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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 ________
COMMISSION FILE NUMBER 0-29204
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SIMCALA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1780941
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
OHIO FERRO ALLOYS ROAD
MT. MEIGS, ALABAMA 36057
(Address of principal executive offices)
(334) 215-7560
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 X___ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The number of shares of the registrant's Common Stock outstanding at
March 1, 1999 was 10,889. There is no public trading market for shares of the
registrant's Common Stock.
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SIMCALA, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
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ITEM PAGE
NUMBER NUMBER
PART I
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1. BUSINESS 1
2. PROPERTIES 7
3. LEGAL PROCEEDINGS 7
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 8
6. SELECTED FINANCIAL DATA 9
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 22
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 23
11. EXECUTIVE COMPENSATION 24
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 27
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 30
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SIGNATURES 36
FINANCIAL STATEMENTS F-1
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document, particularly
regarding anticipating future financial performance, business prospects, growth
and operating strategies, the effects of the Transactions (as defined below) on
SIMCALA, Inc. ("SIMCALA" or 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 may constitute
"forward-looking statements" for purposes of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, 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. A variety of factors, including without limitation
those discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 hereof, may affect the future results of
the Company and could cause those results to differ materially from those
expressed in the forward-looking statements.
PART I.
ITEM 1. BUSINESS.
GENERAL
The Company is a leading domestic manufacturer of silicon metal which
is used in the chemical and aluminum industries. Silicon metal is an essential
raw material used by the chemical industry to produce silicones and polysilicon
and by the aluminum industry primarily as an alloying agent. The Company
produces and sells higher margin chemical grade and specialty aluminum grade
silicon metal, both of which contain the highest concentrations of silicon and
the lowest levels of impurities when compared to lower grades of silicon metal.
Silicones are the basic ingredient used in numerous consumer products, including
lubricants, cosmetics, shampoos, gaskets, building sealants, automotive hoses,
water repellent fluids and high temperature paints and varnishes. Polysilicon is
an essential raw material used in the manufacture of silicon wafers for
semi-conductor chips and solar cells. Aluminum containing silicon metal as an
alloy can be found in a variety of automobile components, including engine
pistons, housing and cast aluminum wheels. Management believes that there are no
commercially feasible substitutes for silicon metal in either the chemical or
aluminum industries. In addition to silicon metal, the Company produces
microsilica, a co-product of the silicon metal smelting process. Microsilica is
a strengthening and filler agent which has applications in the refractory,
concrete, fibercement, oil exploration and minerals industries.
In 1998, the Company's production volume was approximately 36,515
metric tons, with net sales of $55.7 million. The Company estimates that it is
one of the three largest manufacturers, in terms of volume, of silicon metal in
the United States, and that its facility, located in Mt. Meigs, Alabama (the
"Facility"), is the nation's second largest in terms of capacity.
The Company is incorporated under the laws of the state of Delaware.
The Company's principal executive offices are located at Ohio Ferro Alloys Road,
Mt. Meigs, Alabama 36057, and its telephone number is (334) 215-7560. On March
31, 1998 (the "Acquisition Date"), SAC Acquisition Corp., a Georgia corporation
("SAC") and then wholly owned subsidiary of SIMCALA Holdings, Inc., a Georgia
corporation ("Holdings"), acquired all of the outstanding capital stock of the
Company (the "Acquisition") from its stockholders for a cash payment of
approximately $65.3 million. The aggregate purchase price paid by SAC for the
Acquisition was financed with the net proceeds of the offering (the "Offering")
of the Company's 9 5/8% Senior Notes due 2006 in the amount of $75,000,000 (the
"Notes") and the initial capital contribution by CGW Southeast Partners III,
L.P. ("CGW") and C. Edward Boardwine, Dwight L. Goff and R. Myles Cowan, II
(each, a "Senior Manager" and collectively, the "Senior Management") of $22.0
million to Holdings (the "Equity Contribution"), which was then contributed by
Holdings to SAC. Immediately following the Acquisition, SAC merged with and into
the Company, with the Company being the surviving corporation (the "Merger"). As
a result of the Merger, the Company became the obligor of the Notes and a wholly
owned direct subsidiary of Holdings. Holdings has no business other than holding
the capital stock of the Company, which is the sole source of Holding's
financial resources. Holdings is controlled by CGW, which beneficially owns
shares representing 79.8% of the voting power of Holdings (on a fully diluted
basis). Accordingly, CGW, through its
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control of Holdings, controls the Company and has the power to elect all of its
directors, appoint new management, and approve any action requiring the approval
of the holders of the Company's common stock.
In connection with the Acquisition, the Company (i) repaid
approximately $9.2 million of term loan indebtedness (including accrued interest
thereon and fees) outstanding under its prior bank credit facility (the "Old
Credit Facility") with a portion of the net proceeds of the Offering and (ii)
replaced the Old Credit Facility and a related letter of credit reimbursement
agreement (the "Old Reimbursement Agreement") with a new credit facility (the
"New Credit Facility"). The New Credit Facility consists of a $15.0 million
revolving credit facility which provides availability for borrowings and letters
of credit. As part of the Company's industrial revenue bond financing (the "IRB
Financing"), an approximately $6.1 million letter of credit was issued under the
New Credit Facility to replace the letter of credit issued under the Old
Reimbursement Agreement. The Acquisition, the Merger, the replacement of the Old
Credit Facility and the Old Reimbursement Agreement with the New Credit Facility
and the Equity Contribution, the Offering and the application of the net
proceeds therefrom are referred to in this report as the "Transactions."
PRODUCTS AND MARKETS
Silicon Metal
The silicon metal industry consists of two general markets: the
chemical industry market and the aluminum industry market. The chemical industry
market is subdivided into the silicones market and the polysilicon market, both
of which require the highest grade of silicon metal. The aluminum industry
market is subdivided into the primary aluminum market (producing aluminum from
ore) and the secondary aluminum market (producing aluminum from scrap). The
Company defines the primary aluminum market and the higher-end of the secondary
aluminum market as the "specialty aluminum" market because the aluminum produced
for those markets requires higher quality silicon metal.
The chemical industry uses silicon metal as a raw material in the
manufacture of silicones and polysilicon. Silicones are the basic ingredient
used in numerous consumer products, including lubricants, cosmetics, shampoos,
gaskets, building sealants, automotive hoses, water repellent fluids and high
temperature paints and varnishes. Silicones are readily adaptable to a variety
of uses because they possess several desirable qualities, including electrical
resistance, resistance to extreme temperatures, resistance to deterioration from
aging, water repellency, lubricating characteristics, relative chemical and
physiological inertness and resistance to ultraviolet radiation. Polysilicon is
the essential raw material used by the chemical industry in the manufacture of
silicon wafers for semi-conductor chips and solar cells.
The aluminum industry uses silicon metal in the production of aluminum
alloys, both in primary and secondary aluminum production. Aluminum containing
silicon metal as an alloy can be found in a variety of automobile components
including engine pistons, housing and cast aluminum wheels. The addition of
silicon metal to aluminum in the casting process improves castability and
minimizes shrinkage and cracking. In the finished aluminum product, silicon
metal increases corrosion resistance, hardness, tensile strength and wear
resistance.
In 1998 the Company produced approximately 17,000 metric tons of
chemical grade silicon metal and approximately 13,000 tons of specialty aluminum
grade silicon metal, representing approximately 49% and approximately 37% of its
total silicon metal output, respectively.
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Microsilica (Silica Fume)
During the silicon metal production process the offtake gases are drawn
from the smelting furnaces by large fans and are collected in baghouses. As the
material cools it oxidizes to amorphous silicon dioxide (SiO(2)) and condenses
in the form of spheres consisting of non-crystalline silicon dioxide. These
extremely fine particles (less than one micron in size) are referred to as
microsilica (silica fume). Microsilica is widely used in the refractory,
concrete, fibercement, oil exploration and minerals industry. Because there are
more than 50,000 particles of microsilica for each grain of cement, microsilica
is used in cement-based products to fill the microscopic voids between cement
particles. In concrete applications microsilica increases the strength,
durability and reduces permeability in applications such as parking garages,
bridge decks and marine structures. SIMCALA collects approximately 14,000 metric
tons of microsilica annually. In 1998, the Company sold approximately 11,500
metric tons of microsilica.
MANUFACTURING OPERATIONS
Overview
Silicon metal is produced by smelting quartz (SiO(2)) with carbon
substances (typically low ash coal and/or charcoal) and wood chips. Wood chips
provide porosity to the raw material mix. At the Facility, an automated weighing
system accurately measures the mixture of quartz, coal, charcoal and wood chips.
The mixture is fed into the top of a submerged-arc electric furnace by automatic
conveyors. SIMCALA's furnaces measure 28 feet in diameter and nine feet in
depth. Electric power is delivered to the furnaces by pre-baked amorphous carbon
electrodes. The electrodes act as conductors of electricity in each furnace,
generating heat in excess of 3,000(0)C. At this temperature, the mix of raw
materials reaches a molten state. The carbon, acting as a reducing agent,
combines with the oxygen in the silicate to form the silicon metal.
The molten silicon metal is intermittently tapped out of the furnaces
into ladles, where it is refined by injecting oxygen to meet specific customer
requirements. After the refining process, the silicon metal is cast into iron
chills (molds) for cooling. When the casts have cooled, they are weighed and
crushed to the desired size. The finished silicon metal is then shipped to the
customer in bulk, pallet boxes or bags by railcars or trucks.
The emissions from the electric arc furnaces are collected by dust
collecting hoods and passed through a dust collection and bagging system. The
resulting co-product is microsilica.
Technology
The carbothermic smelting process used in the production of silicon
metal is well established. In recent years, the Company has made significant
technological advances in key areas. The batch weighing system for raw materials
is computer controlled to adjust weights for incoming batches based on feedback
from prior batches. Computers monitor key operational variables in the smelting
process for increased production controls. The Company employs the most advanced
furnace electrodes produced by UCAR International Inc., the world leader in
electrode technology. The Company has also installed an advanced oxygen-air
system that enables refining of the molten silicon metal in order to
consistently meet the quality requirements for chemical grade and specialty
aluminum grade silicon metal.
Product Quality
SIMCALA is committed to being a leading manufacturer of high grade
silicon metal. To achieve this goal, SIMCALA is dedicated to a total quality
assurance program which is tied to complying with ISO 9000 standards, including
the use of statistical techniques to improve process capability, audits by
trained and qualified personnel and a documented system for disposing of
nonconforming materials. The Company warrants to its customers that its products
will meet their specifications and provides a Certificate of Analysis with each
shipment. Customers are permitted to return products that do not meet their
specifications. The certified analysis is based on samples taken during the
process at key control points with real time analysis provided by the Company's
in-house X-ray fluorescent analytical instruments.
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Employee Training
The Company believes that it has one of the most experienced and
efficient management teams in the silicon metal business. This management team
is supported by a productive and experienced workforce equipped with skills in
metallurgical operations, maintenance, quality control and marketing. Employees
participate in SIMCALA's training program which has been jointly developed by
the Alabama State Department of Education and the John M. Patterson State
Technical College. The program is designed to provide each employee with the
skills required to evaluate, control and continuously improve production and
support service processes. In 1998, employee productivity was approximately 292
metric tons of silicon metal per hourly employee.
RAW MATERIALS
The Facility is located in close proximity to abundant sources of
high-quality and competitively priced raw materials and electricity. Where
strategically important, the Company may enter into long-term contracts to
secure a stable supply of raw materials at favorable prices, although it
currently has only a long-term contract for the supply of electricity. The
Company believes that the quality of its raw materials is among the highest
available and that supplies are adequate to satisfy its long-term requirements.
Because the Company believes there are sufficient alternative sources of quality
raw materials available to it, it is not expected that the loss of any one of
its suppliers would have a material adverse effect on the Company.
The principal cost components in the production of silicon metal are
electricity, carbon electrodes, quartz, coal, charcoal and wood chips.
Electricity is the largest cost component, comprising 25% of cost of goods sold
in 1998. The balance of raw materials, consisting of electrodes, quartz,
coal/charcoal and wood chips, represented 14%, 4%, 13% and 8% of cost of goods
sold, respectively, in 1998. In addition, labor comprised 7% of cost of goods
sold in 1998.
Electrical power used in the smelting process is supplied by Alabama
Power Company ("APCo") through a dedicated 110,000 volt line into SIMCALA's high
voltage main substation. The Company has a five-year contract with APCo through
February 2000. Although the Company does not expect any rate increases through
the contract period, the current rate schedule could be revised during the
contract term pursuant to regulation by the Alabama Public Service Commission.
If, however, electric rates did increase significantly, such increases would
have an adverse effect on the Company's operating performance and the Company
may not be able to pass the additional cost on to its customers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Dependence on Supply of Electrical Power."
The Company purchases two sizes of quartz from a local supplier. The
low level of iron and titanium impurities found in local Alabama quartz is
ideally suited to produce chemical grade silicon metal. High grade metallurgical
coal is supplied by one supplier located in Alabama and two in Kentucky.
Metallurgical grade charcoal is purchased from one supplier in Kentucky and one
in Missouri. Hardwood logs are purchased and processed into metallurgical wood
chips on-site by an independent contractor. The logs are harvested in close
proximity to the Facility.
CUSTOMERS
The Company is a supplier to two of the largest producers of silicones
in the United States, G.E. Silicones, a division of General Electric Company
("G.E. Silicones"), and Dow Corning Corporation ("Dow Corning"). G.E. Silicones'
production facility, which is located in Waterford, New York, consumes over
50,000 metric tons of silicon metal per year. The facility produces feedstock
for silicones, electronic and fumed silica applications. In 1998, G.E. Silicones
accounted for approximately 11% of the Company's net sales. At December 31,
1998, G.E. Silicones accounted for approximately 8% of the Company's outstanding
accounts receivable.
Dow Corning's production facilities are located in Carrollton, Kentucky
and Midland, Michigan. Dow Corning consumes over 100,000 metric tons of silicon
metal per year with the Carrollton facility being the dominant consumer. The
Midland facility primarily produces feedstock for polysilicon applications in
electronics while Carrollton produces siloxane for silicones applications. In
1998, Dow Corning accounted for approximately 40% of the Company's net sales. At
December 31, 1998, Dow Corning accounted for approximately 54% of the Company's
outstanding accounts receivable.
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SIMCALA also supplies many of the leading companies in the specialty aluminum
industry. The Company's three largest customers in the specialty aluminum
industry are Wabash Alloys, L.L.C. ("Wabash Alloys"), Alcan Ingot & Recycling
("Alcan") and Bohn Aluminum Corp. ("Bohn"), which in 1998 collectively accounted
for approximately 19%, 8% and 3%, respectively, of the Company's net sales. At
December 31, 1998, Wabash Alloys, Alcan and Bohn accounted for approximately
10%, 8% and 3%, respectively, of the Company's outstanding accounts receivable.
In 1998, the Company's five largest customers accounted for
approximately 81% of net sales. The Company does not generally have long-term
contracts with its major customers and the loss of any major customer, or a
significant reduction of the Company's business with any of them, would have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Factors --
Importance of Key Customers."
The Company does, however, currently have contracts for the supply of
silicon metal with three of its major customers. The Company has a three-year
agreement with Wabash Alloys (the "Wabash Agreement"), which is scheduled to
expire on December 31, 2001. Either party may cancel the Wabash Agreement prior
to expiration with six months' advance written notice. The Company also has
entered into a supply agreement with Alcan (the "Alcan Agreement"). The initial
three-year term of the Alcan Agreement will expire on December 31, 1999, but the
Alcan Agreement will continue year to year thereafter unless cancelled by either
party. Either party may cancel the Alcan Agreement upon 180 days written notice
prior to the expiration of the initial term or any renewal term. The Alcan
Agreement also provides that, if for any reason beyond the control of the
parties, economic circumstances change in such a way as to cause undue hardship
to either party or unduly favor one party to the detriment of the other party,
and the parties are unable to find a mutually acceptable solution within ninety
days, the Alcan Agreement can be canceled. In addition, the Company has entered
into a supply agreement with Dow Corning (the "Dow Agreement") with an initial
term commencing January 1, 1998 and ending on December 31, 2004. The Dow
Agreement will automatically continue thereafter until either party terminates
with 24 months prior written notice.
Most of the Company's customers require their suppliers to pass a
rigorous qualification process. Although each customer has established its own
testing requirements, qualification processes are generally designed to test for
(i) low variability of critical chemical elements and (ii) reliable and
predictable chemical reactivity. The process can take anywhere from two to three
years depending upon the customer's testing requirements and the manufacturer's
ability to comply with such requirements. The Company views the qualification
process as a competitive barrier to entry in its business.
COMPETITION
The Company competes in the silicon metal market primarily on the basis
of product quality (particularly in the production of chemical grade silicon
metal), service and price. In the chemical and specialty aluminum markets, the
Company considers itself in competition only with other domestic producers.
Management believes that foreign manufacturers are not reliable alternative
sources of high-grade silicon metal, primarily due to quality issues and high
freight costs. The Company, however, does compete with a number of domestic
companies, including Globe Metallurgical Inc. and Elkem Metals Company ("Elkem
Metals").
SIMCALA is strongly positioned in the chemical and specialty aluminum
markets. In 1998, the Company estimates that it held a market share of
approximately 13% of the total United States chemical market and approximately
13% of the total United States aluminum market, based on metric tons of silicon
metal sold.
EMPLOYEES
As of December 31, 1998, the Company employed 170 people, of which 125
people were paid on an hourly basis. Approximately 80% of the employees paid on
an hourly basis are represented by the United Steelworkers of America, Local
8538 (the "Union"). On August 8, 1995, the Company and the Union entered into a
five-year collective bargaining contract. Although wages remain fixed over the
life of the Union contract, the Company agreed in the contract to discuss wages
with the Union beginning in February 1998. In mid-February 1998, management held
meetings with Union and non-Union employees to discuss various matters,
including wage levels. There has been no increase in wages as a result of such
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meetings. The Company does not believe that this provision in the Union contract
requires the renegotiation of wage levels. The Company believes that its
relations with all its employees are good.
ENVIRONMENTAL AND REGULATORY MATTERS
Environmental
The Company is subject to extensive federal, state and local
environmental laws and regulations governing the discharge, emission, storage,
handling and disposal of a variety of substances and wastes used in or resulting
from the Company's operations. Although the Company believes that it is
currently in material compliance with those laws and regulations, it has
historically, and expects to continue to, incur costs related to environmental
remediation. However, the Company is not aware of any material remediation
contingencies associated with any of its real estate or facilities. The Company
estimates that approximately $1.0 million of budgeted capital expenditures in
each of 1999 and 2000 will relate to air abatement equipment.
Taxes
As an economic incentive to facilitate the rehabilitation of the
Facility, the State Industrial Development Authority, a public corporation
organized under the laws of the State of Alabama (the "SIDA"), granted SIMCALA
significant tax credits against corporate income tax and the collection of state
income tax withholding from employees under Alabama Act No. 93-851, also known
as the "Mercedes Act." Subject to certain requirements, these benefits allow the
Company to (i) apply state employee withholding tax, otherwise payable to the
Alabama Department of Revenue, toward the payment of the Company's debt
obligation under the bond loan agreement associated with the IRB Financing (the
"Bond Loan Agreement") and (ii) take a corporate income tax credit equal to the
amount paid pursuant to the Bond Loan Agreement. The Mercedes Act has been
repealed in favor of a new incentives package for projects subsequent to January
1995. In addition, because legal title to substantially all of the real and
personal property used in the Company's operations is held by the Montgomery
Industrial Development Board (the "Montgomery IDB") in connection with the IRB
Financing, the Company receives, and expects to continue to receive, an
exemption from property tax through May 31, 2010. Furthermore, the Company
expects that the property tax exemptions will apply to the fourth smelting
furnace the Company intends to construct. See "Properties."
Anti-Dumping Duties on Foreign Competitors' Products
In 1990 and 1991, domestic producers of silicon metal successfully
prosecuted anti-dumping actions against unfairly traded imports of silicon metal
from the People's Republic of China (the "PRC"), Brazil and Argentina. These
actions were brought under the antidumping provisions of the Tariff Act of 1930,
as amended. Under that statute, an anti-dumping duty order may be issued if a
domestic industry establishes in proceedings before the United States Department
of Commerce and the United States International Trade Commission that imports
from the country (or countries) covered by the action(s) are being sold at less
than normal value and are causing material injury or threat of such injury to
the domestic industry. An anti-dumping order requires special duties to be
imposed in the amount of the margin of dumping (i.e., the percentage difference
between the United States price for the goods received by the foreign producer
or exporter and the normal value of the merchandise).
