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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-29204
SIMCALA, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
(Address of principal executive offices and zip code)
(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) and has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 1998, there were 4,980,703 outstanding shares of the
Registrant's Common Stock, par value $.0001 per share.
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PART I. FINANCIAL INFORMATION*
* As used in this Form 10-Q, unless the context otherwise requires,
"SAC" refers to SAC Acquisition Corp. "Predecessor" refers to SIMCALA, Inc. in
respect of periods prior to the Acquisition (as defined herein), the "Company"
refers to the registrant, SIMCALA, Inc.
<PAGE> 3
SIMCALA, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
On March 31, 1998, SAC acquired all of the outstanding capital stock of the
Company. The purchase method of accounting was used to record assets acquired
and liabilities assumed. The allocation of the purchase price and acquisition
costs to the assets acquired and liabilities assumed is preliminary and is
subject to change pending finalization of expenses associated with the
transaction. As a result of purchase accounting, the accompanying financial
statements of the Predecessor and the Company are not comparable in all
material respects since the financial statements report financial position,
results of operations, and cash flows of these two separate entities. The
Condensed Balance Sheet as of December 31, 1997 was derived from audited
financial statements as of such date.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 18,967 $ 635
Accounts receivable, net of allowance for doubtful
accounts of $0 at September 30, 1998 and $77 at 6,167 5,830
December 31, 1997
Inventories 2,769 2,664
Deferred income taxes 2,876 1,288
Other current assets 259 128
--------- -------
Total Current Assets 31,038 10,545
Property, Plant and Equipment, net of accumulated
depreciation of $1,945 and $4,045, at September 30, 1998
and December 31, 1997, respectively 53,445 22,448
Intangible Assets, net of accumulated amortization of $1,080
and $540, at September 30, 1998 and December 31, 1997,
respectively 37,466 670
--------- -------
Total Assets $ 121,949 $33,663
========= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 10,413 $ 6,125
Current maturities of long-term debt 79 2,341
Income taxes payable 1,194
--------- -------
Total Current Liabilities 10,492 9,660
Long Term Debt - Net of Current Portion 81,051 12,763
Deferred Income Taxes 13,339 2,964
--------- -------
Total Liabilities 104,882 25,387
Commitments and Contingencies
Stockholder's Equity
Common Stock, 20,000 shares authorized - 22,000 and 10,000 shares issued
and outstanding, at September 30, 1998 and
December 31, 1997, respectively,
par value $.01 per share in 1997 and no par in 1998 -- --
Additional Paid-in Capital 18,807 2,250
Retained Earnings (1,740) 6,026
--------- -------
Total Stockholder's Equity 17,067 8,276
--------- -------
Total Liabilities and Stockholder's Equity $ 121,949 $33,663
========= =======
</TABLE>
See Notes to Condensed Financial Statements.
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SIMCALA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
On March 31, 1998, SAC acquired all of the outstanding capital stock of the
Company. The purchase method of accounting was used to record assets acquired
and liabilities assumed. The allocation of the purchase price and acquisition
costs to the assets acquired and liabilities assumed is preliminary and is
subject to change pending finalization of expenses associated with the
transaction. As a result of purchase accounting, the accompanying financial
statements of the Predecessor and the Company are not comparable in all
material respects since the financial statements report financial position,
results of operations, and cash flows of these two separate entities.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------- --------------------------------------------
Three Months Six Months Three Months Three Months Nine Months
Ended Ended Ended Ended Ended
September 30, September 30, March 31, September 30, September 30,
1998 1998 1998 1997 1997
<S> <C> <C> <C> <C> <C>
Net Sales $ 12,618 $ 27,536 $ 14,854 $ 15,920 $ 46,718
Cost of Goods Sold 12,211 25,233 11,679 12,270 36,897
-------- -------- -------- -------- --------
Gross Profit 407 2,303 3,175 3,650 9,821
Selling, General and Administrative Expenses 613 1,439 3,824 746 2,112
-------- -------- -------- -------- --------
Operating (Loss) Income (206) 864 (649) 2,904 7,709
Interest Expense 1,941 3,840 314 473 1,335
Other Income, Net 271 615 282 76 139
-------- -------- -------- -------- --------
Earnings (Loss) before Income Taxes (1,876) (2,361) (681) 2,507 6,513
Income Tax (Benefit) Provision (575) (621) (100) 1,031 2,393
-------- -------- -------- -------- --------
Net Income (Loss) $ (1,301) $ (1,740) $ (581) $ 1,476 $ 4,120
======== ======== ======== ======== ========
</TABLE>
See Notes to Condensed Financial Statements.
