<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 October 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 December 15, 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
October 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 October 31, 1998 and Metallurg Holdings, Inc.
reported a net loss of approximately $8.4 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 was approximately $102 million, versus $99.2 million
previously reported, (ii) goodwill amortization, net of tax, has been
adjusted in the periods ended October 31, 1998 and (iii) the net loss for the
period is reduced to approximately $5.6 million.
2
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
Part I. FINANCIAL INFORMATION:
<S> <C>
Item 1 - Financial Statements (Unaudited)
Condensed Statements of Consolidated Operations of Metallurg Holdings,
Inc. for the Quarter Ended October 31, 1998 and for
the Period June 10, 1998 (inception) to October 31, 1998 4
Condensed Statements of Consolidated Operations of Metallurg, Inc.
for the Quarter and the Three Quarters Ended October 31, 1998,
the Quarter and the Two Quarters ended October 1997 and
the Quarter Ended March 31, 1997 5
Condensed Statements of Consolidated Comprehensive Income of
Metallurg Holdings, Inc. for the Quarter Ended October 31, 1998 and
for the Period June 10, 1998 (inception) to October 31, 1998 6
Condensed Statements of Consolidated Comprehensive Income of
Metallurg, Inc. for the Quarter and the Three Quarters Ended
October 31, 1998, the Quarter and the Two Quarters Ended October
31, 1997 and the Quarter Ended March 31, 1997 7
Condensed Consolidated Balance Sheet of Metallurg Holdings, Inc. at
October 31, 1998 8
Condensed Consolidated Balance Sheets of Metallurg, Inc. at
October 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 October 31, 1998 11
Condensed Statements of Consolidated Cash Flows of Metallurg, Inc.
for the Three Quarters Ended October 31, 1998, the Two Quarters
Ended October 31, 1997 and the Quarter Ended 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 18-24
Part II. OTHER INFORMATION
Item 6. (a) EXHIBITS 25
6. (b) REPORT ON FORM 8-K 25
Signature Page 26
</TABLE>
3
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Quarter June 10, 1998
Ended (inception) to
October 31, October 31,
1998 1998
-------------------- --------------------
<S> <C> <C>
Total revenue ................................................................ $125,666 $127,940
-------------------- --------------------
Operating costs and expenses:
Cost of sales ............................................................ 109,720 111,894
Selling, general and administrative expenses ............................. 15,080 15,866
Merger-related costs ..................................................... 2,607 3,482
-------------------- --------------------
Total operating costs and expenses ....................................... 127,407 131,242
-------------------- --------------------
Operating loss ......................................................... (1,741) (3,302)
Other income, net ............................................................ 1,306 1,306
Interest expense, net ........................................................ (4,443) (5,276)
-------------------- ---------------------
Loss before income tax provision ............................................. (4,878) (7,272)
Income tax benefit ........................................................... 1,104 1,678
-------------------- ---------------------
Net loss ..................................................................... $(3,774) $(5,594)
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
4
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
--------------------------------------------------------------------- ----------------
Quarter Three Quarters Quarter Two Quarters Quarter
Ended Ended Ended Ended Ended
October 31, October 31, October 31, October 31, March 31,
1998 1998 1997 1997 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
--------------- ------------------ ---------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Total revenue ............................. $142,708 $480,551 $148,325 $315,204 $155,587
--------------- ------------------ ----------------- --------------- ----------------
Operating costs and expenses:
Cost of sales .......................... 124,401 406,080 127,276 269,411 134,060
Selling, general and administrative
expenses ............................ 15,587 45,495 13,560 27,987 15,046
Merger-related costs ................... 2,607 7,023 -- -- --
--------------- ------------------ ----------------- --------------- ----------------
Total operating costs and expenses ..... 142,595 458,598 140,836 297,398 149,106
--------------- ------------------ ----------------- --------------- ----------------
Operating income .................... 113 21,953 7,489 17,806 6,481
Other income (expense):
Other income, net ...................... 1,487 2,032 1,074 998 3,179
Interest expense, net .................. (2,303) (6,919) (1,332) (2,811) (245)
Reorganization expense ................. -- -- -- -- (2,663)
Fresh-start revaluation ................ -- -- -- -- 5,107
--------------- ------------------ ----------------- --------------- ----------------
Income (loss) before income tax
provision and extraordinary item ....... (703) 17,066 7,231 15,993 11,859
Income tax provision (benefit) ............ (741) 8,740 5,517 10,628 (3,063)
--------------- ------------------ ----------------- --------------- ----------------
Income before extra-
ordinary item .......................... 38 8,326 1,714 5,365 14,922
Extraordinary item ........................ -- -- -- -- 43,032
--------------- ------------------ ----------------- --------------- ----------------
Net income ................................ $ 38 $8,326 $1,714 $5,365 $ 57,954
--------------- ------------------ ----------------- --------------- ----------------
--------------- ------------------ ----------------- --------------- ----------------
</TABLE>
See notes to condensed unaudited consolidated financial statements.