Once an order is in place, each year foreign producers, importers,
domestic producers and other interested parties may request a new investigation
(or "administrative review") to determine the margin of dumping during the
immediately preceding year. The rates calculated in these administrative reviews
(or the existing rates if no review is requested) are used to assess
anti-dumping duties on imports during the review period and to collect cash
deposits on future imports. An administrative review covering five Brazilian
producers and a review covering two PRC exporters are now in progress. The rates
established in these reviews and in future reviews will depend upon the prices
and costs during the periods covered by the reviews, the methodologies applied
and other factors. Anti-dumping orders remain in effect until they are revoked.
In order for an individual producer or exporter to qualify for revocation of an
anti-dumping order, the United States Department of Commerce must conclude that
the producer or exporter has sold the merchandise at not less than normal value
for a period of at least three consecutive years and is not likely to sell the
merchandise at less than normal value in the future. Anti-dumping orders may
also be revoked as a result of periodic "sunset reviews."
The domestic silicon metal industry has aggressively sought to maintain
effective relief under the antidumping orders by actively participating in
administrative reviews, appeals and circumvention proceedings. Although these
efforts
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have been successful in protecting the industry from dumped imports from
the countries covered by the orders, no assurance can be given that one or more
of such anti-dumping orders will not be revoked or that effective duty rates
will continue to be imposed.
ITEM 2. PROPERTIES.
The Facility consists of a silicon metal production plant and
administrative offices, which are located on 129 acres in Mt. Meigs, Alabama,
approximately 15 miles from Montgomery. The Facility is the newest "greenfield"
silicon metal manufacturing facility in the United States. A "greenfield"
silicon metal manufacturing facility is a facility that is newly constructed to
manufacture silicon metal, whereas a "brownfield" facility is an addition to or
expansion of an existing silicon metal manufacturing facility. The Facility
contains three identical 20 megawatt submerged-arc electric furnaces with an
annual capacity of 36,000 metric tons of silicon metal and 16,000 metric tons of
microsilica. SIMCALA intends to expand the Facility by constructing a fourth
smelting furnace and the Company believes that after this expansion the Facility
will be the second largest silicon metal production facility in the world. Upon
completion of the fourth furnace, the Company's production capacity will
increase by approximately 12,000 metric tons to approximately 48,000 metric tons
per year. Management estimates that construction of the fourth furnace can be
completed within the next 20 months at a total cost of approximately $25.0
million. As a consequence of the IRB Financing, substantially all of the real
and personal property used in SIMCALA's operations (including the Facility) is
owned by the Montgomery IDB and leased to SIMCALA. The lease expires on June 1,
2010.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in routine litigation from time to time in the
regular course of its business. There are no material legal proceedings pending
or known to be contemplated to which the Company is a party or to which any of
its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year ended December 31,1998.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK
The Company's common stock is not publicly traded. The Company is a
wholly owned subsidiary of Holdings, which, in turn, is substantially owned by
CGW. Holdings has no business other than holding the stock of the Company, which
is the sole source of Holdings' financial resources. Holdings is controlled by
CGW, which beneficially owns shares representing 90.9% of the voting interest in
Holdings (79.8% on a fully diluted basis). Accordingly, CGW, through its control
of Holdings, controls the Company and has the power to elect all of its
directors, appoint new management and approve any action requiring the approval
of the holders of the Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
On March 31, 1998, the Company issued and sold to NationsBanc
Montgomery Securities LLC (the "Initial Purchaser") $75.0 million aggregate
principal amount of 9 5/8% Senior Notes due 2006, Series A. These sales were
exempt from registration under Section 4(2) of the Securities Act. The Initial
Purchaser offered those securities for resale in transactions not requiring
registration under the Securities Act to persons they reasonably believed to be
"Qualified Institutional Buyers" as defined in Rule 144A under the Securities
Act or institutional "Accredited Investors" as defined in subparagraph (a)(1),
(2), (3) or (7) of Commission Rule 501 under the Securities Act. The aggregate
price to investors for those securities was $75.0 million and the Initial
Purchaser received $2.25 million in discounts and commissions.
On March 31, 1998, the Company also issued and sold pursuant to the
exercise of stock options, an aggregate of 889 shares of common stock to C.
Edward Boardwine, its President and Chief Executive Officer, Dwight L. Goff, its
Vice President, and R. Myles Cowan, II, its Vice President -- Finance. The
exercise price for each share subject to an option was $100. The Company relied
upon Section 4(2) and Regulation D to issue the securities.
-8-
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial information as of and for the nine months ended
December 31, 1998 has been derived from the financial statements of the Company
which have been audited by Deloitte & Touche LLP, independent auditors ("D&T"),
and are included elsewhere in this report. The selected financial information
for the three months ended March 31, 1998 has been derived from the statements
of income and cash flows of the Company prior to the Acquisition (the
"Predecessor") which have been audited by D&T and are included elsewhere in this
report. The selected financial information for the year ended December 31, 1997
and as of such date has been derived from the financial statements of the
Predecessor which have been audited by D&T and are included elsewhere in this
report. The selected financial information for the year ended December 31, 1996
and as of such date has been derived from the financial statements of the
Predecessor which have been audited by Crowe, Chizek and Company LLP,
independent auditors, and are included elsewhere in this report. The selected
financial information for the period from February 10, 1995 (date of inception)
to December 31, 1995 and as of December 31, 1995 has been derived from the
audited financial statements of the Predecessor which are not included in this
report. The selected financial information for the period from January 1, 1995
to February 10, 1995, the year ended December 31, 1994 and as of December 31,
1994 has been derived from the unaudited financial statements of SiMETCO, Inc.
("SiMETCO"), a predecessor of the Company. In the opinion of management, the
unaudited statements of operations and cash flows included herein reflect all
normal recurring accruals necessary for a fair statement of the results of the
periods reflected. The selected financial information below is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements and the notes thereto appearing elsewhere herein.
-9-
<PAGE> 12
<TABLE>
<CAPTION>
SIMETCO, INC.(1) PREDECESSOR COMPANY
------------------------- -------------------------------------------------------- ----------------
PERIOD PERIOD FROM
FROM FEB. 10,
JAN. 1, 1995 (DATE OF YEAR ENDED THREE MONTHS NINE MONTHS
YEAR ENDED 1995 TO OF INCEPTION) DECEMBER 31, ENDED ENDED
DECEMBER 31, FEB. 10, TO DEC. 31, ------------------------ MARCH 31, DECEMBER 31,
1994 1995 1995(1) 1996 1997 1998 1998
------------ ----------- ------------ ----------- ----------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
STATEMENT
DATA:
Net sales.......... $31,127 $3,742 $ 31,523 $52,407 $62,184 $ 14,854 $ 40,803
Cost of goods
sold............. 30,310 3,314 32,391 42,798 47,972 11,679 36,906
------- ------ -------- ------- ------- ------------- -------------
Gross profit
(loss)........... 817 428 (868) 9,609 14,212 3,175 3,897
Selling and
administrative
expenses......... 1,749 66 1,599 1,923 2,846 3,824 1,848
------- ------ -------- ------- ------- ------------- --------------
Operating income
(loss)........... (932) 362 (2,467) 7,686 11,366 (649) 2,049
Interest
expense.......... 800 72 1,111 1,511 1,710 314 5,777
Other (expense)
income, net...... (211) -- 359 444 228 282 1,014
------- ------ -------- ------- ------- ------------- --------------
Earnings (loss)
before provision
for income
taxes............ (1,943) 290 (3,219) 6,619 9,884 (681) (2,714)
Provision (benefit)
for income taxes. -- -- -- 1,169 3,513 (100) (492)
------- ------ -------- ------- ------- ------------- ---------------
Net income
(loss)........... $(1,943) $ 290 $ (3,219) $ 5,450 $ 6,371 $ (581) $ (2,222)
======= ====== ======== ======= ======= ============= ================
OPERATING DATA:
(UNAUDITED)
Silicon metal
Production (in
metric tons)..... 23,987 2,395 25,669 33,373 37,852 9,110 27,405
Average sales
price per metric
ton.............. $ 1,366 $1,410 $ 1,436 $ 1,641 $ 1,719 $ 1,661 $ 1,614
Average cost per
metric ton....... $ 1,415 $1,481 $ 1,529 $ 1,358 $ 1,278 $ 1,279 $ 1,290
</TABLE>
-10-
<PAGE> 13
<TABLE>
<CAPTION>
SIMETCO,
INC.(1) PREDECESSOR COMPANY
----------- ------------------------------------ -----------
AS OF AS OF DECEMBER 31, AS OF
DECEMBER 31, ------------------------------------ DECEMBER 31,
1994 1995 1996 1997 1998
------------ -------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit).......... $ (4,069) $ (2,926) $ (3,347) $ 885 $ 12,287
Total assets....................... 12,342 24,217 30,581 33,663 115,526
Long-term debt, less current portion 2,219 12,014 13,207 12,763 12,763
Mandatorily redeemable preferred stock -- 3,000 -- -- --
</TABLE>
- ----------
(1) On February 10, 1995, the Predecessor acquired the Facility from SiMETCO. At
such time, SiMETCO was operating the Facility as a debtor-in-possession
under Chapter 11 of the Bankruptcy Code. In connection with the acquisition
of the Facility, the Predecessor (i) paid a purchase price of approximately
$2.8 million to the estate of SiMETCO, (ii) assumed approximately $7.9
million of vendor indebtedness, accrued expenses and other indebtedness,
(iii) incurred $6.0 million of additional indebtedness and (iv) issued $3.0
million of its Series A Preferred Stock to the estate of SiMETCO. In June
1996, the Series A Preferred Stock was converted into a non-interest bearing
note, which the Predecessor has repaid in full.
-11-
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
On March 31, 1998, Holdings, through its wholly owned subsidiary, SAC,
purchased all of the outstanding shares of common stock of SIMCALA. On such
date, SAC was merged into SIMCALA. SIMCALA, as the surviving corporation in the
Merger, became a wholly owned subsidiary of Holdings.
The following is a discussion of the Company's results of operations.
The discussion is based upon the nine-month period ended December 31, 1998 plus
the three-month period ended March 31, 1998, in comparison to the year ended
December 31, 1997 and the year ended December 31, 1997 in comparison to the year
ended December 31, 1996.
The 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 financial statements as of December 31, 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. 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 December 31, 1998 and
will result in such increases in future years.
The table below sets forth certain statement of operations information
as a percentage of net sales during the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------
1998 (a) 1997 1996
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 87.3 77.1 81.7
----- ----- -----
Gross profit 12.7 22.9 18.3
Selling, general and administrative expenses 10.2 4.6 3.7
----- ----- -----
Operating income 2.5 18.3 14.6
Interest expense 10.9 2.7 2.9
Other income, net 2.3 0.4 0.8
----- ----- -----
Earnings (loss) before income taxes (6.1) 16.0 12.5
Income tax (benefit) provision (1.1) 5.7 2.2
----- ----- -----
Net income (loss) (5.0)% 10.3% 10.3%
===== ===== =====
</TABLE>
(a) The statement of operations of the Predecessor for the period from
January 1, 1998 to March 31, 1998 is combined with the statement
operations of the Company for the period April 1, 1998 to December 31,
1998. The combined presentation is not in conformity with generally
accepted accounting principals but is included for comparative
purposes.
-12-
<PAGE> 15
COMBINED TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO PREDECESSOR YEAR
ENDED DECEMBER 31, 1997
The Company is comparing the Predecessor's actual historical results of
operations for the year ended December 31, 1997 to a Predecessor period of
January 1, 1998 to March 31, 1998 combined with a Company period of April 1,
1998 to December 31, 1998. This combined presentation is not in conformity with
generally accepted accounting principles but is included for comparative
purposes only.
Net Sales
Net sales decreased by $6.5 million in 1998, or 10.5%, to $55.7 million
from $62.2 million in 1997. This decline was due principally to decreased
selling prices in the secondary aluminum silicon metal markets coupled with a
decrease in tons sold. Production of silicon metal in 1998 was 36,515 metric
tons, compared with 37,852 metric tons produced in 1997. Production was lower in
1998 due to an extended shutdown for planned furnace maintenance coupled with
smelting inefficiencies in one of the Company's furnaces during the third
quarter of 1998.
Gross Profit
Gross profit decreased by $7.1 million, or 50.2%, to $7.1 million in
1998 as compared to $14.2 million in 1997. The gross profit margin decreased to
12.7% in 1998 from 22.9% in 1997. These decreases were principally due to the
sales and production impacts discussed above coupled with higher depreciation
costs associated with the Acquisition.
Average selling price per metric ton decreased to $1,627 in 1998 from
$1,719 in 1997 due to excess supply in the secondary aluminum market. Average
production cost per metric ton increased to $1,282 in 1998 from $1,279 in 1997.
This increase resulted primarily from decreased production which allowed for
less absorption of fixed costs.
Selling and Administrative Expenses
Selling and administrative expenses increased $2.8 million, or 99.3%,
to $5.7 million in 1998 as compared to $2.8 million in 1997. The increase was
primarily due to recognition of expenses related to the Acquisition in 1998.
These expenses included a management bonus and option compensation expense, and
the write-off of certain intangibles.
Operating Income
Income from operations decreased $10.0 million to $1.4 million in 1998
from $11.4 million in 1997, while the operating margin decreased to 2.5% from
18.3% for the same period. The decrease was primarily due to decreased sales due
to the extended plant shutdown, increased depreciation expense and increased
expenses associated with the Acquisition.
Interest Expense
Interest expense increased $4.4 million, or 256.2%, to $6.1 million in
1998 from $1.7 million in 1997. The significant change in interest expense
resulted from the increased debt associated with the Transactions.
Other Income - Net
Other income - net increased $1.1 million, or 465.9%, to $1.3 million
in 1998 from $0.2 million in 1997. The increase in other income was primarily
due to increased interest income as the result of excess cash received in
connection with the Transactions.
-13-
<PAGE> 16
Provision for Income Taxes
The provision for income taxes decreased to a benefit of $0.6 million
in 1998 from a provision of $3.5 million in 1997. This decrease was primarily
due to the decrease in taxable income from $9.9 million in 1997 to a loss of
$3.4 million in 1998.
Net Income (Loss)
As a result of the above factors, the net loss for 1998 was $2.8
million compared to net income of $6.4 million for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales
Net sales increased 18.7%, to $62.2 million in 1997 from $52.4 million
in 1996. The increase was principally due to increased production from furnaces
which were refurbished in the third and fourth quarters of 1996 and, as a
result, operated at or near full capacity during 1997. Production increased
13.4%, to 37,852 metric tons in 1997 from 33,373 metric tons in 1996. Increased
sales of higher priced chemical grade silicon metal, as well as increased sales
of microsilica, also contributed to this increase.
Gross Profit
Gross profit increased 47.9%, to $14.2 million in 1997 from $9.6
million in 1996. Gross margin increased to 22.9% in 1997 from 18.3% in 1996
primarily as a result of increased sales of higher margin chemical grade silicon
metal and continuation of improved operating efficiencies. In this regard, the
fixed components of cost of goods sold remained relatively unchanged from 1996
to 1997. However, variable components did increase as a result of higher
production volumes.
Average selling price per metric ton increased to $1,719 in 1997 from
$1,641 in 1996 due to increased demand in the secondary aluminum market. The
Company chose to sell more product in this market to take advantage of the
higher price. Average production cost per metric ton decreased to $1,278 in 1997
from $1,358 in 1996. This decrease resulted primarily from increased production
which allowed broader absorption of fixed costs coupled with more efficient use
of raw materials.
Selling and Administrative Expenses
Selling and administrative expenses increased 48.0%, to $2.8 million in
1997 from $1.9 million in 1996. This increase was principally due to
professional fees incurred in 1997 in connection with the Company's
consideration of various strategic business alternatives, offset in part by a
decrease in bad debt expense. The Company maintains credit insurance which
reduces the risk of loss related to bad debts. In addition, selling and
administrative expenses increased in 1997 primarily due to compensation expense
recorded in connection with the Company's variable stock option plan.
Operating Income
As a result of the above factors, operating income increased $3.7
million, to $11.4 million in 1997 from $7.7
-14-
<PAGE> 17
million in 1996. As a percentage of net sales, operating income increased to
18.3% in 1997 from 14.6% in 1996.
Interest Expense
Interest expense increased 13.1%, to $1.7 million in 1997 from $1.5
million in 1996. This increase was primarily the result of interest costs
associated with the repayment of certain noninterest-bearing indebtedness of the
Company in 1997, offset by decreased average levels of indebtedness used to fund
the Company's operations.
Other Income, Net
Other income, net decreased 48.5%, to $229,000 in 1997 from $445,000 in
1996 primarily as a result of the Company's receipt of approximately $200,000 of
insurance proceeds for losses resulting from hurricane damage in 1996.
Provision for Income Taxes
Provision for income taxes increased to $3.5 million in 1997 from $1.2
million in 1996. The Company's effective tax rate was 35.5% in 1997 compared to
17.7% in 1996. This increase in the effective tax rate resulted primarily from
the Company's reduction of its deferred tax valuation allowance by approximately
$1.1 million in 1996.
Net Income
As a result of the above factors, net income increased $0.9 million, to
$6.4 million in 1997 from $5.5 million in 1996. As a percentage of net sales,
net income remained unchanged.
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. 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.
Cash and cash equivalents were $14.7 million, $0.6 million, and $0.2
million at December 31, 1998, 1997, and 1996, respectively. All of the
significant increase in 1998 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.
Depreciation and amortization for 1998 totaled $5.0 million, compared
to $2.2 million for 1997 and $1.6 million for 1996. The increase in 1998
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 in 1998 due to the amortization of the goodwill
recorded as a result of the Acquisition as well as debt issuance costs related
to the Transactions.
In 1998, 1997, and 1996, net cash provided by operating activities was
$0.5 million, $10.0 million and $9.2 million, respectively. The decrease in 1998
resulted primarily from the decrease in net income. In 1998, 1997, and 1996,
-15-
<PAGE> 18
net cash used in investing activities was $3.9 million, $2.1 million, and $6.9
million, respectively. The changes primarily reflect different levels of capital
spending during the three years. In 1998, 1997, and 1996, net cash used in
financing activities was approximately $28,000, $7.5 million, and $2.1 million,
respectively. The increase in 1997 was principally a result of (i) the net
repayment of $3.2 million of indebtedness outstanding under the Company's
revolving line of credit, (ii) the repayment of $12.8 million of other
indebtedness, (iii) the redemption of the Company's Series B Preferred Stock,
par value $1.00 per share, for $1.5 million, (iv) a payment to stockholders of
$2.3 million, and (v) the payment of a $270,000 preferred stock dividend, all of
which was offset by the Company's borrowing of $13.0 million of term loan
indebtedness under the Old Credit Facility. In 1998, there was no significant
financing activity subsequent to the Transactions.
In 1996, the Company refurbished two of its smelting furnaces.
Consequently, the Company spent almost $4.0 million more on capital items in
1996 than it had budgeted. While all spending was done with internally generated
funds, this capital program exceeded the limits on permitted capital
expenditures in the Company's loan agreement. In addition, the calculation of
fixed charge coverage fell to .99 from 1.0, where a requirement of 1.0 to 1.0
was required. The Company's lender provided all required waivers.
In 1997, the Company began a project to replace a gantry crane in its
raw material loading operation. As a result, capital spending exceeded the
limits on permitted capital expenditures set out in the Company's loan
agreement. The Company's lender provided all required waivers.
In connection with the Acquisition, the Company replaced the Old Credit
Facility with the New 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 IRB Financing. Revolving loans bear interest at a
variable rate equal, at the option of the Company, to (i) a LIBOR-based rate
plus a margin of up to 2.25% per annum, or (ii) the base rate (defined to mean
the higher of (a) the publicly announced "prime rate" of the agent thereunder,
and (b) a rate tied to the rates on overnight federal funds transactions with
members of the Federal Reserve System) plus a margin of up to 1.25% per annum.
