<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
METALLURG HOLDINGS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2967577
-------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
At September 9, 1998, the outstanding capital of Metallurg Holdings, Inc. was
comprised of 5,202.335 shares of Series A Voting Convertible Preferred Stock and
4,500 shares of Series B Non-Voting Preferred Stock, $.01 par value.
<PAGE>
EXPLANATORY INFORMATION
This Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period ended
July 31, 1998 is being filed to reflect a change in the accounting by
Metallurg Holdings, Inc. for its purchase of Metallurg, Inc. on July 13, 1998
and its calculation of goodwill in accordance with APB No. 16, "Business
Combinations". Previously, a $3.5 million payment to cancel compensatory
options of Metallurg, Inc. was recorded as merger-related costs in the period
June 10, 1998 (inception) to July 31, 1998 and Metallurg Holdings, Inc.
reported a net loss of approximately $4.6 million. The condensed consolidated
financial statements of Metallurg Holdings, Inc. and related notes thereto
are amended and restated in their entirety to reflect the $3.5 million
payment, net of taxes of $0.8 million, as a component of the purchase price.
Upon revision, (i) the excess of the purchase price over the fair value of
the net assets acquired is approximately $102 million, versus $99.2 million
previously reported, (ii) goodwill amortization, net of tax, has been
adjusted in the period ended July 31, 1998 and (iii) the net loss for the
period is reduced to approximately $1.8 million.
2
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No. ----
- ---
<S> <C>
Part I. FINANCIAL INFORMATION:
Item 1 - Financial Statements (Unaudited)
Condensed Statement of Consolidated Operations of Metallurg Holdings,
Inc. for the Period June 10, 1998 (inception) to July 31, 1998 4
Condensed Statements of Consolidated Operations of Metallurg, Inc.
for the Quarter and the Two Quarters Ended July 31, 1998 and for
the Quarters Ended July 31, 1997 and March 31, 1997 5
Condensed Statement of Consolidated Comprehensive Income of
Metallurg Holdings, Inc. for the Period June 10, 1998 (inception) to
July 31, 1998 6
Condensed Statements of Consolidated Comprehensive Income of
Metallurg, Inc. for the Quarter and the Two Quarters Ended July 31,
1998 and for the Quarters Ended July 31, 1997 and March 31, 1997 7
Condensed Consolidated Balance Sheet of Metallurg Holdings at
July 31, 1998 8
Condensed Consolidated Balance Sheets of Metallurg, Inc. at
July 31, 1998 and January 31, 1998 9
Condensed Consolidated Balance Sheet of Metallurg, Inc. at
March 31, 1997 10
Condensed Statement of Consolidated Cash Flows of Metallurg Holdings,
Inc. for the Period June 10, 1998 (inception) to July 31, 1998 11
Condensed Statements of Consolidated Cash Flows of Metallurg, Inc.
for the Two Quarters Ended July 31, 1998 and for the Quarters Ended
July 31, 1997 and March 31, 1997 12
Notes to Condensed Unaudited Consolidated Financial Statements 13-17
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-23
Part II. OTHER INFORMATION
Item 6. (a) EXHIBITS 24
6. (b) REPORT ON FORM 8-K 24
Signature Page 25
</TABLE>
3
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
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 ............................. 786
Merger-related costs ..................................................... 875
--------------------
Total operating costs and expenses ....................................... 3,835
--------------------
Operating loss ......................................................... (1,561)
Interest expense, net ........................................................ 833
--------------------
Loss before income tax provision ............................................. (2,394)
Income tax benefit ........................................................... 574
--------------------
Net loss ..................................................................... $(1,820)
--------------------
--------------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
4
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
METALLURG, INC. CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
--------------------------------------------------- ----------------
Quarter Two Quarters Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, March 31,
1998 1998 1997 1997
(Unaudited) (Unaudited) (Unaudited) (Audited)
--------------- --------------- --------------- ----------------
<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-related 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.