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SIMCALA, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
On March 31, 1998, SAC acquired all of the outstanding capital stock of the
Company. The purchase method of accounting was used to record assets acquired
and liabilities assumed. The allocation of the purchase price and acquisition
costs to the assets acquired and liabilities assumed is preliminary and is
subject to change pending finalization of expenses associated with the
transaction. As a result of purchase accounting, the accompanying financial
statements of the Predecessor and the Company are not comparable in all
material respects since the financial statements report financial position,
results of operations, and cash flows of these two separate entities.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------- --------------------------------------------
Three Months Six Months Three Months Three Months Nine Months
Ended Ended Ended Ended Ended
September 30, September 30, March 31, September 30, September 30,
1998 1998 1998 1997 1997
- ---------------------------------------------------------------------------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (1,301) $ (1,740) $ (581) $ 1,476 $ 4,120
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,528 2,962 533 454 1,311
(Increase) decrease in deferred income taxes (630) 800 71
Noncash stock option compensation 904 87 87
Change in assets and liabilities:
(Increase) decrease in accounts receivable 631 656 21 (224) (1,090)
(Increase) decrease in other receivables 1,800 (2,807)
(Increase) decrease in inventories (369) 102 (207) (190) (285)
Decrease (increase) in other assets (184) (435) 140 (380) (2,327)
Decrease (increase) in accounts payable
and other accrued expenses (273) 541 2,365 (95) 1,647
-------- -------- ------- ------- -------
Net cash provided by operating activities 32 3,256 1,168 1,128 3,534
-------- -------- ------- ------- -------
Cash Flows used in Investing Activities:
Purchase of property, plant and equipment (1,079) (2,314) (1,184) (311) (1,504)
-------- -------- ------- ------- -------
Cash Flows from Financing Activities:
Redemption of preferred stock (1,770)
Repayment under line of credit, net (500) (3,244)
Net borrowings (repayment) of long-term debt (16) (32) 39 (607) 2,976
-------- -------- ------- ------- -------
Net cash provided by (used in)
financing activities (16) (32) 39 (1,107) (2,038)
-------- -------- ------- ------- -------
Increase (Decrease) in Cash and Equivalents (1,063) 910 23 (290) (8)
Cash and Equivalents:
Beginning of Period 20,030 18,057 635 468 186
-------- -------- ------- ------- -------
End of Period $ 18,967 $ 18,967 $ 658 $ 178 $ 178
======== ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 86 $ 225 $ 161 $ 497 $ 1,073
======== ======== ======= ======= =======
Income taxes $ 75 $ 75 $ 112 $ -- $ 184
======== ======== ======= ======= =======
</TABLE>
See Notes to Condensed Financial Statements.
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SIMCALA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND OPERATIONS
On March 31, 1998, SAC Acquisition Corp. ("SAC"), a subsidiary of
SIMCALA Holdings, Inc. ("Holdings") purchased all of the outstanding
common stock of SIMCALA, Inc. ("SIMCALA" or the "Company") (the
"Acquisition"). On such date, SAC was merged into SIMCALA. Holdings
and SAC conducted no significant business other than in connection
with the Acquisition.
The Company is a producer of silicon metal for sale to the aluminum
and silicone industries. The Company sells to customers in the metal
industry who are located primarily throughout the United States.
Credit is extended based on an evaluation of the customer's financial
condition. During 1997, three customers accounted for 29%, 24%, and
16% of net sales. During the three months ended September 30, 1998,
three customers accounted for 46.3%, 22.5%, and 8.8% of net sales. At
September 30, 1998 and December 31, 1997, three customers accounted
for 58.8%, 10.5%, and 7.5% and 31%, 26% and 12%, respectively, of
outstanding receivables. The Company maintains credit insurance for
all customer accounts receivable.
The Acquisition of the Predecessor for approximately $65.5 million in
cash, including approximately $5 million for fees and other costs
directly associated with the Acquisition, has been accounted for as a
purchase. The Acquisition was financed through the issuance of senior
notes in the amount of $75,000,000 (see Note 4 to the Condensed
Financial Statements) and equity contributed of $22,000,000.
