosure requirements from those that were required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlement and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Company will adopt this
standard in the fourth quarter of 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently evaluating the impact SFAS No. 133
will have on its financial statements.
9. COMMITMENTS AND CONTINGENCIES
The Company continues defending various claims and legal actions arising in
the normal course of business, including those relating to environmental
matters. Management believes, based on the advice of counsel, that the outcome
of such litigation will not have a material adverse effect on the Company's
consolidated financial statements.
F-66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUER, OR THE INITIAL PURCHASER. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER, SINCE
THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE AN OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... 2
Exchange Rates.................................. 3
Market Data..................................... 3
Summary......................................... 4
Disclosure Regarding Forward Looking
Statements.................................... 19
Risk Factors.................................... 19
The Exchange Offer.............................. 27
Capitalization.................................. 35
Unaudited Pro Forma Condensed Consolidated
Financial Data................................ 36
Selected Financial Data......................... 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 45
Business........................................ 57
Management...................................... 69
Share Ownership................................. 70
Certain Transactions............................ 70
Description of Certain Indebtedness............. 71
Description of the New Notes.................... 72
Plan of Distribution............................ 101
Legal Matters................................... 101
Experts......................................... 102
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL JANUARY 21, 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$121,000,000
METALLURG HOLDINGS, INC.
[LOGO]
OFFER TO EXCHANGE 12 3/4% SERIES B
SENIOR DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR ANY AND ALL
OUTSTANDING 12 3/4% SERIES A
SENIOR DISCOUNT NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
Dated , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL (providing for liability of directors for the unlawful payment
of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Section 145 of the DGCL empowers the Issuer to indemnify, subject to the
standards set forth therein, any person in connection with any action, suit or
proceeding brought before or threatened by reason of the fact that the person
was a director, officer, employee or agent of such company, or is or was serving
as such with respect to another entity at the request of such company. The DGCL
also provides that the Issuer may purchase insurance on behalf of any such
director, officer, employee or agent.
The Issuer's Certificate of Incorporation provides in effect for the
indemnification by the Issuer of each director and officer of the Issuer to the
fullest extent permitted by applicable law.
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement, dated as of July 6, 1998, by and between Metallurg Holdings, Inc. and BancBoston
Securities Inc (the "Initial Purchaser").*
2.1 Merger Agreement, dated as of June 15, 1998, by and among Metallurg Holdings, Inc., Metallurg
Acquisition Corp. and Metallurg, Inc. (incorporated herein by reference to Exhibit 8K2 to Current Report
on Form 8-K filed by Metallurg, Inc. with the Securities and Exchange Commission on June 16, 1998).
3.1 Amended and Restated Certificate of Incorporation of the Issuer.
3.2 By-laws of the Issuer.*
3.2.1 Amendment to By-laws of the Issuer.
4.1 Indenture, dated as of July 13, 1998, by and between the Issuer and United States Trust Company of New
York.*
4.2 Form of 12 3/4% Series A Senior Discount Notes due 2008, dated as of July 13, 1998 (incorporated by
reference to Exhibit 4.1).*
4.3 Form of 12 3/4% Series B Senior Discount Notes due 2008 (incorporated by reference to Exhibit 4.1).*
4.4 Registration Agreement, dated as of July 13, 1998 by and between the Issuer and the Initial Purchaser.*
5.1 Opinion of Rogers & Wells LLP.*
10.1 Pledge Agreement, dated as of July 13, 1998, by and between the Issuer and United States Trust Company
of New York.*
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.2 Loan Agreement dated April 14, 1997 (the "Revolving Credit Facility") among Metallurg, Inc. and
Shieldalloy Metallurgical Corporation as borrowers, Metallurg Services, Inc., MIR (China), Inc. and
Metallurg Holdings Corporation, as Guarantors (the "Guarantors") and BankBoston, N.A. as Agent for the
lending institutions, as amended by the First, Second and Third Amendments thereto (incorporated herein
by reference to Exhibit S410.1 to the Form S-4 Registration Statement filed by the Company with the
Securities and Exchange Commission on December 30, 1997 (File No. 333-42141)).