5
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
June 10, 1998
(inception) to
July 31, 1998
----------------
<S> <C>
Net loss...................................................................... $ (1,820)
Other comprehensive income ................................................... -
----------------
Comprehensive loss ........................................................... $ (1,820)
----------------
----------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
6
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
METALLURG, INC. CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE
INCOME
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reorganized Company Predecessor
------------------------------------------------- Company
--------------
Quarter Two Quarters Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, March 31,
1998 1998 1997 1997
(Unaudited) (Unaudited) (Unaudited) (Audited)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income ..................................... $ 1,498 $ 8,288 $ 3,651 $ 57,954
Other comprehensive income (loss):
Foreign currency translation
adjustments (a)............................. (1,152) (1,076) 1,245 (1,224)
-------------- -------------- -------------- --------------
Comprehensive income ........................... $ 346 $ 7,212 $ 4,896 $ 56,730
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</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
7
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
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 ................................................................... 101,804
Other assets ............................................................... 23,609
----------------
TOTAL ................................................................ $ 448,644
----------------
----------------
LIABILITIES
Current liabilities:
Short-term debt and current portion of long-term debt ................... $ 1,868
Trade payables .......................................................... 59,226
Accrued expenses ........................................................ 32,938
Other current liabilities ............................................... 9,262
----------------
Total current liabilities ............................................ 103,294
----------------
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 .................................................... 353,441
----------------
SHAREHOLDERS' EQUITY
Common and preferred stock ................................................. -
Additional paid-in capital ................................................. 97,023
Retained earnings (deficit) ................................................ (1,820)
----------------
Total shareholders' equity .............................................. 95,203
----------------
TOTAL ................................................................ $ 448,644
----------------
----------------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
8
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
METALLURG, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Reorganized Company
--------------------------------------
July 31, January 31,
1998 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 44,423 $ 43,003
Accounts and notes receivable, net ......................... 95,192 83,931
Inventories ................................................ 121,651 117,589
Other assets ............................................... 15,708 14,239
---------------- ----------------
Total current assets .................................... 276,974 258,762
Property, plant and equipment, net ............................ 43,851 41,502
Other assets .................................................. 20,505 19,522
---------------- ----------------
TOTAL ................................................... $ 341,330 $ 319,786
---------------- ----------------
---------------- ----------------
LIABILITIES
Current liabilities:
Short-term debt and current portion
of long-term debt ....................................... $ 1,868 $ 4,016
Trade payables ............................................. 59,226 51,308
Accrued expenses ........................................... 31,559 30,575
Other current liabilities .................................. 9,262 5,106
---------------- ----------------
Total current liabilities ............................... 101,915 91,005
---------------- ----------------
Long-term debt ................................................ 102,641 103,133
Accrued pension liabilities ................................... 38,134 38,351
Environmental liabilities, net ................................ 37,161 38,527
Other liabilities ............................................. 6,618 6,999
---------------- ----------------
Total long-term liabilities ............................. 184,554 187,010
---------------- ----------------
Total liabilities ....................................... 286,469 278,015
---------------- ----------------
SHAREHOLDERS' EQUITY
Common stock .................................................. - 50
Additional paid-in capital .................................... 46,137 40,209
Accumulated other comprehensive income (loss).................. (403) 673
Retained earnings ............................................. 9,127 839
---------------- ----------------
Total shareholders' equity ................................. 54,861 41,771
---------------- ----------------
TOTAL ................................................... $ 341,330 $ 319,786
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
9
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
METALLURG, INC. CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
The effect of the consummation of the Plan (as defined herein) and the
implementation of fresh-start reporting on Metallurg's consolidated balance
sheet as of March 31, 1997 was as follows:
<TABLE>
<CAPTION>
Adoption of Opening
Prior to Joint Plan Effects of Joint Fresh-Start Balance
Effectiveness Plan (a) Reporting Sheet
------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 66,670 $ (36,330) $ 30,340
Trade receivable, 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
Cumulative foreign currency
translation adjustment ................. 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>
NOTES:
(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.