Accordingly, purchase price has been allocated to the identifiable
assets and liabilities based on fair values at the acquisition date.
The allocation of the purchase price and acquisition costs to the
assets acquired and liabilities assumed is preliminary at September
30, 1998, and is subject to change pending the finalization of
expenses related to the Acquisition. Management does not expect such
adjustments to be material. The excess of the purchase price over the
fair value of the identifiable net assets in the amount of $35.0
million has been classified as goodwill. Additionally, the effect of
the carryover basis of senior management of $3.2 million has been
considered in the allocation of the purchase price. The carryover
basis adjustment results from the application of Emerging Issues Task
Force ("EITF") Consensus No. 88-16, "Basis in Leveraged Buyout
Transactions," and is allocated to property, plant and equipment and
goodwill based upon the March 31, 1998 balances.
The condensed financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Although management believes that the disclosures are adequate to make
the information presented not misleading, it is suggested that the
Predecessor interim condensed financial statements be read in
conjunction with the Predecessor's most recent audited financial
statements and notes thereto. In the opinion of management, all
adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented have been made. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
The condensed financial statements included herein for the periods
prior to March 31, 1998, represent the Predecessor's results of
operations and cash flows prior to the Acquisition and consequently,
are stated on the Predecessor's historical cost basis.
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The condensed financial statements as of September 30, 1998, and for
the six months then ended, reflect the adjustments which were made to
record the Acquisition. Accordingly, the financial statements of the
Predecessor for the periods prior to March 31, 1998 are not comparable
in all material respects with the financial statements subsequent to
the Acquisition date. The most significant differences relate to
amounts recorded for property, plant and equipment, goodwill, and debt
which resulted in increased cost of sales, amortization, depreciation
and interest expense in the six months ended September 30, 1998 and in
future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a summary of the Company's and the Predecessor's accounting
policies, please refer to the Company's Registration Statement No.
333-53791 filed on July 27, 1998 with the Securities and Exchange
Commission on Form S-1.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for the reporting and displaying of
comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements.
SFAS 131 establishes standards for the way the public business
enterprises report information about operating segments in interim
financial reports issued to shareholders. The Company adopted SFAS 130
and SFAS 131 effective January 1, 1998. The adoption of these
standards did not have an effect on its financial statements.
Comprehensive income equals net income for the three months ended
September 30, 1998, the six months ended September 30,1998, the three
months ended March 31, 1998 and the six and nine months ended
September 30, 1997. The Company did not have accumulated other
comprehensive income as of September 30, 1998 or December 31, 1997.
3. INVENTORIES
Inventories consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------- -------------
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw Materials $ 959 $ 948
Finished Goods 1,514 1,420
Supplies 296 296
--------- -------
$ 2,769 $ 2,664
========= =======
</TABLE>
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4. LONG-TERM DEBT
As of September 30, 1998, long-term debt consists of the following (in
thousands of dollars):
<TABLE>
<S> <C>
Senior Notes which bear interest at 9 5/8% and are due April 2006 $75,000
Industrial development bonds which bear interest at a variable rate.
At September 30, 1998, the interest rate was 5.45%. The bonds mature on
December 1, 2019. Bonds and applicable interest are secured by a letter
of credit 6,000
Various capital leases payable at interest rates of 9.91% to 10.0%
expiring at various dates through 1999. Aggregate monthly payments
approximate $6,000 130
-------
81,130
Less current portion 79
-------
Long-term debt $81,051
=======
</TABLE>
The Senior Notes (the "Notes") mature on April 15, 2006, unless
previously redeemed. Interest on the Notes is payable semiannually on
April 15 and October 15, commencing October 15, 1998. The Notes are
redeemable at the option of the Company, in whole or in part, on or
after April 15, 2002, at the redemption price, plus accrued interest
and liquidated damages, as defined, if any. The Notes are generally
unsecured obligations of the Company and rank senior to all existing
and future subordinated indebtedness of the Company.
In connection with the Acquisition, the Company entered into a credit
facility which provides availability for revolving borrowings and
letters of credit in an aggregate amount of up to $15,000,000 (the
"Revolving Credit Facility"). The Revolving Credit Facility expires in
March 2003. At September 30, 1998, $6.1 million was outstanding under
the Revolving Credit Facility.