10.3 Fourth Amendment to the Revolving Credit Facility.*
10.4 German Loan Agreement, dated October 20, 1997, by and among GfE Gesellschaft fur Elektrometallurgie mbH,
GfE Umwelttechnik GmbH, GfE Giessrei und Stahlwerksbedarf GmbH GfE Metalle und Materialien GmbH and
Keramed Medizintechnik GmbH and BankBoston, N.A. acting through its Frankfurt, Germany branch.
(incorporated herein by reference to Exhibit S410.2 to the Form S-4 Registration Statement filed by
Metallurg, Inc. with the Securities and Exchange Commission on December 30, 1997 (File No. 333-42141)).
10.5 Indenture, dated as of November 25, 1997, by and among Metallurg, Inc., the Guarantors and IBJ Schroder
Bank & Trust Company (incorporated herein by reference to Exhibit S44.1 to the Form S-4 Registration
Statement filed by Metallurg, Inc. with the Securities and Exchange Commission on December 30, 1997
(File No. 333-42141)).
10.6 Joint Disclosure Statement for the Fourth Amended and Restated Joint Plan of Reorganization dated
December 18, 1996 (incorporated herein by reference to Exhibit T3E.1 to the Form T-3 filed by Metallurg,
Inc. with the Securities and Exchange Commission on March 21, 1997 (File No. 022-22265)).
10.7 Supplement to Joint Disclosure Statement for the Fourth Amended and Restated Joint Plan of
Reorganization dated December 18, 1996 (incorporated herein by reference to Exhibit T3E.3 to the Form
T-3 filed by Metallurg, Inc. with the Securities and Exchange Commission on March 21, 1997 (File No.
022-22265)).
10.8 Settlement Agreement dated December 27, 1996 between Metallurg, Inc., Shieldalloy Metallurgical
Corporation, the Environmental Protection Agency, the Department of the Interior, the Nuclear Regulatory
Commission and the New Jersey Department of Environmental Protection. (incorporated herein by reference
to Exhibit S410.5 to the Form S-4 Registration Statement filed by Metallurg, Inc. with the Securities
and Exchange Commission on December 30, 1997 (File No. 333-42141)).
10.9 Permanent Injunction Consent Order dated December 23, 1996 between the State of Ohio, Shieldalloy
Metallurgical Corporation, and Cyprus Foote Mineral Company. (incorporated herein by reference to
Exhibit S410.6 to the Form S-4 Registration Statement filed by Metallurg, Inc. with the Securities and
Exchange Commission on December 30, 1997 (File No. 333-42141)).
10.10 Registration Rights Agreement dated April 14, 1997 among Metallurg, Inc. and certain holders of the
Company's common stock. (incorporated herein by reference to Exhibit S410.7 to the Form S-4 Registration
Statement filed by Metallurg, Inc. with the Securities and Exchange Commission on December 30, 1997
(File No. 333-42141)).
10.11 Management Incentive Compensation Plan. (incorporated herein by reference to Exhibit S410.9 to the Form
S-4 Registration Statement filed by Metallurg, Inc. with the Securities and Exchange Commission on
December 30, 1997 (File No. 333-42141)).
10.12 Employment Agreements by Metallurg, Inc. dated April 14, 1997 with Michael A. Standen, Michael A. Banks,
Barry C. Nuss, Eric L. Schondorf, J. Richard Budd III and Robin A. Brumwell. (incorporated herein by
reference to Exhibit S410.10 to the Form S-4 Registration Statement filed by Metallurg, Inc. with the
Securities and Exchange Commission on December 30, 1997 (File No. 333-42141)).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.13 Agreement dated December 20, 1983 between LSM and Alan D. Ewart. (incorporated herein by reference to
Exhibit S410.11 to the Form S-4 Registration Statement filed by Metallurg, Inc. with the Securities and
Exchange Commission on December 30, 1997 (File No. 333-42141)).