10
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
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 ....................................................................... $ (1,820)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of executive stock awards ........................................ 354
Depreciation and amortization ................................................. 256
Interest accretion on Discount Notes .......................................... 416
-------------------
Total ....................................................................... (794)
Change in operating assets and liabilities:
Increase in trade receivables ................................................. 162
Increase in trade payables and accrued expenses ............................... 1,379
-------------------
Net cash provided by operating activities .................................. 747
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .................................... (3)
Cash paid for acquisition of Metallurg, Inc., net of cash acquired ............ (112,345)
-------------------
Net cash used in investing activities ....................................... (112,348)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution .......................................................... 97,023
Proceeds from long-term debt, net ............................................. 62,895
Other ......................................................................... (1,835)
-------------------
Net cash provided by financing activities .................................. 158,083
-------------------
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
11
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
METALLURG, INC. CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
---------------------------------- -----------------
Two Quarters Quarter Quarter
Ended Ended Ended
July 31, July 31, March 31,
1998 1997 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.
12
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
This Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period
ended July 31, 1998 is being filed to reflect a change in the
accounting by Metallurg Holdings, Inc. ("Metallurg Holdings") for its
purchase of Metallurg, Inc. on July 13, 1998 and its calculation of
goodwill in accordance with APB No. 16, "Business Combinations".
Previously, a $3.5 million payment to cancel compensatory options of
Metallurg, Inc. was recorded as merger-related costs in the period June
10, 1998 (inception) to July 31, 1998 and Metallurg Holdings, Inc.
reported a net loss of approximately $4.6 million. The condensed
consolidated financial statements of Metallurg Holdings, Inc. and
related notes thereto are amended and restated in their entirety to
reflect the $3.5 million payment, net of taxes of $0.8 million, as a
component of the purchase price. Upon revision, (i) the excess of the
purchase price over the fair value of the net assets acquired is
approximately $102 million, versus $99.2 million previously reported,
(ii) goodwill amortization, net of tax, has been adjusted in the period
ended July 31, 1998 and (iii) the net loss for the period is reduced to
approximately $1.8 million.
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"). Metallurg,
Inc.'s condensed consolidated financial statements for the quarters
ended July 31, 1998 (unaudited), July 31, 1997 (unaudited), and March
31, 1997 (audited), the two quarters ended July 31, 1998 (unaudited)
and as of July 31, 1998 (unaudited), January 31, 1998 (audited) and
March 31, 1997 (audited), include the accounts of Metallurg, Inc. and
its majority-owned subsidiaries ("Metallurg"). 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.
On February 26, 1997, the Fourth Amended and Restated Joint Plan of
Reorganization (the "Plan") of Metallurg, Inc. 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, Metallurg 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 Metallurg after consummation of the Plan are
not directly comparable to Metallurg's financial statements of prior
periods.
Metallurg Holdings and Metallurg, the 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 $653,000) and (ii) the results of Metallurg,
Inc., the holding company, for the period subsequent to the Merger, as
defined below (a loss of $1,167,000). The results of Metallurg's operating
subsidiaries are not included in
13
<PAGE>
these results. The results of operations of Metallurg for the quarter
ended July 31, 1998 includes operating subsidiaries' results for the
period April 1, 1998 to June 30, 1998 and Metallurg, Inc.'s, the holding
company's, results for the period May 1, 1998 to July 31, 1998. The
results of operations of Metallurg for the two quarters ended July 31,
1998 include the operating subsidiaries' results from January 1, 1998 to
June 30, 1998 and Metallurg, Inc.'s, the holding company's results from
February 1, 1998 to July 31, 1998. 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. Metallurg changed its reporting period on April 1, 1997.