5
<PAGE>
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Quarter June 10, 1998
Ended (inception) to
October 31, October 31,
1998 1998
-------------------- ---------------------
<S> <C> <C>
Net loss...................................................................... $(3,774) $ (5,594)
Other comprehensive income ................................................... 1,356 1,356
-------------------- ---------------------
Comprehensive loss ........................................................... $(2,418) $(4,238)
-------------------- --------------------
-------------------- --------------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
6
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
--------------- ---------------- --------------- --------------- --------------
Quarter Three Quarters Quarter Two Quarters Quarter
Ended Ended Ended Ended Ended
October 31, October 31, October 31, October 31, March 31,
1998 1998 1997 1997 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
--------------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Net income ................................ $ 38 $8,326 $1,714 $5,365 $57,954
Other comprehensive income (loss):
Foreign currency translation
adjustments (a) ..................... 1,356 280 (557) 688 (1,224)
--------------- ---------------- --------------- --------------- --------------
Comprehensive income ...................... $1,394 $8,606 $1,157 $6,053 $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>
October 31,
1998
----------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $42,009
Accounts and notes receivable, net ...................................... 78,489
Inventories ............................................................. 139,932
Other assets ............................................................ 17,360
----------------------
Total current assets ................................................. 277,790
Property, plant and equipment, net ......................................... 48,047
Goodwill ................................................................... 100,179
Other assets ............................................................... 25,461
----------------------
TOTAL ................................................................ $451,477
----------------------
----------------------
LIABILITIES
Current liabilities:
Short-term debt and current portion of long-term debt ................... $ 1,969
Trade payables .......................................................... 48,329
Accrued expenses ........................................................ 38,330
Other current liabilities ............................................... 8,420
----------------------
Total current liabilities ............................................ 97,048
----------------------
Long-term debt ............................................................. 176,086
Accrued pension liabilities ................................................ 41,566
Environmental liabilities, net ............................................. 36,618
Other liabilities .......................................................... 6,020
----------------------
Total long-term liabilities .......................................... 260,290
----------------------
Total liabilities .................................................... 357,338
----------------------
SHAREHOLDERS' EQUITY
Common and preferred stock ................................................. --
Additional paid-in capital.................................................. 98,377
Accumulated other comprehensive income...................................... 1,356
Retained earnings (deficit) ................................................ (5,594)
----------------------
Total shareholders' equity .............................................. 94,139
----------------------
TOTAL ................................................................ $451,477
----------------------
----------------------
See notes to condensed unaudited consolidated financial statements.
