ITEM 3. LEGAL PROCEEDINGS.
Metallurg Holdings is not party to any legal proceedings. Metallurg, Inc. and certain of its subsidiaries are parties to a variety of legal proceedings relating to their operations. The ultimate legal and financial liability of Metallurg in respect of all legal proceedings in which it is involved cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management does not expect that the ultimate outcome of these contingencies, net of liabilities already accrued in Metallurg's Consolidated Balance Sheet, will have a material adverse effect on Metallurg's consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on Metallurg's results of operations and/or cash flows for that period. For discussion of environmental matters, see "Items 1 and 2. Business and Properties -- Environmental Matters."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended January 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
METALLURG HOLDINGS
Metallurg Holdings issued no securities during 1999.
There is no public trading market for Metallurg Holdings' equity securities.
Metallurg Holdings does not presently intend to pay any dividends, although it may choose to do so in the future. Metallurg Holdings is restricted from paying dividends to its shareholders as a result of the indenture for the Senior Discount Notes, which, in general, prohibits Metallurg Holdings from making dividends in an amount greater than 50% of its consolidated net income, as defined in the indenture.
Metallurg Holdings is a holding company with limited operations of its own. Substantially all of Metallurg Holdings' operating income is generated by Metallurg. As a result, Metallurg Holdings will rely upon distributions or advances from Metallurg, Inc. to provide the funds necessary to meet its debt service obligations.
METALLURG
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led by Safeguard International. See "Note 2. Acquisition Transactions" to the Company's Consolidated Financial Statements. There is no public trading market for Metallurg, Inc.'s equity securities.
On November 20, 1998, the Board of Directors of Metallurg, Inc. (the "Board") adopted the Metallurg, Inc. 1998 Equity Compensation Plan (the "ECP"), to provide (i) designated employees of Metallurg, Inc. and its subsidiaries, (ii) certain Key Advisors, as defined in the plan, who perform services for Metallurg, Inc. or its subsidiaries, and (iii) non-employee members of the Board with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and performance units. Under the ECP, 500,000 shares of common stock were made available for stock awards and stock options. Metallurg believes that the ECP will encourage the participants to contribute materially to the growth of Metallurg, thereby benefiting Metallurg's shareholders, and will align the economic interests of the participants with those of the shareholders. Pursuant to the ECP, the Board has awarded to eligible executives and non-employee Board members options to purchase an aggregate of 434,500 shares of common stock, net of cancellations, at an exercise price of $30.00 per share, in 1998 and 1999. Such options have a term of ten years and vest in virtually all cases 20% on the date of grant and 20% on each of the first four anniversaries of the date of grant.
Metallurg, Inc. issued no securities during 1999, other than stock options.
Metallurg, Inc. does not presently intend to pay any dividends, although it may choose to do so in the future. Metallurg, Inc., is restricted from paying dividends to its shareholders as a result of the indenture for the Senior Notes, which, in general, prohibits Metallurg, Inc. from making dividends in an amount greater than 50% of its net income, as defined in the indenture. In addition, Metallurg, Inc.'s revolving credit facility with Fleet National Bank (formerly known as BankBoston, N.A.) limits the payment of dividends.
Metallurg, Inc. is a holding company with limited operations of its own. Substantially all of Metallurg, Inc.'s operating income is generated by its subsidiaries. As a result, Metallurg, Inc. will rely upon distributions or advances from its subsidiaries to provide the funds necessary to meet its debt service obligations. In some cases, however, Metallurg, Inc.'s subsidiaries are restricted in their ability to pay dividends. Metallurg, Inc.'s Turkish subsidiary is limited in its ability to pay dividends from retained earnings, as a result of historical currency devaluation. In addition, working capital facilities and other financing arrangements at Metallurg, Inc.'s subsidiaries restrict such subsidiaries' ability to pay dividends. For example, EWW must obtain the consent of a German governmental authority, which guarantees a portion of EWW's DM 15 million (approximately $7.8 million) working capital facility, in order to pay dividends to Metallurg, Inc. EWW's ability to pay dividends to Metallurg, Inc. is also restricted by the terms of a settlement arrangement entered into with a German state pension board with regard to its pension liability. The stock of EWW has been pledged to secure obligations owed by EWW to the German governmental authority and the German state pension board. LSM is party to a working capital facility which limits its ability to pay dividends in an amount of up to 100% of LSM's annual net income. In addition, Metallurg, Inc.'s Swiss marketing subsidiary may only pay dividends to Metallurg, Inc. in amounts up to 50% of its net income.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected historical financial data of the Company for the period June 10, 1998 (inception) to January 31, 1999 and the year ended January 31, 2000. The Company's results of operations and financial position reflect the acquisition of Metallurg, Inc. on July 13, 1998. The acquisition was accounted for as a purchase and accordingly, the Company's consolidated financial statements are not directly comparable to prior period financial data presented herein. Also presented are selected historical financial data of Metallurg for the years ended December 31, 1995 and 1996, the quarter ended March 31, 1997, the three quarters ended January 31, 1998 and the years ended January 31, 1999 and 2000.
Information as of and for the years ended December 31, 1995 and 1996 is derived from the consolidated financial statements of Metallurg, which have been audited by Deloitte & Touche LLP, independent public accountants. The information as of March 31, 1997 and January 31, 1998, and for the quarter ended March 31, 1997 and the three quarters ended January 31, 1998 is derived from the consolidated financial statements of Metallurg, included elsewhere herein, which have been audited by Deloitte & Touche LLP, independent public accountants.
The information as of and for the years ended January 31, 1999 and 2000 is derived from the consolidated financial statements of the Company and Metallurg, included elsewhere herein, which have been audited by PricewaterhouseCoopers LLP, independent accountants.
Financial information contained herein for periods after March 31, 1997 reflects the effects of the Reorganization Plan, including the implementation of fresh-start reporting, as of March 31, 1997. Accordingly, Metallurg's consolidated financial statements for periods and dates prior to March 31, 1997 are not directly comparable to subsequent consolidated financial statements. The results of operations for the quarter ended March 31, 1997 and the three quarters ended January 31, 1998 are not necessarily indicative of results for the full year. The information in this table should be read in conjunction with "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto of the Company and Metallurg included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
Certain matters discussed under the captions "Business and Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K may constitute forward-looking statements for purposes of Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Factors which may cause the Company's results to be materially different include the cyclical nature of Metallurg's business, Metallurg's dependence on foreign customers (particularly customers in Europe), the economic strength of Metallurg's markets generally and particularly the strength of the demand for iron, steel, aluminum and superalloys and titanium alloy industries in those markets, the accuracy of Metallurg's estimates of the costs of environmental remediation and the extension or expiration of existing anti-dumping duties.