Accordingly, the quarter ended July 31, 1997 includes three months of
operating results for the operating subsidiaries plus, in this
transitional period, an additional month of operating results of
Metallurg, Inc., the holding company, in the amount of an $803,000 loss.
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 $102
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").
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.
14
<PAGE>
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 private investors led
by and including Safeguard.
6. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<TABLE>
<CAPTION>
Metallurg
Holdings Metallurg
-------------- -------------------------------
July 31, January 31, March 31,
1998 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Raw materials ...................................... $ 29,751 $ 32,938 $ 21,769
Work in process .................................... 2,551 1,981 2,330
Finished goods ..................................... 84,523 77,473 80,500
Other .............................................. 4,826 5,197 4,659
-------------- -------------- --------------
Total ........................................... $ 121,651 $ 117,589 $ 109,258
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
15
<PAGE>
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 ....................................... $ 23,934 $ 8,534 $ 6,010
Net income (loss) ...................................... $ 5,455 $ (2,318) $ 2,667
</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 ("FASB")
issued Statement of Financial Accounting Standards ("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.
16
<PAGE>
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.
17
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW - On July 13, 1998, Metallurg Holdings, a Delaware corporation formed
on June 10, 1998 by Safeguard and institutional co-investors, acquired
Metallurg. 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 of credits associated with the fair value adjustments. The
consolidated financial statements after that date are those of a new reporting
entity and are not directly comparable to the pre-confirmation periods.
Metallurg's period ended July 31, 1998 includes operating subsidiaries' results
for the period April 1, 1998 to June 30, 1998 and the holding company's results
for the period May 1, 1998 to July 31, 1998. Metallurg's year-to-date financial
statements ended July 31, 1998 include the operating subsidiaries' results from
January 1, 1998 to June 30, 1998 and the holding company's results from February
1, 1998 to July 31, 1998. The consolidated balance sheet data of the Company at
July 31, 1998 reflect the financial position of Metallurg, Inc. and Metallurg
Holdings, Inc. at July 31, 1998 and the operating subsidiaries at June 30, 1998.
In addition, as a result of Metallurg's change in its fiscal year from a
calendar year to January 31, effective as of April 1, 1997, the consolidated
operating results of Metallurg for the quarter ending July 31, 1997 include the
results of Metallurg, Inc., the parent holding company, for the four month
period ended July 31, 1997 and the results of its operating subsidiaries (whose
fiscal years remain the calendar year) for the three month period ended June 30,
1997. The consolidated balance sheet data of the Company at July 31, 1997
reflect the financial position of Metallurg, Inc. at July 31, 1997 and the
operating subsidiaries at June 30, 1997.
METALLURG HOLDINGS' RESULTS OF OPERATIONS - PERIOD ENDED JULY 31, 1998
The net loss of $1.8 million includes the consolidation of Metallurg, Inc. for
the period subsequent to the acquisition (a loss of $1.2 million) plus interest
and certain general administrative expenses of the holding company.
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 presentation of the Management, Discussion and Analysis for
results of operations are for Metallurg, Inc. and its consolidated subsidiaries
and do not include the results of operations for Metallurg Holdings. As stated
previously, Metallurg Holdings was formed on June 10, 1998 for the purpose of
consummating the acquisition of Metallurg, Inc., which was completed on July 13,
1998.
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.
18
<PAGE>
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 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 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 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-related costs of $4.4 million
incurred in July 1998. These costs included (a) $3.5 million for payments to
cancel compensatory options; (b) $0.6 million in consent fees incurred in order
to obtain a one-time waiver of the change of control provisions of the Senior
Note Indenture and to amend the Indenture to reflect the post-Merger ownership
of Metallurg, Inc.; and (c) $0.3 million of other merger costs.
Operating income increased from $6.5 million for the first quarter of 1997 to
$14.1 million for the first quarter of 1998, an increase of 117.0%. The increase
resulted from the improvement in gross margins and decrease in SG&A, mentioned
above.