8
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
Reorganized Company
--------------------------------------------
October 31, January 31,
1998 1998
--------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 40,515 $ 43,003
Accounts and notes receivable, net ......................... 78,489 83,931
Inventories ................................................ 139,932 117,589
Other assets ............................................... 17,013 14,239
---------------------- ----------------------
Total current assets .................................... 275,949 258,762
Property, plant and equipment, net ............................ 48,047 41,502
Other assets .................................................. 22,444 19,522
---------------------- ----------------------
TOTAL ................................................... $ 346,440 $ 319,786
---------------------- ----------------------
---------------------- ----------------------
LIABILITIES
Current liabilities:
Short-term debt and current portion
of long-term debt ....................................... $ 1,969 $ 4,016
Trade payables ............................................. 48,329 51,308
Accrued expenses ........................................... 37,494 30,575
Other current liabilities .................................. 8,420 5,106
---------------------- ----------------------
Total current liabilities ............................... 96,212 91,005
---------------------- ----------------------
Long-term debt ................................................ 108,415 103,133
Accrued pension liabilities ................................... 41,566 38,351
Environmental liabilities, net ................................ 36,618 38,527
Other liabilities ............................................. 6,020 6,999
---------------------- ----------------------
Total long-term liabilities ............................. 192,619 187,010
---------------------- ----------------------
Total liabilities ....................................... 288,831 278,015
---------------------- ----------------------
SHAREHOLDERS' EQUITY
Common stock .................................................. -- 50
Additional paid-in capital .................................... 47,491 40,209
Accumulated other comprehensive income......................... 953 673
Retained earnings ............................................. 9,165 839
---------------------- ----------------------
Total shareholders' equity ................................. 57,609 41,771
---------------------- ----------------------
TOTAL ................................................... $ 346,440 $ 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>
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
October 31, 1998
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(5,594)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of executive stock awards ........................................ 354
Depreciation and amortization ................................................. 3,338
Interest accretion on Discount Notes .......................................... 2,494
Other ......................................................................... 3,553
-------------------
Total ....................................................................... 4,145
Change in operating assets and liabilities:
Decrease in trade receivables ................................................. 21,294
Increase in inventories ....................................................... (14,209)
Increase in other current assets .............................................. (6,571)
Decrease in trade payables and accrued expenses ............................... (8,732)
Other assets and liabilities, net ............................................. (444)
-------------------
Net cash used in operating activities ....................................... (4,517)
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .................................... (4,581)
Cash paid for acquisition of Metallurg, Inc., net of cash acquired ............ (112,345)
Other, net .................................................................... (101)
-------------------
Net cash used in investing activities ....................................... (117,027)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution .......................................................... 97,023
Proceeds from long-term debt, net ............................................. 68,037
Net short-term borrowings ..................................................... (117)
Other ......................................................................... (1,835)
-------------------
Net cash provided by financing activities .................................. 163,108
-------------------
Effects of exchange rate changes on cash and cash equivalents ................... 445
Net increase in cash and cash equivalents ....................................... 42,009
Cash and cash equivalents - beginning of period ................................. --
-------------------
Cash and cash equivalents - end of period ....................................... $42,009
-------------------
-------------------
</TABLE>
See notes to condensed unaudited consolidated financial statements
11
<PAGE>
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
---------------- --------------- -----------------
Three Quarters Two Quarters Quarter
Ended Ended Ended
October 31, October 31, March 31,
1998 1997 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 8,326 $ 5,365 $57,954
Adjustments to reconcile net income to net cash provided by
operating activities:
Executive stock awards ..................................... 750 875 500
Extraordinary item ......................................... -- -- (43,032)
Fresh-start revaluation .................................... -- -- (5,107)
Depreciation and amortization .............................. 6,234 3,494 2,143
Gain on sale of assets ..................................... (622) (2,183) (3,266)
Reorganization expense, net of payments .................... (144) (4,051) 1,538
Deferred income taxes ...................................... 2,515 4,798 (3,767)
Provision for doubtful accounts ............................ 550 1,242 162
Provision for environmental costs, net of payments ......... (1,718) (927) (256)
Other, net ................................................. 6,656 3,419 3,057
---------------- --------------- ----------------
Total .................................................... 22,547 12,032 9,926
Change in operating assets and liabilities:
Decrease (increase) in trade receivables ................... 7,954 8,363 (20,272)
Increase in inventories .................................... (19,983) (20,081) (6,120)
(Increase) decrease in other current assets ................ (4,985) 1,931 (355)
Increase (decrease) in trade payables and accrued expenses . 6,974 (1,482) 18,895
Decrease in prepetition liabilities ........................ -- -- (39)
Receipt from environmental trust, net ...................... -- -- 5,928
Other assets and liabilities, net .......................... (8,714) (2,993) (1,547)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities ...... 3,793 (2,230) 6,416
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ................. (11,576) (5,493) (2,774)
Proceeds from asset sales .................................. 1,337 3,812 4,966
Other, net ................................................. (2,406) 39 (25)
---------------- --------------- ----------------
Net cash (used in) provided by investing activities ...... (12,645) (1,642) 2,167
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING, MERGER AND REORGANIZATION
ACTIVITIES:
Capital contribution from Safeguard International........... 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 .......................... 5,569 -- 8,100
Net short-term borrowings................................... (1,968) (57) 1,062
Repayment of long-term debt ................................ (975) (576) (487)
---------------- --------------- ----------------
Net cash provided by (used in) financing, merger and
reorganization activities ............................. 6,167 (633) (40,991)
---------------- --------------- ----------------
Effects of exchange rate changes on cash and cash
equivalents ................................................ 197 (217) (526)
---------------- --------------- ----------------
Net decrease in cash and cash equivalents .................... (2,488) (4,722) (32,934)
Cash and cash equivalents - beginning of period .............. 43,003 30,340 63,274
---------------------------------- ----------------
Cash and cash equivalents - end of period .................... $40,515 $25,618 $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 October 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 October 31, 1998 and Metallurg Holdings, Inc.
