<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
METALLURG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 23-2967577
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
800 THE SAFEGUARD BUILDING
435 DEVON PARK DRIVE
WAYNE, PENNSYLVANIA 19087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(610) 293-0838
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[X] Yes [ ] No
There are no common equity securities of the registrant outstanding. At
September 10, 1999, the outstanding capital of Metallurg Holdings, Inc. was
comprised of 5,202.335 shares of Series A Voting Convertible Preferred Stock and
4,524 shares of Series B Non-Voting Preferred Stock, $.01 par value.
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<PAGE> 2
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION:
Item 1 -- Financial Statements (Unaudited)
Condensed Statements of Consolidated Operations of Metallurg
Holdings, Inc. for the Quarter and the Two Quarters
Ended July 31, 1999 and for the Period June 10, 1998
(inception) to July 31, 1998........................... 2
Condensed Statements of Consolidated Operations of
Metallurg, Inc. for the Quarter and the Two Quarters
Ended July 31, 1999 and 1998........................... 3
Condensed Consolidated Balance Sheets of Metallurg Holdings,
Inc. at July 31, 1999 and January 31, 1999............. 4
Condensed Consolidated Balance Sheets of Metallurg, Inc. at
July 31, 1999 and January 31, 1999..................... 5
Condensed Statements of Consolidated Cash Flows of Metallurg
Holdings, Inc. for the Two Quarters Ended July 31, 1999
and for the Period June 10, 1998 (inception) to July
31, 1998............................................... 6
Condensed Statements of Consolidated Cash Flows of
Metallurg, Inc. for the Two Quarters Ended July 31,
1999 and 1998.......................................... 7
Notes to Condensed Unaudited Consolidated Financial
Statements............................................. 8-14
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15-22
Part II OTHER INFORMATION:
Item 6.(a) EXHIBITS........................................ 23
Item 6.(b) REPORT ON FORM 8-K.............................. 23
Signature Page.............................................. 24
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 -- FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
TWO JUNE 10, 1998
QUARTER QUARTERS (INCEPTION)
ENDED ENDED TO
JULY 31, 1999 JULY 31, 1999 JULY 31, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Sales................................................. $115,897 $233,576 $ 2,274
Commission income..................................... 155 289 --
-------- -------- -------
Total revenue............................... 116,052 233,865 2,274
-------- -------- -------
Operating costs and expenses:
Cost of sales....................................... 100,765 208,804 2,174
Selling, general and administrative expenses........ 15,401 31,140 786
Environmental expense recovery...................... (5,501) (5,501) --
Restructuring charges............................... 4,386 4,386 --
Merger-related costs................................ -- -- 875
-------- -------- -------
Total operating costs and expenses.......... 115,051 238,829 3,835
-------- -------- -------
Operating income (loss)..................... 1,001 (4,964) (1,561)
Other income (expense):
Other (expense) income, net......................... (27) 5 --
Interest expense, net............................... (5,069) (10,320) (833)
-------- -------- -------
Loss before income tax provision (benefit)............ (4,095) (15,279) (2,394)
Income tax provision (benefit)........................ 1,771 2,750 (574)
-------- -------- -------
Net loss.............................................. (5,866) (18,029) (1,820)
Other comprehensive loss:
Foreign currency translation adjustment............. (737) (2,421) --
-------- -------- -------
Comprehensive loss.................................. $ (6,603) $(20,450) $(1,820)
======== ======== =======
</TABLE>
See notes to condensed unaudited consolidated financial statements.
2
<PAGE> 4
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 -- FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED TWO QUARTERS ENDED
JULY 31, JULY 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales........................................... $115,897 $169,754 $233,576 $337,429
Commission income............................... 155 259 289 414
-------- -------- -------- --------
Total revenue......................... 116,052 170,013 233,865 337,843
-------- -------- -------- --------
Operating costs and expenses:
Cost of sales................................. 100,765 142,671 208,804 281,679
Selling, general and administrative
expenses................................... 14,066 15,147 28,474 29,908
Environmental expense recovery................ (5,501) -- (5,501) --
Restructuring charges......................... 4,386 -- 4,386 --
Merger costs.................................. -- 4,416 -- 4,416
-------- -------- -------- --------
Total operating costs and expenses.... 113,716 162,234 236,163 316,003
-------- -------- -------- --------
Operating income (loss)............... 2,336 7,779 (2,298) 21,840
Other income (expense):
Other (expense) income, net................... (27) (333) 5 545
Interest expense, net......................... (2,894) (2,544) (5,860) (4,616)
-------- -------- -------- --------
(Loss) income before income tax provision....... (585) 4,902 (8,153) 17,769
Income tax provision............................ 1,769 3,404 2,745 9,481
-------- -------- -------- --------
Net (loss) income............................... (2,354) 1,498 (10,898) 8,288
Other comprehensive loss:
Foreign currency translation adjustment....... (737) (1,152) (2,421) (1,076)
-------- -------- -------- --------
Comprehensive (loss) income................... $ (3,091) $ 346 $(13,319) $ 7,212
======== ======== ======== ========
</TABLE>
See notes to condensed unaudited consolidated financial statements.
3
<PAGE> 5
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 -- FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,724 $ 38,395
Accounts and notes receivable, net........................ 64,333 63,745
Inventories............................................... 99,177 120,658
Other assets.............................................. 18,100 17,106
-------- --------
Total current assets.............................. 227,334 239,904
Property, plant and equipment, net.......................... 47,782 49,018
Goodwill.................................................... 96,255 98,794
Other assets................................................ 24,803 26,640
-------- --------
TOTAL............................................. $396,174 $414,356
======== ========
LIABILITIES
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 4,071 $ 4,945
Trade payables............................................ 38,984 37,460
Accrued expenses.......................................... 31,444 26,047
Other current liabilities................................. 3,124 3,955
-------- --------
Total current liabilities......................... 77,623 72,407
-------- --------
Long-term debt.............................................. 181,501 178,885
Accrued pension liabilities................................. 36,760 41,062
Environmental liabilities, net.............................. 33,372 35,463
Other liabilities........................................... 5,909 5,556
-------- --------
Total long-term liabilities....................... 257,542 260,966
-------- --------
Total liabilities................................. 335,165 333,373
-------- --------
SHAREHOLDERS' EQUITY
Additional paid-in capital.................................. 96,909 96,433
Accumulated other comprehensive (loss) income............... (2,406) 15
Retained deficit............................................ (33,494) (15,465)
-------- --------
Total shareholders' equity........................ 61,009 80,983
-------- --------
TOTAL............................................. $396,174 $414,356
======== ========
</TABLE>
See notes to condensed unaudited consolidated financial statements.