19
<PAGE>
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 expense ........................... (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 $100 million aggregate principal amount of its 11% senior notes due
2007 (the "11% Senior Notes"), which were issued in November 1997. Metallurg
used a portion of the proceeds from the 11% Senior Notes to retire $39.5 million
of the then outstanding 12% Senior-Secured Notes of Metallurg, Inc. due 2007
(the "12% Senior-Secured Notes"). In each of the first two quarters of 1997,
Metallurg accrued approximately $1.2 million of interest expense on these 12%
Senior-Secured Notes. Metallurg did not accrue interest on debt incurred prior
to entering Chapter 11 proceedings. As a result, approximately $2.1 million of
contractual interest on these unsecured obligations, which were reported as part
of liabilities subject to compromise, was not reflected in the quarter ended
March 31, 1997.
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 because of: (i) the excess of foreign tax rates
over the statutory Federal income tax rate; (ii) certain deductible temporary
differences which, in other circumstances would have generated a deferred tax
benefit, have been fully provided for in a valuation allowance; (iii) the
deferred tax effects of certain tax assets, primarily foreign net operating
losses, for which the benefit had been previously recognized approximating
$(0.1) million and $0.5 million in the quarters ended July 31, 1998 and April
30, 1998, respectively; and (iv) the deferred tax effects of certain deferred
tax assets for which a corresponding credit has been recorded to "Additional
paid-in capital" approximating $1.0 million and $0.9 million in the quarters
ended July 31, 1998 and April 30, 1998, respectively. The deferred tax expenses
referred to in items (iii) and (iv) above will not result in cash payments in
future periods.
NET INCOME
Net income decreased from $3.7 million for the quarter ended July 31, 1997 to
$1.5 million for the quarter ended July 31, 1998. The decrease resulted
primarily from the merger-related costs and increased interest expense,
partially offset by increased gross margins, noted above.
20
<PAGE>
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.
LIQUIDITY AND FINANCIAL RESOURCES
GENERAL
The Company's sources of liquidity include cash from operations and amounts
available under credit facilities. Metallurg believes that these sources are
sufficient to fund the current and anticipated future requirements of working
capital, capital expenditures, pension benefits, potential acquisitions and
environmental expenditures through at least 1999.
In November 1997, Metallurg sold $100 million principal amount of 11% Senior
Notes due 2007, the proceeds of which were used to retire Metallurg's then
existing 12% Senior-Secured Notes (approximately $39.5 million), repay certain
debt of the UK and German subsidiaries (approximately $19.8 million) and to pay
a cash dividend (approximately $20.0 million). The balance of the net proceeds
will be used for general corporate purposes.
In July 1998, Metallurg Holdings issued Senior Secured Discount Notes due 2008
which yielded gross proceeds of $65.2 million, which proceeds were used, in
part, to consummate the acquisition of Metallurg, Inc.
At July 31, 1998, the Company 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.
CREDIT FACILITIES AND OTHER FINANCING ARRANGEMENTS
METALLURG, INC.
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, 1998,
there were no outstanding loans and $28.3 million of letters of credit
outstanding in the U.S. under the Revolving Credit Facility. On October 20,
1997, BankBoston, N.A., through its Frankfurt office, made available up to DM
20.5 million (approximately $11.3 million) of financing to certain of its German
subsidiaries (the "German Subfacility"), which is guaranteed by Metallurg and
the other U.S. borrowers under the Revolving Credit Facility.
In addition, several of the other foreign subsidiaries of Metallurg have credit
facility arrangements with local banking institutions to provide funds for
working capital and general corporate purposes. These local credit
21
<PAGE>
facilities contain restrictions that vary from company to company. At July 31,
1998, there were $0.8 million of outstanding loans under these local credit
facilities.
