<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
------------ ------------
COMMISSION FILE NUMBER:
--------
SIMCALA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1780941
(State of incorporation) (I.R.S. Employer
Identification No.)
OHIO FERRO ALLOYS ROAD
MT. MEIGS, ALABAMA 36057
(Address of principal executive offices)
(334) 215-7560
(Registrant's telephone number)
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]
The number of shares of the registrant's Common Stock outstanding as of
August 26, 1998 was 10,889.
================================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION*
Item 1. Financial Statements
* 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), and the
"Company" refers to the registrant, SIMCALA, Inc.
2
<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
------- -----------
June 30, December 31,
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------
(unaudited)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 20,030 $ 635
Accounts receivable, net of allowance for doubtful
accounts of $- at June 30, 1998 and $77 at 5,791 5,830
December 31, 1997
Other receivables 1,007 -
Inventories 2,400 2,664
Deferred income taxes 2,246 1,288
Other current assets 292 128
- --------------------------------------------------------------------------------------------------
Total Current Assets 31,766 10,545
Property, Plant and Equipment, net of accumulated
depreciation of $926 and $4,045, at June 30, 1998
and December 31, 1997, respectively 53,384 22,448
Intangible Assets, net of accumulated amortization of $509
and $540, at June 30, 1998 and December 31, 1997,
respectively 37,759 670
=================================================================================================
Total Assets $122,909 $33,663
=================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 10,056 $ 6,125
Current maturities of long-term debt 79 2,341
Income taxes payable - 1,194
- -------------------------------------------------------------------------------------------------
Total Current Liabilities 10,135 9,660
Long Term Debt - Net of Current Portion 81,067 12,763
Deferred Income Taxes 13,339 2,964
- -------------------------------------------------------------------------------------------------
Total Liabilities 104,541 25,387
- -------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 5)
STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------------------------
Common Stock, 20,000 shares authorized - 10,889 and 10,000 shares
issued and outstanding, at June 30, 1998 and
December 31, 1997, respectively,
par value $.01 per share - -
Additional Paid-in Capital 18,807 2,250
Retained Earnings (439) 6,026
- -------------------------------------------------------------------------------------------------
Total Stockholder's Equity 18,368 8,276
- -------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $122,909 $33,663
=================================================================================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE> 4
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 Three Months Three Months Six Months
Ended Ended Ended Ended
June 30, March 31, June 30, June 30,
1998 1998 1997 1997
- ------------------------------------------------------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net Sales $ 14,918 $ 14,854 $ 15,143 $30,798
Cost of Goods Sold 13,022 11,679 12,403 24,627
- ------------------------------------------------------------ -------- -------- -------
Gross Profit 1,896 3,175 2,740 6,171
Selling, General and Administrative Expenses 826 3,824 685 1,366
- ------------------------------------------------------------ -------- -------- -------
Operating (Loss) Income 1,070 (649) 2,055 4,805
Interest Expense 1,899 314 447 862
Other Income, Net 344 282 33 63
- ------------------------------------------------------------ -------- -------- -------
Earnings (Loss) before Income Taxes (485) (681) 1,641 4,006
Income Tax (Benefit) Provision (46) (100) 558 1,362
- ------------------------------------------------------------ -------- -------- -------
Net Income (Loss) $ (439) $ (581) $ 1,083 $ 2,644
============================================================ ======== ======== =======
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE> 5
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 Three Three Six
Ended June 30, Months Months Months
1998 Ended Ended June Ended
March 31, 30, 1997 June 30,
Cash Flows from Operating Activities 1998 1997
- --------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income $ (439) $ (581) $ 1,083 $ 2,644
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 926 471 433 857
Deferred income taxes - 800 71 71
Noncash stock option compensation - 904 - -
Change in assets and liabilities:
(Increase) decrease in accounts receivable 25 21 125 (866)
(Increase) decrease in other receivables 1,800 (2,807) - -
(Increase) decrease in inventories 471 (207) (229) (95)
Decrease (increase) in other assets 257 202 (2,320) (1,947)
Decrease in accounts payable
and other accrued expenses 184 2,365 2,336 1,742
- ---------------------------------------------------------------------- --------------------------------------
Net cash provided by operating activities 3,224 1,168 1,499 2,406
- ---------------------------------------------------------------------- --------------------------------------
Cash Flows used in Investing Activities
Purchase of property, plant and equipment (1,235) (1,184) (754) (1,193)
- ---------------------------------------------------------------------- --------------------------------------
Cash Flows from Financing Activities
Repayment under line of credit, net - - (2,806) (2,744)
Redemption of preferred stock - - (1,770) (1,770)
Net borrowings (repayment) of long-term debt (16) 39 3,678 3,583
- ---------------------------------------------------------------------- --------------------------------------
Net cash provided by (used in) financing activities (16) 39 (898) (931)
- ---------------------------------------------------------------------- --------------------------------------
Increase in Cash and Equivalents 1,973 23 (153) 282
Cash and Equivalents at Beginning of Period 18,057 635 621 186
- ---------------------------------------------------------------------- --------------------------------------
Cash and Equivalents at End of Period $20,030 $ 658 $ 468 $ 468
====================================================================== ======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 139 $ 161 $ 239 $ 576
======= ======= ======= =======
Income taxes $ - $ 112 $ 184 $ 184
======= ======= ======= =======
</TABLE>
See Notes to Condensed Financial Statements.