In addition, a $6.1 million replacement letter of credit was issued under the
New Credit Facility for the account of the Company as credit support for the
Company's industrial revenue bonds (the "IRB's"). Drawings under the letters of
credit which are not promptly reimbursed by the Company accrue interest at a
variable rate equal to the base rate plus a margin of up to 3.25% per annum. As
of December 31, 1998, no drawings were outstanding under the New Credit
Facility.
Ongoing interest payments on 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 semiannual interest payments of
approximately $3.6 million over the life of the Notes.
In connection with the Company's IRB Financing, the Company has agreed
to pay the principal of, premium, if any, and interest on, the IRBs, which
mature on December 1, 2019. Interest on the IRBs, which is payable monthly,
currently accrues at a rate which is reset every seven days as determined by
Merchant Capital, L.L.C., the remarketing agent for the IRB Financing, based on
its evaluation of certain factors, including, among others, market interest
rates for comparable securities, other financial market rates and indices,
general financial market conditions, the credit standing of SIMCALA and the bank
issuing the letter of credit which provides credit support for the IRBs, and
other relevant facts regarding the Facility. However, interest borne by the IRBs
cannot exceed the lower of 15% per annum and the maximum rate per annum
specified in any letter of credit which provides credit support for the IRBs. As
of December 31, 1998, interest on the IRBs accrued at a rate equal to
approximately 5.3% per annum.
With respect to ongoing capital spending, the Company expects to spend
approximately $2.5 million to $3.0 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 or borrowed cash. The Company
estimates that construction of the furnace will cost a total of approximately
$25.0 million.
The agreement governing the New 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
-16-
<PAGE> 19
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. During 1998, the Company reached agreement with NationsBank, N.A. to
amend all financial covenants in the Credit Agreement and to provide cash
collateral for the letter of credit backing the IRBs until certain leverage
tests are met subsequent to December 31, 1999. At December 31, 1998, the Company
was in compliance with all covenants, as amended.
The Indenture contains a limitation on the incurrence of indebtedness
by the Company and its subsidiaries which is tied, in part, to the Company's
"Fixed Charge Coverage Ratio." For any period, the Fixed Charge Coverage Ratio
generally consists of the ratio of (x) the Company's consolidated net income
during such period (subject to certain adjustments), to (y) certain fixed
charges (generally determined on a consolidated basis) during such period. The
Indenture provides that the Company will not, and will not permit its
subsidiaries to, incur "Indebtedness" or issue "Disqualified Stock," subject to
the following exceptions. The Company may incur any amount of Indebtedness or
issue any amount of Disqualified Stock if, during its most recently ended four
fiscal quarters for which internal financial statements are available
immediately prior to such incurrence or issuance, the Company's Fixed Charge
Coverage Ratio would have been at least (A) 2.0 to 1 on or prior to April 15,
2000, and (B) 2.25 to 1 after April 15, 2000 (determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness or Disqualified Stock had been incurred or issued, as
the case may be, at the beginning of such four-quarter period). If the Company's
Fixed Charge Coverage Ratio does not meet these levels (i.e., the ratio is less
than 2.0 to 1 and 2.25 to 1 for the periods indicated, respectively), the
Company and its subsidiaries may only incur certain types of indebtedness. As of
December 31, 1998, the Fixed Charge Coverage Ratio for the most recently ended
four fiscal quarter period would have been less than 2.0 to 1, on a pro forma
basis.
The Credit Agreement, as amended, contains covenants requiring the
maintenance of certain "Interest Coverage Ratio," "Net Leverage Ratio" and
"Consolidated EBITDA." The "Interest Coverage Ratio" as of the last day of each
fiscal quarter of the Company must be greater than or equal to:
<TABLE>
<CAPTION>
------------------ ----------------- ------------------ ------------------ -------------------
Fiscal Year March 31 June 30 September 30 December 31
------------------ ----------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
1998 na 1.50 1.50 1.50
------------------ ----------------- ------------------ ------------------ -------------------
1999 1.15 1.05 1.05 1.05
------------------ ----------------- ------------------ ------------------ -------------------
2000 1.00 1.00 1.00 1.00
------------------ ----------------- ------------------ ------------------ -------------------
2001 1.25 1.25 1.50 1.75
------------------ ----------------- ------------------ ------------------ -------------------
2002 1.75 1.75 1.75 2.00
------------------ ----------------- ------------------ ------------------ -------------------
thereafter 2.00 na na na
------------------ ----------------- ------------------ ------------------ -------------------
</TABLE>
Interest Coverage Ratio is defined to generally mean the ratio of the Company's
consolidated EBITDA to its consolidated interest expense for the twelve-month
period ending on the last day of any fiscal quarter of the Company.
The "Net Leverage Ratio" as of the last day of each fiscal quarter of
the Company must be less than or equal to:
<TABLE>
<CAPTION>
------------------ ----------------- ------------------ ------------------ -------------------
Fiscal Year March 31 June 30 September 30 December 31
------------------ ----------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
1998 na 5.50 5.50 7.00
------------------ ----------------- ------------------ ------------------ -------------------
1999 7.25 8.25 8.50 9.25
------------------ ----------------- ------------------ ------------------ -------------------
2000 9.75 10.00 11.25 11.50
------------------ ----------------- ------------------ ------------------ -------------------
2001 8.75 7.50 6.50 5.50
------------------ ----------------- ------------------ ------------------ -------------------
2002 5.50 5.50 5.50 5.00
------------------ ----------------- ------------------ ------------------ -------------------
thereafter 5.00 na na na
------------------ ----------------- ------------------ ------------------ -------------------
</TABLE>
-17-
<PAGE> 20
Net Leverage Ratio is defined to generally mean the ratio of the Company's
funded indebtedness (less cash and cash equivalents) to its consolidated EBITDA
for the twelve-month period ending on the last day of any fiscal quarter of the
Company.
The Company must at all times maintain a "Consolidated EBITDA," as of
the last day of each fiscal quarter of the Company, greater than or equal to:
<TABLE>
<CAPTION>
------------------ ----------------- ------------------ ------------------ -------------------
Fiscal Year March 31 June 30 September 30 December 31
------------------ ----------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
1998 na na na $9,500,000
------------------ ----------------- ------------------ ------------------ -------------------
1999 $9,000,000 $8,100,000 $8,100,000 $7,800,000
------------------ ----------------- ------------------ ------------------ -------------------
2000 $7,800,000 $7,800,000 $7,800,000 $7,800,000
------------------ ----------------- ------------------ ------------------ -------------------
2001 $10,200,000 $12,100,000 $13,700,000 $18,100,000
------------------ ----------------- ------------------ ------------------ -------------------
2002 $16,100,000 $16,100,000 $16,100,000 $17,200,000
------------------ ----------------- ------------------ ------------------ -------------------
thereafter $17,200,000 na na na
------------------ ----------------- ------------------ ------------------ -------------------
</TABLE>
As of December 31, 1998, the Interest Coverage Ratio and the Net
Leverage Ratio were 1.71 to 1 and 6.26 to 1, respectively. As of December 31,
1998, the Company's Consolidated EBITDA was approximately $10.6 million.
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.
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 the replacement of the Company's sales order system by July 1, 1999
and perpetual inventory system by June 1, 1999. 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 not
made any significant Year 2000 expenditures through the end of March 1999.
The Company is reviewing 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 affected. Except for the systems controlling the Company's
sales order and perpetual inventory processes, which can be manually operated in
the event of a systems failure, management is not aware of any systems or
operations of the Company that will be adversely affected as a result of the
Year 2000 problem. If, however, any other system or operation of the Company is
adversely affected by the Year 2000 problem, the Company's business, results of
operations and financial condition could be materially adversely affected. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All financial instruments and positions held by the Company are held
for purposes other than trading.
The fair value of the Company's long-term debt and capital leases is
affected by changes in interest rates. The carrying value of the Company's
long-term debt and capital leases was established on March 31, 1998. The
following presents the sensitivity of the fair value of the Company's long-term
debt and capital leases to a hypothetical 10% decrease in interest rates as of
December 31, 1998.
<TABLE>
<CAPTION>
HYPOTHETICAL
CARRYING FAIR INCREASE IN
VALUE VALUE (A) FAIR VALUE (B)
<S> <C> <C> <C>
Long-term debt and capital leases, including
current portion $ 81,106,845 $ 70,081,845 $ 76,081,846
============ ============ ============
</TABLE>
(a) Based on quoted market prices for these or similar items.
(b) Calculated based on the change in discounted cash flow.
-18-
<PAGE> 21
RISK FACTORS
Significant Leverage and Debt Service
The Company has significant outstanding indebtedness and is
significantly leveraged. As of December 31, 1998, the Company had approximately
$82.7 million of indebtedness outstanding and approximately $15.0 million of
secured indebtedness available to be incurred under the New Credit Facility,
which availability is reduced by an approximately $6.1 million letter of credit
issued thereunder.
The degree to which the Company is leveraged as a result of the
Transactions could have important consequences to the Company, including, but
not limited to, (i) increasing the Company's vulnerability to adverse general
economic and industry conditions, (ii) limiting the Company's ability to obtain
additional financing for future capital expenditures, general corporate or other
purposes, (iii) requiring the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal of, and interest
on, indebtedness, thereby reducing the funds available for operations and future
business opportunities, (iv) limiting the Company's flexibility in reacting to
changes in its business and the industry and (v) placing the Company at a
competitive disadvantage vis-a-vis less leveraged competitors. In addition, the
Indenture and the New Credit Facility contain financial and other restrictive
covenants that limit the ability of the Company to, among other things, borrow
additional funds. Failure by the Company to comply with such covenants could
result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company. In addition, the degree to which the
Company is leveraged could prevent it from repurchasing all of the Notes
tendered to it upon the occurrence of a change of control.
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 New 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Restrictive Covenants
The New Credit Facility and the Indenture contain numerous restrictive
covenants which limit, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to pay dividends
or make other restricted payments, to make investments, loans and guarantees and
to sell or otherwise dispose of a substantial portion of its assets to, or merge
or consolidate with, another entity. The New Credit Facility also contains a
number of financial covenants that require the Company to meet certain financial
ratios and tests and provides that a "change of control" constitutes an event of
default thereunder. A failure to comply with the obligations contained in the
New Credit Facility or the Indenture, if not cured or waived, could permit
acceleration of the related indebtedness and the acceleration of indebtedness
under other instruments of the Company that contain cross-acceleration or
cross-default provisions. Upon the occurrence of an event of default under the
New Credit Facility, the lenders thereunder would be entitled to exercise the
remedies available to a secured creditor under applicable law. If the Company
were obligated to repay all or a significant portion of its indebtedness, there
can be no assurance that it would have sufficient cash to do so or that it could
successfully refinance such indebtedness. In addition, other indebtedness that
the Company may incur in the future may contain financial or other covenants
more restrictive than those contained in the New Credit Facility or the
Indenture. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
-19-
<PAGE> 22
Importance of Key Customers
Certain of the Company's customers are material to its business and
operations. In 1998, Dow Corning accounted for approximately $22.7 million, or
approximately 40%, of net sales; G.E. Silicones accounted for approximately $6.3
million, or approximately 11%, of net sales; Wabash Alloys accounted for
approximately $11.1 million, or approximately 19%, of net sales; and Alcan
accounted for approximately $4.5 million, or approximately 8%, of net sales. In
1998, the Company's five largest customers accounted for approximately $46.3
million, or approximately 81%, of net sales. Dow Corning is currently operating
as a debtor-in-possession under Chapter 11 of the Bankruptcy Code.
The Company's prospects depend on the success of its customers, as well
as its customers' retention of the Company as a significant supplier of silicon
metal. A significant part of the Company's business strategy is directed toward
strengthening its relationships with its major customers that purchase chemical
grade silicon metal, such as G.E. Silicones and Dow Corning. The Company does
not generally have long-term contracts with its major customers and the loss of
any major customer, or a significant reduction of the Company's business with
any of them, would have a material adverse effect on the Company. See "--
Competition."
Dependence on Supply of Electrical Power
The production of silicon metal is heavily dependent upon a reliable
supply of electrical power. The Company's electrical power is supplied by APCo
through a dedicated 110,000 volt line. The Facility operates twenty four hours a
day, seven days per week. Any interruption in the supply of electrical power to
the Facility would adversely effect production levels and a sustained
interruption in the power supply would have a material adverse effect on the
Company.
Competition
The silicon metal manufacturing industry is highly competitive. A
number of the Company's competitors are significantly larger and have greater
financial resources than the Company. In addition, certain of the Company's
major customers have in the past manufactured silicon metal for their own use,
thereby reducing their need to purchase silicon metal from suppliers such as the
Company. The resumption of silicon metal manufacturing by one or more of these
major customers would thus reduce the quantity of silicon metal purchased from
the Company and could have a material adverse effect on the Company. There can
be no assurance that the Company will be able to continue to compete
successfully in silicon metal manufacturing or that the Company will maintain or
increase its sales of chemical grade and specialty aluminum grade silicon metal.
See "Business -- Competition."
Anti-Dumping Duties on Foreign Competitors' Products
In 1990 and 1991, domestic producers of silicon metal successfully
prosecuted anti-dumping actions against unfairly traded imports of silicon metal
from the PRC, Brazil and Argentina. These actions were brought under the
anti-dumping provisions of the Tariff Act of 1930, as amended. Under that
statute, an anti-dumping duty order may be issued if a domestic industry
establishes in proceedings before the United States Department of Commerce and
the United States International Trade Commission that imports from the country
(or countries) covered by the action(s) are being sold at less than normal value
and are causing material injury or threat of such injury to the domestic
industry. An anti-dumping order requires special duties to be imposed in the
amount of the margin of dumping (i.e., the percentage difference between the
United States price for the goods received by the foreign producer or exporter
and the normal value of the merchandise).
Once an order is in place, each year foreign producers, importers,
domestic producers and other interested parties may request a new investigation
(or "administrative review") to determine the margin of dumping during the
immediately preceding year. The rates calculated in these administrative reviews
(or the existing rates if no review is requested) are used to assess
anti-dumping duties on imports during the review period and to collect cash
deposits on future imports. An administrative review covering five Brazilian
producers and a review covering two PRC exporters are now in progress. The rates
established in these reviews and in future reviews will depend upon the prices
and costs during the periods covered by
-20-
<PAGE> 23
the reviews, the methodologies applied and other factors. Anti-dumping orders
remain in effect until they are revoked. In order for an individual foreign
producer or exporter to qualify for revocation of an anti-dumping order, the
United States Department of Commerce must conclude that the producer or exporter
has sold the merchandise at not less than normal value for a period of at least
three consecutive years and is not likely to sell the merchandise at less than
normal value in the future. Anti-dumping orders may also be revoked as a result
of periodic "sunset reviews."
No assurance can be given that one or more of such anti-dumping orders
will not be revoked or that effective duty rates will continue to be imposed.
Any such revocation or the imposition of ineffective duty rates could have a
material adverse effect on the Company. See "Business -- Environmental and
Regulatory Matters -- Anti-Dumping Duties on Foreign Competitors' Products."
Environmental Laws and Regulations
The Company is subject to extensive federal, state and local
environmental laws and regulations governing the discharge, emission, storage,
handling and disposal of a variety of substances and wastes used in or resulting
from the Company's operations. There can be no assurance that environmental laws
or regulations (or the interpretation of existing laws or regulations) will not
become more stringent in the future, that the Company will not incur substantial
costs in the future to comply with such requirements or that the Company will
not discover currently unknown environmental problems or conditions. Any such
event could have a material adverse effect on the Company. See "Business --
Environmental and Regulatory Matters -- Environmental."
Dependence on Key Personnel
The Company's operations are dependent, to a significant extent, on the
continued employment of each Senior Manager, with whom it has entered into
employment agreements containing non-compete provisions. If these employees of
the Company become unable to continue in their respective roles, or if the
Company is unable to attract and retain other skilled employees, the Company's
results of operations and financial condition could be adversely effected.
Control by Investors
As a result of the Acquisition and the Merger, 100% of the outstanding
shares of the Company's common stock is directly owned by Holdings. Holdings has
no business other than holding the capital stock of the Company, which is the
sole source of Holdings' financial resources. Holdings is controlled by CGW,
which beneficially owns shares representing 79.8% of the voting power of
Holdings (on a fully diluted basis) and has the power to elect all of the
directors of Holdings. Accordingly, CGW, through its control of Holdings,
controls the Company and has the power to elect all of its directors, appoint
new management and approve any action requiring the approval of the holders of
the Company's common stock, including adopting amendments to the Company's
Certificate of Incorporation and approving mergers or sales of substantially all
of the Company's assets. The directors elected by Holdings have the authority to
make decisions affecting the capital structure of the Company, including the
issuance of additional capital stock, the implementation of stock repurchase
programs and the declaration of dividends. See "Certain Relationships and
Related Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."
-21-
<PAGE> 24
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quantitative and Qualitative Disclosures about Market
Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and financial statement schedules in Part IV,
Item 14(a)(1) and (2) of this report are incorporated by reference into this
Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
-22-
<PAGE> 25
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND OFFICERS OF THE COMPANY
Set forth below are the names and positions of the directors, officers
and significant employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------- --- ---------------------------------------------
<S> <C> <C>
C. Edward Boardwine... 52 President, Chief Executive Officer and
Director
Dwight L. Goff........ 44 Vice President
R. Myles Cowan, II.... 47 Vice President of Finance
Howard L. McHenry..... 55 Senior Metallurgist
Roger Hall............ 57 Superintendent of Engineering and Maintenance
Edwin A. Wahlen, Jr... 51 Director
William A. Davies..... 53 Director
James A. O'Donnell.... 46 Director
</TABLE>
C. EDWARD BOARDWINE has been the President and Chief Executive Officer
of the Company since February 1995. Prior to joining the Company, he was Vice
President -- Silicon Metal Division of Elkem ASA, a ferroalloy and silicon metal
manufacturer based in Oslo, Norway, since July 1990. Mr. Boardwine became a
director of the Company on the Acquisition Date.
DWIGHT L. GOFF has been the Vice President of the Company since
February 1995. Prior to joining the Company, he was President of Elkem
Materials, Inc., a microsilica marketing company, since November 1989. In
addition, from June 1989 until February 1995, Mr. Goff was the Division
Controller for the Silicon Metal Division of Elkem Metals, a ferroalloy
manufacturer.
R. MYLES COWAN, II has been the Vice President -- Finance of the
Company since October 1995. Prior to joining the Company, he was employed by the
Thermal Components Group, a division of Insilco Corporation, a diversified
manufacturing company, since October 1990, where he had most recently been
Director of Business Planning. Mr. Cowan filed a voluntary petition under
Chapter 7 of the Bankruptcy Code in December 1995, and the case resulting
therefrom was discharged in April 1996.
HOWARD L. MCHENRY has been the Senior Metallurgist of the Company since
July 1995. Prior thereto, he was employed by Elkem Metals since July 1981, where
he had most recently been the Senior Metallurgist.
ROGER HALL has been the Superintendent of Engineering and Maintenance
of the Company since February 1995. Prior thereto, he was employed in a similar
capacity by SiMETCO at the Facility since May 1988.
EDWIN A. WAHLEN, JR. is a member of CGW Southeast III, L.L.C., the
general partner of CGW (the "General Partner") and is jointly responsible for
all major decisions of the General Partner. Mr. Wahlen is also a member of CGW
Southeast Management III, L.L.C. (the "Management Company"), an affiliate of
CGW. Mr. Wahlen has been a member of the General Partner, the Management Company
or affiliated entities for more than five years. He is a director of AMRESCO,
Inc., Cameron Ashley Building Products, Inc. and several private companies. Mr.
Wahlen became a director of the Company on the Acquisition Date.
WILLIAM A. DAVIES is a member of the General Partner, and is
responsible for sourcing, structuring and negotiating transactions,
participating in strategic planning with members of management of various CGW
portfolio companies to increase value and manage exit strategies. Mr. Davies has
been a member of the General Partner or an employee of affiliates of the General
Partner for more than five years. He is a director of Gorges/Quik-to-Fix Foods,
Inc. and several private companies. Mr. Davies became a director of the Company
on the Acquisition Date.