METALLURG HOLDINGS
Metallurg Holdings is a holding company, and its ability to meet its payment
obligations on the Discount Notes is dependent upon the receipt of dividends and
other distributions from its direct and indirect subsidiaries. Metallurg
Holdings does not have, and may not in the future have, any material assets
other than the common stock of Metallurg. Metallurg, Inc. and its subsidiaries
are parties to various credit agreements, including the Senior Note Indenture
and the Revolving Credit Facility, which impose substantial restrictions on
Metallurg, Inc.'s ability to pay dividends to Metallurg Holdings.
CAPITAL EXPENDITURES
Metallurg invested $7.0 million in capital expenditures during the first two
quarters of 1998. Capital expenditures are expected to total approximately $20.0
million in 1998. Although 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 the AICPA Statement of Position
96-1, "Environmental Remediation Liabilities", which among other requirements,
states that losses associated with environmental remediation obligations are
accrued when such losses are deemed probable and reasonably estimable. Such
accruals generally are recognized no later than the completion of the remedial
feasibility study and are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are generally not discounted to their present value. During the
first two quarters of 1998, Metallurg expended $1.0 million for environmental
remediation.
As part of the Plan, Shieldalloy entered into settlement agreements with various
environmental regulatory authorities with regard to all of the significant
environmental remediation liabilities of which it is aware. Pursuant to these
agreements, Shieldalloy has agreed to perform environmental remediation which,
as of July 31, 1998, had an estimated cost of completion of $38.9 million. Of
this amount, approximately $2.9 million is expected to be expended in the second
half of 1998, $4.3 million in 1999 and $8.1 million in 2000. In addition,
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.
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
22
<PAGE>
based on Metallurg's normal interactions with its customers and suppliers and
because of the wide attention which the issue has received. Metallurg has not
yet seen the need for contingency plans for the Year 2000 issue, but this need
will continue to be monitored as Metallurg obtains more information about the
state of readiness of its suppliers and customers.
Metallurg presently believes that the Year 2000 issue will not pose significant
operational problems for its business systems. However, if any needed
modifications and conversions were not made, or were not completed timely, the
Year 2000 issue could have an adverse impact on Metallurg's operations and
liquidity. If any of Metallurg's suppliers or customers do not, or if Metallurg
itself does not, successfully deal with the Year 2000 issue, Metallurg could
experience delays in receiving or shipping products and in receiving payments.
The severity of these possible problems would depend on the nature of the
problem and how quickly it could be corrected or an alternative implemented,
which is unknown at this time.
The anticipated costs for Metallurg to become Year 2000 compliant and the
anticipated timing for Metallurg to complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including timely performance by third parties who
will provide Metallurg with the software for its new systems. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to locate and
correct all relevant computer codes, the ability to successfully integrate new
business systems with existing operations and similar uncertainties. Some risks
of the Year 2000 issue are beyond the control of Metallurg and its suppliers and
customers. In particular, Metallurg cannot predict the effect that the Year 2000
issue will have on the general economy.
23
<PAGE>
PART II OTHER INFORMATION
Item 6. (a) EXHIBITS
27 Financial Data Schedule
6. (b) REPORT ON FORM 8-K
On August 12, 1998, Metallurg Holdings filed a Form 8-K related
to the announcement of a new management team at Metallurg, Inc.
As of the date of such filing, Metallurg Holdings was not
required by law under the Exchange Act to file this form with the
SEC. However, pursuant to Section 4.2 of the Indenture, dated as
of July 13, 1998, by and between the Company and United States
Trust Company of New York, as trustee, the Company is required to
file with the SEC such information, documents and other reports
as are specified under Section 13 and 15(d) of the Exchange Act.
The Company has chosen to fulfill its obligations under such
Indenture by filing this report on Form 10-Q with the SEC.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METALLURG HOLDINGS, INC.
January 28, 1999 /s/ ARTHUR R. SPECTOR
-----------------------------------------
Arthur R. Spector
Vice President
(Principal Financial Officer and
Principal Accounting Officer)
25
<TABLE> <S> <C>
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