The Notes and the Revolving Credit Facility contain a number of
covenants, including, among others, covenants restricting the Company
and its subsidiaries with respect to the incurrence of indebtedness
(including contingent obligations); the creation of liens;
substantially changing the nature of its business; the consummation of
certain transactions such as dispositions of substantial assets,
mergers or consolidations; the making of certain investments and
loans; the making of dividends and other distributions; the prepayment
of indebtedness; transactions with affiliates; agreeing to certain
restrictions on its actions (including agreeing not to grant liens);
and limitations on sale leaseback transactions. In addition, the
Revolving Credit Facility contains affirmative covenants including,
among others, requirements regarding compliance with laws;
preservation of corporate existence; maintenance of insurance; payment
of taxes and other obligations; maintenance of properties;
environmental compliance; the keeping of the books and records; the
maintenance of intellectual property; and the delivery of financial
and other information to the agent and the lenders under the Revolving
Credit Facility.
The Company is required to comply with certain financial tests and
maintain certain financial ratios. Certain of these test and ratios
include: (i) maintaining a minimum net worth; (ii) maintaining a
maximum ratio of indebtedness to EBITDA; and (iii) maintaining a
minimum ratio of EBITDA to interest expense.
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<PAGE> 9
During the quarter ended September 30, 1998, the Company reached
agreement with BankAmerica to amend its Minimum Net Worth covenant. As
a result of the amendment, the Company is in compliance with all loan
covenants as of November 9, 1998.
Credit extended under the Revolving Credit Facility is secured by
substantially all of the Company's assets and the real and personal
property used in the Company's operations.
The Company is a party to a capital lease for land and buildings at
its manufacturing facility in Mt. Meigs, Alabama (the "Lease"). The
Lease is with the Industrial Development Board ("IDB") for the city of
Montgomery. Rental payments of $2,000 a year are required and the term
of the Lease expires June 1, 2010. The Lease contains a bargain
purchase option whereby the property can be purchased from the IDB for
$1.
5. PRO FORMA DATA
The following unaudited pro forma financial data has been prepared
assuming that the Acquisition was consummated on January 1, 1997. This
pro forma financial data is presented for informational purposes and
is not necessarily indicative of the operating results that would have
occurred had the Acquisition been consummated on January 1, 1997, nor
is it necessarily indicative of future operations (in thousands of
dollars).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
Ended Ended Ended Ended
March 31, 1998 September 30, 1998 September 30, 1997 September 30, 1997
<S> <C> <C> <C> <C>
Net Sales $ 14,854 $ 42,390 $15,920 $ 46,718
Net Income (Loss) $ (2,378) $ (7,988) $ 72 $ (1,248)
</TABLE>
6. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into a
consulting agreement with CGW Southeast Management III, L.L.C. ("CGW
Management") whereby the Company pays a monthly retainer fee of
$15,000 for financial and management consulting services. In addition,
the Company pays a fee to CGW Management at the end of each year which
is based on the profits generated by the Company during the year. The
consulting agreement expires in 2003.
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7. SUPPLEMENTAL CASH FLOW INFORMATION
Following are the sources and uses of cash associated with the
Acquisition (in thousands of dollars):
<TABLE>
<S> <C>
Sources of Funds Received for the Acquisition:
Notes sold in the offering $ 75,000
Equity contribution 22,000
--------
$ 97,000
========
Uses of Funds for the Acquisition:
The Acquisition $ 65,533
Repayment of indebtedness 9,159
Transaction fees and expenses 4,886
General corporate purposes 17,422
--------
$ 97,000
========
</TABLE>
-8-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
On March 31, 1998, SIMCALA Holdings, Inc. ("Holdings"), through its
wholly-owned subsidiary, SAC Acquisition Corp. ("SAC"), acquired all
of the outstanding shares of common stock of SIMCALA, Inc. ("SIMCALA"
or the "Company"). On such date, SAC was merged into SIMCALA (the
"Acquisition"). SIMCALA, as the surviving corporation in the
Acquisition, became a wholly-owned subsidiary of Holdings.
The following is a discussion of the Company's results of operations.
The discussion is based upon (a) the three month period ended
September 30, 1998 in comparison to the three month period ended
September 30, 1997 and (b) the six month period ended September 30,
1998 plus the three month period ended March 31, 1998, in comparison
to the nine month period ended September 30, 1997.
RESULTS OF OPERATIONS
The table below sets forth certain income and expense items and the
percentage that such items increased or decreased in 1998 when
compared to the corresponding period in 1997.