OVERVIEW
Metallurg Holdings was formed on June 10, 1998 and is owned by Safeguard International (an international private equity fund that invests primarily in equity securities of companies in process industries), certain limited partners of Safeguard International, certain individuals and a private equity fund which is associated with Safeguard International. As Metallurg Holdings is a holding company and does not have any material operations or assets other than the ownership of Metallurg, Inc., the following discussions of the Company's results of operations relates to Metallurg, unless otherwise indicated.
Metallurg is a leading international producer and seller of high quality metal alloys and specialty metals used by manufacturers of steel, aluminum, superalloys, titanium alloys, chemicals and other metal consuming industries. The industries that Metallurg supplies are cyclical. See "Items 1 and 2. Business and Properties -- Products and Markets". Throughout 1997 and into 1998, market conditions for most of Metallurg's products were favorable. However, sales prices and demand for several of Metallurg's major products declined during the second half of 1998 and into 1999. Metallurg believes that the price declines were the result of economic turmoil seen in Asia, Latin America and Russia in 1997 and 1998. In the steel industry, this led to lower production almost everywhere except in the U.S. during the first half of 1998. In the second half of 1998, Japan, Russia, Brazil and some other Asian countries exported large volumes of steel to the U.S., causing domestic production to be drastically curtailed in the latter months of 1998. The import problems that beset the U.S. steel industry in 1998 and early 1999 have eased and steel production and demand have improved here and throughout the rest of the world. U.S. steel production is recently back to the peak levels of the first half of 1998, and worldwide stainless steel growth is particularly strong at present. In the aerospace sector, civilian airliner deliveries for 1998 fell substantially below the level previously forecast by one major producer and the production plans for subsequent years were scaled back in response to order postponements and cancellations as Trans-Pacific and Asian air passenger volumes contracted sharply. Furthermore, Asian demand for corrosion resistant materials for major capital projects also fell sharply due to the economic and financial difficulties in the region. These factors contributed to lower sales of Metallurg's products to the superalloy and titanium alloy industries, which continue to hold excessive inventories, particularly of their aerospace related products. However, the outlook for the superalloy industry is improving as the industry prepares to meet significant demand for the construction of land based turbines during the period 2000-2003, and Metallurg is seeing stronger demand, starting in the fourth quarter of 1999, for certain of its related products. The aluminum industry had sustained satisfactory levels of demand for Metallurg's products throughout 1998 and 1999 and is expected to experience modest growth in the foreseeable future.
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led by Safeguard International. See "Note 2. Acquisition Transactions" to the Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS -- METALLURG HOLDINGS
The Company's results of operations for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999 include the results of Metallurg Holdings and Metallurg Inc. for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999, respectively, and of the operating subsidiaries for the year ended December 31, 1999 and the period June 10, 1998 (inception) to December 31, 1998, respectively. The consolidated balance sheet data of the Company at January 31, 2000 and 1999 reflect the financial position of Metallurg Holdings and Metallurg, Inc. at January 31, 2000 and 1999, respectively, and of the operating subsidiaries at December 31, 1999 and 1998, respectively.
YEAR ENDED JANUARY 31, 2000 AND THE PERIOD JUNE 10, 1998 (INCEPTION) TO JANUARY 31, 1999
The net loss of $33.2 million for the year ended January 31, 2000, includes the consolidation of Metallurg (a loss of $18.7 million), $9.2 million of interest expense on its Senior Discount Notes, $5.4 million of amortization of acquisition, goodwill and deferred issuance costs, $0.1 million of general overhead costs and $0.2 million of interest income.
The net loss of $15.5 million for the period June 10, 1998 (inception) to January 31, 1999, includes the consolidation of Metallurg for the period subsequent to the acquisition (a loss of $7.9 million, which excludes certain Merger-related costs of $3.5 million, relating to the cancellation of compensatory stock options, which were accounted for as purchase price by Metallurg Holdings), $4.5 million of interest expense on its Senior Discount Notes, $2.9 million of amortization of acquisition, goodwill and deferred issuance costs and $0.2 million of general overhead costs.
RESULTS OF OPERATIONS -- METALLURG
As a result of Metallurg, Inc.'s change in its fiscal year from a calendar year to January 31, effective as of April 1, 1997, the consolidated operating results of Metallurg for the fiscal years ending January 31, 2000 and 1999 include the results of Metallurg, Inc., the parent holding company, for the years ended January 31, 2000 and 1999, respectively, and the results of its operating subsidiaries (whose fiscal years remain the calendar year) for the years ended December 31, 1999 and 1998, respectively. The consolidated balance sheet data of Metallurg at January 31, 2000 and 1999 reflect the financial position of Metallurg, Inc. at January 31, 2000 and 1999, respectively, and of the operating subsidiaries at December 31, 1999 and 1998, respectively. The consolidated operating results of Metallurg for the four quarters ended January 31, 1998 include the results of Metallurg, Inc. for the thirteen months ended January 31, 1998 and the results of its operating subsidiaries for the year ended December 31, 1997. The consolidated balance sheet data of Metallurg at January 31, 1998 reflect the financial position of Metallurg, Inc. at January 31, 1998 and of the operating subsidiaries at December 31, 1997.
Effective March 31, 1997, Metallurg implemented fresh-start reporting relating to its emergence from bankruptcy. Accordingly, all assets and liabilities were restated to reflect their respective fair values and the consolidated financial statements after that date are those of a new reporting entity and are not directly comparable to the pre-confirmation periods. The amounts presented below for Metallurg for the four quarters ended January 31, 1998 represent the mathematical addition of the historical amounts for the predecessor company and the reorganized company only for purposes of the discussion below. Significant differences between periods due to fresh-start reporting adjustments are explained below, when necessary.
YEAR ENDED JANUARY 31, 2000 COMPARED TO THE YEAR ENDED JANUARY 31, 1999
Shieldalloy's revenues decreased $66.8 million, or 34.9%, below 1998. As a result of the lower output of the U.S. steel industry, reduced volume and selling prices of ferrovanadium during 1999 resulted in a decrease in revenues of approximately $30 million. The majority of the remaining decline is attributable to lower volume and selling prices of ferrosilicon, chrome metal and low carbon ferrochrome resulting from lower demand from the steel and superalloy industries.
Metallurg's European units were all affected negatively by oversupply of materials in the aerospace industry supply chain discussed earlier and weak production levels in the European steel industry. LSM's revenues were $23.4 million, or 13.6%, below 1998 due primarily to decreased volume of ferrotitanium and chromium metal sales. GfE's revenues were $44.3 million, or 34.1%, below 1998 due primarily to decreased selling prices and volumes of vanadium aluminum and other titanium masteralloys, ferroniobium, ferrovanadium and chrome products. Revenues of EWW were $14.9 million, or 31.2%, below the first three quarters of 1998 due primarily to reduced demand for low carbon ferrochrome.