-23-
<PAGE> 26
JAMES A. O'DONNELL has been a member of the General Partner since 1995,
and is responsible for sourcing, structuring and negotiating transactions,
participating in strategic planning with members of management of various CGW
portfolio companies to increase value and manage exit strategies. Mr. O'Donnell
has been a general partner of Sherry Lane Partners, a private equity investment
firm based in Dallas, Texas since 1992. Also, Mr. O'Donnell has been a general
partner of O'Donnell & Masur, a private equity investment firm based in Dallas,
Texas, since 1989. He is a director of Bestway Rental, Inc., Gorges/Quik-to-Fix
Foods, Inc. and several private companies. Mr. O'Donnell became a director of
the Company on the Acquisition Date.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned during the years
ended December 31, 1998 and 1997 by the Chief Executive Officer of the Company
and each other executive officer of the Company who served as such at December
31, 1998 and whose total salary and bonus exceeded $100,000 (collectively, the
"Named Executive Officers"). The Company did not grant any stock appreciation
rights or make any long-term incentive plan payouts during the periods shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS
------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION($)
- -------------------------------- ---- --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
C. Edward Boardwine, 1998 197,310 75,768 109 1,186,769(1)
President and Chief Executive 1997 189,545 123,545 -- 11,185(2)
Officer
Dwight L. Goff, 1998 97,423 33,776 -- 196,250(3)
Vice President 1997 95,206 54,000 -- --
R. Myles Cowan, II, 1998 88,196 29,527 -- 196,250(3)
Vice President-- Finance 1997 83,000 49,800 -- --
</TABLE>
- ----------
(1) Includes $9,274 for premiums paid by the Company with respect to a split
dollar life insurance policy for Mr. Boardwine and $1,177,495 with respect
to a one-time bonus paid in connection with the Acquisition.
(2) Includes $8,567 for premiums paid by the Company with respect to a split
dollar life insurance policy for Mr. Boardwine and $2,618 for payments made
by the Company to Mr. Boardwine with respect to a mortgage interest
differential. The mortgage interest differential was paid to Mr. Boardwine
in connection with his relocation to Mt. Meigs, Alabama from Pennsylvania
and represents the difference that he must pay due to the greater interest
rate under his current home mortgage as compared to his prior mortgage in
Pennsylvania.
(3) Reflects a one-time bonus paid in connection with the Acquisition.
-24-
<PAGE> 27
OPTION GRANTS
The following table sets forth information regarding options to acquire
shares of the common stock of the Company that were granted during the year
ended December 31, 1998. See "-- Stock Incentive Plan" for information regarding
options for shares of the capital stock of Holdings.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF PERCENT OF GRANT DATE
SECURITIES TOTAL OPTIONS VALUE
UNDERLYING GRANTED TO MARKET PRICE -------------
OPTIONS EMPLOYEES IN EXERCISE ON DATE OF EXPIRATION GRANT DATE
GRANTED FISCAL YEAR OR BASE PRICE GRANT DATE PRESENT VALUE
---------- ------------- ------------- ------------ ----------- --------------
NAME
<S> <C> <C> <C> <C> <C> <C>
C. Edward Boardwine 109 100% $100 $6,126(1) 3/31/08 $656,834(2)
Dwight L. Goff 0 -- -- -- -- --
R. Myles Cowan, II 0 -- -- -- -- --
</TABLE>
(1) The options to acquire 109 shares of the common stock of SIMCALA were
granted to Mr. Boardwine on March 31, 1998 and immediately exercised, and
the shares were then sold by Mr. Boardwine in connection with the
Acquisition. The market price on date of grant is based on the price per
share paid by SAC in connection with the Acquisition.
(2) The grant date present value is based on the difference between the option
exercise price of $100 and the fair market value of $6,126 per share at
March 31, 1998 multiplied by the number of shares underlying the options.
-25-
<PAGE> 28
OPTION EXERCISES
The following table sets forth information regarding options to acquire
shares of the common stock of the Company that were exercised during the year
ended December 31, 1998. No unexercised options for shares of the common stock
of the Company were held by the Named Executive Officers at December 31, 1998.
See "-- Stock Incentive Plan" for information regarding options for shares of
the capital stock of Holdings.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
SHARES
ACQUIRED ON
NAME EXERCISE VALUE REALIZED(1)
- ---- ----------- ----------------
<S> <C> <C>
C. Edward Boardwine 671 $4,110,443
Dwight L. Goff 109 667,717
R. Myles Cowan, II 109 667,717
</TABLE>
- --------------
(1) Each of the Named Executive Officers exercised all of their options on
March 31, 1998 and immediately sold their shares in connection with
the Acquisition. The value realized is based on the price per share
paid by SAC in the Acquisition, which was approximately $6,126. In
accordance with the terms of the Acquisition, no exercise price was
payable by the Named Executive Officers with respect to their options.
-26-
<PAGE> 29
EMPLOYMENT AGREEMENTS
SIMCALA has an employment agreement (collectively, the "Employment
Agreements") with each Senior Manager (previously defined herein as Messrs.
Boardwine, Goff and Cowan) for a term expiring on the fifth anniversary of the
Acquisition Date. The Company has the right to terminate the Employment
Agreements at any time prior to their scheduled expiration upon thirty (30) days
written notice. However, if a Senior Manager is terminated other than for cause,
whether pursuant to such Senior Manager's Employment Agreement or following the
termination or expiration of the term of such Employment Agreement, such Senior
Manager will receive, in addition to earned salary and bonus, a severance
payment equal to 12 months' base salary. If a Senior Manager is terminated for
cause, death or disability, or upon the voluntary termination by such Senior
Manager of his employment under such Senior Manager's Employment Agreement, such
Senior Manager will receive only earned salary and, in the case of termination
due to death or disability, bonus due as of the date of termination. The
Employment Agreements also contain non-competition, non-solicitation and
confidentiality provisions.
Mr. Boardwine's Employment Agreement provides for a base salary of
$205,000, Mr. Goff's Employment Agreement provides for a base salary of
$100,000, and Mr. Cowan's Employment Agreement provides for a base salary of
$90,000. Mr. Boardwine is eligible to receive a bonus of up to 75% of his base
salary, while Messrs. Goff and Cowan are eligible to receive a bonus of up to
65% of their respective base salaries. Half of the bonus available to the Senior
Managers is awarded based upon earnings of the Company (subject to certain
adjustments) if certain performance targets of the Company are reached. The
other half of the bonus is awarded to each Senior Manager and paid at the
discretion of the Company's Board of Directors. The amount of any discretionary
bonus awarded is based primarily on the performance of the Company and whether
and to what extent it achieves or exceeds its annual budget.
STOCK INCENTIVE PLAN
Holdings has adopted a Stock Incentive Plan (the "Plan") pursuant to
which options (the "Options") to purchase up to 8,000 shares of the capital
stock of Holdings (the "Holdings Stock") may be granted to the Senior Management
or other employees selected for participation in the Plan by the Compensation
Committee of the Company's Board of Directors. At the time of the Acquisition
Closing, Messrs. Boardwine, Goff and Cowan were issued Options to acquire 2,046,
512 and 512 shares, respectively, of Holdings Stock. The Options are subject to
a five-year vesting period and the Options issued on the Acquisition Date are
exercisable at an initial price per share of $1,000. The Options will
immediately and fully vest in the event of a merger or consolidation of Holdings
with, or the sale of substantially all of the assets or stock of Holdings to,
any person other than CGW or a CGW affiliate. The term of the Options expires
ten years from the date of grant. The Plan also provides for other equity-based
forms of incentive compensation in addition to the Options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Holdings owns 100% of the issued and outstanding capital stock of the
Company. The issued and outstanding Holdings Stock is owned 90.9% by CGW and
9.1% by the Senior Management. Affiliated entities of each of Edwin A. Wahlen,
Jr., William A. Davies and James A. O'Donnell are limited partners of CGW. See
"Directors and Executive Officers of the Registrant" and "Certain Relationships
and Related Transactions."
The following table sets forth, as of March 1, 1999, certain additional
information regarding the ownership of the Holdings Stock by: (i) each director
of the Company; (ii) each executive officer of the Company; (iii) all directors
and executive officers of the Company as a group; and (iv) each person known to
the Company to be the beneficial owner of more than 5% of the Holdings Stock.
-27-
<PAGE> 30
<TABLE>
<CAPTION>
PERCENT OF ALL
NUMBER OF SHARES HOLDINGS STOCK
NAME OF STOCKHOLDER BENEFICIALLY OWNED(1) OUTSTANDING
-------------------------------------------- --------------------- ---------------
<S> <C> <C>
CGW Southeast Partners III, L.P.(2)........ 20,000 90.9%
Edwin A. Wahlen, Jr.
William A. Davies
James A. O'Donnell
C. Edward Boardwine(3)..................... 1,655 7.5%
Dwight L. Goff............................. 195 0.9%
R. Myles Cowan, II......................... 150 0.7%
All directors and executive officers as a
group (6 persons)(2)...................... 22,000 100%
</TABLE>
- ----------
(1) Excludes 2,046, 512, and 512 shares of Holdings Stock which may be acquired
upon the exercise of Options granted to Messrs. Boardwine, Goff and Cowan,
respectively, on the Acquisition Date. None of these Options will begin to
vest until March 31, 1999.
(2) Messrs. Wahlen, Davies and O'Donnell may be deemed to beneficially own the
shares of Holdings Stock held of record by CGW because they are members of
the General Partner and may therefore be deemed to share voting and
investment power with respect to such shares. The business address of
CGW and Messrs. Wahlen, Davies and O'Donnell is 12 Piedmont Center,
Suite 210, Atlanta, Georgia 30305.
(3) The business address of Mr. Boardwine is SIMCALA, Inc., Ohio Ferro Alloys
Road, Mt. Meigs, Alabama 36057.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SHAREHOLDERS AGREEMENT
On the Acquisition Date, CGW and the Senior Management, as the
shareholders of Holdings, entered into a Shareholders Agreement (the
"Shareholders Agreement"). All future purchasers of Holdings Stock will be
required to enter into the Shareholders Agreement. The Shareholders Agreement
contains restrictions on the transferability of the Holdings Stock and other
rights and obligations of Holdings, CGW and the Senior Management with respect
to the Holdings Stock.
In addition, the Shareholders Agreement grants to the Senior Managers
pre-emptive rights, exercisable pro rata in accordance with their respective
ownership of Holdings Stock, to purchase shares or equity securities of Holdings
(other than shares of capital stock issued upon exercise of options, rights,
awards or grants pursuant to the Plan). The Shareholders Agreement also provides
for certain co-sale rights of the Senior Managers in the event CGW elects to
sell all or a portion of its shares of Holdings Stock and co-sale obligations of
the Senior Managers in the event of a sale of Holdings or its subsidiaries
(including SIMCALA). Holdings has a right of first refusal in connection with
any proposed sale by any Senior Manager of his investment in Holdings.
The Shareholders Agreement further provides that if a Senior Manager's
employment is terminated for any reason other than for cause, such Senior
Manager will have the right to sell to Holdings any shares of Holdings Stock
owned by such Senior Manager at the greater of cost or fair value. Such right is
exercisable within one month (six months in the event of the death or disability
of the Senior Manager) following such termination of employment of the Senior
Manager. If a Senior Manager's employment is terminated for cause, Holdings will
have the right, exercisable within 120 days following such termination, to
repurchase any shares of Holdings Stock owned by such Senior Manager at the
lesser of cost or fair value. Fair value of the repurchased shares will be
determined by agreement between Holdings and the Senior Manager whose shares are
being repurchased or, failing such agreement, by an independent appraiser.
-28-
<PAGE> 31
If Holdings is unable to, or elects not to, exercise any right to
purchase such shares of capital stock from a Senior Manager or his transferee,
Holdings may assign such right to CGW, which may then exercise such right with
respect to the purchase of such shares of capital stock as to which such right
is assigned.
TRANSACTIONS WITH CGW, ITS AFFILIATES AND CERTAIN STOCKHOLDERS
On the Acquisition Date, the General Partner entered into a consulting
agreement (the "Consulting Agreement") with the Company whereby the Company pays
the General Partner a monthly retainer fee of $15,000 for financial and
management consulting services. The General Partner may also receive additional
compensation if approved by the Board of Directors of the Company at the end of
each fiscal year of the Company, based upon the overall performance of the
Company. The Company paid the General Partner additional compensation in the
amount of $22,000 in 1998. The Consulting Agreement expires five years from the
Acquisition Date. On the Acquisition Date, the General Partner delegated its
rights and obligations under the Consulting Agreement to the Management Company,
an affiliate of CGW. On the Acquisition Date, the Company also paid to the
Management Company an investment banking fee of $1.35 million for its services
in assisting the Company in structuring and negotiating the Transactions.
Messrs. Wahlen, Davies and O'Donnell are each a director of the Company
and a member of the General Partner. Mr. Wahlen is also a member of the
Management Company.
In June 1997, Mr. Cowan received a loan of $75,000 from a third-party
lender, which was guaranteed by the Company. This guarantee was terminated on
the Acquisition Date.
In connection with the exercise of certain stock options by members of
Senior Management immediately prior to the Acquisition Date, the Company was
responsible to certain tax authorities for payment of $1,799,863 of withholding
taxes (the "Tax Obligation") by June 15, 1998. Upon the payment by the Company
of the Tax Obligation, each of the members of Senior Management reimbursed the
Company for his pro rata portion of the Tax Obligation. C. Edward Boardwine,
Dwight L. Goff and R. Myles Cowan, II reimbursed the Company $1,358,501,
$220,681 and $220,681, respectively.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation of the Company contains a provision
eliminating, to the full extent permitted by Delaware law or any other
applicable law, the personal liability of directors to the Company or its
stockholders with respect to any acts or omissions in the performance of a
director's duties as a director of the Company. The Certificate of Incorporation
of the Company also provides that directors and officers of the Company will be
indemnified by the Company to the full extent permitted by Delaware law or any
other applicable law, but the Company may enter into agreements providing for
greater or different indemnification.
The Articles of Incorporation of Holdings contains a provision
eliminating the personal liability of directors to Holdings or its shareholders
for monetary damages for breaches of their duty of care or other duty as a
director, except in certain prescribed circumstances. The Bylaws of Holdings
provide that directors and officers of Holdings will be indemnified by Holdings
to the extent allowed by Georgia law, against all expenses, judgments, fines and
amounts paid in settlement that are actually and reasonably incurred in
connection with service for or on behalf of Holdings. The Bylaws of Holdings
further provide that Holdings may purchase and maintain insurance on behalf of
its directors and officers whether or not Holdings would have the power to
indemnify such directors and officers against any liability under Georgia law.
-29-
<PAGE> 32
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS
The following financial statements of SIMCALA, Inc., incorporated by
reference into Item 8, are attached hereto:
Independent Auditors' Reports
Balance Sheets as of December 31, 1998 and December 31, 1997
Statements of Operations for the nine months ended December 31, 1998, the three
months ended March 31, 1998, and the years ended December 31, 1997 and December
31, 1996
Statements of Changes in Shareholders' Equity for the nine months ended December
31, 1998, the three months ended March 31, 1998, and the years ended December
31, 1997 and December 31, 1996
Statements of Cash Flows for the nine months ended December 31, 1998, the three
months ended March 31, 1998, and the years ended December 31, 1997 and December
31, 1996
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of SIMCALA, Inc. is attached
hereto:
Schedule II -- Valuation and Qualifying Account of SIMCALA, Inc. for
the years ended December 31, 1996 and 1997, the three months ended March 31,
1998 and the nine months ended December 31, 1998
All other schedules have been omitted, as they are not required under
the related instructions or are inapplicable, or because the information
required is included in the consolidated financial statements.
3. EXHIBITS
The exhibits indicated below are either included or incorporated by
reference herein, as indicated.
-30-
<PAGE> 33
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------
[S] [C]
2.1 Stock Purchase Agreement dated as of February 10, 1998, as
amended by the amendment thereto dated as of March 4, 1998,
among SIMCALA, Inc., SAC Acquisition Corp. and the selling
stockholders party thereto (incorporated by reference from
Exhibit 2.1 to the Registrant's Registration Statement on Form
S-1 (File No. 333-53791), and amendments thereto, originally
filed on May 28, 1998).
2.2 Purchase Agreement dated March 24, 1998 between SAC
Acquisition Corp. and NationsBanc Montgomery Securities LLC
(incorporated by reference from Exhibit 2.2 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
2.3 Purchase Agreement Supplement dated as of March 31, 1998
between SIMCALA, Inc. and NationsBanc Montgomery Securities
LLC (incorporated by reference from Exhibit 2.3 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
2.4 Agreement and Plan of Merger dated as of March 31, 1998
between SAC Acquisition Corp. and SIMCALA, Inc. (incorporated
by reference from Exhibit 2.4 to the Registrant's Registration
Statement on Form S-1 (File No. 333-53791), and amendments
thereto, originally filed on May 28, 1998).
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
3.2 Bylaws of the Company (incorporated by reference from Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(File No. 333-53791), and amendments thereto, originally filed
on May 28, 1998).
4.1 Indenture dated as of March 31, 1998 between SAC Acquisition
Corp. and IBJ Schroder Bank & Trust Company, as trustee
(incorporated by reference from Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
4.2 Supplemental Indenture dated as of March 31, 1998 between
SIMCALA, Inc. and IBJ Schroder Bank & Trust Company, as
trustee (incorporated by reference from Exhibit 4.2 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
4.3 Registration Rights Agreement dated as of March 31, 1998
between SAC Acquisition Corp. and NationsBanc Montgomery
Securities LLC (incorporated by reference from Exhibit 4.3 to
the Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
4.4 Registration Rights Agreement Supplement dated as of March 31,
1998 between SIMCALA, Inc. and NationsBanc Montgomery
Securities LLC (incorporated by reference from Exhibit 4.4 to
the Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
4.5 Form of 9 5/8% Senior Notes due 2006, Series A (included in
Exhibit 4.1 as exhibit A-1 thereto).
-31-
<PAGE> 34
10.1 Agreement for Investment Banking Services dated March 31, 1998
between SIMCALA, Inc. and CGW Southeast Management III, L.L.C.
(incorporated by reference from Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.2 Agreement for Consulting Services dated March 31, 1998 between
SIMCALA, Inc. and CGW Southeast III, L.L.C. (incorporated by
reference from Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (File No. 333-53791), and amendments
thereto, originally filed on May 28, 1998).
10.3 Credit Agreement dated as of March 31, 1998 among SIMCALA,
Inc., as borrower, SIMCALA Holdings, Inc., as guarantor, the
lenders party thereto, and NationsBank, N.A., as agent
(incorporated by reference from Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.4 Pledge Agreement dated as of March 31, 1998 among SIMCALA
Holdings, Inc., SIMCALA, Inc. and NationsBank, N.A., as agent
(incorporated by reference from Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.5 Security Agreement dated as of March 31, 1998 among SIMCALA
Holdings, Inc., SIMCALA, Inc. and NationsBank, N.A., as agent
(incorporated by reference from Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.6 Mortgage, Security Agreement, Assignment of Leases and Rents
and Fixture Financing Statement given as of March 31, 1998 by
SIMCALA, Inc. and The Industrial Development Board of the City
of Montgomery in favor of NationsBank, N.A. (incorporated by
reference from Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 (File No. 333-53791), and amendments
thereto, originally filed on May 28, 1998).
10.7 Consolidated, Amended, and Restated Lease Agreement dated as
of January 1, 1995 between the Industrial Development Board of
the City of Montgomery, as lessor, and SIMCALA, Inc., as
lessee (incorporated by reference from Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
-32-
<PAGE> 35
10.8 Loan Agreement dated as of January 1, 1995 between the State
Industrial Development Authority, as lender, and SIMCALA, Inc.
and the Industrial Development Board of the City of
Montgomery, as borrowers (incorporated by reference from
Exhibit 10.8 to the Registrant's Registration Statement on
Form S-1 (File No. 333-53791), and amendments thereto,
originally filed on May 28, 1998).