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
%INCREASE
QUARTER ENDED (DECREASE)
SEPTEMBER 30, FROM
------------------------------ PRIOR
1998 1997 PERIOD
<S> <C> <C> <C>
Net sales $ 12,618 $ 15,920 (20.7)%
Cost of goods sold 12,211 12,270 (0.6)%
-------- --------
Gross profit 407 3,650 (88.8)%
Selling, general and administrative expenses 613 746 (17.8)%
-------- --------
Operating income (loss) (206) 2,904 (107.1)%
Interest expense 1,941 473 310.4 %
Other income, net 271 76 256.6 %
-------- --------
Earnings (loss) before income taxes (1,876) 2,507 (174.8)%
Income tax (benefit) provision (575) 1,031 (155.8)%
-------- --------
Net income (loss) $ (1,301) $ 1,476 (188.1)%
======== ========
</TABLE>
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The table below sets forth certain of the Company's statement of
operations information as a percentage of net sales during the three
months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
------------------------------
1998 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 96.8% 77.1%
--------- -------
Gross profit margin 3.2% 22.9%
Selling, general and administrative expenses 4.9% 4.7%
--------- -------
Operating income (loss) (1.7)% 18.2%
Interest expense 15.4% 3.0%
Other income, net 2.1% 0.5%
--------- -------
Earnings (loss) before income taxes (15.0)% 15.7%
Income tax (benefit) provision (4.6)% 6.5%
--------- -------
Net income (loss) (10.4)% 9.2%
========= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
NET SALES
Net sales decreased by $3.3 million in the third quarter of 1998, or
20.7 percent, to $12.6 million from $15.9 million in the third quarter
of 1997. This decline was due principally to decreased selling prices
in the secondary aluminum silicon metal markets coupled with a
decrease in tons sold in the quarter. Production of silicon metal in
the third quarter of 1998 was 8,554 metric tons, compared with 9,866
metric tons produced in the same period in 1997. Production was lower
due to a shutdown for planned furnace maintenance coupled with
smelting inefficiencies in one of the Company's furnaces.
GROSS PROFIT
Gross profit decreased by $3.2 million, or 88.8 percent, to $.4 million
in the third quarter of 1998 as compared to $3.6 million in the third
quarter of 1997. The gross profit margin, defined as gross profit as a
percentage of net sales, decreased to 3.2 percent in the third quarter
of 1998 from 22.9 percent in the third quarter of 1997. These decreases
were principally due to decreased selling prices in secondary aluminum
silicon metal markets coupled with higher depreciation and amortization
expenses resulting from the Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $.1 million, to
$.6 million in the third quarter of 1998 as compared to $.7 million in
the third quarter of 1997. The decrease is primarily due to
recognition of stock option compensation expense in 1997 which was not
recognized in 1998.
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<PAGE> 13
OPERATING INCOME
As a result of the decrease in net sales as discussed above, income
from operations decreased $3.1 million to $(.2) million in the third
quarter of 1998 from $2.9 million in the third quarter of 1997, while
the operating margin, defined as operating income (loss) as a
percentage of net sales, decreased to (1.7) percent from 18.2 percent
for the same periods.
INTEREST EXPENSE
Interest expense increased $1.4 million to $1.9 million in the third
quarter of 1998 from $.5 million in the third quarter of 1997. The
significant change in interest expense resulted from the increased
debt associated with the Acquisition.
OTHER INCOME - NET
Other income - net increased $.2 million to $.3 million in the third
quarter of 1998 from $76,000 in the third quarter of 1997. The
increase in income is primarily due to increased interest income as
the result of excess cash received from the Acquisition.
INCOME TAX (BENEFIT) PROVISION
The provision for income taxes decreased to a benefit of $.6 million
in the third quarter of 1998 from a provision of $1.0 million in the
second quarter of 1996. This decrease is primarily due to the decrease
in taxable income from $2.5 million in 1997 to a loss of $1.9 million
in the third quarter of 1998.