4
<PAGE> 6
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 -- FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 44,557 $ 37,293
Accounts and notes receivable, net........................ 64,333 63,680
Inventories............................................... 99,177 120,658
Other assets.............................................. 17,739 16,759
-------- --------
Total current assets.............................. 225,806 238,390
Property, plant and equipment, net.......................... 47,782 49,018
Other assets................................................ 22,045 23,709
-------- --------
Total............................................. $295,633 $311,117
======== ========
LIABILITIES
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 4,071 $ 4,945
Trade payables............................................ 38,984 37,460
Accrued expenses.......................................... 31,208 25,801
Other current liabilities................................. 3,124 3,955
-------- --------
Total current liabilities......................... 77,387 72,161
-------- --------
Long-term debt.............................................. 107,358 109,185
Accrued pension liabilities................................. 36,760 41,062
Environmental liabilities, net.............................. 33,372 35,463
Other liabilities........................................... 5,909 5,556
-------- --------
Total long-term liabilities....................... 183,399 191,266
-------- --------
Total liabilities................................. 260,786 263,427
-------- --------
SHAREHOLDERS' EQUITY
Common stock................................................ 50 50
Additional paid-in capital.................................. 45,733 45,257
Accumulated other comprehensive loss........................ (2,809) (388)
Retained (deficit) earnings................................. (8,127) 2,771
-------- --------
Total shareholders' equity........................ 34,847 47,690
-------- --------
Total............................................. $295,633 $311,117
======== ========
</TABLE>
See notes to condensed unaudited consolidated financial statements.
5
<PAGE> 7
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 -- FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TWO FOR THE PERIOD
QUARTERS JUNE 10, 1998
ENDED (INCEPTION) TO
JULY 31, 1999 JULY 31, 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $(18,029) $ (1,820)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,702 256
Loss on sale of assets.................................... 3 --
Interest accretion on Discount Notes...................... 4,443 416
Deferred income taxes..................................... 1,100 --
Provision for doubtful accounts........................... 141 --
Provision for restructuring costs......................... 4,386 --
Amortization of executive stock awards.................... -- 354
Other, net................................................ 3,773 --
-------- ---------
Total............................................. 2,519 (794)
Change in operating assets and liabilities:
(Increase) decrease in trade receivables.................. (7,740) 162
Decrease in inventories................................... 16,680 --
Increase in other current assets.......................... (2,243) --
Increase in trade payables and accrued expenses........... 13,306 1,379
Payments for environmental remediation.................... (1,817) --
Other assets and liabilities, net......................... (7,389) --
-------- ---------
Net cash provided by operating activities......... 13,316 747
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (5,089) (3)
Proceeds from asset sales................................. 35 --
Cash paid for acquisition of Metallurg, Inc., net of cash
acquired............................................... -- (112,345)
Other, net................................................ 63 --
-------- ---------
Net cash used in investing activities............. (4,991) (112,348)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings................................. 117 --
(Repayment) proceeds of long-term debt, net............... (524) 62,895
Capital contribution...................................... -- 97,023
Other..................................................... -- (1,835)
-------- ---------
Net cash (used in) provided by financing
activities...................................... (407) 158,083
-------- ---------
Effects of exchange rate changes on cash and cash
equivalents............................................... (589) --
-------- ---------
Net increase in cash and cash equivalents................... 7,329 46,482
Cash and cash equivalents -- beginning of period............ 38,395 --
-------- ---------
Cash and cash equivalents -- end of period.................. $ 45,724 $ 46,482
======== =========
</TABLE>
See notes to condensed unaudited consolidated financial statements.
6
<PAGE> 8
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 -- FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED JULY 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $(10,898) $ 8,288
Adjustments to reconcile net income to net cash provided by
operating activities:
Executive stock awards.................................... -- 750
Depreciation and amortization............................. 3,990 4,282
Loss (gain) on sale of assets............................. 3 (592)
Deferred income taxes..................................... 1,100 2,279
Provision for doubtful accounts........................... 141 606
Provision for restructuring costs......................... 4,386 --
Other, net................................................ 3,773 2,397
-------- --------
Total............................................. 2,495 18,010
Change in operating assets and liabilities:
Increase in trade receivables............................. (7,805) (12,596)
Decrease (increase) in inventories........................ 16,680 (5,774)
(Increase) decrease in other current assets............... (2,229) 1,586
Increase in trade payables and accrued expenses........... 13,316 16,542
Payments for environmental remediation.................... (1,817) (1,006)
Other assets and liabilities, net......................... (7,389) (8,270)
-------- --------
Net cash provided by operating activities......... 13,251 8,492
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (5,089) (6,998)
Proceeds from asset sales................................. 35 1,286
Other, net................................................ 63 (2,254)
-------- --------
Net cash used in investing activities............. (4,991) (7,966)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from Safeguard International......... -- 3,541
Net short-term borrowings (repayments).................... 117 (1,851)
Repayment of long-term debt............................... (524) (548)
-------- --------
Net cash (used in) provided by financing
activities...................................... (407) 1,142
-------- --------
Effects of exchange rate changes on cash and cash
equivalents............................................... (589) (248)
-------- --------
Net increase in cash and cash equivalents................... 7,264 1,420
Cash and cash equivalents -- beginning of period............ 37,293 43,003
-------- --------
Cash and cash equivalents -- end of period.................. $ 44,557 $ 44,423
======== ========
</TABLE>
See notes to condensed unaudited consolidated financial statements.
7
<PAGE> 9
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Metallurg Holdings, Inc., a Delaware corporation, was formed on June 10,
1998 and is owned by a group of investors led by and including Safeguard
International Fund, L.P. ("Safeguard International"), an international private
equity fund that invests primarily in equity securities of companies in process
industries. On July 13, 1998, Metallurg Holdings, Inc. acquired Metallurg, Inc.
(the "Merger").
The accompanying condensed unaudited consolidated financial statements
include the accounts of Metallurg Holdings, Inc. ("Metallurg Holdings"),
Metallurg, Inc. and its majority-owned subsidiaries ("Metallurg") (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. The condensed
consolidated balance sheet as of January 31, 1999 was 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.