10.9 Contract for Electric Power dated February 8, 1995 between
Alabama Power Company and SIMCALA, Inc., as amended by the
amendment thereto dated July 8, 1997 (incorporated by
reference from Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1 (File No. 333-53791), and amendments
thereto, originally filed on May 28, 1998).*
10.10 Supply Agreement dated August 3, 1997 between Alcan Ingot &
Recycling and SIMCALA, Inc. (incorporated by reference from
Exhibit 10.10 to the Registrant's Registration Statement on
Form S-1 (File No. 333-53791), and amendments thereto,
originally filed on May 28, 1998).*
10.11 Silicon Metal Purchase Agreement dated December 30, 1998
between Wabash Alloys, L.L.C. and SIMCALA, Inc.**,***
10.12 Supply Agreement dated as of January 1, 1998 between SIMCALA,
Inc. and Dow Corning Corporation.**,***
10.13 Employment and Confidentiality Agreement dated February 10,
1998 between SAC Acquisition Corp. and Dwight L. Goff
(incorporated by reference from Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.14 Employment and Confidentiality Agreement dated February 10,
1998 between SAC Acquisition Corp. and R. Myles Cowan
(incorporated by reference from Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.15 Employment and Confidentiality Agreement dated February 10,
1998 between SAC Acquisition Corp. and C. Edward Boardwine
(incorporated by reference from Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.16 1995-2000 Basic Labor Agreement and Seniority Rules and
Regulations dated August 8, 1995 between United Steelworkers
of America (AFL-CIO) and SIMCALA, Inc. (incorporated by
reference from Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 (File No. 333-53791), and amendments
thereto, originally filed on May 28, 1998).
-33-
<PAGE> 36
10.17 Escrow Agreement dated as of March 31, 1998 between (i) the
selling stockholders party to the Stock Purchase Agreement
dated as of February 10, 1998 among SIMCALA, Inc., SAC
Acquisition Corp. and such selling stockholders and (ii)
SIMCALA, Inc. (incorporated by reference from Exhibit 10.17 to
the Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.18 Shareholders Agreement dated as of March 31, 1998 among
SIMCALA Holdings, Inc., CGW Southeast Partners III, L.P., Carl
Edward Boardwine, Dwight L. Goff and R. Myles Cowan
(incorporated by reference from Exhibit 10.18 to the
Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
10.19 Letter Amendment to Credit Agreement dated November 9, 1998
among SIMCALA, Inc., SIMCALA Holdings, Inc. and NationsBank,
N.A.***
10.20 Second Amendment to Credit Agreement dated as of January 25,
1999 among SIMCALA, Inc., SIMCALA Holdings, Inc. and
NationsBank, N.A.***
27.1 Financial Data Schedule (for SEC use only).***
99.1 Form of Non-Qualified Stock Option Agreement of SIMCALA
Holdings, Inc. (incorporated by reference from Exhibit 99.1 to
the Registrant's Registration Statement on Form S-1 (File No.
333-53791), and amendments thereto, originally filed on May
28, 1998).
99.2 SIMCALA Holdings, Inc. 1998 Stock Incentive Plan (incorporated
by reference from Exhibit 99.2 to the Registrant's
Registration Statement on Form S-1 (File No. 333-53791), and
amendments thereto, originally filed on May 28, 1998).
- ----------
* Confidential treatment has been granted by the Securities and Exchange
Commission (the ""Commission") for certain portions of this Exhibit
pursuant to Rule 406 under the Securities Act.
** Certain portions of this Exhibit have been deleted and confidentially
filed with the Commission pursuant to a confidential treatment request
under Rule 406 under the Securities Act.
*** Filed Herewith
-34-
<PAGE> 37
(B) REPORTS ON FORM 8-K
None
(C) EXHIBITS
See Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
-35-
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 1999.
SIMCALA, INC.
BY: /s/ William A. Davies
------------------------------------
William A. Davies
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 30, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ William A. Davies Chairman of the Board
- ---------------------------------
William A. Davies
/s/ C. Edward Boardwine President, Chief Executive Officer and Director
- ---------------------------------
C. Edward Boardwine
/s/ Dwight L. Goff Vice President
- ---------------------------------
Dwight L. Goff
/s/ R. Myles Cowan, II Vice President of Finance (Principal Accounting and
- --------------------------------- Financial Officer)
R. Myles Cowan, II
/s/ Edwin A. Wahlen, Jr. Director
- ---------------------------------
Edwin A. Wahlen, Jr.
/s/ James A. O'Donnell Director
- ---------------------------------
James A. O'Donnell
</TABLE>
-36-
<PAGE> 39
SCHEDULE II
SIMCALA, INC.
VALUATION AND QUALIFYING ACCOUNT
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997, THE THREE MONTHS
ENDED MARCH 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------
RECOVERY DEDUCTIONS-
BALANCE AT OF AMOUNTS AMOUNTS
BEGINNING CHARGED TO FROM WRITTEN OFF BALANCE AT
OF COSTS AND INSURANCE AS END
DESCRIPTION PERIOD EXPENSES POLICY UNCOLLECTIBLE OF PERIOD
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $ 101,644 $ 90,000 $ 84,372 $ 107,272
Year ended December 31, 1997 107,272 $ 8,846 38,682 77,436
Three months ended March 31, 1998 77,436 77,436
====================================================================================================================================
Nine months ended December 31, 1998 $ - $ -
</TABLE>
<PAGE> 40
SIMCALA, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report................................................................. F-1
Independent Auditors' Report................................................................. F-2
Balance Sheets as of December 31, 1998 and December 31, 1997................................. F-3
Statements of Operations for the nine months ended December 31, 1998, the three
months ended March 31, 1998, and the years ended December 31, 1997 and December 31,
1996......................................................................................... F-4
Statements of Changes in Shareholders' Equity for the nine months ended December 31, 1998,
the three months ended March 31, 1998, and the years ended December 31, 1997 and December
31, 1996 .................................................................................... F-5
Statements of Cash Flows for the nine months ended December 31, 1998, the three months ended
March 31, 1998, and the years ended December 31, 1997 and December 31, 1996.................. F-6
Notes to Financial Statements................................................................ F-8
</TABLE>
All other schedules have been omitted, as they are not required under the
related instructions, are inapplicable, or because the information required
is included in the financial statements.
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
Board of Directors
Simcala, Inc.
We have audited the accompanying balance sheet of SIMCALA, Inc. (the "Company")
as of December 31, 1998 and the related statements of operations, changes in
shareholders' equity, and cash flows for the nine months in the period then
ended. We have also audited the accompanying balance sheet of the Predecessor
(Note 1) as of December 31, 1997 and the related statements of operations,
changes in shareholders' equity and cash flows for the year then ended and for
the three months ended March 31, 1998. Our audits also included the financial
statement schedule for the nine-month period ended December 31, 1998, the
three-month period ended March 31, 1998 and the year ended December 31, 1997,
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and of
the Predecessor as of December 31, 1997 and the results of their operations and
their cash flows for the nine months ended December 31, 1998 (Company), for the
year ended December 31, 1997 (Predecessor), and for the three months ended
March 31, 1998 (Predecessor) in conformity with generally accepted accounting
principles. Also in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 26, 1999
F-1
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
Board of Directors, Inc.
SIMCALA, Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity, and cash flows of SIMCALA, Inc. for the year ended
December 31, 1996. Our audit also includes the financial statement schedule for
the year ended December 31, 1996, listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations and cash flows of SIMCALA,
Inc. for the year ended December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule,
when considered in relation to the basic statements taken as a whole, presents
fairly in all material respects the information set forth therein.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 17, 1997
F-2
<PAGE> 43
SIMCALA, INC.
BALANCE SHEETS
On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the
outstanding capital stock of the Company and on such date SAC was merged into
the Company. The purchase method of accounting was used to record assets
acquired and liabilities assumed. As a result of purchase accounting, the
accompanying financial statements of the Company and the Predecessor 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
DECEMBER 31, | DECEMBER 31,
ASSETS 1998 | 1997
|
<S> <C> | <C>
CURRENT ASSETS: |
Cash and cash equivalents $ 14,652,789 | $ 634,877
Accounts receivable (less allowance for |
doubtful accounts of $77,436 in 1997) 6,126,286 | 5,830,386
Inventories 3,416,277 | 2,663,941
Deferred income taxes | 1,288,000
|
Other current assets 272,113 | 127,628
------------- | ------------
|
Total current assets 24,467,465 | 10,544,832
|
PROPERTY, PLANT, AND EQUIPMENT: |
Land, building, and improvements 1,720,075 | 1,294,032
Machinery and equipment, furniture and fixtures 53,623,436 | 24,917,520
Construction in-progress 436,184 | 281,876
------------- | ------------
|
55,779,695 | 26,493,428
|
Accumulated depreciation (2,974,138) | (4,045,499)
------------- | ------------
|
Property, plant, and equipment, net 52,805,557 | 22,447,929
|
INTANGIBLE ASSETS (net of accumulated amortization |
of $1,533,862 and $540,297 in 1998 and 1997, respectively) 38,252,601 | 669,778
------------- | ------------
|
|
|
$ 115,525,623 | $ 33,662,539
============= | ============
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
CURRENT LIABILITIES: |
Accounts payable $ 3,330,469 | $ 5,327,055
Accrued expenses 1,048,578 | 651,272
Accrued interest payable 1,638,560 | 146,618
Current maturities of interest-bearing, long-term debt and capital leases 72,747 | 2,340,752
Income taxes payable | 1,194,000
------------- | ------------
|
|
Total current liabilities 6,090,354 | 9,659,697
INTEREST-BEARING, LONG-TERM DEBT AND CAPITAL LEASES - |
Net of current portion 81,034,098 | 12,763,170
|
|
DEFERRED INCOME TAXES 11,816,575 | 2,964,000
------------- | ------------
|
|
Total liabilities 98,941,027 | 25,386,867
|
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
SHAREHOLDERS' EQUITY: |
Preferred stock (Series B preferred stock, 3,000 shares authorized, none |
issued and outstanding, $1.00 par value - Note 11) |
Common stock, 20,000 shares authorized - 10,899 and 10,000 shares |
issued and outstanding, respectively, par value $.01 109 | 100
Additional paid-in capital 18,806,891 | 2,250,189
Retained earnings (deficit) (2,222,404) | 6,025,383
------------- | ------------
|
Total shareholders' equity 16,584,596 | 8,275,672
------------- | ------------
|
|
|
|
$ 115,525,623 | $ 33,662,539
============= | ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 44
SIMCALA, INC.
STATEMENTS OF OPERATIONS
On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the
outstanding capital stock of the Company and on such date SAC merged into the
Company. The purchase method of accounting was used to record assets acquired
and liabilities assumed. As a result of purchase accounting, the accompanying
financial statements of the Company and the Predecessor 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
------------ | -----------------------------------------------------------
NINE MONTHS |
ENDED | THREE MONTHS YEAR ENDED
DECEMBER 31, | ENDED MARCH 31, DECEMBER 31,
------------ | -----------------------------------------------------------
1998 | 1998 1997 1996
|
<S> <C> | <C> <C> <C>
|
NET SALES $ 40,802,907 | $ 14,853,920 $ 62,184,345 $ 52,407,269
|
COST OF GOODS SOLD 36,906,111 | 11,678,879 47,972,065 42,797,540
------------ | ------------ ------------ ------------
|
Gross profit 3,896,796 | 3,175,041 14,212,280 9,609,729
|
SELLING AND ADMINISTRATIVE EXPENSE 1,848,388 | 3,824,493 2,845,842 1,923,466
------------ | ------------ ------------ ------------
|
OPERATING INCOME (LOSS) 2,048,408 | (649,452) 11,366,438 7,686,263
|
INTEREST EXPENSE 5,776,761 | 313,946 1,709,586 1,511,596
|
OTHER INCOME, NET 1,013,611 | 282,272 228,461 444,451
------------ | ------------ ------------ ------------
|
INCOME (LOSS) BEFORE PROVISION |
FOR INCOME TAXES (2,714,742) | (681,126) 9,885,313 6,619,118
|
PROVISION (BENEFIT) FOR INCOME TAXES (492,338) | (100,198) 3,514,000 1,169,000
------------ | ------------ ------------ ------------
|
NET INCOME (LOSS) $ (2,222,404) | $ (580,928) $ 6,371,313 $ 5,450,118
============ | ============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 45
SIMCALA, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the
outstanding capital stock of the Company and on such date SAC was merged into
the Company. The purchase method of accounting was used to record assets
acquired and liabilities assumed. As a result of purchase accounting, the
accompanying financial statements of the Company and the Predecessor 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>
SERIES B ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE - January 1, 1996 $ 1,500,000 $ 100 $ 999,900 $ (3,218,342) $ (718,342)
Conversion of preferred stock 903,566 903,566
Net income 5,450,118 5,450,118
----------- ----- ------------ ------------ ------------
BALANCE - December 31, 1996 1,500,000 100 1,903,466 2,231,776 5,635,342
Redemption of preferred stock (1,500,000) (1,500,000)
Preferred stock dividend (270,000) (270,000)
Payment to shareholders
in conjunction with
extinguishment of debt (2,307,706) (2,307,706)
Compensation expense - stock options 346,723 346,723
Net income 6,371,313 6,371,313
----------- ----- ------------ ------------ ------------
BALANCE - December 31, 1997 100 2,250,189 6,025,383 8,275,672
Net loss (580,928) (580,928)
Tax benefit of exercise of
stock options 1,460,000 1,460,000
Issuance of stock for exercise
of options 9 903,651 903,660
----------- ----- ------------ ------------ ------------
BALANCE - March 31, 1998 $ -- $ 109 $ 4,613,840 $ 5,444,455 $ 10,058,404
=========== ===== ============ ============ ============
- --------------------------------------------------------------------------------------------------------------------------------
Issuance of stock $ 109 $ 21,999,891 $ 22,000,000
Carryover basis adjustment (3,193,000) (3,193,000)
Net loss $(2,222,404) (2,222,404)
----- ------------ ------------ ------------
BALANCE - December 31, 1998 $ 109 $ 18,806,891 $ (2,222,404) $ 16,584,596
===== ============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 46
SIMCALA, INC.
STATEMENTS OF CASH FLOWS
On March 31, 1998, SAC Acquisition Corp. ("SAC") acquired all of the
outstanding capital stock of the Company and on such date SAC was merged into
the Company. The purchase method of accounting was used to record assets
acquired and liabilities assumed. As a result of purchase accounting, the
accompanying financial statements of the Company and the Predecessor 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>
PREDECESSOR
COMPANY | ---------------------------------------------
NINE MONTHS | THREE MONTHS
ENDED | ENDED YEAR ENDED
DECEMBER 31, | MARCH 31, DECEMBER 31,
------------ | ---------------------------------------------
1998 | 1998 1997 1996
|
<S> <C> | <C> <C> <C>
OPERATING ACTIVITIES: |
Net income (loss) $ (2,222,404) | $ (580,928) $ 6,371,313 $ 5,450,118
Adjustments to reconcile net income (loss) to net cash |
provided by (used in) operating activities: |
Depreciation 2,974,138 | 447,674 1,766,377 1,350,782
Amortization of intangible assets 1,533,761 | 9,229 401,200 242,519
Debt discount | 14,000 89,349 332,396
Increase (decrease) in net deferred income tax liability (492,338) | 800,000 1,267,000 409,000
Noncash stock option compensation | 903,680 346,723
Other | 91,644
Change in assets and liabilities: |
Decrease (increase) in accounts receivable 2,497,277 | 20,824 (784,808) (758,012)
Increase in other receivables | (2,806,751)
Decrease (increase) in inventory (545,377) | (206,968) (702,590) 524,124
Decrease (increase) in prepaid income taxes (125,000) | 110,000 (110,000)
Decrease (increase) in other assets (230,508) | 202,831 (9,193) (183,550)
Increase (decrease) in accounts payable and other |
accrued expenses (4,036,645) | 2,364,754 1,139,968 1,885,802
------------ | ----------- ----------- -----------
|
Net cash provided by (used in) operating activities (647,096) | 1,168,345 9,995,339 9,234,823
|
INVESTING ACTIVITIES - Purchase of property, |
plant, and equipment (2,690,822) | (1,184,422) (2,074,521) (6,913,146)
|
FINANCING ACTIVITIES: |
Payments on noninterest-bearing debt | (5,597,197)
Repayments under line of credit, net | (3,243,692) (1,816,196)
Borrowings (repayments) of long-term debt, net (66,625) | 39,085 (7,221,940) (341,941)
Additional long-term borrowings | 13,000,000 14,392
Redemption of preferred stock | (1,500,000)
Preferred stock dividend | (270,000)
Payment to shareholders | (2,307,706)
Debt issuance cost | (331,697)
------------ | ----------- ----------- -----------
|
Net cash provided by (used in) financing activities (66,625) | 39,085 (7,472,232) (2,143,745)
------------ | ----------- ----------- -----------
|
INCREASE (DECREASE) IN |
CASH AND CASH EQUIVALENTS (3,404,543) | 23,008 448,586 177,932
|
CASH AND CASH EQUIVALENTS: |
Beginning of period 18,057,332 | 634,877 186,291 8,359
------------ | ----------- ----------- -----------
|
End of period $ 14,652,789 | $ 657,885 $ 634,877 $ 186,291
============ | =========== =========== ===========
</TABLE>
(Continued)
F-6
<PAGE> 47
SIMCALA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY | -----------------------------------------------
NINE MONTHS | THREE MONTHS
ENDED | ENDED YEAR ENDED
DECEMBER 31, | MARCH 31, DECEMBER 31,
----------- | ------------ -----------------------------
1998 | 1998 1997 1996
|
<S> <C> | <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
Cash paid for: |
Interest $ 4,203,730 | $ 161,000 $ 1,559,742 $ 1,237,845
=========== | =========== =========== ===========
|
Income taxes $ 125,000 | $ 112,000 $ 770,000 $ 870,000
=========== | =========== =========== ===========
Noncash transactions:
Conversion of preferred stock into debt $ -- $ 3,000,000
=========== ===========
Equipment acquired under capital lease $ 70,000 $ 150,250
=========== ===========
</TABLE>
See notes to financial statements. (Concluded)
F-7
<PAGE> 48
SIMCALA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997, FOR THE NINE MONTHS
ENDED DECEMBER 31, 1998, THE THREE MONTHS ENDED
MARCH 31, 1998, AND THE TWO YEARS ENDED DECEMBER 31, 1997
1. ORGANIZATION AND OPERATIONS
On March 31, 1998, SIMCALA Holdings, Inc. ("Holdings"), through its
wholly owned subsidiary, SAC Acquisition Corp. ("SAC") purchased all
of the outstanding common stock of SIMCALA, Inc. ("SIMCALA" or the
"Company"). On such date, SAC was merged into SIMCALA (the
"Acquisition"). Holdings and SAC conducted no significant business
other than in connection with the Acquisition. The term "Predecessor"
refers to the Company prior to the Acquisition.
The Company is a producer of silicon metal for sale to the aluminum
and silicones 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 the nine months ended December 31, 1998, the three
months ended March 31, 1998, and the years ended 1997 and 1996, three
customers accounted for 40%, 15%, and 14%; 40%, 21%, and 10%; 29%,
24%, and 16%; and 27%, 24%, and 12% of net sales, respectively. At
December 31, 1998 and 1997, three customers accounted for 54%, 10%,
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 $65.3 million in
cash, including $6.1 million in expenses directly related to the
Acquisition and assumption of approximately $22 million in
liabilities, 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 financial statements) and equity
contributed of $22,000,000. The uses of cash associated with the
Acquisition were as follows (in thousands of dollars):
<TABLE>
<S> <C>
The Acquisition $ 65,291
Repayment of indebtedness 9,159
Transaction fees and expenses 6,051
General corporate purposes 16,499
--------
$ 97,000
========
</TABLE>
Accordingly, the purchase price has been allocated to the identifiable
assets and liabilities based on fair values at the acquisition date.
The excess of the purchase price over the fair value of the
identifiable net assets in the amount of $34.5 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.
F-8
<PAGE> 49
The Acquisition was financed through the issuance of senior notes in
the amount of $75,000,000 (see Note 4) and equity contributed of
$22,000,000. Senior Management had an 8% ownership interest in the
Predecessor, and as a result of the Acquisition, has a 9% ownership
interest in the Company. The sale of the Predecessor's stock of which
92% was not owned by Senior Management, constitutes a change in
control of the Company.