Gross margins decreased from $81.3 million in the year ended January 31, 1999 to $51.2 million in the year ended January 31, 2000, a decrease of 37.0%, due principally to price and volume decreases in ferrovanadium, ferrotitanium, chromium and low carbon ferrochrome. Gross margins also reflect lower of cost or market inventory provisions of approximately $6.4 million relating to Shieldalloy's ferrovanadium products. The values of Metallurg's assets were reduced pursuant to fresh-start reporting, reducing depreciation expense by $1.1 million and $1.4 million in the years ended January 31, 2000 and 1999, respectively, and increasing gross margins by equal amounts.
Selling, general and administrative expenses ("SG&A") decreased from $58.6 million in the year ended January 31, 1999 to $54.7 million in the year ended January 31, 2000, a decrease of 6.7%, due principally to
lower compensation costs. For the year ended January 31, 2000, SG&A represented 11.6% of Metallurg's sales compared to 9.7% for the year ended January 31, 1999.
In June 1999, Shieldalloy recognized an environmental expense recovery of $5.5 million upon settlement with an insurance company relating to coverage for certain environmental claims stemming from the 1960's and forward. These claims relate mostly to the historical costs of remedial activities at Shieldalloy's Newfield, New Jersey site.
During the second quarter of 1999, Metallurg initiated a restructuring program. The restructuring is intended to reduce Metallurg's cost structure, to streamline management and production technical functions and focus resources in support of higher margin products at core production units. The restructuring plan includes the discontinuation of certain production activities, termination of employees, a facility closing and the write-down of certain redundant plant and equipment and related spare parts and supplies. The restructuring predominately affects Metallurg's operations in Europe. As a result of the restructuring and other cost reduction initiatives, including the reduction of certain distribution activities, Metallurg expects to reduce its workforce by over 180 employees and generate cost savings of about $9-10 million annually in future periods. See "Note 5. Restructuring" to the Company's Consolidated Financial Statements.
Operating income decreased from $14.8 million in the year ended January 31, 1999 to a loss of $4.5 million in the year ended January 31, 2000. The decrease in operating income reflected the decrease in gross margin and restructuring charges of $6.5 million, offset somewhat by lower SG&A expenses and the environmental recovery of $5.5 million, as discussed above.
Interest income (expense), net is as follows (in thousands):
Interest expense, net, increased by $0.5 million reflecting higher effective interest rates and increased external borrowing levels.
Income tax provision, net of tax benefits, is as follows (in thousands):
The differences between the statutory Federal income tax rate and Metallurg's effective rate result primarily because of: (i) the U.S. taxability of foreign dividends; (ii) the excess of the statutory Federal income tax rate over foreign tax rates: (iii) certain deductible temporary differences which, in other circumstances would have generated a deferred tax benefit, have been fully provided for in a valuation allowance; (iv) the deferred tax effects of certain tax assets, primarily foreign net operating losses, for which the benefit had been previously recognized approximating $0.3 million in the year ended January 31, 2000; and (v) the deferred tax effects of certain deferred tax assets which a corresponding credit has been recorded to "Additional paid-in capital" approximately $1.0 million in the year ended January 31, 2000. The deferred tax expenses referred to in items (iv) and (v) above will not result in cash payments in future periods. See "Note 12. Income Taxes" to the Company's Consolidated Financial Statements.
Net income decreased from $1.9 million for the year ended January 31, 1999 to a net loss of $18.7 million for the year ended January 31, 2000. The decrease in the current year results mostly from reduced gross margins and the restructuring charges noted above.
YEAR ENDED JANUARY 31, 1999 COMPARED TO THE FOUR QUARTERS ENDED JANUARY 31,
Total revenues decreased by 4.0%, from $632.6 million in the four quarters ended January 31, 1998 to $607.2 million in the year ended January 31, 1999. Although volume and selling prices of ferrovanadium increased significantly in the first half of 1998, market prices then declined by over 30% in the fourth quarter of 1998, reducing the overall growth in revenues from ferrovanadium sales during the year. Revenues from sales of chromium metal increased in the year ended January 31, 1999, due primarily to increased volume. These increases were more than offset, however, by a reduction in sales of low carbon ferrochrome, ferroboron, aluminum master alloys and compacted products, due primarily to lower volumes. Revenues from sales of products not produced by Metallurg, primarily cobalt, silicon and manganese products, also declined during this period, due primarily to lower volumes.
Gross margins decreased from $88.5 million in the four quarters ended January 31, 1998 to $81.3 million in the year ended January 31, 1999, a decrease of 8.1%, due principally to the decreases in low carbon ferrochrome margins resulting from lower selling prices and less favorable product mix. In aluminum master alloys and compacted products, a decrease in volume was more than offset by improvements in product mix and cost reductions. Gross margins also reflect lower of cost or market inventory provisions of approximately $7.9 million relating to ferrovanadium and several chrome products, which Metallurg recognized during the last two quarters ended January 31, 1999. The values of Metallurg's assets were reduced pursuant to fresh-start reporting, reducing depreciation expense by $1.4 million and $1.1 million in the year ended January 31, 1999 and the four quarters ended January 31, 1998, respectively, and increasing gross margins by equal amounts.
SG&A were comparable in the two periods. For the four quarters ended January 31, 1998, SG&A represented 9.3% of Metallurg's sales compared to 9.7% for the year ended January 31, 1999.
Operating income decreased from $29.9 million in the four quarters ended January 31, 1998 to $14.8 million in the year ended January 31, 1999, a decrease of 50.5%. The decrease in operating income reflected the decrease in gross margin, discussed above, as well as Merger-related costs of $7.9 million incurred in the year ended January 31, 1999. These Merger-related costs included: (i) $3.5 million for payments to cancel compensatory options; (ii) $0.6 million in consent fees incurred in order to obtain a one-time waiver of the change of control provisions of the indenture with regard to Metallurg, Inc.'s Senior Notes and to amend the indenture to reflect the post-Merger ownership of Metallurg, Inc.; (iii) $2.8 million for payments made pursuant to existing employment agreements with Metallurg, Inc. management; and (iv) approximately $1.0 million of other Merger-related costs.
Interest income (expense), net is as follows (in thousands):
Interest expense increased significantly in the year ended January 31, 1999, as Metallurg, Inc. accrued approximately $11 million of interest expense on its $100 million aggregate principal amount of Senior Notes, which were issued in November 1997. Metallurg, Inc. used a portion of the proceeds from the Senior Notes to retire $39.5 million of the then outstanding 12% senior-secured notes of Metallurg, Inc. due 2007. In the four quarters ended January 31, 1998, Metallurg, Inc. accrued approximately $4.6 million of interest expense on these 12% senior-secured notes and approximately $2.0 million of interest expense on the Senior Notes. Metallurg, Inc. did not accrue interest on debt incurred prior to entering Chapter 11 proceedings. As a result,
approximately $2.1 million of contractual interest on these unsecured obligations, which were reported as part of liabilities subject to compromise, was not reflected in the quarter ended March 31, 1997.