reported a net loss of approximately $8.4 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 was
approximately $102 million, versus $99.2 million previously reported,
(ii) goodwill amortization, net of tax, has been adjusted in the
periods ended October 31, 1998 and (iii) the net loss for the period is
reduced to approximately $5.6 million.
Metallurg Holdings' accompanying condensed unaudited consolidated
financial statements as of October 31, 1998 and for the periods ended
October 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 quarter and the
three quarters ended October 31, 1998 (unaudited), the quarter and the two
quarters ended October 31, 1997 (unaudited), and March 31, 1997 (audited)
and as of October 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 October 31, 1998 includes (i)
the results of Metallurg Holdings from its inception (June 10, 1998) to
October 31, 1998 (a loss of $4,112,000) and (ii) the results of Metallurg
for the period subsequent to the Merger date of July 13, 1998, as defined
below (a loss of $1,482,000). The results of operations of Metallurg for
the quarter ended October 31, 1998 includes operating subsidiaries'
results for the period July 1, 1998 to September 30, 1998 and Metallurg,
Inc.'s, the holding company's, results for the period August 1, 1998 to
October 31, 1998.
13
<PAGE>
The results of operations of Metallurg for the three quarters ended
October 31, 1998 include the operating subsidiaries' results from January
1, 1998 to September 30, 1998 and Metallurg, Inc.'s, the holding company's
results from February 1, 1998 to October 31, 1998. The consolidated
balance sheet at October 31, 1998 reflects the positions of Metallurg
Holdings and Metallurg, Inc. at October 31, 1998 and of Metallurg's
operating subsidiaries at September 30, 1998.
2. THE ACQUISITION TRANSACTIONS
Metallurg Holdings, a Delaware corporation formed on June 10, 1998, is a
wholly owned subsidiary of a group of investors led by and including
Safeguard International Fund, L.P. ("Safeguard International"), an
international private equity fund that invests primarily in equity
securities of companies in process industries, certain limited partners of
Safeguard International and a private equity fund. 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 assumed liabilities, net
of cash, was approximately $300 million. The excess of the purchase price
over the fair value of the net assets acquired was approximately $102
million and is being amortized over a period of 20 years.
In order to finance the Merger, (i) Safeguard International 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. No other
modifications to terms of then outstanding debt were affected in this
regard.
For further information, see the financial statements and footnotes
thereto included in Metallurg, Inc.'s Form 10-Q for the quarter ended
October 31, 1998 and report on Form 10-K for the period ended January 31,
1998.
3. CHANGE OF CONTROL
Following the acquisition transactions discussed above, Metallurg made a
number of management changes. As of August 10, 1998, Michael A. Standen
resigned as President and Chief Executive Officer and was elected Vice
Chairman of the board of directors. Alan D. Ewart was appointed President
and Chief
14
<PAGE>
Executive Officer, Eric E. Jackson was appointed Senior Vice President and
Chief Operating Officer and Robin A. Brumwell was appointed Senior Vice
President. Barry C. Nuss and Mr. Brumwell signed new employment agreements
with Metallurg, pursuant to which each received a one-time payment of
$150,000 in consideration of waiving their right to receive payments under
their former employment agreements. As of October 31, 1998, J. Richard
Budd and Eric L. Schondorf elected to terminate their employment
agreements. Mr. Budd resigned as Senior Vice President as of October 31,
1998. Michael A. Banks has notified Metallurg that he intends to terminate
his employment as of January 1999. Pursuant to employment agreements
between Metallurg and Mr. Standen, Mr. Budd, Mr. Banks and Mr. Schondorf,
each of these individuals became entitled to payments of $1.2 million,
$474,300, $321,300 and $313,650, respectively, as a result of their
termination, 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 become
entitled in the event of their termination.
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 October 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 presented since 100% of the
capital stock of the Company is owned by a group of private investors led
by and including Safeguard International.
6. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<TABLE>
<CAPTION>
Metallurg
Holdings Metallurg
----------------- ---------------- ---------------
October 31, January 31, March 31,
1998 1998 1997
----------------- ---------------- ---------------
<S> <C> <C> <C>
Raw materials ...................................... $ 41,017 $ 32,938 $ 21,769
Work in process .................................... 2,761 1,981 2,330
Finished goods ..................................... 91,046 77,473 80,500
Other .............................................. 5,108 5,197 4,659
----------------- ---------------- ---------------
Total ........................................... $139,932 $117,589 $109,258
----------------- ---------------- ---------------
----------------- ---------------- ---------------
</TABLE>
7. PRO FORMA RESULTS (UNAUDITED)
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
15
<PAGE>
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>
Three Quarters Two Quarters Quarter
Ended Ended Ended
October 31, October 31, March 31,
1998 1997 1997
----------------- --------------- ---------------
<S> <C> <C> <C>
Revenues ............................................... $480,551 $315,204 $155,587
Operating income ....................................... $25,346 $14,695 $ 6,014
Net income (loss) ...................................... $ 4,225 $ (4,972) $ 2,671
</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, July 13, 1998. The cost of the Merger was allocated on the
basis of the preliminary estimated fair market value of the assets
acquired and liabilities assumed.
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
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", as of February 1, 1998. This
standard requires the display of comprehensive income and its components
in the financial statements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 131 requires the reporting of profit and loss,
specific revenue and expense items and assets for reportable segments. It
also requires the reconciliation of total segment revenues, total segment
profit or loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. The Company will adopt this standard in the fourth quarter of
1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
About Pensions and Other Postretirement Benefits". SFAS No. 132 changes
current financial disclosure requirements from those that were required
under SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlement and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions".
The Company will adopt this standard in the fourth quarter of 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years
16
<PAGE>
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
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/A
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 Metallurg Holdings, Inc. 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, pricing of the
Company's products, the accuracy of the Company's estimates of the costs of
environmental remediation and the extension or expiration of existing
anti-dumping duties.
OVERVIEW - On July 13, 1998, Metallurg Holdings, a Delaware corporation formed
on June 10, 1998 by Safeguard International 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 Holdings' quarter ended October 31, 1998 includes the holding
company's results for the period August 1, 1998 to October 31, 1998 and the
consolidated results of Metallurg, as described below. Metallurg Holdings'
year-to-date financial statements ended October 31, 1998 include the results of
the holding company from its inception (June 10, 1998) to October 31, 1998 and
the consolidated results of Metallurg for the period subsequent to the Merger
date of July 13, 1998 to October 31, 1998, as described below. Metallurg's
quarter ended October 31, 1998 includes operating subsidiaries' results for the
period July 1, 1998 to September 30, 1998 and the holding company's results for
the period August 1, 1998 to October 31, 1998. Metallurg's year-to-date
financial statements ended October 31, 1998 include the operating subsidiaries'
results from January 1, 1998 to September 30, 1998 and the holding company's
results from February 1, 1998 to October 31, 1998. The consolidated balance
sheet data of the Company at October 31, 1998 reflect the financial position of
Metallurg, Inc. and Metallurg Holdings, Inc. at October 31, 1998 and the
operating subsidiaries at September 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 three quarters ending October 31, 1997
include the results of Metallurg, Inc., the parent holding company, for the ten
month period ended October 31, 1997 and the results of its operating
subsidiaries (whose fiscal years remain the calendar year) for the nine month
period ended September 30, 1997. The consolidated balance sheet data of
Metallurg at October 31, 1997 reflect the financial position of Metallurg, Inc.
at October 31, 1997 and the operating subsidiaries at September 30, 1997.
18
<PAGE>
METALLURG HOLDINGS' RESULTS OF OPERATIONS - QUARTER AND THE PERIOD ENDED OCTOBER
31, 1998
The net loss of $5.6 million includes the consolidation of Metallurg, Inc. for
the period subsequent to the acquisition (a loss of $1.5 million), $2.5 million
of interest expense on its Senior Secured Discount Notes and amortized goodwill
and deferred issuance costs, in the amount of approximately $1.6 million.