For further information, see the financial statements and footnotes thereto
included in the Company's audited consolidated financial statements for the year
ended January 31, 1999.
Metallurg Holdings and Metallurg, Inc. both report on a fiscal year ending
January 31. The operating subsidiaries of Metallurg, Inc. report on a calendar
year ending December 31. Accordingly, the consolidated financial statements of
Metallurg Holdings in 1999 include the accounts of Metallurg Holdings and
Metallurg, Inc. for the quarter and the two quarters ended July 31, 1999 and of
Metallurg, Inc.'s operating subsidiaries for the quarter and the two quarters
ended June 30, 1999. The consolidated financial statements of Metallurg Holdings
in 1998 include (i) the results of Metallurg Holdings from its inception (June
10, 1998) to July 31, 1998 (a loss of $653,000) and (ii) the results of
Metallurg, Inc., the holding company, for the period subsequent to the Merger (a
loss of $1,167,000). Accordingly, the results of Metallurg's operating
subsidiaries are not included in these 1998 results. Balance sheet data at July
31, 1999 reflect the financial position of Metallurg Holdings and Metallurg,
Inc. at July 31, 1999 and of Metallurg, Inc.'s operating subsidiaries at June
30, 1999. Balance sheet data at January 31, 1999 reflect the financial position
of Metallurg Holdings and Metallurg, Inc. at January 31, 1999 and of Metallurg,
Inc.'s operating subsidiaries at December 31, 1998.
2. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 1999
-------- -----------
<S> <C> <C>
Raw materials.......................................... $19,247 $ 29,096
Work in process........................................ 2,652 3,249
Finished goods......................................... 72,648 83,116
Other.................................................. 4,630 5,197
------- --------
Total........................................ $99,177 $120,658
======= ========
</TABLE>
3. 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
8
<PAGE> 10
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
consolidated financial position, results of operations or liquidity. There can
be no assurance, however, that existing or future litigation will not result in
an adverse judgment against the Company which could have a material adverse
effect on the Company's future results of operations or cash flows.
4. EARNINGS PER COMMON SHARE
Earnings per share is not presented since 100% of the capital stock of the
Company is owned by a group of private investors led by and including Safeguard
International.
5. ACQUISITION TRANSACTIONS
On July 13, 1998, Metallurg was acquired by a group of investors led by
Safeguard International. The acquisition was accomplished by Metallurg
Acquisition Corp., a wholly owned subsidiary of Metallurg Holdings, merging with
and into Metallurg, with Metallurg being the surviving company and Metallurg
Holdings becoming the sole parent of Metallurg. Metallurg Holdings was formed on
June 10, 1998 and is owned by Safeguard International (an international private
equity fund that invests primarily in equity securities of companies in process
industries), certain limited partners of Safeguard International, certain
individuals and a private equity fund.
At the time of the Merger, each outstanding share of Metallurg common
stock, par value $.01 per share, was converted into the right to receive $30 in
cash, representing an aggregate cash price of approximately $152,200,000
(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
$300,000,000. The excess of the purchase price over the estimated fair value of
the net assets acquired was approximately $101,500,000 and is being amortized
over a period of 20 years. The purchase price allocation is subject to
finalization in 1999.
In order to finance the Merger, (i) Safeguard International and certain of
its limited partners contributed approximately $97,000,000 of capital to
Metallurg Holdings (the "Equity Contribution"); and (ii) Metallurg Holdings
received approximately $62,900,000 net proceeds upon consummation of the
offering (the "Offering") of $121,000,000 aggregate principal amount at maturity
of 12 3/4% Senior Discount Notes due 2008 (the "Discount Notes"). 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").
In connection with the Merger, Metallurg received the consents (the
"Consents 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".
Merger-related costs of $4,416,000 were incurred, and recorded as expense
by Metallurg, in the period ended July 31, 1998 and included (i) $3,541,000 for
payments to cancel compensatory stock options; (ii) $625,000 in consent fees
incurred in order to obtain the one-time waiver of the change of control
provisions of the Senior Note Indenture and (iii) $250,000 of other
merger-related costs. Metallurg was reimbursed for the compensatory stock option
cancellation costs of $3,541,000 by a capital contribution from Safeguard
International at the time of the Merger, which amount is included in Metallurg
Holdings' acquisition cost. Accordingly, Metallurg Holdings recognized the
balance of such costs, totaling $875,000, in the post-Merger period ended July
31, 1998. Additional merger-related costs of $3,472,000 were incurred and
recorded as expense by Metallurg in the year ended January 31, 1999.
9
<PAGE> 11
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
6. PRO FORMA RESULTS (UNAUDITED)
The pro forma information presented below is based upon the historical
financial statements of the Company included elsewhere herein. The pro forma
information illustrate the estimated effects of (i) the issuance of the 12 3/4%
Senior Discount Notes of Metallurg Holdings due 2008 and (ii) the Merger and the
transactions related thereto (collectively, the "Pro Forma Transactions"), as if
these transactions had occurred as of January 31, 1998.
<TABLE>
<CAPTION>
TWO QUARTERS TWO QUARTERS
ENDED ENDED
JULY 31, JULY 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues........................................... $233,865 $337,843
Operating (loss) income............................ (4,964) 23,593
Net (loss) income.................................. (18,288) 5,712
</TABLE>
The pro forma financial information 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,
July 13, 1998. The cost of the Merger was allocated on the basis of the
preliminary estimated fair value of the assets acquired and liabilities assumed.
These estimates are being finalized in 1999.
The pro forma adjustments include the amortization of goodwill over 20
years, interest expense due to the issuance of the Discount Notes, certain
overhead expenses and the tax effect of the pro forma adjustments.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, 2000. The Company is currently evaluating the impact SFAS No. 133
will have on its financial statements.
8. SUPPLEMENTAL GUARANTOR INFORMATION
In November 1997, Metallurg, Inc. issued $100 million principal amount of
its 11% Senior Notes due 2007. Under the terms of the Senior Notes, Shieldalloy
Metallurgical Corporation ("Shieldalloy"), Metallurg Holdings Corporation,
Metallurg Services, Inc., Metallurg International Resources, Inc. ("MIR, Inc.")
and MIR (China), Inc. (collectively, the "Guarantors"), wholly owned
subsidiaries of Metallurg, Inc. have fully and unconditionally guaranteed on a
joint and several basis Metallurg, Inc.'s obligations to pay principal, premium
and interest relative to the Senior Notes. During the second quarter of 1999,
Metallurg, Inc. established MIR, Inc. as a wholly owned subsidiary and a
guarantor of the Senior Notes. Certain commercial activities previously carried
out by Metallurg, Inc. are now being carried out by MIR, Inc. 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.