5
<PAGE> 6
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 June
30, 1998, three customers accounted for 40%, 16%, and 14% of net sales. At June
30, 1998 and December 31, 1997, three customers accounted for 45%, 11%, and 8%
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 $6 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 June 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," 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. The condensed financial statements as of June 30, 1998,
and for the three 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, intangibles and debt which will result in increased cost of sales,
amortization, depreciation and interest expense in the three months ended June
30, 1998 and in future periods.
6
<PAGE> 7
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 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
June 30, 1998, the three months ended March 31, 1998 and the three and six
months ended June 30, 1997. The Company did not have accumulated other
comprehensive income as of June 30, 1998 or December 31, 1997.
3. INVENTORIES
Inventories consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
Company Predecessor
--------------- ---------------
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Raw Materials $ 788 $ 948
Finished Goods 1,316 1,420
Supplies 296 296
=============== ===============
$2,400 $2,664
=============== ===============
</TABLE>
4. LONG-TERM DEBT
As of June 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 June 30, 1998, the
interest rate was 5.75%. 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 $6000 146
------------
81,146
Less current portion (79)
============
Long-term debt $81,067
============
</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 June 30, 1998, $6.1 million
was outstanding under the Revolving Credit Facility.
7
<PAGE> 8
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.
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. COMMITMENTS AND CONTINGENCIES
As of June 30, 1998, the Company had entered into contracts totaling
approximately $1.0 million for the construction of certain production equipment
and had a commitment to purchase lumber totaling approximately $145,000.
The Company is involved in litigation arising in the normal course of business.
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the financial statements.
8
<PAGE> 9
6. 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 Six Months Three months Six Months
Ended Ended Ended Ended
March 31, 1998 June 30, 1998 June 30, 1997 June 30, 1997
<S> <C> <C> <C> <C>
Net Sales $14,854 $29,772 $15,143 $30,798
Net Income (Loss) $(2,378) $(2,622) $ (758) $(1,058)
</TABLE>
7. 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.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following is 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>
9
<PAGE> 10
Item 2. 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 June 30, 1998 in
comparison to the three month period ended June 30, 1997 and (b) the three month
period ended June 30, 1998 plus the three month period ended March 31, 1998, in
comparison to the six month period ended June 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
(Decrease)
Quarter Ended Quarter Ended from Prior
June 30, 1998 June 30, 1997 Period
------------- ------------- ------
<S> <C> <C> <C>
Net sales $ 14,918 $15,143 (1.5)%
Cost of goods sold 13,022 12,403 5.0%
-------- -------
Gross profit 1,896 2,740 (31.0)%
Selling, general and administrative expenses 826 685 20.8%
-------- -------
Operating income (loss) 1,070 2,055 (48.0)%
Interest expense 1,899 447 324.8%
Other income, net 344 33 942.4%
-------- -------
Earnings (loss) before income taxes (485) 1,641 (129.5)%
Income tax (benefit) provision (46) 558 (108.8)%
-------- -------
Net income (loss) $ (439) $ 1,083 (41.9)%
======== =======
</TABLE>
10
<PAGE> 11
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 June 30,
1998 and 1997:
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 87.3 81.9
----- -----
Gross profit 12.7 18.1
Selling, general and administrative expenses 5.5 4.5
----- -----
Operating income (loss) 7.2 13.6
Interest expense 12.7 3.0
Other income, net 2.3 0.2
----- -----
Earnings (loss) before income taxes (3.2) 10.8
Income tax (benefit) provision ( .3) 3.7
----- -----
Net income (loss) (2.9)% 7.1%
===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET SALES
Net sales decreased $0.2 million, or 1.5 %, to $14.9 million in the second
quarter of 1998 from $15.1 million in the second quarter of 1997. This decline
was due principally to decreased selling prices in the secondary aluminum
silicon metal markets coupled with a very slight decrease in tons sold in the
quarter. Production of silicon metal in the second quarter of 1998 was 9,470
metric tons, compared with 9,297 metric tons produced in the same period in
1997.