Income tax provision, net of tax benefits, is as follows (in thousands):
The differences between the statutory Federal income tax rate and Metallurg's effective rate result primarily because of: (i) the U.S. taxability of foreign dividends; (ii) the excess of the statutory Federal income tax rate over foreign tax rates; (iii) certain deductible temporary differences which, in other circumstances would have generated a deferred tax benefit, have been fully provided for in a valuation allowance; (iv) the deferred tax effects of certain tax assets, primarily foreign net operating losses, for which the benefit had been previously recognized approximating $0.1 million in the year ended January 31, 1999; and (v) the deferred tax effects of certain deferred tax assets for which a corresponding credit has been recorded to "Additional paid-in capital" approximating $0.7 million the year ended January 31, 1999. The deferred tax expenses referred to in items (iv) and (v) above will not result in cash payments in future periods.
Net income decreased from $64.2 million for the four quarters ended January 31, 1998 to $1.9 million for the year ended January 31, 1999. Included in prior year net income is an extraordinary item of $42.2 million, representing primarily the cancellation of debt resulting from the consummation of Metallurg's Reorganization Plan, and a $5.1 million credit, representing the effects of revaluing Metallurg's assets and liabilities under fresh-start reporting. In addition, other income included gains on the sales of Metallurg, Inc.'s New York office building and of certain plant assets of GfE totaling $4.4 million. The decrease in the current year results from reduced gross margins, Merger-related costs and increased interest expenses, is noted above.
FOUR QUARTERS ENDED JANUARY 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
Total revenues for Metallurg, Inc. and its subsidiaries decreased from $650.0 million in the year ended December 31, 1996 to $632.6 million in the four quarters ended January 31, 1998, a decrease of 2.7%. Sales attributable to Frankel Metal Company ("FMC"), Metallurg's former titanium scrap processing subsidiary, accounted for a decrease of $10.3 million. Reduced volumes and selling prices for manganese and ferrosilicon products in the U.S., resulting from strong competition and lack of supply at competitive prices, respectively, accounted for a decrease in sales. In addition, sales of low carbon ferrochrome declined as customers slowed down their buying in the quarter ended January 31, 1998. Offsetting this decrease, however, were increased volumes and selling prices for ferrovanadium and ferrotitanium, resulting from a strong steel market. In addition, the installation in 1997 of a new plant for the production of chromium metal in the UK contributed to an increase in sales.
Gross margins increased from $83.5 million in the year ended December 31, 1996 to $88.5 million in the four quarters ended January 31, 1998, an increase of 6.0%. Increases in volumes and selling prices of ferrovanadium and ferrotitanium, as discussed above, accounted for much of the increase. Although Metallurg's UK aluminum powder producing division recorded decreased sales in the four quarters ended January 31, 1998 compared to the year ended December 31, 1996, margins relating to such division increased due to a change in product mix. The values of Metallurg's assets were reduced pursuant to fresh-start reporting, reducing depreciation expense in the four quarters ended January 31, 1998 by $1.1 million and increasing gross margin by an equal amount. Gross margins related to ferrosilicon products, however, declined as a result of reduced volumes and selling prices, as discussed above. In aluminum master alloys and compacted products, increased volumes improved production variances and significantly offset a decrease in margins at Metallurg's UK operations caused by the impact of a strong British pound. Gross margins related to FMC accounted for a further decrease in gross margins of $1.6 million during this period.
SG&A increased from $57.1 million in the year ended December 31, 1996 to $58.6 million in the four quarters ended January 31, 1998, an increase of 2.6%. For the year ended December 31, 1996, SG&A represented 8.8% of Metallurg's sales compared to 9.3% for the four quarters ended January 31, 1998. SG&A increased principally as a result of increased bonus accruals and awards under the Stock Award and Stock Option Plan of Metallurg, Inc. incurred in connection with the consummation of the Reorganization Plan, additional costs related to the audit of the March 31, 1997 financial statements and the inclusion of an extra month of Metallurg, Inc.'s operations.
Operating loss was $11.2 million in the year ended December 31, 1996, compared to operating income of $29.9 million in the four quarters ended January 31, 1998. The loss in 1996 was due principally to an environmental provision of $37.6 million, representing the anticipated future costs of remediation and maintenance of various environmental projects, primarily at Shieldalloy. The improvement resulted from an increase in margins on sales of ferrovanadium, ferrotitanium and aluminum powders due to the strength of the steel, superalloy and chemical industries, partially offset by a decrease in margins on aluminum master alloys and briquettes resulting from a highly competitive marketplace. Operating income for the year ended December 31, 1996 included $1.5 million of environmental expenses related to the operation of the water remediation facility at Metallurg's Newfield, New Jersey site. As a result of Metallurg's adoption of the American Institute of Certified Public Accountants' Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities", operating income in the four quarters ended January 31, 1998 does not include such water remediation expenses. In addition, as discussed above, as a result of the change of the holding company's fiscal year, operating income of $29.9 million in the four quarters ended January 31, 1998 included approximately $0.4 million of expenses related to the operations of the holding company for the month of January 1998.
Interest income (expense), net is as follows (in thousands):
Interest expense increased in the four quarters ended January 31, 1998, as Metallurg, Inc. recognized interest expense of $4.6 million on its 12% senior-secured notes through November 1997 and accrued interest expense of $2.0 million on its Senior Notes which were issued in November 1997. As a result of the change in the fiscal year, the four quarters ended January 31, 1998 contain an additional month of interest expense of approximately $0.9 million. Metallurg, Inc. did not accrue interest on debt incurred prior to entering Chapter 11 proceedings and therefore, approximately $2.1 million and $8.6 million of contractual interest on these unsecured obligations, which were reported as part of liabilities subject to compromise, were not reflected in the four quarters ended January 31, 1998 and the year ended December 31, 1996, respectively.
Income tax provision, net of tax benefits is as follows (in thousands):
The differences between the statutory Federal income tax rate and Metallurg's effective rate are principally due to: (i) the excess of foreign tax rates over the statutory Federal income tax rate; (ii) certain deductible temporary differences which, in the absence of fresh-start reporting would have generated a
deferred tax benefit, have been fully provided for in a valuation allowance; (iii) the deferred tax effects of certain tax assets, primarily foreign net operating losses, for which the benefit had been previously recognized approximating $2.3 million in the four quarters ended January 31, 1998 and (iv) the deferred tax effects of certain deferred tax assets for which a corresponding credit has been recorded to "Additional paid-in capital" approximating $2.9 million in the four quarters ended January 31, 1998. The deferred tax expenses referred to in items (iii) and (iv) above will not result in cash payments in future periods.