10
<PAGE> 12
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE QUARTER ENDED JULY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
METALLURG, INC. COMBINED COMBINED
("PARENT GUARANTOR NON-GUARANTOR
COMPANY") SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales....................................... $39,604 $94,728 $(18,435) $115,897
Commission income........................... 19 202 (66) 155
------- ------- -------- --------
Total revenue..................... 39,623 94,930 (18,501) 116,052
------- ------- -------- --------
Operating costs and expenses:
Cost of sales............................. $ 1 36,090 83,835 (19,161) 100,765
Selling, general and administrative
expenses............................... 1,345 2,614 10,107 -- 14,066
Environmental expense recovery............ -- (5,501) -- -- (5,501)
Restructuring charges..................... -- -- 4,386 -- 4,386
------- ------- ------- -------- --------
Total operating costs and expenses........ 1,346 33,203 98,328 (19,161) 113,716
------- ------- ------- -------- --------
Operating (loss) income..................... (1,346) 6,420 (3,398) 660 2,336
Other income (expense):
Other income (expense), net............... 2 (16) (13) -- (27)
Interest (expense) income, net............ (2,794) 345 (445) -- (2,894)
Equity in earnings (losses) of
subsidiaries........................... 141 (3,371) -- 3,230 --
------- ------- ------- -------- --------
(Loss) income before income tax provision... (3,997) 3,378 (3,856) 3,890 (585)
Income tax (benefit) provision.............. (1,643) 2,305 1,107 -- 1,769
------- ------- ------- -------- --------
Net (loss) income........................... (2,354) 1,073 (4,963) 3,890 (2,354)
Other comprehensive (loss) income:
Foreign currency translation adjustment... (737) 1,123 (743) (380) (737)
------- ------- ------- -------- --------
Comprehensive (loss) income................. $(3,091) $ 2,196 $(5,706) $ 3,510 $ (3,091)
======= ======= ======= ======== ========
</TABLE>
11
<PAGE> 13
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE TWO QUARTERS ENDED JULY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
METALLURG, INC. COMBINED COMBINED
("PARENT GUARANTOR NON-GUARANTOR
COMPANY") SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales....................................... $ 7,297 $72,345 $191,381 $(37,447) $233,576
Commission income........................... -- 21 379 (111) 289
-------- ------- -------- -------- --------
Total revenue..................... 7,297 72,366 191,760 (37,558) 233,865
-------- ------- -------- -------- --------
Operating costs and expenses:
Cost of sales............................. 6,573 71,334 168,955 (38,058) 208,804
Selling, general and administrative
expenses............................... 3,271 4,805 20,398 -- 28,474
Environmental expense recovery............ -- (5,501) -- -- (5,501)
Restructuring charges..................... -- -- 4,386 -- 4,386
-------- ------- -------- -------- --------
Total operating costs and
expenses........................ 9,844 70,638 193,739 (38,058) 236,163
-------- ------- -------- -------- --------
Operating (loss) income..................... (2,547) 1,728 (1,979) 500 (2,298)
Other income (expense):
Other income (expense), net............... 2 (9) 12 -- 5
Interest (expense) income, net............ (5,725) 771 (906) -- (5,860)
Equity in losses of subsidiaries.......... (2,845) (4,046) -- 6,891 --
-------- ------- -------- -------- --------
Loss before income tax provision............ (11,115) (1,556) (2,873) 7,391 (8,153)
Income tax (benefit) provision.............. (217) 682 2,280 -- 2,745
-------- ------- -------- -------- --------
Net loss.................................... (10,898) (2,238) (5,153) 7,391 (10,898)
Other comprehensive loss:
Foreign currency translation adjustment... (2,421) (76) (2,419) 2,495 (2,421)
-------- ------- -------- -------- --------
Comprehensive loss.......................... $(13,319) $(2,314) $ (7,572) $ 9,886 $(13,319)
======== ======= ======== ======== ========
</TABLE>
12
<PAGE> 14
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
METALLURG, INC. COMBINED COMBINED
("PARENT GUARANTOR NON-GUARANTOR
COMPANY") SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 36,677 $ 562 $ 13,129 $ (5,811) $ 44,557
Accounts, notes and loans
receivable, net............... 19,853 48,146 55,530 (59,196) 64,333
Inventories...................... -- 35,162 66,633 (2,618) 99,177
Other assets..................... 10,187 1,020 9,998 (3,466) 17,739
-------- -------- -------- --------- --------
Total current assets..... 66,717 84,890 145,290 (71,091) 225,806
Investments -- intergroup.......... 101,795 51,527 -- (153,322) --
Property, plant and equipment,
net.............................. 1,025 8,440 38,317 -- 47,782
Other assets....................... 9,260 20,379 13,830 (21,424) 22,045
-------- -------- -------- --------- --------
Total.................... $178,797 $165,236 $197,437 $(245,837) $295,633
======== ======== ======== ========= ========
LIABILITIES
Current liabilities:
Short-term debt and current
portion of long-term debt..... $ 9,882 $ (5,811) $ 4,071
Accounts and loans payable....... $ 21,949 $ 30,857 55,384 (69,206) 38,984
Accrued expenses................. 3,275 9,178 18,755 -- 31,208
Other current liabilities........ -- 3,518 3,072 (3,466) 3,124
-------- -------- -------- --------- --------
Total current
liabilities............ 25,224 43,553 87,093 (78,483) 77,387
-------- -------- -------- --------- --------
Long-term liabilities:
Long-term debt................... 100,000 -- 7,358 -- 107,358
Accrued pension liabilities...... 155 1,774 34,831 -- 36,760
Environmental liabilities, net... -- 31,180 2,192 -- 33,372
Other liabilities................ 18,571 -- 8,752 (21,414) 5,909
-------- -------- -------- --------- --------
Total long-term
liabilities............ 118,726 32,954 53,133 (21,414) 183,399
-------- -------- -------- --------- --------
Total liabilities........ 143,950 76,507 140,226 (99,897) 260,786
-------- -------- -------- --------- --------
SHAREHOLDERS' EQUITY:
Common stock outstanding......... 50 1,227 52,191 (53,418) 50
Additional paid-in capital....... 45,733 94,460 1,014 (95,474) 45,733
Accumulated other comprehensive
(loss) income................. (2,809) (1,847) 18,926 (17,079) (2,809)
Retained deficit................. (8,127) (5,111) (14,920) 20,031 (8,127)
-------- -------- -------- --------- --------
Shareholders' equity..... 34,847 88,729 57,211 (145,940) 34,847
-------- -------- -------- --------- --------
Total.................... $178,797 $165,236 $197,437 $(245,837) $295,633
======== ======== ======== ========= ========
</TABLE>
13
<PAGE> 15
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE TWO QUARTERS ENDED JULY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
METALLURG, INC. COMBINED COMBINED