12.1 Statement re computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Issuer.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Rogers & Wells LLP (to be contained in the opinion filed as Exhibit 5.1).*
24.1 Power of attorney (incorporated by reference in the signature pages).*
25.1 Form T-1 Statement of Eligibility and Qualification of United States Trust Company of New York.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement.*
</TABLE>
- ------------------------
* Previously filed.
ITEM 22. UNDERTAKING.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
(d) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(e) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through the use
of a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successfull defence of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on October 14, 1998.
<TABLE>
<S> <C> <C>
METALLURG HOLDINGS, INC.
By: /s/ MICHAEL R. HOLLY
-----------------------------------------
Michael R. Holly
Vice President and Director
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ President and Director October 13, 1998
Heinz C. Schimmelbusch
*
- ------------------------------ Vice President and October 13, 1998
Arthur R. Spector Director
/s/ MICHAEL R. HOLLY
- ------------------------------ Vice President and October 13, 1998
Michael R. Holly Director
*
- ------------------------------ Treasurer October 13, 1998
Douglas A. Fastuca
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ DIANA WECHSLER KEREKES*
-----------------------------------
Attorney In Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Issuer
3.2.1 Amendment to By-laws of the Issuer
12.1 Statement Re computation of ratio of earnings to fixed charges
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
</TABLE>
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
METALLURG HOLDINGS, INC.
METALLURG HOLDINGS, INC., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Metallurg Holdings, Inc. The date
of filing of its Certificate of Incorporation with the Secretary of State was
June 10, 1998.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of this
corporation to read in its entirety as follows:
FIRST: The name of the corporation is Metallurg Holdings, Inc.
SECOND: The address, including street, number, city, and county, of
the registered office of the corporation in the State of Delaware is 1013 Centre
Road, in the city of Wilmington and the County of New Castle, Zip Code 19805.
The name of its registered agent at such address is the Corporation Service
Company.
THIRD: The nature of the business to be conducted or promoted and the
purposes of the corporation are to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware.
FOURTH: The total number of shares of all classes of stock which the
corporation is authorized to issue is 50,000 shares, of which 30,000 shares
shall be Common Stock, $.01 par value ("Common Stock"), 10,000 shares shall be
Series A Voting Convertible Preferred Stock, $.01 par value ("Series A Preferred
Stock"), and 10,000 shares shall be Series B Non-Voting Convertible Preferred
Stock, $.01 par value ("Series B Preferred Stock"). The Series A Preferred Stock
and the Series B Preferred Stock are together referred to as the "Preferred
Stock."
The following is a statement of the powers, preferences and rights,
and the qualifications, limitations and restrictions thereof, of each class of
capital stock of the corporation.
A. COMMON STOCK.
1. Dividend Rights. Dividends may be declared and paid on the
Common Stock from funds legally available therefor as and when
determined by the Board of Directors, subject in all cases to
the rights and preferences of the holders of the Preferred
Stock.
<PAGE>
2. Liquidation Rights. Subject to the rights and preferences of
the holders of the Preferred Stock, upon any voluntary or
involuntary liquidation, dissolution or winding up of the
affairs of the corporation (a "Liquidation"), the holders of
Common Stock shall be entitled to receive all remaining assets
of the corporation available for distribution to its
stockholders, pro rata based on the number of shares of Common
Stock held by them.
3. Voting Rights. The holders of shares of Common Stock shall be
entitled to one vote for each share so held, and shall be
entitled to notice of any stockholders' meeting and to vote
upon such matters as may be provided in the by-laws of the
corporation, and as may be provided by law. Holders of Common
Stock shall not be entitled to cumulate their votes for any
purpose.