The 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 financial statements as
of December 31, 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. 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 December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents - The Company considers all highly liquid debt
instruments with a maturity of three months or less when purchased, to
be cash equivalents.
Inventories - Inventories are stated using the average cost method
which approximates the first-in, first-out (FIFO) inventory cost
method.
Property, Plant, and Equipment - It is the policy of the Company to
capitalize expenditures for major renewals and betterments and to
charge to operating expenses the cost of current maintenance and
repairs. Interest costs associated with major property additions are
capitalized while the projects are in the process of acquisition and
construction. The Company evaluates the estimated useful lives and the
carrying value of assets on a periodic basis to determine whether
events or circumstances warrant revised estimated useful lives or
whether any impairment exists. Management believes no impairment
existed at December 31, 1998.
F-9
<PAGE> 50
The Company provides for depreciation over the estimated useful lives
of plant and equipment by the straight-line method using the following
useful lives (in years):
<TABLE>
<CAPTION>
USEFUL
ASSET CATEGORY LIFE
<S> <C>
Land improvements 20
Buildings 40
Machinery and equipment 14
Mobile equipment and vehicles 6
Furniture and fixtures 10
Computer equipment 7
Computer software 5
</TABLE>
The cost and the accumulated depreciation and amortization relating to
assets retired or otherwise disposed of, is eliminated from the
respective accounts at the time of disposition. Gains or losses from
disposition are included in current operating results.
Intangible Assets - Intangible assets include the excess of the cash
consideration over the estimated fair market value of the net assets
acquired in the Acquisition of $34.5 million which is being amortized
over twenty-five years. In addition, debt issuance costs of $5.3
million have been recorded and are being amortized over eight years.
The Company evaluates the amortization period and the carrying value
of intangible assets, including goodwill on a periodic basis,
including evaluating the performance of the underlying businesses
which gave rise to such amount to determine whether events or
circumstances warrant revised estimates of useful lives or whether
impairment exists. In performing the review of recoverability, the
Company estimates the future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition. If the
sum of the expected undiscounted future cash flows is less than the
carrying amount, an impairment is recognized, based on the difference
between the estimated fair value and the carrying value.
Stock-Based Compensation - Stock-based compensation is accounted for
in accordance with APB 25, Accounting for Stock Issued to Employees,
and related interpretations. Effective January 1, 1996, the Company
adopted the disclosure-only provisions of SFAS 123, Accounting for
Stock-Based Compensation. See Note 8 to the financial statements.
New Accounting Pronouncements - As of January 1, 1998, the Company
adopted Statement of Financial Accounting Standards 130, Reporting
Comprehensive Income ("SFAS 130"), which establishes new rules for the
reporting and display of comprehensive income and its components. As
the Company had no other comprehensive income for any of the periods
presented herein, the adoption of SFAS 130 had no impact on the
Company's financial statements.
As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards 131, Disclosures about Segments of An Enterprise
and Related Information ("SFAS 131"). SFAS 131 establishes annual and
interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas,
and major customers. The Company has no separate reportable segments
under the criteria of SFAS 131, so the adoption had no impact on the
Company's financial statements or disclosures contained herein.
However, the Company has adopted
F-10
<PAGE> 51
the disclosure requirements for transactions with major customers. See
Note 1 to the financial statements.
In June 1998, Statement of Financial Accounting Standards 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS
133") was issued. SFAS 133 establishes standards for derivative
instruments and hedging activities and 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 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company intends to adopt SFAS 133
in 2000. The Company has not completed the process of evaluating the
impact that will result from adopting SFAS 133. The Company is
therefore unable to disclose the impact that adopting SFAS 133 will
have on its financial position and results of operations when such
statement is adopted.
3. INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
COMPANY | PREDECESSOR
1998 | 1997
|
<S> <C> | <C>
Raw materials $ 908,839 | $ 948,627
Finished goods 2,211,438 | 1,419,668
Supplies 296,000 | 295,646
----------- | -----------
|
$ 3,416,277 | $ 2,663,941
=========== | ===========
</TABLE>
F-11
<PAGE> 52
4. LONG-TERM DEBT
The following is a summary of interest-bearing, long-term debt:
<TABLE>
<CAPTION>
COMPANY | PREDECESSOR
1998 | 1997
|
<S> <C> | <C>
Senior notes which bear interest at 9 5/8% and are due April 2006 $ 75,000,000 |
|
Industrial development bonds which bear interest at a variable |
rate. At December 31, 1998 and 1997, the interest rate was 5.30% |
and 5.90%, respectively. The bonds mature on December 1, 2019 |
The bonds and applicable interest are secured by a letter of credit. 6,000,000 | $ 6,000,000
|
Term loan with a bank which bears interest at the current Eurodollar advance |
rate plus a variable rate dictated by the Company's cash flow leverage ratio |
(2.50% at December 31, 1997) |
Amount was refinanced in connection with the Acquisition. | 9,000,000
|
Various capital leases payable with interest rates ranging from 9.91% |
to 10.16% expiring at various dates through 2000. Aggregate |
monthly payments approximate $6,000. 106,845 | 103,922
------------ | ------------
|
81,106,845 | 15,103,922
Less current portion 72,747 | 2,340,752
------------ | ------------
|
Long-term debt $ 81,034,098 | $ 12,763,170
============ | ============
</TABLE>
The future maturities of interest-bearing, long-term debt and capital
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1999 $ 72,747
2000 34,098
2001 --
2002 --
2003 --
Thereafter 81,000,000
------------
$ 81,106,845
============
</TABLE>
The Senior Notes (the "Notes") mature in 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. At any time on or before
April 15, 2001, the Company may redeem up to 30% of the original
aggregate principal amount
F-12
<PAGE> 53
of the Notes with the net proceeds of a public offering of common
stock of the Company or Holdings, provided that at least 70% of the
original aggregate principal amount of Notes remains outstanding
immediately after the occurrence of such redemption.
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
"Commitment"). The credit facility expires in March 2003. At March 31,
1998, $6.1 million related to letters of credit was outstanding under
the credit facility.
The Credit Facility requires that the Commitment be permanently
reduced, upon certain non-ordinary course asset sales by Holdings, the
Company or any future subsidiary of the Company. Revolving loans will
bear interest at a variable rate equal, at the option of the Company,
to (i) LIBOR (having interest periods of 1, 2, 3, or 6 months, at the
Company's option) plus a margin of up to 3.0% per annum, or (ii) the
base rate (defined to mean the higher of (i) publicly announced "prime
rate," and (ii) a rate tied to overnight Federal Funds transactions
with members of the Federal Reserve System) plus a margin of up to
2.0% per annum. Drawings under letters of credit which are not
promptly reimbursed by the Company are expected to accrue interest at
a variable rate equal to the base rate plus a margin up to 3.0% per
annum. Beginning 36 months after the closing of the Credit Facility,
these margins may be reduced based on the financial performance of the
Company.
The Notes and the 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 Credit Facility contains
affirmative covenants including, among other, 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
Credit Facility.
The Company is also required to comply with certain financial tests
and maintain certain financial ratios. Certain of these test and
ratios include: (i) maintaining a minimum earning before interest,
taxes, depreciation and amortization ("EBITDA"); (ii) maintaining a
maximum ratio of indebtedness to EBITDA; and (iii) maintaining a
minimum ratio of EBITDA to interest expense. During 1998, the Company
reached agreement with its lender to amend all financial covenants. At
December 31, 1998, the Company was in compliance with all covenants,
as amended.
Credit extended under the Credit Facility is secured by substantially
all of the Company's assets and the real and personal property used in
the Company's operations.
F-13
<PAGE> 54
In January 1999, the Company entered into an amendment to the Notes
agreement. This amendment required the Company to cash collateralize
the $6,000,000 letter of credit backing the industrial development
bonds. This cash collateral must remain in place until certain
leverage tests are met in the Year 2000. In addition, the amendment
changed certain of the Company's financial tests and minimum financial
ratios.
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.
The Company capitalized $93,094 of interest expense during the nine
months ended December 31, 1998.
5. PRO FORMA DATA
The following unaudited pro forma financial data has been prepared
assuming that the Acquisition was consummated on January 1, 1996. 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, 1996, nor
is it necessarily indicative of future operations.
<TABLE>
<CAPTION>
THREE MONTHS YEAR YEAR
ENDED ENDED ENDED
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C> <C>
Net Sales $ 14,854,000 $ 62,184,000 $ 52,407,000
Net Loss $ (2,377,000) $ (891,000) $ (3,176,000)
</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.
During the nine months ended December 31, 1998, the Company paid CGW
Management $157,000. The consulting agreement expires 2003. At the
Acquisition closing, the Company paid to CGW Management an investment
banking fee of $1.35 million for its services in assisting the Company
in structuring and negotiating the Acquisition.
In connection with the exercise of stock options by certain members of
management, the Company was owed $1,800,000 by management related to
tax withholdings due on such compensation. Such amount was recorded as
a receivable as of March 31, 1998 and was paid on June 12, 1998.
During October 1996, a partnership formed primarily by the
shareholders of the Predecessor purchased various debt instruments of
the Predecessor with face amounts aggregating $7,675,000 for
$3,130,000, respectively. With the proceeds from a subsequent
refinancing, the Company paid the face amount of
F-14
<PAGE> 55
the obligations due under these debt instruments. Prepayment penalties
and other fees of $464,000 were also paid to the Partnership in 1997.
The stockholders' portion of the payment amount greater than the
recorded carrying value of the notes of $2,307,706 has been recorded
as a reduction of stockholders' equity.
The Predecessor entered into a Management Agreement with its former
majority stockholder to provide management services to the Company.
The Company incurred stockholder management fees of $31,250, $250,000
and $250,000 during the three months ended March 31, 1998 and the
years ended December 31, 1997 and 1996, respectively. Effective with
the Acquisition, the Management Agreement was terminated.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of its financial instruments,
the carrying value of which differed from fair value, using available
market information and appropriate valuation methodologies.
Considerable judgment is required in developing the estimates of fair
value presented herein and, therefore, the values are not necessarily
indicative of the amounts that could be realized in a current market
exchange.
The carrying amount and the estimated fair value of such financial
instruments as of December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
<S> <C> <C>
COMPANY
December 31, 1998:
Long-term debt and capital leases, including current portion $ 81,106,845 $ 70,081,845
============ ============
PREDECESSOR
December 31, 1997:
Long-term debt and capital leases, including current portion $ 15,103,922 $ 15,097,497
============ ============
</TABLE>
The estimated fair value of the long-term debt as of December 31, 1998
is based upon current market values of $75,000,000 in publicly traded
debt and carrying value of $6,106,845 in industrial development bonds
and capital leases.
The estimated fair value of the long-term debt as of December 31, 1997
is based upon interest rates that currently were available for
issuance of a $9,000,000 term loan with similar terms and remaining
maturity and carrying value of $6,103,992 in industrial development
bonds and capital leases.
8. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
On March 31, 1998, Holdings adopted the SIMCALA Holdings, Inc. 1998
Stock Incentive Plan (the "1998 Plan") under which stock options,
stock appreciation rights, restricted stock, or other stock-based
awards for 8,000 shares of common stock or restricted common stock
could be granted, provided that no more than 10% of the reserved
shares may be granted as restricted stock or other unrestricted stock
awards. Certain members of the Company's management were granted
options totaling 3,070 for an
F-15
<PAGE> 56
exercise price of $1,000 per share, which approximated fair value on
March 31, 1998. As of December 31, 1998, no other awards had been
granted under the 1998 Plan. The options have a ten-year expiration
and vest ratably over five years; however, the 1998 Plan contains a
provision for accelerating vesting if certain events occur. No options
were exercisable at December 31, 1998.
In 1995, the Predecessor established the SIMCALA, Inc. 1995 Stock
Option Plan (the "Plan") under which stock options for 889 shares of
common stock could be granted. In connection with this Plan, the
Company granted options to purchase 780 shares at an exercise price of
$100 per share prior to December 31, 1997. On March 31, 1998, the
Company granted additional options to acquire 109 shares at $100 per
share. All options were vested and exercised as of March 31, 1998. In
accordance with the Stock Purchase Agreement, no exercise price was
payable to the Predecessor with respect to the options. As such,
compensation expense was recognized for the waiver of the exercise
price. Of the total options, 211 options vested based on performance
criteria. Compensation expense of $903,680 and $346,723 associated
with such options was recognized in the three months ended March 31,
1998 and the year ended December 31, 1997, respectively. As of
December 31, 1997, 415 options were exercisable; however, none had
been exercised.
The Company applies APB 25 in accounting for its stock-based
compensation plans. Effective January 1, 1996, the Company adopted the
disclosure-only provisions of SFAS 123. Had compensation costs for the
Company's stock-based compensation plans been determined based on the
fair value at the grant date consistent with the method set forth in
SFAS 123, the Company's net income (loss) for the nine months ended
December 31, 1998 and years ended 1997 and 1996 would have been
($2,379,217), $6,366,324 and $5,445,220, respectively.
The fair value of the options granted under the 1998 Plan was
estimated at $171.98 per share, using the Black-Scholes Option Pricing
Model and the following weighted-average assumptions: risk-free
interest rate of 5.64%; dividend yield, expected volatility, and
assumed forfeiture rate of 0%; and expected life of 3.4 years.
The fair value of the options granted under the Plan during 1995 was
estimated at $29.74 per share using the Black-Scholes Option Pricing
Model and the following weighted average assumptions: risk-free
interest rate of 7.1%; dividend yield, expected volatility, and
assumed forfeiture rate of 0%; and an expected life of five years. The
fair value of options granted under the Plan during 1998 was estimated
at $28.11 per share using the Black-Scholes Option Pricing Model and
the following weighted average assumptions: risk-free interest rate of
6.6%; dividend yield, expected volatility, and assumed forfeiture rate
of 0%; and an expected life of five years.
9. RETIREMENT PLAN
The Company sponsors a qualified 401(k) savings plan covering all
employees who have completed six months of employment. If a
participating employee decides to contribute, a portion of the
contribution is matched by the Company. Total retirement plan expense
for the nine months ended December 31, 1998, the three months ended
March 31 1998, and the years ended 1997 and 1996, was $73,142,
$27,512, $97,217, and $81,846, respectively.
F-16
<PAGE> 57
10. INCOME TAXES
The provision for income taxes for the nine months ended December 31,
1998, the three months ended March 31, 1998, and the years ended 1997
and 1996, consisted of the following:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------
NINE MONTHS | THREE MONTHS
ENDED | ENDED PREDECESSOR
DECEMBER 31, | MARCH 31, ----------------------------
1998 | 1998 1997 1996
|
<S> <C> | <C> <C> <C>
Current $ -- | $(900,198) $ 2,247,000 $ 760,000
Deferred (492,338) | 800,000 1,267,000 1,490,753
Change in valuation allowance | (1,081,753)
----------- | --------- ----------- -----------
|
Provision for income taxes $ (492,338) | $(100,198) $ 3,514,000 $ 1,169,000
=========== | ========= =========== ===========
</TABLE>
The difference between the effective tax rate and the statutory rate
is reconciled below (amounts in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------- ------------------ PREDECESSOR
NINE MONTHS ENDED THREE MONTHS ENDED -----------------------------------------
DECEMBER 31, 1998 MARCH 31, 1998 1997 1996
----------------------------------------- -----------------------------------------
DOLLARS PERCENTAGE| DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
|
<S> <C> <C> | <C> <C> <C> <C> <C> <C>
Statutory rate $(923) (34.0)% | $(232) (34.0)% $3,361 34.0% $ 2,250 34.0%
State income tax, net |
of federal benefit (59) (2.2) |
Nondeductible goodwill 350 12.9 |
Other permanent items 140 5.2 | 132 19.4 153 1.5
Valuation allowance | (1,081) (16.3)
----- ---- | ----- ----- ------ ---- ------- ----
Recorded tax expense $(492) 18.1% | $(100) (14.6)% $3,514 35.5% $ 1,169 17.7 %
===== ==== | ===== ===== ====== ==== ======= ====
</TABLE>
The Company paid no Alabama state income taxes for the nine months
ended December 31, 1998, three months ended March 31, 1998, and the
years ended December 31, 1997 and 1996 due to benefits granted by the
State of Alabama under the Mercedes Act.
F-17
<PAGE> 58
Significant components of the deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
COMPANY | PREDECESSOR
1998 | 1997
|
<S> <C> | <C>
Deferred tax liabilities: |
Accelerated tax depreciation $ 14,671,200 | $ 2,918,000
Other liabilities 111,124 | 8,000
------------ | -----------
14,782,324 | 2,926,000
|
Deferred tax assets: |
AMT credit carryforwards 746,049 | 1,090,000
Net operating loss carryforwards 1,987,615 |
Other assets 232,085 | 160,000
------------ | -----------
2,965,749 | 1,250,000
------------ | -----------
|
Net deferred tax liability $(11,816,575) | $(1,676,000)
============ | ===========
</TABLE>
Based on management's assessment, it is more likely than not that the
deferred tax assets will be realized through future taxable earnings.
At December 31, 1998, the Company had a tax net operating loss
carryforward of $5,845,000, which expires December 31, 2018.
Additionally, the Company has AMT credit carryforwards at December 31,
1998 of $2,194,000, which expire December 31, 2013.
11. PREFERRED STOCK
In connection with the acquisition of the Company in 1995, 1,500
shares of Series B cumulative 8% preferred stock were issued. In 1997,
the preferred stock was redeemed at the redemption value of $1,000 per
share plus $270,000 of accrued dividends.
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company had approximately 170 employees,
approximately 100 of which are covered by provisions of a collective
bargaining agreement. The collective bargaining agreement expires in
2000.
Total rental expense for property and equipment was $266,783,
$109,370, $219,087, and $229,273 for the nine months ended December
31, 1998, the three months ended March 31, 1998, and the years ended
December 31, 1997 and 1996, respectively. Minimum annual rentals under
noncancelable operating leases are $153,791, $137,426, $78,947, and
$79, for the years ended 1999, 2000, 2001, 2000, respectively.
F-18
<PAGE> 59
13. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
NET INCOME
COMPANY'S QUARTER ENDED NET SALES GROSS PROFIT (LOSS)
--------- ------------ ----------
<S> <C> <C> <C>
December 31, 1998 $ 13,267 $ 1,594 $ (482)
September 30, 1998 12,618 407 (1,301)
June 30, 1998 14,918 1,896 (439)
---------------------------------------------------------------------------------------------------------
PREDECESSOR'S QUARTER ENDED
March 31, 1998 $ 14,854 $ 3,175 $ (581)
December 31, 1997 15,466 4,392 2,242
September 30, 1997 15,920 3,650 1,476
June 30, 1997 15,143 2,740 1,083
March 31, 1997 15,655 3,430 1,570
</TABLE>
F-19
<PAGE> 1
EXHIBIT 10.11
Certain portions of this exhibit have been deleted and confidentially
filed with the Securities and Exchange Commission pursuant to a confidential
treatment request under Rule 406 under the Securities Act of 1933, as amended.
The confidential portions of the exhibit that have been deleted are indicated
by "[***]" inserted in place of such confidential information.
SILICON METAL PURCHASE AGREEMENT
WABASH ALLOYS, L.L.C. - SIMCALA, INC.
<TABLE>
<S> <C>
ITEM: [********] Grade Silicon Metal
Iron: [**********]
Calcium: [**********]
[********] Grade Silicon Metal
Iron: [**********]
Calcium: [**********]
[********] Grade Silicon Metal
Iron: [**********]
Calcium: [**********]
Size: [******************************************]
Shipment in bulk truckload quantities.
DURATION: January 1, 1999 through December 31, 2001
QUANTITY: [******] Grade: [**] truckloads/month ([******] tons/year)
[******] Grade: [**] truckloads/month ([******] tons/year)
[******] Grade: [**] truckloads/month ([******] tons/year)
[******] grade may be substituted when [**] grade not available.
Additional tonnage as mutually agreed upon (both companies flexible).
TERMS: [************************************************]
[*********************************************************]
Review [****************************] (if necessary).
PRICE: The [******] grade price effective January 1, 1999 is [******]/pound.
This price will be [***********************************************
*******************************************************************
*******************************************************************
*******************************************************************
********]. The [******] grade price will be [*********************].
The [******] grade price will be [*********************]. The [******]
grade price will be [*************************************************
**********************************************************************
********************************************].
CANCEL: Must be written with six (6) month's advance notice.