("PARENT GUARANTOR NON-GUARANTOR
COMPANY") SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING
ACTIVITIES....................... $(6,942) $ 18,748 $ 2,696 $(1,251) $13,251
------- -------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment..................... (167) (1,359) (3,563) -- (5,089)
Proceeds from asset sales........ -- 16 19 -- 35
Other, net....................... (299) (2,761) 3,123 -- 63
------- -------- ------- ------- -------
Net cash used in investing
activities....................... (466) (4,104) (421) -- (4,991)
------- -------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Intergroup borrowings
(repayments).................. 16,632 (15,177) (2,706) 1,251 --
Net short-term borrowings........ -- -- (150) 267 117
Repayment of long-term debt...... -- -- (524) -- (524)
Dividends received (paid)........ 1,840 -- (1,840) -- --
------- -------- ------- ------- -------
Net cash provided by (used in)
financing activities............. 18,472 (15,177) (5,220) 1,518 (407)
------- -------- ------- ------- -------
Effects of exchange rate changes on
cash and cash equivalents........ -- -- (589) -- (589)
------- -------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents................. 11,064 (533) (3,534) 267 7,264
Cash and cash
equivalents -- beginning of
period........................... 25,613 1,095 16,663 (6,078) 37,293
------- -------- ------- ------- -------
Cash and cash equivalents -- end of
period........................... $36,677 $ 562 $13,129 $(5,811) $44,557
======= ======== ======= ======= =======
</TABLE>
14
<PAGE> 16
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-Q may
constitute forward-looking statements for purposes of Section 21E of the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance and achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Factors which may cause the Company's results to be
materially different include the cyclical nature of the Company's business, the
Company's dependence on foreign customers (particularly customers in Europe),
the economic strength of the Company'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 the Company's estimates of
the costs of environmental remediation and the extension or expiration of
existing anti-dumping duties.
OVERVIEW
Metallurg is a leading international producer and seller of high quality
metal alloys and specialty metals used by manufacturers of steel, aluminum,
superalloys, titanium, chemicals and other metal consuming industries. The
industries that Metallurg supplies are cyclical. Throughout 1997 and into 1998,
market conditions for most of Metallurg's products were favorable. However,
sales prices and demand for several of Metallurg's major products declined
during the second half of 1998 and into 1999. Metallurg believes that the
declines were the result of economic turmoil seen in Asia, Latin America and
Russia in 1997 and 1998. In the steel industry, this led to lower production
almost everywhere except in the U.S. during the first half of 1998. In the
second half of 1998, Japan, Russia, Brazil and some other Asian countries
exported large volumes of steel to the U.S., causing domestic production to be
drastically curtailed in the latter months of 1998. In 1999, domestic steel
production has increased slightly each quarter although total first half
production was about 11% below the prior year. In addition, civilian airliner
production in 1998 did not reach the levels forecast by a major producer, and
the economic turmoil already mentioned caused postponements and cancellation of
orders for airliners as trans-Pacific and Asian air passenger volumes fell
sharply. Furthermore, Asian demand for corrosion resistant materials for capital
projects also fell sharply. These factors contributed to lower sales of products
to the superalloy and titanium alloy industries, which continue to hold
excessive inventories, particularly of their aerospace related products. The
aluminum industry had sustained satisfactory levels of demand for Metallurg's
products throughout 1998, and this has continued in 1999.
METALLURG HOLDINGS' RESULTS OF OPERATIONS
In the quarter ended July 31, 1999, Metallurg Holdings recognized a net
loss of $5.9 million, which includes the consolidation of Metallurg (a loss of
$2.4 million), $2.2 million of interest expense on its Discount Notes and $1.3
million of amortization of acquisition, goodwill and deferred debt issuance
costs. In the two quarters ended July 31, 1999, Metallurg Holdings recognized a
net loss of $18.0 million, which includes the consolidation of Metallurg (a loss
of $10.9 million), $4.4 million of interest expense on its Discount Notes and
$2.7 million of amortization of acquisition, goodwill and deferred issuance
costs.
In the period June 10, 1998 (inception) to July 31, 1998, Metallurg
Holdings recognized a net loss of $1.8 million, which includes the consolidation
of Metallurg (a loss of $1.2 million), $0.4 million of net interest expense on
its Discount Notes and $0.2 million of amortization of acquisition, goodwill and
deferred issuance costs.
As Metallurg Holdings is a holding company and does not have any material
operations or assets other than the ownership of Metallurg, the following
discussion of the Company's results of operations relates to Metallurg, unless
otherwise indicated.
15
<PAGE> 17
METALLURG INC.'S RESULTS OF OPERATIONS
Metallurg operates in one significant industry segment, the manufacture and
sale of ferrous and non-ferrous metals and alloys. Metallurg is organized
geographically, with its core production facilities in the United States, United
Kingdom and Germany supported by a worldwide sales network.
Summarized financial information concerning Metallurg's reportable segments
is shown in the following table (in thousands). Each segment records direct
expenses related to its employees and operations. The "Other" column includes
corporate related items, fresh-start adjustments and results of subsidiaries not
meeting the quantitative thresholds as prescribed by applicable accounting
rules. Metallurg does not allocate general corporate overhead expenses to
operating segments. There have been no material changes in segment assets from
the amounts disclosed in the last annual report.
Results of Operations -- The Quarter Ended July 31, 1999 Compared to the
Quarter Ended July 31, 1998
<TABLE>
<CAPTION>
GESELLSCHAFT
LONDON AND FUR
SCANDINAVIAN ELEKTRO- ELEKTROWERK
METALLURGICAL METALLURGIE WEISWEILER
CO., LTD. MBH GMBH INTERSEGMENT CONSOLIDATED
FOR THE QUARTER ENDED JULY 31, SHIELDALLOY ("LSM") ("GFE") ("EWW") OTHER ELIMINATIONS TOTALS
- ------------------------------ ----------- ------------- ------------ ----------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues from external $27,706 $26,500 $16,593 $ 2,958 $42,295 $116,052
customers....................