NET INCOME (LOSS)
Net loss for the third quarter of 1998 was $1.3 million compared to
net income of $1.5 million for the third quarter of 1997. This
decrease was primarily due to the decrease in net sales as discussed
above as well as increased depreciation and amortization expenses
resulting from the Acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
GENERAL
The condensed financial statements included herein for the periods
prior to March 31, 1998, represent the Predecessor's results of
operations and cash flows prior to the Acquisition and consequently,
are stated on the Predecessor's historical cost basis. The condensed
financial statements as of September 30, 1998, and for the nine months
then ended, reflect the adjustments which were made to record the
Acquisition. Accordingly, the financial statements of the Predecessor
for the periods prior to March 31, 1998 are not comparable in all
material respects with the financial statements subsequent to the
Acquisition date. The most significant differences relate to amounts
recorded for property, plant and equipment, goodwill, and debt which
resulted in increased cost of sales, amortization, depreciation and
interest expense in the nine months ended September 30, 1998 and will
result in such increases in future periods.
NET SALES
Net sales decreased by approximately $4.3 million in the first nine
months of 1998, or 9.3 percent, to $42.4 million from $46.7 million in
the first nine months of 1997. This decrease is due principally to a
decrease in selling prices in aluminum silicon metal markets coupled
with lower sales volume. The
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<PAGE> 14
lower sales volume resulted from lower production volume. Production
in the first nine months of 1998 was 27.134 metric tons, compared with
28.238 metric tons produced in the same period in 1997.
GROSS PROFIT
Gross profit decreased by $4.3 million, or 44.2 percent, to $5.5
million in the first nine months of 1998 as compared to $9.8 million
in the first nine months of 1997. At the same time, the gross profit
margin decreased to 12.9 percent from 21.0 percent. These decreases
were principally due to decreased selling prices in secondary aluminum
silicon metal markets coupled with higher depreciation and
amortization expenses resulting from the Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $3.2 million to
$5.3 million in the first nine months of 1998 as compared to $2.1
million in the first nine months of 1997. The increase is due to a
bonus paid to management related to the exercise of options of $1.5
million during the quarter ended March 31, 1998. In addition, the
Company recognized compensation expense of $.9 million related to the
exercise of stock options in the first quarter of 1998. The difference
was further impacted by increases in management fees and compensation
expense related to the Acquisition.
OPERATING INCOME
As a result of the above comments, income from operations decreased
$7.5 million to $.2 million in the first nine months of 1998 from $7.7
million in the first nine months of 1997. At the same time, the
operating margin decreased to .5 percent from 16.5 percent for the
same period last year. Excluding the bonus costs discussed above
recorded in the first quarter of 1998, income from operations
decreased $6.0 million, or 77.9 percent, to $1.7 million in the first
nine months of 1998 from $7.7 million in the first nine months of
1997, while the operating margin decreased to 4 percent from 16.5
percent for the same period last year.
INTEREST EXPENSE
Interest expense increased $2.9 million to $4.2 million for the first
nine months of 1998 from $1.3 in the first nine months of 1997. The
increase resulted form substantially higher debt levels beginning in
the second quarter of 1998 associated with the Acquisition.
OTHER INCOME - NET
Other income - net increased $.8 million to $.9 million in the first
nine months of 1998 from $.1 million in the first nine months of 1997
due to increased benefits associated with the state of Alabama's
Mercedes Act which allows the Company to recognize the state taxes
withheld from employees as income coupled with higher interest income.
The interest was earned on excess cash balances resulting from the
Acquisition. This increased benefit resulted from state tax
withholdings recognized in the period for compensation related to
stock options exercised by certain managers in connection with the
Acquisition.
-12-
<PAGE> 15
INCOME TAX (BENEFIT) PROVISION
The provision for income taxes decreased to a benefit of $.7 million
in the first nine months of 1998 from a provision of $2.4 million in
the first nine months of 1997. This decrease was primarily due to the
decrease in taxable income from $6.5 million in 1997 to a loss of $3.0
million in 1998.
NET INCOME (LOSS)
Net loss for the first nine months of 1998 was $3.1 million compared
to net income of $4.1 million for the first nine months of 1997. This
decrease was primarily due to the decrease in net sales as discussed
above as well as increased depreciation and amortization expenses
resulting from the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from
operations, borrowings under its secured credit facility and a portion
of the net proceeds from the offering of its 9 5/8% Senior Notes due
2006 (the "Notes"). The Company's principal uses of liquidity are to
fund operations, meet debt service retirements and finance the
Company's planned capital expenditures, including the construction of
a fourth smelting furnace.
The Company's cash flows from its operations are influenced by selling
prices of its products and raw materials costs, and are subject to
moderate fluctuation due to market supply factors driven by imports.