Net income was $64.2 million for the four quarters ended January 31, 1998 compared to a loss of $28.5 million for the year ended December 31, 1996 due primarily to an extraordinary item of $42.2 million, representing the cancellation of debt resulting from the consummation of Metallurg's Reorganization Plan, and a $5.1 million credit, representing the effects of revaluing Metallurg's assets and liabilities under fresh-start reporting. Net income for the four quarters ended January 31, 1998 included a loss of approximately $1.2 million related to the operations of Metallurg, Inc. for the month of January 1998. Reorganization expenses for the year ended December 31, 1996 totaled $3.5 million compared to $2.7 million in the four quarters ended January 31, 1998. In the four quarters ended January 31, 1998, other income included gains on the sales of Metallurg, Inc.'s New York office building and of certain plant assets of GfE. In the year ended December 31, 1996, other income included an additional gain on the sale of land in Turkey.
LIQUIDITY AND FINANCIAL RESOURCES
General. The Company's sources of liquidity include cash and cash equivalents, cash from operations and amounts available under credit facilities. At January 31, 2000, the Company had $59.8 million in cash equivalents and working capital of $137.2 million as compared to $38.4 million and $166.8 million, respectively, at January 31, 1999. For the year ended January 31, 2000, the Company generated $35.5 million in cash from operations.
On October 29, 1999, Metallurg, Inc., Shieldalloy, and certain of their subsidiaries (the "Borrowers") renewed their existing credit facility with certain financial institutions led by Fleet National Bank as agent (the "Revolving Credit Facility") for a term of five years. The Revolving Credit Facility permits borrowings of up to $50.0 million for working capital requirements and general corporate purposes, up to $35.0 million of which may be used for letters of credit in the U.S. Pursuant to the Revolving Credit Facility, Fleet National Bank, through its London office, is providing up to DM 20.5 million (approximately $10.6 million) of financing to GfE, which is guaranteed by the Borrowers and certain U.S. subsidiaries.
On September 10, 1999, LSM entered into a term loan facility with HSBC Bank plc (formerly known as Midland Bank plc) in the amount of L6.0 million (approximately $9.7 million), the proceeds of which are to be used to finance capital expenditures. This facility, which is unsecured, expires in December 2006. Quarterly repayments commence in December 2002 and outstanding loans under the facility bear interest at LIBOR plus 1.0%.
In addition, several of the other foreign subsidiaries of Metallurg, Inc. have term loans and credit facility arrangements with local banking institutions to provide funds for working capital and general corporate purposes. These term loans and local credit facilities contain restrictions that vary from company to company and, in certain circumstances, local law and such restrictions limit the subsidiaries' ability to pay dividends to Metallurg, Inc.
See "Note 10. Borrowings" to the Company's Consolidated Financial Statements.
The Company believes that these sources are sufficient to fund the current and anticipated future requirements of working capital, capital expenditures, pension benefits, potential acquisitions and environmental expenditures through at least January 31, 2001.
Capital Expenditures. Metallurg invested $13.9 million in capital projects during the year ended January 31, 2000. Metallurg's capital expenditures include projects related to improving Metallurg's operations, productivity improvements, replacement projects and ongoing environmental requirements (which are in addition to expenditures discussed in "Environmental Remediation Costs"). Capital expenditures are budgeted to increase significantly over prior year levels to approximately $25 million in the year ended
January 31, 2001, including $19 million of capital investments which Metallurg believes will result in decreased costs of production, improved efficiency and expanded production capacities. The remaining capital expenditures planned are primarily for replacement and major repairs of existing facilities. Although Metallurg has budgeted these items in the year ended January 31, 2001, Metallurg has not committed to complete these projects during that period as such commitments are contingent on senior management approval and other conditions. Metallurg believes that these projects will be funded through existing and future internally generated cash and local credit lines.
Acquisitions. On March 31, 2000, LSM purchased the business of Hydelko KS, a Norwegian producer of master alloys for the aluminum industry, for approximately $9 million. The acquisition will complement the production capabilities of Metallurg's operations in the UK, U.S. and Brazil by increasing its market shares in Scandinavia, Europe and the U.S. and by introducing new product ideas.
Market Risk. Metallurg uses financial instruments to manage the impact of foreign exchange rate changes on earnings and cash flows. Accordingly, Metallurg enters into forward exchange contracts to protect the value of existing foreign currency assets and liabilities and to hedge future foreign currency product costs. Gains and losses on these contracts are offset by the gains and losses on the underlying transactions.
Year 2000 Readiness. Based on information available to date, Metallurg has not experienced any material adverse effects on its business, products, results of operations or financial condition as a result of the Year 2000 issue. All needed modifications and conversions of its business systems were completed prior to year-end. Over the past several years, Metallurg's management and accounting systems were upgraded generally and to make them Year 2000 ready. The costs associated with such upgrades or modifications were expensed as incurred or capitalized, as appropriate. Total incremental spending by Metallurg was not material to Metallurg's operations, liquidity or capital resources. Metallurg will continue to monitor for potential Year 2000 issues at its own facilities, its customers and suppliers, in order to permit a rapid response should any issues arise.
Environmental Remediation Costs. In 1996, Metallurg elected early adoption of SOP 96-1, "Environmental Remediation Liabilities," which among other requirements, states that losses associated with environmental remediation obligations are accrued when such losses are deemed probable and reasonably estimable. Such accruals generally are recognized no later than the completion of the remedial feasibility study and are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are generally not discounted to their present value. During the year ended January 31, 2000, Metallurg expended $2.9 million for environmental remediation.
As part of the Reorganization Plan, Shieldalloy entered into settlement agreements with various environmental regulatory authorities with regard to all of the significant environmental remediation liabilities of which it is aware. Pursuant to these agreements, Shieldalloy has agreed to perform environmental remediation which, as of January 31, 2000, had an estimated cost of completion of $38.2 million. Of this amount, approximately $3.3 million is expected to be expended in 2000, $5.6 million in 2001 and $8.4 million in 2002. In addition, Metallurg estimates it will make expenditures of $3.6 million with respect to environmental remediation at its foreign facilities. Of this amount, approximately $0.7 million is expected to be expended in 2000 and $0.5 million in 2001. No spending is anticipated in 2002. These amounts have been accrued for in prior years and are reflected in Metallurg's balance sheet liabilities. See "Note 15. Environmental Liabilities" to the Company's Consolidated Financial Statements.
Metallurg believes that while its remediation obligations and other environmental costs, in the aggregate, will reduce its liquidity, Metallurg believes its cash balances, cash from operations and cash available under its credit facilities is sufficient to fund its current and anticipated future requirements for environmental expenditures.
Effects of Recently Issued Accounting Standards. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Metallurg is currently evaluating the impact SFAS No. 133 will have on its financial statements.