Intergroup revenue............. 1,039 9,628 4,370 5,114 9,955 $(30,106) --
Environmental expense (5,501) -- -- -- -- -- (5,501)
recovery.....................
Restructuring charges.......... -- -- 3,385 1,001 -- -- 4,386
Income tax provision 2,235 251 131 223 (1,071) -- 1,769
(benefit)....................
Net income (loss).............. 4,336 858 (4,834) (1,001) (2,232) 519 (2,354)
1998
Revenues from external $55,587 $31,010 $30,589 $ 4,695 $48,132 $170,013
customers....................
Intergroup revenue............. 1,573 14,262 4,500 7,530 14,684 $(42,549) --
Merger costs................... -- -- -- -- 4,416 -- 4,416
Income tax provision 3,062 566 559 420 (1,203) -- 3,404
(benefit)....................
Net income..................... 4,337 1,361 772 343 2,305 (7,620) 1,498
</TABLE>
Total Revenues
Shieldalloy revenues were $28.4 million, or 50%, below the second quarter
of 1998. As a result of the continuing weakness in the U.S. steel industry,
volume and selling prices of ferrovanadium remained lower in the second quarter
of 1999, resulting in a decrease of approximately $9.2 million. The majority of
the remaining decline is attributable to lower volume and selling prices of
ferrosilicon, chrome metal and low carbon ferrochrome resulting from lower
demand from the steel and superalloy industries.
Excess superalloy and titanium alloy inventories in the aerospace supply
chain impacted negatively on both price and particularly volume of EWW's
specialty low carbon ferrochrome, LSM's chromium and GfE's vanadium aluminum and
titanium masteralloy products. Continuing weakness in the steel sector
contributed to low prices and volumes of LSM's ferrotitanium, EWW's normal grade
ferrochrome and GfE's ferrovanadium and ferroniobium. As a result, EWW's
revenues fell $4.2 million, or 34%, below the second quarter of 1998 and GfE,
with heavy dependence on the titanium industry, saw revenues fall $14.1 million,
or 40% below the second quarter of 1998. Although LSM's revenues fell by $9.1
million, or 20%, for reasons noted above, volumes for its products to the
aluminum industry remained strong.
Gross Margins
Gross margins decreased from $27.3 million in the quarter ended July 31,
1998 to $15.3 million in the quarter ended July 31, 1999, a decrease of 44.1%,
due principally to price and volume decreases in ferrovanadium, low carbon
ferrochrome, vanadium aluminum, ferrotitanium and chromium. In aluminum
16
<PAGE> 18
master alloys and compacted products, improvements in product mix and cost
reductions more than offset a decrease in selling price.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased from $15.1
million in the quarter ended July 31, 1998 to $14.1 million in the quarter ended
July 31, 1999, a decrease of 7.1%. For the quarter ended July 31, 1998, SG&A
represented 8.9% of Metallurg's sales compared to 12.1% for the quarter ended
July 31, 1999, as a result of decreased revenue.
Environmental Expense Recovery
In June 1999, Metallurg recognized income in the amount of $5.5 million
upon settlement with an insurance company relating to coverage for certain
environmental claims stemming from the 1960's and forward. These claims relate
mostly to the historical costs of remedial activities at Metallurg's Newfield,
New Jersey site.
Restructuring Charges
During the second quarter of 1999, Metallurg initiated a restructuring
program. The restructuring is intended to reduce Metallurg's cost structure,
streamline management and production technical functions and focus resources in
support of higher margin products at core production units. The restructuring
plan includes the discontinuation of certain production activities, termination
of employees, a facility closing and the write-down of certain redundant plant
and equipment and related spare parts and supplies. The restructuring
predominantly affects Metallurg's operations in Europe.
In June 1999, a charge of $4.4 million was recorded with respect to the
restructuring of Metallurg's German operations (GfE and EWW). Approximately 100
employees were notified of terminations as operations were curtailed in line
with current demands for Metallurg's products. The terminations will take effect
through the end of 2000 and a provision for severance and other employee costs
of $2.9 million was recorded. Such costs shall be substantially disbursed in
2000. Additional costs of $1.5 million were recorded for the write-down of
redundant fixed assets and related spare parts and supplies.
During July 1999, management approved a restructuring plan relating to its
U.K. operations (LSM). Currently, LSM is soliciting voluntary terminations in
its plan to simplify its organization and reduce costs by restructuring its
businesses into fewer operating divisions and relocating administrative
functions to its Rotherham plant site from its London office, which will be
closed. The restructuring is to be completed during 2000 and provisions for its
costs, which are not determinable at this time, will be recorded during the
second half of 1999.
Operating Income
Operating income decreased from $7.8 million in the quarter ended July 31,
1998 to $2.3 million in the quarter ended July 31, 1999, due primarily to the
decrease in gross margin and the other items, discussed above. Merger costs of
$4.4 million, consisting primarily of costs to cancel compensatory stock
options, were recorded in the quarter ended July 31, 1998.
Interest Expense, Net
Interest expense, net, is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JULY 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest income.......................................... $ 995 $ 820
Interest expense......................................... (3,889) (3,364)
------- -------
Income expense, net.................................... $(2,894) $(2,544)
======= =======
</TABLE>
17
<PAGE> 19
Interest expense increased in the quarter ended July 31, 1999 reflecting
primarily higher effective interest rates and increased external borrowing
levels of GfE during the current period.
Income Tax Provision
Income tax provision, net of tax benefits, is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JULY 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Total current............................................ $1,249 $2,512
Total deferred........................................... 520 892
------ ------
Income tax provision, net.............................. $1,769 $3,404
====== ======
</TABLE>
The differences between the statutory Federal income tax rate and
Metallurg's effective rate result primarily because of: (i) the U.S. taxability
of foreign dividends; (ii) the excess of foreign tax rates over the statutory
Federal income tax rate; (iii) certain deductible temporary differences which,
in other circumstances would have generated a deferred tax benefit, have been
fully provided for in a valuation allowance; (iv) the deferred tax effects of
certain tax assets, primarily foreign net operating losses, for which the
benefit had been previously recognized approximating $0.3 million in the quarter
ended July 31, 1999; and (v) the deferred tax effects of certain deferred tax
assets for which a corresponding credit has been recorded to "Additional paid-in
capital" approximating $0.2 million in the quarter ended July 31, 1999. The
deferred tax expenses referred to in items (iv) and (v) above will not result in
cash payments in future periods.