</TABLE>
/s/ 12/30/98
- ---------------------------- --------------------------
Wabash Alloys, L.L.C. Date
/s/ C. E. Boardwine 12/30/98
- ---------------------------- --------------------------
SIMCALA, Inc. Date
<PAGE> 1
EXHIBIT 10.12
Certain portions of this exhibit have been deleted and confidentially filed
with the Securities and Exchange Commission pursuant to a confidential treatment
request under Rule 406 under the Securities Act of 1933, as amended. The
confidential portions of the exhibit that have been deleted are indicated by
"[***]" inserted in place of such confidential information. In addition, all
exhibits to this exhibit have been deleted and confidentially filed with the
Securities and Exchange Commission.
SUPPLY AGREEMENT
BETWEEN
SIMCALA, INC.
AND
DOW CORNING CORPORATION
<PAGE> 2
PREAMBLE
SIMCALA and Dow Corning Corporation understand the need for continuous
"real" cost improvement. SIMCALA understands that Dow Corning Corporation is
entering into this contract with the intent to purchase silicon metal between
January 1, 1998, and December 31, 2004, with convincing evidence that in so
doing, Dow Corning Corporation will have significantly higher value through
lower costs, better quality, and consistent reliability of supply for the life
of the contract than it would have with short term and/or level volume supplier
arrangements. SIMCALA gains a committed long-term customer who intends to
provide consistent and dependable long-term growth. SIMCALA and Dow Corning
Corporation are committed to working together towards continuous improvement of
value in terms of the cost, price, quality, productivity, and service related to
the production and use of silicon metal. Both parties agree that the key to the
success of this contract is not in mechanics but in mutual trust that these
commitments to continuous improvement will be fully implemented.
<PAGE> 3
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT (hereinafter "Agreement") is made and entered
into as of the 1st day of January, 1998 by and between SIMCALA, INC., a Delaware
Corporation located in Montgomery, Alabama (hereinafter "Seller") and DOW
CORNING CORPORATION, a Michigan Corporation with headquarters in Midland,
Michigan (hereinafter "Buyer").
WHEREAS, Seller is a producer of silicon metal at its Montgomery,
Alabama plant and is presently producing silicon metal sold to Buyer by Seller;
and
WHEREAS, Seller and Buyer desire to enter into this Agreement to
provide for the sale and purchase of silicon metal and further cooperation
between Seller and Buyer to extend the continuous improvement in cost, quality
and performance of the product; and
WHEREAS, in entering into this Agreement, it is intended that Seller
will continue to have a committed long term customer and the opportunity to
enjoy consistent long term growth; and
WHEREAS, Buyer's aim in entering into this Agreement is to keep its
assured long term supply of silicon metal for the life of the Agreement and its
ongoing opportunity to lower costs and obtain better quality; and
WHEREAS, both Seller and Buyer remain committed to continually working
toward continuous improvement in cost, price, quality and service regarding the
sale and purchase of silicon metal, and the parties agree that the key to a
successful Agreement is still mutual trust and commitment to continuous
improvement; and
WHEREAS, the sale of silicon metal and the productivity improvement
sharing shall be carried out under and subject to the terms and conditions set
forth hereinafter and if appropriate in a separate sub-agreement(s) as needed;
NOW, THEREFORE, Seller agrees to sell to Buyer, and Buyer agrees to
purchase from Seller, silicon metal under and subject to the following terms and
conditions:
1. Effective Date. This Agreement shall become effective January 1,
1998.
2. Cooperation and Sharing. Seller and Buyer agree to use their best
efforts to work together to generate productivity improvements resulting in cost
savings and product performance opportunities. Both Seller and Buyer understand
the need for cooperation in order to obtain this goal and agree to take
commercially acceptable action, including appointing members to quality
technical teams for handling various subjects, in order to pursue the goal.
Seller and Buyer agree that the appointed teams will meet at least twice per
year and discuss such opportunities. All such opportunities that require a
change in specifications must be real and measurable, and the measurements
involved must
<PAGE> 4
take account of the effect on both Seller and Buyer. Cost savings opportunities
shall be shared equitably by Seller and Buyer net of any capital investments
required. Seller and Buyer intend to enter into separate written sub-agreements
which will set forth their mutual intentions and agreements regarding each such
opportunity and necessary capital investments.
When cooperation generates productivity improvements, the resultant
cost savings shall be reflected in the annual price adjustment provided for
under Exhibit A. In addition to the annual price changes pursuant to Exhibit A,
the price may be adjusted to reflect cost savings through the Formula Price
Adjustment as hereinafter defined in Exhibit B. Mutually developed and approved
cost savings opportunities can be implemented at any time during a "Calendar
Year" which term, as used in this Supply Agreement, shall mean a twelve (12)
month period from January 1 to December 31. The cost savings idea shall be
evaluated for a period of not less than six (6) months following its
implementation, during which time the real and measurable savings will be
verified. Such savings shall be shared equitably between Buyer and Seller. A
Formula Price Adjustment can be made to the actual price then in effect
following the six (6) month evaluation period.
During the six (6) month evaluation period, Buyer and Seller will
monitor and review monthly performance of the cost savings idea. Once such a
Formula Price Adjustment has been made to the actual price, Buyer and Seller may
discontinue all or part of any cost savings practice by mutual agreement set
forth in a written termination agreement which shall state the reasons for such
discontinuance. If Buyer and Seller agree to discontinue a cost saving practice,
the actual price will be readjusted, as appropriate, beginning with the month
following that month during which the cost savings practice is discontinued.
3. Quantity. Seller agrees to sell and deliver to Buyer, and Buyer
agrees to purchase and receive from Seller, a minimum quantity of silicon metal
of [***] metric tonnes during the initial three (3) Calendar Years set forth on
Exhibit D hereto (the "3 Year Minimum"). Seller and Buyer agree that the
quantity that Buyer is required to purchase from Seller for any single Calendar
Year during such initial three year period shall be at least equal, but not
limited to, [**********] which comply with the Buyer's specifications as given
in Exhibit C of this Agreement. In any case the minimum tonnage in any such
Calendar Year supplied by Seller to Buyer shall not be less than [***] metric
tons. [********] conforming to the specification in Exhibit C or other
specifications as mutually agreed between the parties.
During each three (3) Calendar Year period ending December 31 in each
of the years 2001 and thereafter during the term hereof, Seller shall sell and
deliver to Buyer, and Buyer shall purchase and receive from Seller, a quantity
of silicon metal which complies with Buyer's specifications as set forth on
Exhibit C that is equal to the amount
- 2 -
<PAGE> 5
set forth opposite the last year of such three (3) year period on Exhibit D
under the caption "Rolling Minimum" (the "3 Year Rolling Minimum").
Seller agrees that it will construct a new brown field furnace, which
shall be known as Furnace No. 4 ("Furnace No. 4"), and will use its commercially
reasonable best efforts to cause such furnace to be fully constructed and
operational prior to January 1, 2001.
4. Incremental Volume. Quantities up to the Total Maximum Purchases as
defined in Exhibit D per Calendar Year shall be understood as conventional
volume ("Conventional Volume"). Any additional quantity of silicon metal
purchased by Buyer from Seller in any Calendar Year from the production tonnages
of No. 1, No. 2, No. 3 or No. 4 furnaces over and above the Conventional Volume
for that Calendar Year shall be incremental volume ("Incremental Volume"). Any
such Incremental Volume will be added to the Conventional Volume provided for in
this Agreement by means of a sub-agreement between Seller and Buyer which shall
set forth the agreed upon pricing, quantities and other specifications for such
Incremental Volume.
5. Quality. All of the silicon metal sold and delivered hereunder by
Seller shall meet the specifications which are set forth in Exhibit C attached
hereto and made a part hereof, as well as such other specifications which may be
agreed upon in writing from time to time between Seller and Buyer, unless waived
by Buyer.
6. Pricing.
[***********************]
- 3 -
<PAGE> 6
7. Term. The initial term of this Agreement (the "Term") shall be for
seven (7) Calendar Years commencing January 1, 1998 and, if either party issues
a "notice of termination" prior to January 1, 2002, ending December 31, 2004,
unless sooner terminated as provided below. If neither party issues a "notice of
termination," the Term of this Agreement shall automatically continue from year
to year after December 31, 2004 and may be terminated under this Section by
either party submitting to the other party not less than twenty four (24) months
prior written notice of such party's election to terminate this Agreement.
8. Confidentiality. This Supply Agreement and everything set forth
herein, all information shared pursuant hereto between Seller and Buyer, and all
related agreements and sub-agreements are and shall remain confidential and
proprietary to the parties hereto, or to the disclosing party, if appropriate.
All information disclosed by a party hereto under this Agreement shall be
subject to the same obligations of non-disclosure and limited use by the
receiving party in accordance with the terms of the Confidentiality Agreement
dated July 17, 1995, between Dow Corning Corporation, Seller and Buyer, or in
accordance with any present or future confidentiality agreements which may be
applicable between Seller and Buyer.
- 4 -
<PAGE> 7
9. Third Parties. Seller and Buyer understand and agree that some of
the information, gains or improvements resulting from the cooperation and
productivity sharing to be carried out hereunder and under any sub-agreement
hereto will be applicable to the business of one or both of the parties as that
business relates to third parties. Therefore, despite the provision for
confidentiality set forth herein above, Seller and Buyer agree to meet and to
discuss the desire of either party hereto to use information, gains or
improvements in their business with third parties, and both Seller and Buyer
agree that all reasonable requests or permission to so share such information,
gains or improvements shall be mutually agreed to by both parties hereto and
such agreement shall not be unreasonably withheld.
10. Right to Audit. Buyer reserves the right to have Seller's records
inspected by a certified public accountant agreed to by both parties at
reasonable times during normal business hours to verify increases or decreases
in the cost factors set forth in Exhibit A. The certified public accountant will
be instructed to only advise Buyer and Seller whether the increases or decreases
are correct or incorrect according to the provisions of Exhibit A, and, if
incorrect, to advise Buyer and Seller what the correct increase or decrease
should be. The certified public accountant shall be advised not to reveal the
facts forming the basis of his opinion regarding price increases or decreases to
any party whatsoever, including Buyer, without the prior written consent of
Seller.
11. Delivery and Acceptance. Delivery of the silicon metal hereunder by
Seller to Buyer shall be [******], or other sources mutually approved by both
parties hereto, such approval not to be unreasonably withheld. [********]
12. Specifications and Quality Control, Weight, Patents and Disclaimer.
A. Product Specification and Quality Control. All of the
silicon metal delivered hereunder shall conform to the specifications
which are set forth in Exhibit C attached hereto and made a part
hereof, unless waived by Buyer. Seller warrants that Buyer shall
receive a good title to the silicon metal delivered hereunder. In the
event of disqualification of the silicon metal because of failure to
conform to the specifications, Buyer may suspend this Agreement at its
discretion until the product is requalified by Buyer. Both parties will
use their respective
- 5 -
<PAGE> 8
commercially reasonable best efforts to remedy the problems. Pending
resolution of such problems, the minimum quantity of silicon metal that
Buyer is obligated to purchase hereunder may at Buyer's option be
adjusted downwards accordingly for that period of time.
The analysis established by Seller is preliminarily binding.
However, if Buyer's own sampling analysis within sixty (60) days after
delivery states a deviation from the specification according to Exhibit
C, then Buyer in writing immediately will give Seller the opportunity
to carry out a joint sample taking. Should the parties fail to reach an
agreement as to analysis, they shall jointly appoint an independent
expert. The costs for the expert shall be borne by the party whose
results deviates the most from the expert's analysis.
B. Weight. Seller's certified weight shall govern [****].
However, Buyer reserves the right to submit any delivery to check
weighing on a certified weight immediately after receipt of the
material. If the value deviates more than [***] from the weight
indicated by Seller, then Buyer will inform Seller in writing
immediately about the difference, and an appropriate invoicing
adjustment will be made.
C. Patents. Notwithstanding any other limitations of liability
in this Agreement, if any suit is brought against Buyer for
infringement of any patents alleging that the silicon metal delivered
under this Agreement or that Seller's method of manufacturing it
infringes any patents, Seller shall, at its own expense, defend and
control the suit against these allegations only, and shall pay any
award of damages assessed against Buyer in the suit to the extent only
that the damages are awarded in connection specifically with the
alleged infringement, provided Buyer gives Seller prompt notice in
writing of the institution of the suit and, to the full extent of the
Buyer's power to do so, Buyer permits Seller to defend and control the
suit against these allegations. The above fully expresses Buyer's
exclusive remedy and Seller's sole liability with respect to
infringement of any patent by the silicon metal delivered under this
Agreement, and Seller expressly disclaims any express or implied
warranty against infringement with respect to such silicon metal. In no
case will Seller be liable to defend or pay any award of damages
assessed against Buyer in any suit or cause of action alleging that the
use of the silicon metal delivered under this Agreement infringes any
patent. Buyer shall not hold Seller responsible for any claim, loss or
expense arising out of Seller's compliance with any specifications
furnished by Buyer with respect to the silicon metal.
Notwithstanding any other limitations of liability in this
Agreement, if any suit is brought against Seller for infringement of
any patents alleging that Buyer's use of the silicon metal delivered
under this Agreement infringes any patents, Buyer shall, at its own
expense, defend and control the suit against these allegations only,
and shall pay any award of damages assessed against Seller in the
- 6 -
<PAGE> 9
suit to the extent only that the damages are awarded in connection
specifically with the alleged infringement, provided that Seller gives
Buyer prompt notice in writing of the institution of the suit and, to
the full extent of the Seller's power to do so, Seller permits Buyer to
defend and control the suit against these allegations. The above fully
expresses Seller's exclusive remedy and Buyer's sole liability with
respect to infringement of any patent by Buyer's use of any silicon
metal delivered under this Agreement, and Buyer expressly disclaims any
express or implied warranty against infringement with respect to
Buyer's use of silicon metal.
D. Seller further warrants that it has taken adequate
precautions to verify that its computer systems will properly process
date calculations through the year 2000 and beyond and that its
manufacture and delivery of the Goods will not be delayed or suspended
due to the failure of its date calculations.
E. DISCLAIMER. EXCEPT AS SPECIFIED HEREINABOVE IN THIS
PARAGRAPH 12, THERE ARE NO EXPRESS WARRANTIES BY SELLER AND NO
WARRANTIES BY SELLER SHALL BE IMPLIED OR OTHERWISE CREATED UNDER
APPLICABLE LAW, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF
MERCHANTABILITY OR ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.
13. Payment Terms. For all silicon metal sold, delivered and accepted
hereunder, Buyer shall pay Seller, [***] of the receipt of Seller's invoice.
14. Force Majeure.
A. Neither party shall be liable for its failure to perform
hereunder (other than any failure to pay money) caused by contingencies
beyond its reasonable control, including but not limited to acts of
God, fire, floods, wars, sabotage, accidents, labor disputes (whether
or not such disputes are within the power of the party to settle),
serious equipment failure resulting in a full furnace outage in excess
of twenty-one (21) days unless caused by a misuse or failure to perform
routine maintenance or furnace power reduction in excess of thirty
percent (30%) of furnace normal power for a period of twenty-eight (28)
days, governmental actions, inability to obtain material, equipment or
transportation and any other occurrence beyond its control. The party
whose performance is prevented by such contingencies shall have the
right not to perform as herein provided during the period of such
contingency and the total amount of silicon metal herein provided for
shall be reduced accordingly.
B. If a force majeure event prohibits Seller from delivering
to Buyer the quantities of Silicon Metal provided for hereunder, Seller
shall deliver to Buyer that percentage of Seller's production which is
equal to the percentage of Seller's production during the previous
twelve (12) month period which was represented
- 7 -
<PAGE> 10
by Buyer's purchases during that time period, at a net unit price which
is equal to the unit price which would have been paid by Buyer if its
full purchase order had been filled. If the Buyer is required to
purchase silicon metal from other sources due to a force majeure
condition at the Seller, then the Buyer may reduce the contract minimum
by a like amount.
C. If Buyer is affected by an event of force majeure, Buyer
shall purchase from Seller the quantity of silicon metal which shall be
determined on the same basis as set forth in Paragraph B above.
15. Hardship. The intent of the parties is that the results of this
Agreement are to be favorable to both parties over the long term, consistent
with the attitude put forward in this Agreement. If during the term of this
Agreement, one or both of the parties experiences unexpected or excessive
hardship related to the performance of this Agreement, then both parties agree
to try to resolve the hardship on a reasonable basis through mutual discussions.
Hardship includes but is not limited to significant charges in costs greater
than 10%, but in no way event shall be related to a change in market conditions,
such as supply/demand imbalances or market price changes.
16. Assignment/Successor. This Agreement may not be assigned by either
party without the prior written consent of the other party, which consent shall
not be unreasonably withheld. Notwithstanding the above, Buyer may perform any
of the obligations undertaken by it and may exercise any of the rights granted
to it under this Agreement through Dow Corning Corporation, or any wholly owned
subsidiary thereof; provided, however, that any act or omission of any such
company with respect to this Agreement shall be deemed to be the act or omission
of the Buyer. For the avoidance of doubt, any purchases by any such company
shall be deemed to be purchases by the Buyer and counted towards meeting Buyer's
minimum purchase obligations hereunder.
In the event of a change in the ownership or control of either party
hereto, this Agreement shall remain fully enforceable according to the present
terms and conditions; the other party will be notified accordingly by the
affected party and should any new owner or controlling body be unacceptable to
the other party, that other party may, upon notice to the affected party,
terminate this Agreement with twelve (12) months written notice of termination.
17. Governing Law. The validity, interpretation and performance of this
Agreement shall be governed under and in accordance with the laws of the State
of Michigan.
18. Entire Agreement. As of the effective date 1 January 1998, this
Agreement, along with its Exhibits, confidentiality agreement and any
sub-agreements, contains the entire agreement of the parties, superseding any
previous understandings, commitments or agreements, oral or written, with
respect to the subject matter hereof. No modification of this Agreement or
waiver of the terms and conditions hereof shall be
- 8 -
<PAGE> 11
binding upon either party unless approved in writing by an authorized
representative of such party. Further, no modification of this Agreement shall
be effected by the acknowledgment or acceptance of purchase order forms or
releases containing other or different terms or conditions, whether or not
signed by an authorized representative of such party.
19. Compliance with Law. Seller and Buyer hereby agree to comply with
all provisions of all present and future laws and regulations applicable to this
Agreement and its performance.
20. Relationship of the Parties. Seller and Buyer do not intend or
contemplate the formation or establishment of any partnership, joint venture,
pooling arrangement or other formal business organization of any kind. Nothing
in this Agreement is to be construed as constituting the appointment of any
party hereto as an employee or agent of the other party. Neither party shall
have any right or authority to assume or to create any obligation or
responsibility, as expressed or implied, on behalf of or in the name of the
other party. Each party is acting hereunder solely as an independent contractor.
21. Representations of Buyer. Buyer represents and warrants to Seller
that the purchase of silicon metal, including the purchase of silicon metal in
the quantities and on the terms set forth herein, is a part of the regular and
ordinary course of the business of Buyer, that this Agreement is made and
entered into in the ordinary course of the business of Buyer, that the
execution, delivery and performance of this Agreement by Buyer does not violate
any law, rule, regulation, judicial order or decree to which Buyer is subject,
that no consent or approval of any court, judicial body, governmental agency or
third party to the execution, delivery or performance of this Agreement by Buyer
is necessary or required, and that this Agreement is the legal, valid and
binding obligation of Buyer enforceable against Buyer in accordance with its
terms.
22. Notices. Any written notice required to be provided to either of
the parties hereunder shall be effective when mailed by registered or certified
mail, postage prepaid, or when sent by facsimile or courier, in each case
addressed to the party intended to receive the same as follows:
To Seller:
Simcala, Inc.
P.O. Box 68
Ohio Ferroalloys Rd.