GROSS PROFIT
Gross profit decreased $0.8 million, or 31.0%, to $1.9 million in the second
quarter of 1998 from $2.7 million in the second quarter of 1997. The gross
profit margin decreased to 12.7% in the second quarter of 1998 from 18.1% in
the second quarter of 1997. These decreases were principally due to the sales
impacts discussed above coupled with higher depreciation costs associated with
the Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.1 million, to $0.8
million in the second quarter of 1998 from $0.7 million in the second quarter of
1997. The increase was primarily due to additional expenses associated with new
management fee arrangements and new employee compensation incentive programs
which were put into place as a result of the Acquisition.
OPERATING INCOME
Income from operations decreased $1.0 million to $1.1 million in the second
quarter of 1998 from $2.1 million in the second quarter of 1997, while the
operating margin decreased to 7.2 percent from 13.6 percent for the same
periods.
11
<PAGE> 12
INTEREST EXPENSE
Interest expense increased $1.5 million to $1.9 million in the second quarter of
1998 from $0.4 million in the second 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 $311,000 to $344,000 in the second quarter of 1998
from $33,000 in the second quarter of 1997. The increase in income was primarily
due to increased interest income as the result of excess cash received from the
Acquisition.
INCOME TAX PROVISION
The provision for income taxes decreased to a benefit of $46,000 in the second
quarter of 1998 from a provision of $558,000 in the second quarter of 1997. This
decrease was primarily due to the decrease in taxable income from $1.6 million
in the second quarter of 1997 to a loss of $0.5 million in the second quarter of
1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 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 June 30, 1998,
and for the three 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, intangibles and debt which will result in increased cost of sales,
amortization, depreciation and interest expense in the three months ended June
30, 1998 and in future periods.
NET SALES
Net sales decreased $1.0 million, or 3.3%, to $29.8 million in the first six
months of 1998 from $30.8 million in the first six months of 1997. This decrease
was due principally to a decrease in selling prices in secondary aluminum
silicon metal markets coupled with slightly lower sales volume. Production in
the first six months of 1998 was 18,579 metric tons, compared with 18,373 metric
tons produced in the same period in 1997.
GROSS PROFIT
Gross profit decreased $1.1 million, or 17.8%, to $5.1 million in the first six
months of 1998 from $6.2 million in the first six months of 1997. At the same
time, the gross profit margin decreased to 17.0% from 20.0%. 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 EXPENSES
Selling, general and administrative expenses increased $3.3 million to $4.7
million in the first six months of 1998 from $1.4 million in the first six
months of 1997. The increase was due to a bonus of $1.5 million paid to
management related to the exercise of options and the recognition of
compensation expense of $0.9 million related to certain stock options during the
quarter ended March 31, 1998. In addition, the Company incurred increases in
management fees and compensation expense related to the Acquisition.
12
<PAGE> 13
OPERATING INCOME
Income from operations decreased $4.4 million to $0.4 million in the first six
months of 1998 from $4.8 million in the first six months of 1997. At the same
time, the operating margin decreased to 1.4 percent from 15.6 percent for the
same periods. Excluding the bonus costs discussed above recorded in the first
quarter of 1998, income from operations decreased $2.9 million, or 60.0 percent,
to $1.9 million in the first six months of 1998 from $4.8 million in the first
six months of 1997, while the operating margin decreased to 6.5 percent from
15.6 percent for the same periods.
INTEREST EXPENSE
Interest expense increased $1.3 million to $2.2 million for the first six months
of 1998 from $0.9 million in the first six months of 1997. The increase resulted
from substantially higher debt levels in the second quarter of 1998 associated
with the Acquisition.
OTHER INCOME - NET
Other income - net increased $0.5 million to $0.6 million in the first six
months of 1998 from $0.1 million in the first six months of 1997 primarily 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. 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.
INCOME TAX PROVISION
The provision for income taxes decreased to a benefit of $0.1 million in the
first six months of 1998 from a provision of $1.4 million in the first six
months of 1997. This decrease was primarily due to the decrease in taxable
income from $4.0 million in the first six months of 1997 to a loss of $1.2
million in the first six months of 1998.