Net Income
Net income decreased from $1.5 million for the quarter ended July 31, 1998
to a loss of $2.4 million for the quarter ended July 31, 1999 due primarily to
reduced gross margins and the other items, discussed above.
Results of Operations -- The Two Quarters Ended July 31, 1999 Compared to the
Two Quarters Ended July 31, 1998
<TABLE>
<CAPTION>
INTERSEGMENT CONSOLIDATED
FOR THE FOR THE TWO QUARTERS ENDED JULY 31, SHIELDALLOY LSM GFE EWW OTHER ELIMINATIONS TOTALS
- ------------------------------------------- ----------- ------- ------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues from external customers....... $ 59,418 $53,455 $36,543 $ 6,248 $ 78,201 $233,865
Intergroup revenue..................... 2,068 18,281 8,022 10,551 21,237 $(60,159) --
Environmental expense recovery......... (5,501) -- -- -- -- -- (5,501)
Restructuring charges.................. -- -- 3,385 1,001 -- -- 4,386
Income tax provision................... 566 507 272 449 951 -- 2,745
Net income (loss)...................... 1,632 1,244 (5,917) (777) (10,425) 3,345 (10,898)
1998
Revenues from external customers....... $109,962 $62,041 $60,046 $ 9,993 $ 95,801 $337,843
Intergroup revenue..................... 2,731 30,008 7,270 17,402 28,564 $(85,975) --
Merger costs........................... -- -- -- -- 4,416 -- 4,416
Income tax provision (benefit)......... 6,175 1,171 1,160 1,281 (306) -- 9,481
Net income............................. 8,746 2,688 1,648 1,134 10,355 (16,283) 8,288
</TABLE>
Total Revenues
Shieldalloy revenues were $51.2 million, or 45%, below the first two
quarters of 1998. As a result of continuing weakness in the U.S. steel industry,
decreased volume and selling prices of ferrovanadium during the first two
quarters of 1999 resulted in a decrease of approximately $19 million. The
majority of the remaining decline is attributable to lower volume and selling
prices of ferrosilicon, chrome metal and low carbon ferrochrome resulting from
lower demand from the steel and superalloy industries.
18
<PAGE> 20
Weakness in the aerospace industry led to a reduction in superalloy and
titanium alloy demand that impacted negatively on price, and particularly on
volumes, of Metallurg's specialty low carbon ferrochrome, chromium and vanadium
aluminum products. As a result of continuing poor demand in the steel and
aerospace industries, LSM revenues were $20.3 million, or 22%, below the first
two quarters of 1998 due primarily to decreased volume of ferrotitanium and
chromium metal sales. GfE revenues were $22.8 million, or 34%, below 1998 due
primarily to decreased selling prices and volumes of vanadium aluminum, titanium
masteralloys, ferroniobium and ferrovanadium. Revenues of EWW were $10.6
million, or 39%, below the first two quarters of 1998 due primarily to reduced
demand for low carbon ferrochrome.
Gross Margins
Gross margins decreased from $56.2 million in the two quarters ended July
31, 1998 to $25.1 million in the two quarters ended July 31, 1999, a decrease of
55.4%, due principally to price and volume decreases in ferrovanadium,
ferrotitanium and chromium. In addition, Shieldalloy recognized a lower of cost
or market adjustment of $3.6 million relating to ferrovanadium in the first
quarter of 1999. In aluminum master alloys and compacted products, improvements
in product mix and cost reductions more than offset a decrease in selling price.
Gross margins of low carbon ferrochrome declined in 1999, resulting from lower
selling prices, volume and less favorable product mix.
Selling, General and Administrative Expenses
SG&A decreased from $29.9 million in the two quarters ended July 31, 1998
to $28.5 million in the two quarters ended July 31, 1999, a decrease of 4.8%.
For the two quarters ended July 31, 1998, SG&A represented 8.9% of Metallurg's
sales compared to 12.2% for the two quarters ended July 31, 1999, as a result of
decreased revenue.
Environmental Expense Recovery
In June 1999, Metallurg recognized income in the amount of $5.5 million
upon settlement, with an insurance company, concerning certain environmental
matters, as discussed above.
Restructuring Charges
In June 1999, Metallurg recorded $4.4 million of restructuring charges
related to its German subsidiaries, as discussed above.
Operating Income
Operating income decreased from $21.8 million in the two quarters ended
July 31, 1998 to a loss of $2.3 million in the two quarters ended July 31, 1999,
due primarily to the decrease in gross margin and the other items, discussed
above.
Interest Expense, Net
Interest expense, net, is as follows (in thousands):
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
JULY 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Interest income.......................................... $ 1,487 $ 1,648
Interest expense......................................... (7,347) (6,264)
------- -------
Income expense, net.................................... $(5,860) $(4,616)
======= =======
</TABLE>
Interest expense increased $1.2 million in the two quarters ended July 31,
1999 reflecting primarily higher effective interest rates and increased external
borrowing levels of GfE during the current period.
19
<PAGE> 21
Income Tax Provision
Income tax provision, net of tax benefits, is as follows (in thousands):
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
JULY 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Total current.............................................. $1,645 $7,202
Total deferred............................................. 1,100 2,279
------ ------
Income tax provision, net................................ $2,745 $9,481
====== ======
</TABLE>
The differences between the statutory Federal income tax rate and
Metallurg's effective rate result primarily because of: (i) the U.S. taxability
of foreign dividends; (ii) the excess of foreign tax rates over the statutory
Federal income tax rate; (iii) certain deductible temporary differences which,
in other circumstances would have generated a deferred tax benefit, have been
fully provided for in a valuation allowance; (iv) the deferred tax effects of
certain tax assets, primarily foreign net operating losses, for which the
benefit had been previously recognized approximating $0.5 million in the two
quarters ended July 31, 1999; and (v) the deferred tax effects of certain
deferred tax assets for which a corresponding credit has been recorded to
"Additional paid-in capital" approximating $0.5 million in the two quarters
ended July 31, 1999. The deferred tax expenses referred to in items (iv) and (v)
above will not result in cash payments in future periods.