EFFECTS OF INFLATION
Inflation has not had a significant effect on Metallurg's operations. However, there can be no assurance that inflation will not have a material effect on Metallurg's operations in the future. Metallurg is subject to price fluctuations in its raw materials and products. These fluctuations have affected and will continue to affect Metallurg's results of operations. See "Results of Operations."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following audited consolidated financial statements of Metallurg Holdings, Inc. and Metallurg, Inc. are presented herein pursuant to the requirements of Item 8 on the pages indicated below:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Metallurg Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of Metallurg Holdings, Inc. (the "Company") and its subsidiaries at January 31, 2000 and 1999, and the results of their operations and their cash flows for the year ended January 31, 2000 and for the period June 10, 1998 (inception) to January 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP New York, New York March 17, 2000
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS (IN THOUSANDS)
See notes to consolidated financial statements.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (IN THOUSANDS)
See notes to consolidated financial statements.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metallurg Holdings, Inc. ("Metallurg Holdings"), a Delaware corporation formed on June 10, 1998, together with its consolidated subsidiaries, (collectively, the "Company"), is wholly owned by a group of investors led by and including Safeguard International Fund, L.P. ("Safeguard International"), an international private equity fund that invests primarily in equity securities of companies in process industries. On July 13, 1998, Metallurg Acquisition Corp., a wholly owned subsidiary of Metallurg Holdings, merged with and into Metallurg, Inc., with Metallurg Inc. being the surviving company and Metallurg Holdings becoming the sole parent of Metallurg Inc. (the "Merger").
Metallurg, Inc. and its majority-owned subsidiaries (collectively, "Metallurg") manufacture and sell high quality metal alloys and specialty metals used by manufacturers of steel, aluminum, superalloys, titanium alloys, chemicals and other metal consuming industries. Metallurg sells more than 500 different products to over 3,000 customers worldwide (primarily in North America and Europe).
Basis of Presentation and Consolidation -- Metallurg Holdings and Metallurg, Inc. both report on a fiscal year ending January 31. The operating subsidiaries of Metallurg, Inc. report on a calendar year ending December 31. Accordingly, the Company's results of operations for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999 include the results of Metallurg Holdings and Metallurg Inc. for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999, respectively, and of the operating subsidiaries for the year ended December 31, 1999 and the period June 10, 1998 (inception) to December 31, 1998, respectively. The consolidated balance sheet data of the Company at January 31, 2000 and 1999 reflect the financial position of Metallurg Holdings and Metallurg, Inc. at January 31, 2000 and 1999, respectively, and of the operating subsidiaries at December 31, 1999 and 1998, respectively. All material intercompany transactions and balances have been eliminated in consolidation. The accounts of foreign subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52.
Accounting 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 at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- The Company presents all highly liquid instruments, maturing within 30 days or less when purchased, as cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market. The cost of inventories is determined using principally the average cost and specific identification methods.
Goodwill -- Goodwill, which represents the excess of acquisition cost over the estimated fair value of net assets acquired in business combinations, is being amortized on a straight-line basis over 20 years. For the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999, amortization expense was $5,077,000 and $2,750,000, respectively. The Company assesses whether its long-lived assets are impaired, based on an evaluation of undiscounted projected cash flows, whenever significant events or changes occur that might impair recovery of recorded costs through the remaining amortization period. In the event an impairment of long-lived assets is present, the recoverability of goodwill will be assessed. See "Note 2. Acquisition Transactions" to the Company's Consolidated Financial Statements.
Investments in Affiliates -- Investments in affiliates in which the Company has a 20% to 50% ownership interest and exercises significant management influence are accounted for in accordance with the equity method. Investments in which the Company has less than a 20% interest are carried at cost.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Depreciation -- Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed using principally the straight-line method over the estimated useful lives of the assets. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in income.
Revenue Recognition -- Sales represent amounts invoiced to customers by Metallurg and such revenue is recognized when the product is shipped and title to the product passes to the customer. In certain instances, Metallurg arranges sales for which the supplier invoices the customer directly. In such cases, Metallurg receives commission income, which is recognized when the supplier passes title to the customer.
Environmental Remediation Costs -- In accordance with the American Institute of Certified Public Accountants' Statement of Position No. 96-1, "Environmental Remediation Liabilities", losses associated with environmental remediation obligations are accrued when such losses are deemed probable and reasonably estimable. Such accruals generally are recognized no later than the completion of the remedial feasibility study and are adjusted as further information develops or circumstances change. Cost of future expenditures for environmental remediation obligations are generally not discounted to their present value.
Valuation of Long-Lived Assets -- In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
Income Taxes -- The Company uses the liability method whereby deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The Company does not provide for U.S. Federal income taxes on the accumulated earnings considered permanently reinvested in certain of its foreign subsidiaries which approximated $38,900,000 and $40,000,000 at January 31, 2000 and January 31, 1999, respectively. These earnings have been invested in facilities and other assets and have been subject to substantial foreign income taxes, which may or could offset a major portion of any tax liability resulting from their remittance and inclusion in U.S. taxable income. Accordingly, the Company does not provide for U.S. income taxes on foreign currency translation adjustments related to these foreign subsidiaries.
Retirement Plans -- Pension costs of Metallurg, Inc. and its domestic consolidated subsidiaries are funded or accrued currently. Metallurg, Inc.'s foreign subsidiaries maintain separate pension plans for their employees. Such foreign plans are either funded currently or accruals are recorded in the respective balance sheets to reflect pension plan liabilities.
Stock-Based Compensation -- Metallurg, Inc. accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of Metallurg, Inc.'s common stock at the date of grant over the amount an employee must pay to acquire the stock. Disclosures required with respect to alternative fair value measurement and recognition methods prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" are presented in Note 13.
Foreign Exchange Gains and Losses -- Foreign exchange transaction gains of $954,000 and $192,000 were recorded for the year ended January 31, 2000 and for the period June 10, 1998 (inception) to January 31,
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, respectively. Translation gains and losses resulting from reporting foreign subsidiaries in U.S. dollars are recorded directly to shareholders' equity.
Financial Instruments -- Metallurg enters into foreign exchange contracts in the regular course of business to manage exposure against fluctuations on sales and raw material purchase transactions denominated in currencies other than the functional currencies of its businesses. Unrealized gains and losses are deferred and recognized in income or as adjustments of carrying amounts when the hedged transactions are included in income. Gains and losses on unhedged foreign currency transactions are included in income. The Company does not hold or issue financial instruments for trading purposes.
Recently Issued Accounting Pronouncements -- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact SFAS No. 133 will have on its financial statements.
Earnings Per Share -- Earnings per share is not presented since Metallurg Holdings is wholly owned by a group of private investors led by and including Safeguard International.
Reclassification -- Certain prior year amounts were reclassified to conform to 2000 presentations.
2. ACQUISITION TRANSACTIONS
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led by Safeguard International. The acquisition was accomplished by Metallurg Acquisition Corp., a wholly owned subsidiary of Metallurg Holdings, merging with and into Metallurg, Inc., with Metallurg, Inc. being the surviving company and Metallurg Holdings becoming the sole parent of Metallurg, Inc. Metallurg Holdings was formed on June 10, 1998 and is owned by Safeguard International (an international private equity fund that invests primarily in equity securities of companies in process industries), certain limited partners of Safeguard International, certain individuals and a private equity fund.