B. PREFERRED STOCK. The terms of the Series A Preferred Stock and the
Series B Preferred Stock are identical in all respects except with
respect to voting rights, as set forth in Section 3 below.
1. Dividend Rights. The holders of Preferred Stock shall be
entitled to share in any dividends declared and paid upon or
set aside for the Common Stock, pro rata in accordance with
the number of shares of Common Stock into which such shares of
Preferred Stock are then convertible.
2. Liquidation. Upon any Liquidation, after payment or provision
for payment of the debts and other liabilities of the
corporation, the holders of Preferred Stock shall be entitled
to receive, out of the remaining assets of the corporation
available for distribution to its stockholders, with respect
to each share of Preferred Stock an amount equal to the sum of
(i) the Original Cost of such share and (ii) all declared but
unpaid dividends payable with respect to such share under
Section 1 above before any distribution shall be made to the
holders of the Common Stock. If upon any Liquidation, the
assets of the corporation available for distribution to its
stockholders shall be insufficient to pay the holders of
Preferred Stock the full amount to which they shall be
entitled, the holders of Preferred Stock shall share in any
distribution of such assets pro rata based on the number of
shares of Preferred Stock held by them. "Original Cost" of
any share of Preferred Stock means (A) $10,000 in the case
of whole shares and (B) in the case of fractional shares,
the product of such fraction and $10,000.
3. Voting Rights.
(a) In addition to the rights provided by applicable law or
under paragraph (c) below, the holders of Series A
Preferred Stock shall be entitled to vote on all
matters as to which holders of Common Stock shall be
entitled to vote, in the same manner and with the same
effect
-2-
<PAGE>
as such holders of Common Stock, voting together with
the holders of Common Stock as one class. Each share of
Series A Preferred Stock shall entitle the holder
thereof to such number of votes as shall equal the
number of shares of Common Stock into which such share
of Series A Preferred Stock is then convertible.
(b) The holders of shares of Series B Preferred Stock
shall not be entitled to vote on any matters except as
required by applicable law or under paragraph (c) below.
(c) Notwithstanding any other provision hereof, the
corporation shall not, without the affirmative consent
or approval of the holders of at least 90% of the
shares of Series A Preferred Stock and 90% of the
shares of Series B Preferred Stock then outstanding,
each voting separately as a class, in any manner alter
or change the powers, preferences or rights, or
qualifications, limitations or restrictions thereof, of
the Series A Preferred Stock or the Series B Preferred
Stock. The corporation shall not, without the
affirmative consent or approval of the holders of at
least two-thirds of the shares of Series A Preferred
Stock and two-thirds of the shares of Series B
Preferred Stock then outstanding, each voting
separately as a class, amend this Certificate of
Incorporation in a manner that adversely affects the
holders of either the shares of Series A Preferred
Stock or the shares of Series B Preferred Stock.
4. Optional Conversion.
(a) Upon the terms set forth in this Section, each holder
of shares of Preferred Stock shall have the right, at
such holder's option, at any time and from time to
time, to convert all, but not less than all, of such
holders' shares into the number of fully paid and
nonassessable whole or fractional shares of Common
Stock equal to the quotient obtained by dividing (i)
the product of $10,000 and the number of shares of
Preferred Stock being converted, by (ii) the Conversion
Price (as defined below), as last adjusted and then in
effect, by surrender of the certificates representing
the shares of Preferred Stock to be converted. The
conversion price per share at which shares of Common
Stock shall be issuable upon conversion of shares of
Preferred Stock (the "Conversion Price") shall be
$10,000, subject to adjustment as set forth below.