Net Income
Net income decreased from $8.3 million for the two quarters ended July 31,
1998 to a loss of $10.9 million for the two quarters ended July 31, 1999. The
decrease in 1999 results primarily from reduced gross margins and the other
items, discussed above.
LIQUIDITY AND FINANCIAL RESOURCES
General
The Company's sources of liquidity include cash from operations and amounts
available under credit facilities. The Company believes that these sources are
sufficient to fund the current and anticipated future requirements of working
capital, capital expenditures, pension benefits, potential acquisitions and
environmental expenditures through at least January 31, 2001.
At July 31, 1999, the Company had cash and cash equivalents of $45.7
million and working capital of $149.7 million. Metallurg had cash and cash
equivalents of $44.6 million and working capital of $148.4 million, as compared
to $37.3 million and $166.2 million, respectively, at January 31, 1999. For the
first two quarters of 1999, the Company generated $13.3 million in cash from
operations including substantial reductions in inventories resulting from
reduced levels of business and increased operational focus on working capital
reductions. Capital expenditures approximated $5.1 million in the first two
quarters of 1999.
Credit Facilities 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 resources at a rate per annum equal to (i) the Alternate
Base Rate plus 1.0% per annum (the Alternate Base Rate is the greater of the
Base Rate or the Federal Funds Effective Rate plus 0.5%) or (ii) the reserve
adjusted Eurodollar rate plus 2.5% for interest periods of one, two or three
months. The Revolving Credit Facility permits borrowings of up to $50.0 million
for working capital requirements and general corporate purposes, up to $30.0
million of which may be used for letters of credit in the U.S. At July 31, 1999,
there were no outstanding loans and $24.2 million of letters of credit
outstanding in the U.S. under the Revolving Credit Facility. On October 20,
1997, BankBoston, N.A., through its Frankfurt office, made available up to DM
20.5 million (approximately $10.8 million) of financing to certain of its German
subsidiaries (the "German Subfacility"), which is guaranteed by Metallurg and
the other U.S. borrowers
20
<PAGE> 22
under the Revolving Credit Facility. At July 31, 1999, immaterial amounts were
outstanding in Germany under the German Subfacility.
In addition, certain 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, 1999, there were
$2.9 million of outstanding loans under these local credit facilities.
CAPITAL EXPENDITURES
Metallurg invested $5.1 million in capital expenditures during the first
two quarters of 1999. Capital expenditures are expected to total approximately
$18.0 million in 1999. Although Metallurg has projected these items in 1999,
Metallurg has not committed purchases to vendors for all of these projects,
which are contingent on local 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
American Institute of Certified Public Accountants Statement of Position
96-1, "Environmental Remediation Liabilities", states that losses associated
with environmental remediation obligations are accrued when such losses are
deemed probable and reasonably estimable. Such accruals generally are recognized
no later than the completion of the remedial feasibility study and are adjusted
as further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are generally not
discounted to their present value. During the first two quarters of 1999,
Metallurg expended $1.8 million for environmental remediation.
In 1997, 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, 1999, had an estimated cost of completion of $36.2 million. Of
this amount, approximately $0.9 million is expected to be expended in the second
half of 1999, $6.5 million in 2000 and $7.4 million in 2001. In addition,
Metallurg estimates it will make expenditures of $3.8 million with respect to
environmental remediation at its foreign facilities. Of this amount,
approximately $0.2 million is expected to be expended in the second half of
1999, $0.9 million in 2000 and $0.8 million in 2001.
YEAR 2000 READINESS
Metallurg has completed an internal review of its and its subsidiaries'
information technology systems in connection with its assessment of Year 2000
readiness and has almost completed the replacement or modifications of the
management and accounting systems at its subsidiaries to upgrade them generally
and to make them Year 2000 ready. Metallurg expects to spend between $1.0
million and $2.0 million on these systems changes, much of which has already
been spent. Metallurg expects that the information technology systems for all of
its subsidiaries will be Year 2000 ready early in the fourth quarter of 1999.
Those systems that are not being replaced are being, or have been, modified by
Company personnel to assure that they are Year 2000 ready. Accordingly, no
additional cost has been recognized for such internal upgrades. Metallurg has
substantially completed its assessment of whether any of its non-information
technology will need to be modified to become Year 2000 ready.
Metallurg has not received written assurances from its significant
suppliers and customers to determine the state of their readiness with regard to
Year 2000. Metallurg believes that they will be prepared for Year 2000 based on
its normal interactions with its customers and suppliers and because of the wide
attention that 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 it obtains more information about the state of readiness of its
suppliers and customers.
21
<PAGE> 23
Metallurg presently believes that the Year 2000 issue will not pose
significant operational problems for its business systems as it believes that
all needed modifications and conversions will be timely made. 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 ready and the
anticipated timing to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including timely performance by third parties who will provide
Metallurg with the software for its new systems. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to locate and
correct all relevant computer codes, the ability to successfully integrate new
business systems with existing operations and similar uncertainties. Some risks
of the Year 2000 issue are beyond the control of Metallurg and its suppliers and
customers. In particular, Metallurg cannot predict the effect that the Year 2000
issue will have on the general economy.
22
<PAGE> 24
PART II
OTHER INFORMATION
ITEM 6.(a) EXHIBITS
27. Financial Data Schedule
6.(b) REPORT ON FORM 8-K
None
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on September 10, 1999 on its
behalf by the undersigned thereunto duly authorized.
METALLURG HOLDINGS, INC.
/s/ ARTHUR R. SPECTOR
--------------------------------------
Arthur R. Spector
Vice President
(Principal Financial Officer and
Principal Accounting Officer)
24
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THE COMPANY WAS FORMED ON JUNE 10, 1998 (INCEPTION)
AND HAS A FISCAL YEAR ENDING JANUARY 31
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
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<PERIOD-END> JUL-31-1999
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<SECURITIES> 0
<RECEIVABLES> 66,244
<ALLOWANCES> (1,911)
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<PP&E> 63,118
<DEPRECIATION> (15,336)
<TOTAL-ASSETS> 396,174
<CURRENT-LIABILITIES> 77,623
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0
0
<COMMON> 0
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<CGS> 100,765
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<INTEREST-EXPENSE> 6,207
<INCOME-PRETAX> (4,095)
<INCOME-TAX> 1,771
<INCOME-CONTINUING> (5,866)
<DISCONTINUED> 0
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