At the time of the Merger, each outstanding share of Metallurg, Inc.'s common stock, par value $.01 per share, was converted into the right to receive $30 in cash, representing an aggregate cash price of approximately $152,200,000 (including payments for cancellation of compensatory options). Metallurg Holdings' purchase of Metallurg, Inc was recorded under the purchase method of accounting in accordance with APB Opinion No. 16, "Business Combinations". The total value of the transaction, including existing indebtedness and environmental, pension and other liabilities, net of cash, was approximately $300,000,000. The excess of the purchase price over the estimated fair value of the net assets acquired was approximately $101,500,000 and is being amortized over a period of 20 years.
In order to finance the Merger, (i) Safeguard International and certain of its limited partners contributed approximately $97,000,000 of capital to Metallurg Holdings (the "Equity Contribution"); and (ii) Metallurg Holdings received approximately $62,900,000 net proceeds upon consummation of the offering (the "Offering") of $121,000,000 aggregate principal amount at maturity of 12 3/4% Senior Discount Notes due 2008 (the "Senior Discount Notes"). As used herein, the term "Acquisition Transactions" means the Equity Contribution, the Offering, the Merger, the Consent Solicitation (as defined herein) and the execution of a supplemental indenture to the indenture governing Metallurg, Inc.'s 11% Senior Notes due 2007 (the "Senior Notes").
In connection with the Merger, Metallurg, Inc. received the consents (the "Consents Solicitation") of 100% of the registered holders of its Senior Notes to a one-time waiver of the change of control provisions of
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Senior Note indenture to make such provisions inapplicable to the Merger and to amend the definition of "Permitted Holders".
Merger-related costs of $7,888,000 were incurred, and recorded as expense by Metallurg, Inc. in the year ended January 31, 1999 and included (i) $3,541,000 for payments to cancel compensatory stock options; (ii) $625,000 in consent fees incurred in order to obtain the one-time waiver of the change of control provisions of the Senior Note indenture; (iii) $2,822,000 for payments made pursuant to existing employment agreements with Metallurg, Inc.'s management and (iv) $900,000 of other merger-related costs. Metallurg, Inc. was reimbursed for the compensatory stock option cancellation costs of $3,541,000 by a capital contribution from Safeguard International at the time of the Merger, which amount is included in Metallurg Holdings' acquisition cost. Accordingly, Metallurg Holdings recognized the balance of such costs, totaling $4,347,000, in the post-Merger period ended January 31, 1999.
3. PRO FORMA RESULTS (UNAUDITED)
The pro forma information presented herein is based upon the historical financial statements of the Company included elsewhere herein. The pro forma information illustrates the estimated effects of (i) the issuance of the Senior Discount Notes and (ii) the Merger and the transactions related thereto, as if each of the listed transactions had occurred as of February 1, 1998.
4. SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" in the period ended January 31, 1999 which changes the way the Company reports information about its reportable segments. The accounting policies of the reportable segments are the same as those described in Note 1. Information for prior periods presented have been restated in order to conform to the current year presentation.
Metallurg operates in one significant industry segment, the manufacture and sale of ferrous and non-ferrous metals and alloys. Metallurg is organized geographically, having established a worldwide sales network built around its core production facilities in the United States, the United Kingdom and Germany. In addition to selling products manufactured by Metallurg, Metallurg distributes complementary products manufactured by third parties. The results of Metallurg Holdings consist primarily of interest expense on the Senior Discount Notes, amortization of goodwill and deferred debt issuance costs and general overhead expenses. Such costs are reported in the segment "Other" below
Reportable Segments
Shieldalloy Metallurgical Corporation ("Shieldalloy") -- This unit is comprised of two production facilities in the U.S. The New Jersey plant manufactures and sells aluminum alloy grain refiners and alloying tablets for the aluminum industry, metal powders for the welding industry and specialty ferroalloys for the superalloy and steel industries. The Ohio plant manufactures and sells ferrovanadium and vanadium based chemicals used mostly in the steel and petrochemical industries. In addition to its manufacturing operations, Shieldalloy imports and distributes complementary products manufactured by affiliates and third parties.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
London & Scandinavian Metallurgical Co., Ltd. and its subsidiaries (collectively, "LSM") -- This unit is comprised mainly of three production facilities in the UK which manufacture and sell aluminum alloy grain refiners and alloying tablets for the aluminum industry, chromium metal and specialty ferroalloys for the steel and superalloy industries and aluminum powder for various metal powder consuming industries.
Gesellschaft fur Elektrometallurgie mbH and its subsidiaries (collectively, "GfE") -- This unit is comprised of two production facilities and a sales office in Germany. The Nuremburg plant manufactures and sells a wide variety of specialty products, including vanadium based chemicals and sophisticated metals, alloys and powders used in the titanium, superalloy, electronics, steel, biomedical and optics industries. The Morsdorf plant produces medical prostheses, implants and surgical instruments for orthopedic applications.
Elektrowerk Weisweiler GmbH ("EWW") -- This production unit, also located in Germany, produces various grades of low carbon ferrochrome used in the superalloy, welding and steel industries.
Summarized financial information concerning the Company's reportable segments is shown in the following table (in thousands). Each segment records direct expenses related to its employees and operations. The "Other" column includes corporate related items, fresh start adjustments and results of subsidiaries not meeting the quantitative thresholds as prescribed by applicable accounting rules for determining reportable segments. The Company does not allocate general corporate overhead expenses to operating segments.
The financial data of the Company in the period June 10, 1998 (inception) to January 31, 1999 include the accounts of (i) Metallurg Holdings for the period June 10, 1998 (inception) to January 31, 1999; (ii) Metallurg, Inc. for the period July 13, 1998 to January 31, 1999 (post-Merger); and (iii) Metallurg, Inc.'s operating subsidiaries for the period July 13, 1998 to December 31, 1998 (post-Merger).
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Metallurg sells its products in over 50 countries. The following full year revenue by country (in thousands) is of Metallurg and the portion of such revenue arising prior to the Merger date is deducted therefrom.
The following table presents property, plant and equipment by country based on the location of the assets (in thousands):
5. RESTRUCTURING
During the second quarter of 1999, Metallurg initiated a restructuring program. The restructuring is intended to reduce Metallurg's cost structure, to streamline management and production functions and focus resources in support of higher margin products at core production units. The restructuring plan includes the discontinuation of certain production activities, termination of employees, a facility closing and the write-down of certain redundant plant and equipment and related spare parts and supplies. The restructuring predomi-
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nantly affects Metallurg's operations in Europe. Details of the restructuring charge are as follows (in thousands):
During 1999, a charge of approximately $4,179,000 was recorded with respect to the restructuring of Metallurg's German operations (GfE and EWW). Approximately 94 employees were notified of terminations as operations were curtailed in line with current demands for Metallurg's products. Provisions of $2,393,000 for severance costs, $1,223,000, primarily for the write-down of redundant fixed assets, and $563,000 of other costs were recorded. During 1999, 49 employees terminated service pursuant to the restructuring plan and payments totaling $1,038,000 were made in respect of these severance costs. The balance of such costs will be substantially disbursed by the end of 2001, when certain production activities are permanently closed down. Additionally, fixed assets and spare parts with an aggregate net book value of approximately $863,000 were taken out of service during the year.