(b) The holder of any shares of Preferred Stock may
exercise the conversion right pursuant to paragraph (a)
above by delivering to the corporation the certificate
or certificates for the shares to be converted, duly
endorsed or assigned in blank to the corporation (if
required by it), accompanied by written notice stating
that the holder elects to convert such shares and
stating the name or names (with
-3-
<PAGE>
address) in which the certificate or certificates for
the shares of Common Stock are to be issued. Conversion
shall be deemed to have been effected on the date when
such delivery is made (the "Conversion Date"). As
promptly as practicable thereafter, the corporation
shall issue and deliver to or upon the written order of
such holder, to the place designated by such holder, a
certificate or certificates for the number of shares of
Common Stock to which such holder is entitled. The
person in whose name the certificate or certificates
for Common Stock are to be issued shall be deemed to
have become a stockholder of record on the applicable
Conversion Date unless the transfer books of the
corporation are closed on that date, in which event
such person shall be deemed to have become a
stockholder of record on the next succeeding date on
which the transfer books are open, but the Conversion
Price shall be that in effect on the Conversion Date.
(c) The corporation shall reserve, and at all times from
and after the date of issuance of the Preferred Stock
keep reserved, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of the
shares of Preferred Stock, sufficient shares of Common
Stock to provide for the conversion of all outstanding
shares of Preferred Stock.
(d) If the number of shares of Common Stock outstanding
is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares
of Common Stock, then, following the record date for
the determination of holders of Common Stock entitled
to receive such stock dividend, subdivision or
split-up, the Conversion Price shall be appropriately
decreased so that the number of shares of Common Stock
issuable on conversion of each share of Preferred Stock
shall be increased in proportion to such increase in
outstanding shares.
(e) If the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of
Common Stock, then, following the record date for such
combination, the Conversion Price shall be
appropriately increased so that the number of shares of
Common Stock issuable on conversion of each share of
Preferred Stock shall be decreased in proportion to
such decrease in outstanding shares.
(f) In the event of any capital reorganization of the
corporation, any reclassification of the stock of the
corporation (other than a change in par value or from
no par value to par value or from par value to no par
value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or any
consolidation or merger of the
-4-
<PAGE>
corporation, each share of Preferred Stock shall after
such reorganization, reclassification, consolidation,
or merger be convertible into the kind and number of
shares of stock or other securities or property of the
corporation or of the entity resulting from such
consolidation or surviving such merger to which the
holder of the number of shares of Common Stock
deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation or
merger) upon conversion of such share of Preferred
Stock would have been entitled upon such
reorganization, reclassification, consolidation or
merger. The provisions of this clause shall similarly
apply to successive reorganizations, reclassifications,
consolidations or mergers.
5. Mandatory Conversion.
(a) Upon the consummation of an Initial Public Offering (as
defined below), each share of Preferred Stock then
outstanding shall, by virtue of and simultaneously with
such consummation, be deemed automatically converted
into the number of fully paid and nonassessable whole
or fractional shares of Common Stock equal to the
quotient obtained by dividing (i) $10,000 by (ii) the
Conversion Price, as last adjusted and then in effect.
(b) As promptly as practicable after the date of
consummation of any Initial Public Offering and the
delivery to the corporation of the certificate or
certificates for the shares of Preferred Stock which
have been converted, duly endorsed or assigned in blank
to the corporation (if required by it), the corporation
shall issue and deliver to or upon the written order of
each holder of Preferred Stock, to the place designated
by such holder, a certificate or certificates for the
number of full shares of Common Stock to which such
holder is entitled. The person in whose name the
certificate or certificates for Common Stock are to be
issued shall be deemed to have become a stockholder of
Common Stock of record on the date of consummation of
such Initial Public Offering and on such date the
shares of Preferred Stock shall cease to be outstanding
and all rights with respect to the shares of Preferred
Stock so converted shall terminate (except the right to
receive shares of Common Stock issuable upon such
conversion), whether or not the certificates
representing such shares have been received by the
corporation.
(c) "Initial Public Offering" means the consummation of the
first public offering of Common Stock pursuant to a
registration statement filed under the Securities Act
of 1933.
FIFTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for
creating, defining, limiting
-5-
<PAGE>
and regulating the powers of the corporation, the directors and the
stockholders.