Mt. Meigs, AL 36057
Facsimile: (334) 215-8969
Attention: President and Chief Executive Officer -
C.E. Boardwine
- 9 -
<PAGE> 12
To Buyer:
Dow Corning Corporation
3901 S. Saginaw Rd.
Midland, MI 48686-0995
Facsimile: (517) 496-1036
Attention: Purchasing Manager - James B. May
23. Arbitration. If a dispute arises under this Supply Agreement which
cannot be resolved by the personnel directly involved, either party may give
written notice to the other designating an executive officer with appropriate
authority to be its representative in negotiations relating to the dispute. Upon
receipt of this notice, the other party shall, within five (5) business days,
designate an executive officer with similar authority to be its representative.
The designated executive officers shall, following whatever investigation each
deems appropriate, promptly enter into discussions concerning the dispute. If
the dispute is not resolved as a result of such discussions within ninety (90)
days, such dispute shall be referred to final and binding arbitration in
accordance with the commercial rules of the American Arbitration Association.
Unless the parties agree otherwise in writing, such arbitration shall be held in
a mutually acceptable location. The expense of arbitration shall be borne
one-half (1/2) by Seller and one-half (1/2) by Buyer, unless otherwise specified
in the award. Each party shall pay the fees and expenses of its own counsel,
unless otherwise specified in the award.
24. Delivery/Scheduling. Seller shall deliver silicon metal to Buyer in
approximately equal quarterly quantities starting in the year 1998. Prior to the
beginning of each Calendar Year, Buyer shall provide Seller with a non-binding
estimate of the quantity of silicon metal that it will purchase hereunder during
each quarter of the following Calendar Year, which non-binding estimate shall be
updated on a quarterly basis during the year.
25. Purchase Orders. Buyer may issue purchase orders to Seller
hereunder for the silicon metal, for Buyer's administrative purposes only, and
no terms and conditions contained in such purchase orders which conflict with
anything in this Supply Agreement shall be effective as between Buyer and
Seller.
26. Packaging. If any change in the herein agreed upon packaging is
requested by Buyer, Seller shall package Products in accordance with
instructions from Buyer, at Buyer's expense.
27. Counterparts. This Agreement is executed in any number of
counterparts, each of which shall be deemed an original for all purposes, and
all of which together shall constitute one agreement.
- 10 -
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by representatives duly authorized as of the day and year first above
written.
WITNESS: SIMCALA, INC.
By: /s/ C.E. Boardwine
--------------------------------------
C.E. Boardwine
President and Chief Executive Officer
WITNESS: DOW CORNING CORPORATION
By: /s/ Robert P. Krasa
--------------------------------------
Robert P. Krasa
Vice President, General Manager,
CPBG
- 11 -
<PAGE> 1
EXHIBIT 10.19
[NationsBank Letterhead]
November 9, 1998
Simcala, Inc.
P.O. Box 68
Mt. Meigs, Alabama 36057-0068
Attn: Chief Financial Officers
RE: Credit Agreement dated as of March 31, 1998 (the "Credit
Agreement") among Simcala, Inc., the other Credit Parties
party thereto, the Lenders party thereto and NationsBank,
N.A., as Agent
Gentlemen:
Reference is made to the Credit Agreement described above, the defined terms of
which are incorporated herein by reference.
You have requested that the Consolidated Net Worth covenant appearing in Section
7.11(c) of the Credit Agreement be amended for the fiscal quarter ending
September 30, 1998.
Accordingly, on behalf of all of the Lenders, we hereby agree with you to amend
and restate Section 7.11(c) of the Credit Agreement in its entirety to read as
follows:
(c) Consolidated Net Worth. As of the last day of each fiscal
quarter of the Credit Parties, the Consolidated Net Worth of the
Borrower shall be greater than or equal to $18,000,000, increased on a
cumulative basis as of the end of each fiscal quarter of the Credit
Parties, commencing with the fiscal quarter ending June 30, 1998 by an
amount equal to 50% of Consolidated Net Income (to the extent positive)
for the fiscal quarter then ended; provided, however, that Consolidated
Net Worth for the fiscal quarter ended September 30, 1998 shall be
greater than or equal to $17,300,000.
This amendment shall become effective upon execution of this letter by the
parties hereto and the payment by the Borrower to the Agent, for the benefit of
the Lenders, of an amendment fee in the amount of $10,000.
All references in the Credit Agreement and the other Credit Documents to the
"Credit Agreement" shall be deemed to refer to the Credit Agreement as amended
hereby.
<PAGE> 2
Except as modified hereby, all of the terms and provisions of the Credit
Agreement and the other Credit Documents shall remain in full force and effect.
This letter agreement shall be governed by and construed in accordance with the
laws of the State of North Carolina.
This letter agreement may be executed in one or more counterparts, each of which
constitute an original, and all of which taken together shall constitute a
single document.
Sincerely,
NATIONSBANK, N.A.
By /s/ Curtis D. Lueker
-------------------------
Curtis D. Lueker
Assistant Vice President
ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN:
SIMCALA, INC.
By /s/ R. Myles Cowan
-------------------------------
Title: CFO
ACKNOWLEDGED AND CONSENTED TO AS OF THE DATE FIRST ABOVE WRITTEN:
SIMCALA HOLDINGS, INC.
By /s/ William A. Davies
-------------------------------
Title: Director
- 2 -
<PAGE> 1
EXHIBIT 10.20
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of January 25, 1999, is entered into by and among SIMCALA, INC. (the
"Borrower"), the guarantors identified as such on the signature pages attached
hereto (the "Guarantors;" collectively, the Borrower and the Guarantors are
referred to as the "Credit Parties"), the lenders identified as such on the
signature pages hereto (the "Lenders") and NATIONSBANK, N.A., as Agent (the
"Agent") for the Lenders.
RECITALS
A. The Borrower, the Guarantors, the Lenders and the Agent entered into
that certain Credit Agreement dated as of March 31, 1998, as amended by that
Amendment Letter dated November 9, 1998 (as so amended, the "Existing Credit
Agreement").
B. The Lenders have agreed to execute and deliver this Amendment on the
terms and conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
PART I
DEFINITIONS
SUBPART 1.1 GENERAL DEFINITIONS. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including the preamble
and recitals, have the meanings provided in the Existing Credit Agreement.
SUBPART 1.2 CERTAIN DEFINITIONS. Unless the context otherwise requires,
the following terms used in this Amendment shall have the indicated definitions:
"Amended Credit Agreement" means the Existing Credit Agreement as
amended hereby.
"Amendment No. 2 Effective Date" has the meaning ascribed to such term
in Part 4.1 of this Amendment.
- 1 -
<PAGE> 2
PART II
AMENDMENTS TO EXISTING CREDIT AGREEMENT
SUBPART 2.1 AMENDMENTS TO SECTION 1.1.
(a) The following definitions appearing in Section 1.1 of the
Existing Credit Agreement are hereby amended and restated to read as
follows:
"Applicable Percentage" means, for purposes of calculating the
applicable interest rate for any day for any Loan, the applicable rate
of the Unused Fee for any day for purposes of Section 3.5(b), the
applicable rate of the Standby Letter of Credit Fee for any day for
purposes of Section 3.5(c)(i) or the applicable rate of the Trade
Letter of Credit Fee for any day for purposes of Section 3.5(c)(ii),
the appropriate applicable percentage corresponding to the Total
Leverage Ratio in effect as of the most recent Calculation Date:
<TABLE>
<CAPTION>
========================================================================================================================
APPLICABLE APPLICABLE APPLICABLE APPLICABLE
TOTAL PERCENTAGE FOR PERCENTAGE FOR PERCENTAGE FOR PERCENTAGE FOR APPLICABLE
PRICING LEVERAGE EURODOLLAR BASE RATE STANDBY LETTER TRADE LETTER OF PERCENTAGE FOR
LEVEL RATIO LOANS LOANS OF CREDIT FEE CREDIT FEE COMMITMENT FEES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
I > 5.00 to 1.0 3.00% 2.00% 3.00% 1.00% .60%
------------------------------------------------------------------------------------------------------------------------
II < 5.00 to 1.0 2.25% 1.25% 2.25% .50% .50%
-
but > 3.75 to
1.0
------------------------------------------------------------------------------------------------------------------------
< 3.75 to 1.0
III - 2.00% 1.00% 2.00% .50% .50%
but > 2.50 to
1.0
------------------------------------------------------------------------------------------------------------------------
IV < 2.50 to 1.0 1.75% .75% 1.75% .50% .375%
-
========================================================================================================================
</TABLE>
The Applicable Percentages shall be determined and adjusted
quarterly on the date (each a "Calculation Date") five Business Days
after the earlier of (x) the date by which the Borrower is required to
provide the officer's certificate in accordance with the provisions of
Section 7.1(c) for the most recently ended fiscal quarter of the Credit
Parties or (y) the date such officer's certificate is actually
delivered to the Agent; provided, however, that (i) the initial
Applicable Percentages shall be based on Pricing Level I (as shown
above) and shall remain at Pricing Level I until the first Calculation
Date subsequent to December 30, 1998, and, thereafter, the Pricing
Level shall be determined by the Total Leverage Ratio as of the last
day of the most recently ended fiscal quarter of the Credit Parties
preceding the applicable Calculation Date, and (ii) if the Borrower
fails to provide the officer's certificate to the Agency Services
Address as required by Section 7.1(c) for the last day of the most
recently ended fiscal quarter of the Credit Parties preceding the
applicable Calculation Date, the Applicable Percentage from such
Calculation Date shall be based on Pricing Level I until such time as
an appropriate officer's certificate is provided, whereupon the Pricing
Level shall be determined by the Total Leverage Ratio as of the last
day of the most recently ended fiscal quarter of the Credit Parties
preceding such Calculation Date. Except as provided above, each
Applicable Percentage shall be effective from one Calculation Date
until the next Calculation Date. Any adjustment in the Applicable
Percentages shall be applicable to all existing Loans and Letters of
Credit as well as any new Loans and Letters of Credit made or issued.
The Applicable Percentage for the Standby Letter of Credit Fee
- 2 -
<PAGE> 3
for any standby Letter of Credit shall be 1.0% so long as such Letter
of Credit is cash-collateralized pursuant to Section 2.2(l).
"Collateral Documents" means a collective reference to the
Security Agreement, the Pledge Agreement, the Mortgage Instruments, the
Assignment of Cash Collateral Account and such other documents executed
and delivered in connection with the attachment and perfection of the
Agent's security interests and liens arising thereunder, including,
without limitation, UCC financing statements and patent and trademark
filings.
(b) A new definition of "Assignment of Cash Collateral Account is
hereby added to Section 1.1 of the Existing Credit Agreement in the appropriate
alphabetical order to read as follows:
"Assignment of Cash Collateral Account" means that Assignment
of Cash Collateral Account dated as of January 15, 1999 among the
Borrower and the Agent.
(c) The definition of "Consolidated Net Worth" appearing in Section 1.1
of the Existing Credit Agreement is hereby deleted.
SUBPART 2.2 AMENDMENT TO SECTION 2.2. A new clause (l) is added to
Section 2.2 of the Existing Credit Agreement immediately following clause (k),
which shall read as follows:
(l) Cash Collateral. Until such time as the Interest Coverage Ratio is
at least 1.50 to 1.0 for two consecutive fiscal quarters subsequent to December
31, 1999, the Borrower shall pay to the Agent cash, to be held by the Agent, for
the benefit of the Lenders, in a cash collateral account pursuant to the
Assignment of Cash Collateral Account as additional security for the LOC
Obligations in respect of drawings under all outstanding Letters of Credit in an
amount equal to the maximum aggregate amount which may be drawn under such
Letters of Credit. The Applicable Percentage otherwise in effect for the Standby
Letter of Credit Fee with respect to any standby Letter of Credit which is
cash-collateralized pursuant to this clause (l) shall be 1.0% for so long as
such Letter of Credit is cash-collateralized.
SUBPART 2.3 AMENDMENTS TO SECTION 7.1. Section 7.1(m) of the Existing
Credit Agreement is hereby renumbered as Section 7.1(n) and a new Section 7.1(m)
is added to the Existing Credit Agreement which reads as follows:
(m) Monthly Financial Statements. As soon as available, and in
any event within 30 days after the end of each fiscal month of the
Credit Parties, a consolidated balance sheet and income statement of
the Credit Parties as of the end of such fiscal month, together with
related consolidated statements of operations and retained earnings and
of cash flows for such fiscal month, in each case setting forth in
comparative form (i) consolidated figures for the corresponding period
of the preceding fiscal year and (ii) consolidated figures for the
corresponding period of the budget of the Credit Parties for the
current fiscal year, all such financial information described above to
be in a form satisfactory to the Agent.
- 3 -
<PAGE> 4
SUBPART 2.4 AMENDMENTS TO SECTION 7.11. Section 7.11 of the Existing
Credit Agreement is hereby amended and restated to read as follows:
7.11 FINANCIAL COVENANTS.
(a) Interest Coverage Ratio. The Interest Coverage Ratio, as of the
last day of each fiscal quarter of the Credit Parties, shall be greater than or
equal to:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fiscal Year March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1.50 1.50 1.50
- --------------------------------------------------------------------------------------------
1999 1.15 1.05 1.05 1.05
- --------------------------------------------------------------------------------------------
2000 1.00 1.00 1.00 1.00
- --------------------------------------------------------------------------------------------
2001 1.25 1.25 1.50 1.75
- --------------------------------------------------------------------------------------------
2002 1.75 1.75 1.75 2.00
- --------------------------------------------------------------------------------------------
thereafter 2.00
- --------------------------------------------------------------------------------------------
</TABLE>
(b) Net Leverage Ratio. The Credit Parties shall cause the Net Leverage
Ratio, as of the last day of each fiscal quarter of the Credit Parties, to be
less than or equal to:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fiscal Year March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 5.50 5.50 7.00
- --------------------------------------------------------------------------------------------
1999 7.25 8.25 8.50 9.25
- --------------------------------------------------------------------------------------------
2000 9.75 10.00 11.25 11.50
- --------------------------------------------------------------------------------------------
2001 8.75 7.50 6.50 5.50
- --------------------------------------------------------------------------------------------
2002 5.50 5.50 5.50 5.00
- --------------------------------------------------------------------------------------------
thereafter 5.00
- --------------------------------------------------------------------------------------------
</TABLE>
(c) Minimum Consolidated EBITDA. At all times the Consolidated EBITDA,
as of the last day of each fiscal quarter of the Credit Parties, shall be
greater than or equal to:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fiscal Year March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 9,500,000
- --------------------------------------------------------------------------------------------
1999 $ 9,000,000 $ 8,100,000 $ 8,100,000 $ 7,800,000
- --------------------------------------------------------------------------------------------
2000 $ 7,800,000 $ 7,800,000 $ 7,800,000 $ 7,800,000
- --------------------------------------------------------------------------------------------
2001 $10,200,000 $12,100,000 $13,700,000 $16,100,000
- --------------------------------------------------------------------------------------------
2002 $16,100,000 $16,100,000 $16,100,000 $17,200,000
- --------------------------------------------------------------------------------------------
thereafter $17,200,000
- --------------------------------------------------------------------------------------------
</TABLE>
- 4 -
<PAGE> 5
PART III
REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES
Each Credit Party hereby represents and warrants to the Agent and to
each Lender that:
(i) each of the representations and warranties of the
Borrower contained in the Amended Credit Agreement or in any
other Credit Document is true as of the date hereof (after
giving effect to this Amendment);
(ii) after giving effect to this Amendment, no
Default or Event of Default exists and is continuing under the
Amended Credit Agreement;
(iii) since the date of the last financial statements
of the Borrower delivered to Lenders, no material adverse
change has occurred in the business, financial condition,
operations or prospects of the Consolidated Parties other than
as previously disclosed to the Lenders; and
(iv) no consent, approval, authorization or order of
, or filing, registration or qualification with, any court or
governmental authority or third party is required in
connection with the execution, delivery or performance by such
Person of this Amendment.
PART IV
CONDITIONS TO EFFECTIVENESS
SUBPART 4.1. EFFECTIVE TIME OF AMENDMENT. This Amendment shall be and
become effective as of the first Business Day upon which each of the conditions
set forth in this Subpart 4.1 shall have been completed to the satisfaction of
the Agent and the Required Lenders (the "Amendment No. 2 Effective Date").
SUBPART 4.1. EXECUTION OF AMENDMENT. The Agent shall have received
counterparts (or other evidence of execution, including telephonic message,
satisfactory to the Agent) of the due execution of this Amendment on behalf of
the Credit Parties and the Required Lenders.
SUBPART 4.2. AMENDMENT FEES. The Agent shall have received from the
Borrower, on the Amendment No. 2 Effective Date, for the account of each Lender,
in immediately available funds, an amendment fee of 0.25% of each Lender's
Commitment.
SUBPART 4.4. ASSIGNMENT OF CASH COLLATERAL ACCOUNT. The Agent shall
have received executed counterparts of the Assignment of Cash Collateral Account
in form of Exhibit A hereto.
SUBPART 4.4. OTHER DOCUMENTS. The Agent shall have received such other
documents relating to the transactions contemplated hereby as the Agent or
counsel to the Agent may reasonably request of the Borrower in writing on or
before the Amendment No. 2 Effective Date.
- 5 -
<PAGE> 6
SUBPART 4.5. EXPENSES OF AGENT. The Borrower shall have reimbursed the
Agent for all reasonable out-of-pocket expenses of the Agent , including without
limitation, all reasonable fees and expenses of its attorneys, incurred in
connection with the negotiation, preparation or execution of this Amendment.
PART V
MISCELLANEOUS
SUBPART 5.1 FURTHER ASSURANCES. As soon as practicable after receipt of
a written request from the Agent, and in any event not later than 30 days from
the date such request is received by the Borrower, the Credit Parties shall
cause to be delivered to the Agent, in form and content reasonably satisfactory
to the Agent, all documents or other instruments incident to the transactions
contemplated by this Agreement in the reasonable judgment of the Agent.
SUBPART 5.2. REFERENCES. References in this Amendment to any Part or
Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment. As of the Amendment No. 2 Effective Date, all references in the
Credit Documents to the "Credit Agreement" shall be deemed to refer to such
document as amended by this Amendment.
SUBPART 5.3. COUNTERPARTS. This Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which constitute together one and the same agreement.
SUBPART 5.4. GOVERNING LAW. This Amendment shall be deemed to be a
contract made under and governed by the internal laws and judicial decisions of
the State of North Carolina without giving effect to the conflict of law
principles thereof.
SUBPART 5.5. SUCCESSORS AND ASSIGNS. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SUBPART 5.6. ENTIRE AGREEMENT. The Amended Credit Agreement, this
Amendment, and the other Credit Documents, as amended hereby, constitute the
entire contract among the parties relative to the subject matter hereof.
SUBPART 5.7. NO OTHER CHANGES. Except as expressly modified and amended
in this Agreement, all of the terms, provisions and conditions of the Credit
Documents shall remain unchanged.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
BORROWER: SIMCALA, INC.,
a Delaware corporation
By: /s/ C. E. Boardwine
--------------------------------------
Name: C. E. Boardwine
Title: Pres/CEO
GUARANTOR: SIMCALA HOLDINGS, INC.,
a Georgia corporation
By: /s/ William A. Davies
--------------------------------------
Name: William A. Davies
Title: Director
LENDERS: NATIONSBANK, N.A., individually as a Lender
and in its capacity as Agent
By: /s/ Curtis D. Lueker
--------------------------------------
Name: Curtis D. Lueker
Title: Assistant Vice President
- 7 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,652,789
<SECURITIES> 0
<RECEIVABLES> 6,126,286
<ALLOWANCES> 0
<INVENTORY> 3,416,277
<CURRENT-ASSETS> 24,467,465
<PP&E> 55,779,695
<DEPRECIATION> (2,974,138)
<TOTAL-ASSETS> 115,525,623
<CURRENT-LIABILITIES> 6,090,354
<BONDS> 81,000,000
0
0
<COMMON> 109
<OTHER-SE> 16,584,487
<TOTAL-LIABILITY-AND-EQUITY> 115,525,623
<SALES> 40,802,907
<TOTAL-REVENUES> 40,802,907
<CGS> 36,906,111
<TOTAL-COSTS> 36,906,111
<OTHER-EXPENSES> 1,848,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,776,761
<INCOME-PRETAX> (2,714,742)
<INCOME-TAX> (492,338)
<INCOME-CONTINUING> (2,222,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,222,404)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