The net loss of $3.8 million in the quarter ended October 31, 1998 was
primarily attributable to $2.1 million of interest expense on the Company's
Senior Secured Discount Notes, $1.3 million of goodwill amortization and the
loss of Metallurg, Inc. during the period of $0.3 million, which included
$2.6 million of merger-related costs, primarily payments made pursuant to
existing employment agreements with Metallurg management.
METALLURG INC.'S RESULTS OF OPERATIONS -
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, which are
discussed in the preceding paragraph. 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.
The amounts presented below for the Company for the three quarters ended October
31, 1997 represent the mathematical addition of the historical amounts for the
Predecessor Company and the Reorganized Company only for purposes of the
discussion below. Significant differences between periods due to fresh-start
reporting adjustments are explained below, when necessary.
<TABLE>
<CAPTION>
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
-------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Total revenue ................................ $142,708 $148,325 $480,551 $470,791
-------------- ----------------- ----------------- ------------------
Operating costs and expenses:
Cost of sales ............................. 124,401 127,276 406,080 403,471
Selling, general and administrative
expenses ............................... 15,587 13,560 45,495 43,033
Merger-related costs ...................... 2,607 -- 7,023 --
-------------- ----------------- ----------------- ------------------
Total operating costs and expenses ........ 142,595 140,836 458,598 446,504
-------------- ----------------- ----------------- ------------------
Operating income ....................... 113 7,489 21,953 24,287
Other income (expense):
Other income, net ......................... 1,487 1,074 2,032 4,177
Interest expense, net ..................... (2,303) (1,332) (6,919) (3,056)
Reorganization expense .................... -- -- -- (2,663)
Fresh-start revaluation ................... -- -- -- 5,107
-------------- ----------------- ----------------- ------------------
Income (loss) before income tax
provision and extraordinary item .......... (703) 7,231 17,066 27,852
Income tax provision (benefit) ............... (741) 5,517 8,740 7,565
---------------------------------- --------------------------------------
Income before extraordinary item ............. 38 1,714 8,326 20,287
Extraordinary item ........................... -- -- -- 43,032
-------------- ----------------- ----------------- ------------------
Net income ................................... $ 38 $1,714 $8,326 $63,319
-------------- ----------------- ----------------- ------------------
-------------- ----------------- ----------------- ------------------
</TABLE>
TOTAL REVENUES
Total revenues increased by 2.1%, from $470.8 million in the three quarters
ended October 31, 1997 to $480.6 million in the three quarters ended October 31,
1998. Increased volume and selling prices during the first half of 1998 of
ferrovanadium accounted for most of the increase. In addition, revenues from
increased sales of
19
<PAGE>
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. Revenues from sales of
products not produced by the Company, primarily cobalt, silicon and manganese
products, also declined during this period, due primarily to lower volumes.
Total revenues decreased by 3.8%, from $148.3 million in the third quarter of
1997 to $142.7 million in the third quarter of 1998. Decreased revenues from
sales of aluminum master alloys and compacted products, cobalt, silicon and
manganese products, due primarily to declines in volume, more than offset the
increase in volume and selling prices of ferrovanadium.
GROSS MARGINS
Gross margins increased from $67.3 million in the three quarters ended October
31, 1997 to $74.5 million in the three quarters ended October 31, 1998, an
increase of 10.6%, due principally to the price and volume increases in
ferrovanadium. In aluminum master alloys and compacted products, a decrease in
volume was more than offset by improvements in product mix and cost reductions.
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 the Company's assets were reduced pursuant to
fresh-start reporting, reducing depreciation expense by $1.0 million and $0.7
million in the three quarters ended October 31, 1998 and 1997, respectively, and
increasing gross margins by equal amounts.
Gross margins decreased from $21.0 million in the third quarter of 1997 to $18.3
million in the third quarter of 1998, a decrease of 13.0%. Decreases in low
carbon ferrochrome margins, due to lower volume and selling prices, and
decreases in gross margins from sales of products not produced by the Company,
more than offset the increase in ferrovanadium margins resulting from higher
selling prices during the period. The values of the Company's assets were
reduced pursuant to fresh-start reporting, reducing depreciation expense in each
of the quarters ended October 31, 1998 and 1997 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 $43.0
million in the three quarters ended October 31, 1997 to $45.5 million in the
three quarters ended October 31, 1998, an increase of 5.7%. For the three
quarters ended October 31, 1997, SG&A represented 9.1% of the Company's sales
compared to 9.5% for the three quarters ended October 31, 1998. SG&A were higher
in 1998 due primarily to increased compensation expense and increased spending
on research and development projects.