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
requirements 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 by the developing nature of the
markets for this product. Average transaction selling prices for the Company's
microsilica in the second quarter of 1998 were slightly below the average
transaction selling prices at the end of the second quarter of 1997.
Cash and cash equivalents at June 30, 1998 increased significantly from December
31, 1997, to $20.0 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 second quarter of 1998 increased to $1.4
million from $0.8 million in the second quarter of 1997. The increase primarily
resulted from a significant increase in depreciation related 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.
13
<PAGE> 14
For the six months ended June 30, 1998 and June 30, 1997, net cash provided by
operating activities was $4.4 million and $2.4 million, respectively. This
increase resulted primarily from a decrease in other assets. Net cash used in
investing activities increased to $2.4 million for the six months ended June 30,
1998 from $1.2 million for the six months ended June 30, 1997. This increase was
primarily a result of the Company purchasing additional production equipment.
Net cash provided by financing activities was $23,000 for the six months ended
June 30, 1998 as compared to net cash used in financing activities of $931,000
for the six months ended June 30, 1997. This change was principally a result of
debt refinancing in the second quarter of 1997.
For the three months ended June 30, 1998 and June 30, 1997, net cash provided by
operating activities was $3.2 million and $1.5 million, respectively. This
increase resulted primarily from collection of a receivable related to tax
withholdings on compensation from the exercise of stock options in 1998. Net
cash used in investing activities increased to $1.2 million for the three months
ended June 30, 1998 from $.8 million for the three months ended June 30, 1997.
This increase was primarily a result of the Company purchasing additional
production equipment Net cash used in financing activities decreased to $16,000
for the three months ended June 30, 1998 from $898,000 for the three months
ended June 30, 1997. This decrease was principally a result of debt refinancing
in the second quarter of 1997.
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 June 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.
As of June 30, 1998, the Company had entered into contracts totaling
approximately $1.0 million for the construction of certain production equipment
and had a commitment to purchase lumber totaling approximately $145,000.
The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes), or to fund planned capital expenditures will depend on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
availability under the Credit Facility, will be adequate to meet the Company's
future liquidity needs for at least the next two years. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations or that future borrowings will be available under the Credit Facility
in an amount sufficient to enable the Company to service its indebtedness,
including the Notes, or to fund its other liquidity needs, including the
construction of a fourth smelting furnace. In addition, the Company may need to
refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.
14
<PAGE> 15
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
Agreement 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 Indenture governing the Notes also impose
restrictions on the operation of the Company's business.
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. Programs that are time-sensitive 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 or a computer shutdown.
The Company has identified the systems that could be affected by the year 2000
issue and is developing a plan to resolve the issue. The plan contemplates,
among other things, the replacement or modification of existing data processing
systems as necessary. Management has estimated that the costs associated with
the implementation of the plan to be approximately $50,000.
FORWARD-LOOKING INFORMATION
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 variations 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 factors, in addition
to those discussed elsewhere in this document, affect the future results of the
Company and could cause those results to differ materially from those expressed
in the forward-looking statements: a decline in the demand for silicon metal;
changes in the price of silicon metal; the inability of the Company, or its
major customers 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; an event requiring a redemption of the Notes; changes in
accounting policies and practices; and other risks identified from time to time
in the Company's SEC reports.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 6. Exhibits.
(a) Exhibits
27 - Financial Data Schedule (for SEC use only).
16
<PAGE> 17
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)
Date August 26, 1998 /s/ R. Myles Cowan
----------------------- ------------------------------------------
R. Myles Cowan
Vice President and Chief Financial Officer
(Principal Accounting and Financial
Officer)
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,030
<SECURITIES> 0
<RECEIVABLES> 5,791
<ALLOWANCES> 0
<INVENTORY> 2,400
<CURRENT-ASSETS> 31,766
<PP&E> 53,384
<DEPRECIATION> 926
<TOTAL-ASSETS> 122,909
<CURRENT-LIABILITIES> 10,135
<BONDS> 81,067
0
0
<COMMON> 18,807
<OTHER-SE> (439)
<TOTAL-LIABILITY-AND-EQUITY> 122,909
<SALES> 14,918
<TOTAL-REVENUES> 14,918
<CGS> 13,022
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<FN>
CUMULATIVE 6 MONTHS ENDED JUNE 30, 1998 INFORMATION IS NOT INCLUDED DUE TO
CHANGE IN CONTROL OF COMPANY ON MARCH 31, 1998.
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