The Company's silicon metal business experiences price fluctuations
principally due to the competitive nature of one of its markets, the
secondary aluminum market. Historically, the Company's microsilica
business has been affected the developing nature of the markets for
this product. Average transaction selling prices for the Company's
microsilica in the third quarter of 1998 were slightly below the
average transaction selling princes at the end of the third quarter of
1997.
Cash and cash equivalents at September 30, 1998 increased
significantly from December 31, 1997, to $19.0 million from $0.6
million. Approximately $17.0 million of this increase is related to
excess borrowings as of the Acquisition date. These funds will be used
by the Company to fund part of the construction cost of a fourth
smelting furnace. The remaining increase in cash results from normal
operations of the Company coupled with the timing of payment of a
recurring liability of the Company.
Depreciation and amortization for the third quarter of 1998 totaled
$1.5 million compared to $.5 million in the same quarter last year.
The increase primarily results from a significant increase in
depreciation which relates to the step-up of assets associated with
the Acquisition. In addition, amortization expense increased
significantly due to the amortization of the goodwill recorded as a
result of the Acquisition as well as debt issuance costs also related
to the Acquisition.
For the nine months ended September 30, 1998 and September 30, 1997,
net cash provided by operating activities was $4.4 million and $3.5
million, respectively. This increase resulted primarily from an
increase in noncash expenses and collection of a large receivable
offset by reduced net income. Net cash used in investing activities
increased to $3.5 million for the nine months ended September 30, 1998
from $1.5 million for the nine months ended September 30, 1997. This
increase was the result of higher capital spending. Net cash provided
by financing activities was $7,000 for the nine months ended September
30, 1998 as compared to net cash used in financing activities of $2.0
million for the nine months ended September 30, 1997. This change was
principally a result of no significant financing activity in 1998.
-13-
<PAGE> 16
For the three months ended September 30, 1998 and September 30, 1997,
net cash provided by operating activities was $32,000 and $1.2
million, respectively. This decrease resulted primarily from a
significant decrease in net income. Net cash used in investing
activities increased to $1.1 million for the three months ended
September 30, 1998 from $.3 million for the three months ended
September 30, 1997. This increase was the result of higher capital
spending. Net cash used in financing activities was $16,000 for the
three months ended September 30, 1998 as compared to $1.1 million for
the three months ended September 30, 1997. This change was principally
a result of no required principal payments during the quarter ended
September 30, 1998.
In connection with the Acquisition, the Company replaced its existing
credit facility with a new credit facility (the "Credit Facility")
providing availability for revolving borrowings and letters of credit
in an aggregate principal amount of up to $15.0 million (of which $6.1
million is reserved for support of a letter of credit issued in
connection with the industrial revenue bond financing of the Company).
As of September 30, 1998, the Company had $15.0 million of
availability under the Credit Facility (as such availability is
reduced by the $6.1 million letter of credit thereunder).
Ongoing interest payments on the 9 5/8% Senior Notes due 2006 (the
"Notes") represent significant liquidity requirements for the Company.
With respect to the $75.0 million borrowed under the Notes, the
Company will be required to make semi-annual interest payments of
approximately $3.6 million over the life of the Notes.
With respect to ongoing capital spending, the Company expects to spend
approximately $3.0 million to $4.0 million annually to properly
maintain its furnaces and other production facilities. In addition,
the Company intends to add a fourth smelting furnace over the next two
years from proceeds of the Notes together with internally generated
cash flow. The Company estimates that construction of the furnace will
cost a total of approximately $25.0 million.
Moreover, the agreement governing the Credit Facility (the " Credit
Agreement") imposes restrictions on the Company's ability to make
capital expenditures and both the Credit Agreement and the indenture
governing the Notes ("the Indenture") limit the Company's ability to
incur additional indebtedness. Such restrictions, together with the
highly leveraged nature of the Company, could limit the Company's
ability to respond to market conditions, to meet its capital spending
program, to provide for unanticipated capital investments or to take
advantage of business opportunities. The covenants contained in the
Credit Agreements also, among other things, restrict the ability of
the Company and its subsidiaries to dispose of assets, incur guarantee
obligations, repay the Notes, pay dividends, create liens on assets,
enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in acquisitions or consolidations,
make capital expenditures or engage in certain transactions with
affiliates, and otherwise restrict corporate activities. The covenants
contained in the Indentures governing the Notes also impose
restrictions on the operation of the Company's business. During the
quarter ended September 30, 1998, the Company reached agreement with
BankAmerica to amend its' Minimum Net Worth covenant. As a result of
the amendment, the Company is in compliance with all loan covenants as
of November 9, 1998.