SG&A increased from $13.6 million in the third quarter of 1997 to $15.6 million
in the third quarter of 1998, an increase of 14.9%. For the third quarter of
1997, SG&A represented 9.2% of the Company's sales compared to 10.9% for the
third quarter of 1998. SG&A were higher in 1998 due to increased compensation
expense and increased research and development spending. During 1997, the
Company recognized a recovery of bad debt expense which reduced SG&A by
approximately $0.5 million.
OPERATING INCOME
Operating income decreased from $24.3 million in the three quarters ended
October 31, 1997 to $22.0 million in the three quarters ended October 31, 1998,
a decrease of 9.6%. The increase in gross margin, discussed above, was more than
offset by merger-related costs of $7.0 million incurred in 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 Indenture with regard to the Company's
senior notes and to amend the Indenture to reflect the post-Merger ownership of
Metallurg, Inc.; (c) $2.1 million for payments made pursuant to existing
employment agreements with Metallurg management; and (d) $0.8 million of other
merger-related costs.
Operating income decreased substantially, from $7.5 million for the third
quarter of 1997 to $0.1 million for the third quarter of 1998. The decrease
resulted from reduced gross margins and increased SG&A, as noted above.
20
<PAGE>
In addition, $2.6 million of merger-related costs, primarily payments made
pursuant to existing employment agreements with Metallurg management, were
recorded during the period.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
---------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income ....................... $ 995 $ 610 $ 2,643 $ 3,018
Interest expense ....................... (3,298) (1,942) (9,562) (6,074)
---------------- --------------- ------------------ ------------------
Interest income (expense), net ..... $(2,303) $(1,332) $(6,919) $(3,056)
---------------- --------------- ------------------ ------------------
---------------- --------------- ------------------ ------------------
</TABLE>
Interest expense increased significantly in 1998. In each of the first three
quarters of 1998, the Company 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. The Company
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 three quarters of 1997,
the Company accrued approximately $1.2 million of interest expense on these 12%
Senior-Secured Notes. The Company 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 Three Quarters Three Quarters
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
---------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Total current ......................... $(943) $3,420 $6,259 $6,534
Total deferred ......................... 202 2,097 2,481 1,031
---------------- --------------- ------------------ ------------------
Income tax provision (benefit), net $(741) $5,517 $8,740 $7,565
---------------- --------------- ------------------ ------------------
---------------- --------------- ------------------ ------------------
</TABLE>
The differences between the statutory Federal income tax rate and the Company'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
$(0.8) million and $(0.4) million in the quarter and the three quarters ended
October 31, 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 $2.9 million in
the quarter and the three quarters ended October 31, 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 $63.3 million for the three quarters ended October 31,
1997 to $8.3 million for the three quarters ended October 31, 1998. Included in
the 1997 net income is an extraordinary item of $43.0 million
21
<PAGE>
representing the cancellation of debt resulting from the consummation of the
Company's Reorganization Plan and a $5.1 million credit representing the effects
of revaluing the Company's assets and liabilities under fresh-start reporting.
In addition, other income included gains on the sales of the Company's New York
office building and of certain plant assets of one of the Company's German
subsidiaries totaling $4.7 million. The decrease in 1998 results from the
merger-related costs and increased interest and SG&A expenses, noted above.
These decreases more than offset gains from increased gross margins, as noted
above, as well as a $0.9 million gain realized on the sale of the Company's
Luxembourg affiliate.
Net income was $1.7 million for the third quarter of 1997 compared to breakeven
for the third quarter of 1998, due primarily to reduced gross margins and the
merger-related costs, as described above.
RECENT MARKET DEVELOPMENTS
Market prices for several of the Company's products have been declining during
the second half of 1998. The Company believes that the price declines are a
result of lower worldwide and significantly lower U.S. steel production and
adjustments of production plans for the titanium and superalloy industries,
among other generally weaker metal market conditions. During the quarter ended
October 31, 1998, the Company recognized lower of cost or market inventory
provisions of approximately $1.4 million relating to several chrome products.
Management anticipates additional inventory write-downs during the fourth
quarter, the amount of which is indeterminable at this time, because it is
dependent on future market conditions. The market price of ferrovanadium, a
significant product produced by the Company, declined from over $9 per pound
vanadium at the end of October to under $6 per pound vanadium at the end of
November.