A. In furtherance of and not in limitation of the powers conferred
by statute, the board of directors is expressly authorized to
make, alter or repeal the bylaws of the corporation.
B. The directors of the corporation shall be entitled to the
benefits of all limitations on the liability of directors
generally that are now or hereafter become available under the
General Corporation Law of Delaware. Without limiting the
generality of the foregoing, no director of the corporation shall
be personally liable to the corporation or to any stockholder of
the corporation for monetary damages for breach of fiduciary duty
as a director, provided that this provision shall not limit the
liability of a director (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts
of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, or (iv)
for any transaction from which the director derived an improper
personal benefit.
C. Elections of directors need not be by written ballot unless the
bylaws of the corporation shall so provide.
D. The corporation shall, to the maximum extent permitted from time
to time under the laws of the State of Delaware, indemnify and
upon request shall advance expenses to any person who is or was a
party or is threatened to be made a party to any threatened,
pending or completed action, suit, proceeding or claim, whether
civil, criminal, administrative or investigative, by reason of
the fact that he is or was or has agreed to be a director or
officer of this corporation or while a director or officer is or
was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, against expenses
(including attorney's fees and expenses), judgments, fines,
penalties and amounts paid in settlement or incurred in
connection with the investigation, preparation to defend or
defense of such action, suit, proceeding, claim or counterclaim
initiated by or on behalf of such person. Such indemnification
shall not be exclusive of other indemnification rights arising
under any by-law, agreement, vote of directors or stockholders or
otherwise and shall inure to the benefit of the heirs and legal
representatives of such person. Any repeal or modification of the
foregoing provisions of this Section (D) of Article FIFTH shall
not adversely affect any right or protection of a director or
officer of the corporation existing at the time of such repeal or
modification.
SIXTH: Except as expressly provided in any agreement between any
stockholder and the corporation, no holder of stock of the corporation shall be
entitled as of right to purchase or subscribe for any part of any unissued stock
of the corporation or any additional
-6-
<PAGE>
stock to be issued by reason of any increase of the authorized capital stock of
the corporation, or any bonds, certificates of indebtedness, debentures or other
securities convertible into stock or such additional authorized issue of new
stock, but rather such stock, bonds, certificates of indebtedness, debentures
and other securities may be issued and disposed of pursuant to resolution of the
board of directors to such persons, firms, corporations or associations, and
upon such terms as may be deemed advisable by the board of directors in the
exercise of their discretion.
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware, as the by-laws may provide. The books of the corporation may
be kept (subject to the provisions of the Delaware General Corporation Law)
outside of the State of Delaware at such place or places as may be from time to
time designated by the board of directors or in the by-laws of the corporation.
EIGHTH: The corporation reserves the right to amend, alter, change or
repeal any provisions contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
3. This Amended and Restated Certificate of Incorporation was duly
adopted by the directors and stockholders of the corporation, acting by
unanimous written consent in lieu of meeting effective as of this date, pursuant
to Sections 228 and 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by its authorized officer as of the 13th day of October, 1998.
METALLURG HOLDINGS, INC.
By: /s/ Michael R. Holly
----------------------------------
Name: Michael R. Holly
Title: Vice President
Attested:
By: /s/ Diana Wechsler Kerekes
-------------------------------
Name: Diana Wechsler Kerekes
Title: Secretary
-7-
<PAGE>
Exhibit 3.2.1
UNANIMOUS CONSENT IN WRITING OF THE BOARD OF DIRECTORS
OF METALLURG HOLDINGS, INC.
The undersigned, being all the members of the Board of Directors of
Metallurg Holdings, Inc., a Delaware corporation (the "Company"), by Consent
in Writing pursuant to the authority contained in Section 141(f) of the
General Corporation Law of the State of Delaware, without the formality of
convening a meeting, do hereby consent to the following resolutions:
RESOLVED, that Michael R. Holly is hereby elected to the office of
Vice President - Finance of the Company, to hold office until the
next Annual Meeting of the Board of Directors until his successor is
duly elected and qualified; and it is further
RESOLVED, that Section 1.03 of the Bylaws of the Company be and
hereby is amended to read in full as follows:
SECTION 1.03. FISCAL YEAR. The fiscal year of the corporation
shall end on the 31st of January in each year.