YEAR 2000
The Company uses several application programs written over many years
using two-digit year fields to define the applicable year, rather than
four-digit year fields. Such programs may recognize a date using "00"
as the year 1900 rather than the Year 2000. This misinterpretation of
the year could result in an incorrect computation, a computer
malfunction, or a computer shutdown.
-14-
<PAGE> 17
The Company has identified the systems that could be affected by the
Year-2000 issue and has developed a plan to resolve the issue. The
plan contemplates, among other things, the replacement or modification
of certain data processing systems. Management has estimated that the
costs associated with the implementation of the plan to be
approximately $50,000 although no assurances can be given in this
regard.
The Company has also begun to review its top suppliers and customers
to determine whether they have similar Year-2000 issues and, if so,
when they will become Year-2000 compliant. This will allow the Company
to determine whether the suppliers' and customers' Year-2000 problems
will impede their ability to provide goods and services to the
Company. An initial review has indicated that all of the Company's
major suppliers and customers appear to be in the progress of
resolving their Year-2000 issues and that they do not foresee any
material problems.
If the Company cannot successfully and timely resolve its Year-2000
issues, its business, results of operations and financial condition
could be materially adversely effected. The Company has not developed
a contingency plan in the event of a Year-2000 problem. However, based
upon the results of the Company's internal review, it does not believe
a contingency plan is necessary. The Company will, however, continue
to evaluate the need for a contingency plan is necessary. The Company
will, however, continue to evaluate the need for a contingency plan.
FORWARD LOOKING STATEMENTS
Certain of the matters discussed in the preceding pages, particularly
regarding anticipating future financial performance, business
prospects, growth and operating strategies, the effects of the
Acquisition on the Company and similar matters, and those preceded by,
followed by or that otherwise include the words "may," "would,"
"could," "will," "believes," "expects," "anticipates, plans, intends,
estimates, or similar expressions or variation thereof constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended. For those statements, the Company
claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve a number of risks and
uncertainties. The following important facts, in addition to those
discussed elsewhere in this document, may affect the future results of
the Company and could cause those results to differ materially from
those expressed in the forward-looking statements: the Company's
significant leverage and debt service requirements; restrictive
covenants in the Company's debt agreements; the loss of business from
a key customer; the Company's dependence on its supply of electrical
power; increasing levels of competition in the Company's industry; the
maintenance of effective silicon metal anti-dumping legislation;
changes in the demand for, and the pricing of, silicon metal; the
Company's retention of key personnel; changes in the price of silicon
metal; the inability of the Company, or its major customer or
suppliers, to resolve the Year-2000 issue in a manner that does not
have a material adverse effect on the business, operations or revenues
of the Company; changes in accounting policies and practices; and
other risks identified from time to time in the Company's SEC reports.
-15-
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR NOTES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Not applicable
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMCALA, Inc.
- ----------------------------------------------------------
(Registrant)
<TABLE>
<S> <C>
Date November 13, 1998 /s/ R. Myles Cowan
--------------------------- -------------------------------------------
R. Myles Cowan
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
</TABLE>
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,967
<SECURITIES> 0
<RECEIVABLES> 6,167
<ALLOWANCES> 0
<INVENTORY> 2,769
<CURRENT-ASSETS> 31,038
<PP&E> 53,445
<DEPRECIATION> 1,945
<TOTAL-ASSETS> 121,949
<CURRENT-LIABILITIES> 10,492
<BONDS> 81,051
0
0
<COMMON> 18,807
<OTHER-SE> (1,740)
<TOTAL-LIABILITY-AND-EQUITY> 121,949
<SALES> 27,536
<TOTAL-REVENUES> 28,151
<CGS> 25,233
<TOTAL-COSTS> 25,233
<OTHER-EXPENSES> 1,439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,840
<INCOME-PRETAX> (2,361)
<INCOME-TAX> (620)
<INCOME-CONTINUING> (1,740)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,740)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
CUMULATIVE 9 MONTHS ENDED 9-30-98 INFORMATION IS NOT INCLUDED DUE TO CHANGE IN
CONTROL OF COMPANY ON MARCH 31, 1998.
</FN>
</TABLE>