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 October 31, 1998, the Company had $42.0 million of cash and cash equivalents
and working capital of $180.7 million. Metallurg had $40.5 million in cash and
cash equivalents and working capital of $179.7 million at October 31, 1998, as
compared to $43.0 million and $167.8 million, respectively, at January 31, 1998.
For the first three quarters of 1998, Metallurg generated $3.8 million in cash
from operations and received proceeds of approximately $1.1 million on the sale
of its Luxembourg affiliate. Capital expenditures approximated $11.6 million in
the first three quarters and in February 1998, Metallurg purchased an additional
5% interest in a Russian magnesium metal producer for approximately $2.0
million.
22
<PAGE>
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 October 31,
1998, there were no outstanding loans and $25.3 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. At October 31,
1998, loans of $0.4 million were outstanding in Germany under this facility.
In August 1998, one of the Company's German subsidiaries entered into a term
loan with IKB Deutsche Industriebank in the amount of DM 10.0 million
(approximately $6.0 million). The loan, which matures in 2008, bears interest at
rates ranging from 3.75% - 4.75% and is secured by certain property of the
German subsidiary.
In addition, several of the other foreign subsidiaries of Metallurg have credit
facility arrangements with local banking institutions to provide funds for
working capital and general corporate purposes. These local credit facilities
contain restrictions that vary from company to company. At October 31, 1998,
there were $0.4 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 $11.6 million in capital expenditures during the first three
quarters of 1998. Capital expenditures are expected to total approximately $20.0
million in 1998. Although the Company has budgeted these items in 1998, the
Company has not committed to complete these projects which are contingent on
senior management approval and other conditions. The Company 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, the Company 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 three quarters of 1998, the Company expended $1.7 million for
environmental remediation.
23
<PAGE>
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 October 31, 1998, had an estimated cost of completion of $38.2 million. Of
this amount, approximately $1.9 million is expected to be expended in the last
quarter of 1998, $3.3 million in 1999 and $6.6 million in 2000. In addition, the
Company estimates it will make expenditures of $5.4 million with respect to
environmental remediation at its foreign facilities. Of this amount,
approximately $0.1 million is expected to be expended in the last quarter of
1998, $0.2 million in 1999 and $0.8 million in 2000.
YEAR 2000 COMPLIANCE
The Year 2000 statement set forth below is a Year 2000 Readiness Disclosure
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
105-271. Please note that, for purposes of any action brought under the
securities laws, as that term is defined in section 3(a)(47) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), the Year 2000 Information and
Readiness Disclosure Act does not apply to any statements contained in any
documents or materials filed with the Securities and Exchange Commission, or
with Federal banking regulators, pursuant to section 12(i) of the Securities
Exchange Act of 1934 (15 U.S.C. 781(i)), or disclosures or writing that, when
made, accompanied the solicitation of an offer or sale of securities.
Metallurg has completed an internal review of its and its subsidiaries'
information technology systems in connection with its assessment of Year 2000
compliance. Metallurg is in the process of replacing or modifying some of the
management and accounting systems at its subsidiaries to upgrade them generally
and to make them Year 2000 compliant. Metallurg expects to spend between $1.0
million and $2.0 million on these systems changes. Metallurg expects that the
information technology systems for all of its subsidiaries will be Year 2000
compliant by March 31, 1999. Metallurg is currently assessing whether any of its
non-information technology will need to be modified to become Year 2000
compliant.
Metallurg has not received written assurances from its significant suppliers and
customers to determine the state of their readiness with regard to Year 2000
compliance. Metallurg believes that they will be prepared for Year 2000 based on
Metallurg's normal interactions with its customers and suppliers and because of
the wide attention which the issue has received. Metallurg has not yet seen the
need for contingency plans for the Year 2000 issue, but this need will continue
to be monitored as Metallurg obtains more information about the state of
readiness of its suppliers and customers.
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.
24
<PAGE>
PART II OTHER INFORMATION
ITEM 6. (A) EXHIBITS
27 Financial Data Schedule
6. (b) REPORT ON FORM 8-K
1. Form 8-K dated November 25, 1998 (filed on November
25, 1998) announcing that Metallurg Holdings had
changed its certified public accountants to
PricewaterhouseCoopers LLP.
25
<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)
26
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