SIGNED AND SEALED effective as of the last date written below.
September 1, 1998 /s/ Heinz Schimmelbusch
---------------------------------
Heinz Schimmelbusch
September 1, 1998 /s/ Arthur R. Spector
---------------------------------
Arthur R. Spector
September 1, 1998 /s/ Michael R. Holly
---------------------------------
Michael R. Holly
-1-
<PAGE>
Exhibit 12.1
Calculation of Earnings to Fixed Charges
[$ in thousands]
<TABLE>
<CAPTION>
Pre-Confirmation
------------------------------------------------------------------------------
Three Months Nine Months Quarter
Years Ended December 31, Ended Ended Ended
---------------------------------------- March 31, December 31, March 31,
1993 1994 1995 1996 1996 1996 1997
-------- -------- -------- -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income......................... (62,757) 516 9,836 (20,042) 7,215 (27,257) 11,859
Add: interest expense.................. 9,434 4,815 4,851 3,043 1,335 1,708 1,706
Add: 1/3 rental expense................ 270 271 272 289 72 217 170
-------- -------- -------- -------- ----------- ------------ --------
Adjusted earnings...................... (53,053) 5,602 14,959 (16,710) 8,622 (25,332) 13,735
-------- -------- -------- -------- ----------- ------------ --------
Fixed charges:
Interest:
interest expense....................... 9,434 4,815 4,851 3,043 1,335 1,708 1,706
Contractual interest (1)............... 2,600 8,300 9,200 8,600 2,150 6,450 2,136
1/3 rental expense..................... 270 271 272 289 72 217 170
-------- -------- -------- -------- ----------- ------------ --------
Total fixed charges.................... 12,304 13,386 14,323 11,932 3,557 8,375 4,012
-------- -------- -------- -------- ----------- ------------ --------
Ratio of earnings to fixed charges.......... NM NM 1.0x NM 2.4x 3.4x
-------- -------- -------- -------- ----------- ------------ --------
-------- -------- -------- -------- ----------- ------------ --------
Deficiency of earnings to fixed charge...... 65,357 7,784 28,642 33,707
-------- -------- -------- -------- ----------- ------------ --------
-------- -------- -------- -------- ----------- ------------ --------
Post-Confirmation
---------------------------
Three Quarters Quarter
Ended Ended
January 31, April 30,
1998 1998
<S> -------------- ---------
<C> <C>
Earnings: 19,523 12,867
Pre-tax income......................... 8,270 2,900
Add: interest expense.................. 596 199
Add: 1/3 rental expense................ -------------- ---------
28,389 15,966
Adjusted earnings...................... -------------- ---------
Fixed charges:
Interest: 8,270 2,900
interest expense....................... -- --
Contractual interest (1)............... 596 199
1/3 rental expense..................... -------------- ---------
8,866 3,099
Total fixed charges.................... -------------- ---------
3.2x 5.2x
Ratio of earnings to fixed charges.......... -------------- ---------
-------------- ---------
Deficiency of earnings to fixed charge...... -------------- ---------
-------------- ---------
</TABLE>
- -------------------------
(1) Contractual interest relates to interest on prepetition debt that was not
accrued while the Company was in Chapter 11 proceedings.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre Effective Amendment No. 2 to the
Registration Statement of Metallurg Holdings, Inc., on Form S-4 of our report
dated April 1, 1998, appearing in the Prospectus, which is part of this Pre
Effective Amendment No. 2 to the Registration Statement and to the reference to
us under the headings "Summary Financial Data", "Selected Financial Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
October 13, 1998
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
October 13, 1998