During the fourth quarter of 1999, a charge of approximately $2,357,000 was recorded with respect to the restructuring of Metallurg's UK operations (LSM). Fifty-five employees were notified of terminations as part of LSM's plan to simplify its organization and reduce costs by restructuring its businesses into fewer operating divisions. In addition, administrative functions are to be relocated to its Rotherham plant site from its London office, which will be closed. Provisions of $2,145,000 for severance costs and $212,000 related to the costs of the office closing were recorded. During 1999, 27 employees were terminated and payments of approximately $998,000 were made in respect of these severance costs. The restructuring is to be completed and substantially all remaining costs are to be paid during 2000.
6. MINORITY INTEREST
In September 1999, GfE established a 60% controlling interest in a new facility to be built in Italy to recover vanadium from residues generated by power plants. An EU grant will provide a major part of the capital cost of the plant, which should be on-stream in mid-2001. Amounts related to the 40% ownership interests are reported as Minority Interest in the consolidated financial statements.
7. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows (in thousands):
Depreciation expense related to property, plant and equipment charged to operations for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999 was $7,660,000 and $3,700,000, respectively.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RETIREMENT PLANS
Metallurg Holdings does not have any benefit plans. The following data represents Metallurg's defined benefit plans for the years ended January 31, 2000 and 1999.
DEFINED BENEFIT PLANS
The following table summarizes the changes in benefit obligation and changes in plan assets for Metallurg's operations in the U.S., UK and Germany in the periods presented (in thousands). Summary data for the other foreign subsidiaries is included below under the caption "Other Benefit Plans".
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the components of net periodic benefit cost (in thousands):
The following tables summarize the funded/unfunded status of Metallurg's pension plans in the U.S., UK and Germany.
Metallurg, Inc. and its domestic consolidated subsidiaries have defined benefit pension plans covering substantially all salaried and certain hourly paid employees. The plans generally provide benefit payments using a formula based on an employee's compensation and length of service. These plans are funded in amounts equal to the minimum funding requirements of the Employee Retirement Income Security Act. Substantially all plan assets are invested in cash and short-term investments or listed stocks and bonds. The funded status of these plans is as follows (in thousands):
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LSM maintains a defined benefit pension plan covering all eligible employees. Substantially all plan assets are invested in listed stocks and bonds. The funded status of this plan is as follows (in thousands):
Metallurg's German subsidiaries maintain defined benefit pension plans covering substantially all eligible employees. The funded status of these plans is as follows (in thousands):
OTHER BENEFIT PLANS
Metallurg, Inc. maintains a discretionary defined contribution profit sharing plan covering substantially all of the salaried employees of Metallurg, Inc. and its domestic consolidated subsidiaries. The related expense, net of forfeitures, was $15,000 and $104,000 in the year ended January 31, 2000 and in the period June 10, 1998 (inception) to January 31, 1999, respectively.
Balance sheet accruals for pension plans of Metallurg, Inc.'s other foreign subsidiaries approximate or exceed the related actuarially computed value of accumulated benefit obligations. Accrued pension liabilities for these plans were $479,000 and $506,000 at January 31, 2000 and January 31, 1999, respectively. Pension expense relating to these plans was $74,000 and $115,000 for the year ended January 31, 2000 and for the period June 10, 1998 (inception) to January 31, 1999, respectively.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. BORROWINGS
Long-term debt consists of the following (in thousands):
METALLURG HOLDINGS
At the time of the Merger, Metallurg Holdings received approximately $62,900,000 net proceeds upon consummation of the offering of $121,000,000 aggregate principal amount at maturity of Senior Discount Notes due 2008 in a Rule 144A private placement to qualified institutional investors. In October 1998, the 144A notes were exchanged for similar notes registered under the Securities Act of 1933, as amended. The Senior Discount Notes will accrete at a rate of 12 3/4%, compounded semi-annually, to July 15, 2003. Cash interest will not accrue or be payable prior to such date. Commencing July 15, 2003, the Senior Discount Notes will accrue cash interest at a rate of 12 3/4% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing January 15, 2004. The Senior Discount Notes are redeemable at the option of Metallurg Holdings, in whole or in part, at any time on or after July 15, 2003. Prior to July 15, 2001, a maximum of 34% of the Senior Discount Notes may be redeemed with net proceeds of one or more public equity offerings of Metallurg Holdings. The Senior Discount Notes are senior, secured obligations of Metallurg Holdings and rank pari passu in right of payment with all existing and future unsubordinated indebtedness and senior in right of payment to all subordinated indebtedness of Metallurg Holdings. However, the Senior Discount Notes are effectively subordinated to all existing and future liabilities of Metallurg.
The Senior Discount Notes are secured by an assignment and pledge to a trustee of (i) all of the outstanding equity interests held by Metallurg Holdings in Metallurg, Inc. and (ii) all promissory notes issued from time to time to Metallurg Holdings by Metallurg, Inc. The indenture contains limitations on, among other things, the ability of Metallurg Holdings to incur indebtedness and enter into certain mergers, consolidations or assets sales. In the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999, Metallurg Holdings recognized approximately $9,170,000 and $4,523,000, respectively, of interest expense related to the Senior Discount Notes. Other interest expense, including that of Metallurg, totaled $13,602,000 and $7,309,000, respectively, during these periods.
Metallurg Holdings is a holding company, and its ability to meet its payment obligations on the Senior Discount Notes is dependent upon the receipt of dividends and other distributions from its direct and indirect subsidiaries. Metallurg Holdings does not have, and may not in the future have, any material assets other than the common stock of Metallurg, Inc. Metallurg, Inc. and its subsidiaries are parties to various credit
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements, including the Senior Note indenture and the Revolving Credit Facility, which impose substantial restrictions on Metallurg, Inc.'s ability to pay dividends to Metallurg Holdings.
METALLURG, INC. AND DOMESTIC SUBSIDIARIES
In November 1997, Metallurg, Inc. sold the $100,000,000 Senior Notes which mature in 2007 and accrue interest at a rate of 11% per annum, payable semi-annually commencing in June 1998. The Senior Notes are redeemable at the option of Metallurg, Inc., in whole or in part, at any time on or after December 2002. Prior to December 1, 2000, a maximum of 34% of the Senior Notes may be redeemed with net proceeds of one or more public equity offerings of Metallurg, Inc. The Senior Notes are fully and unconditionally guaranteed by the U.S. subsidiaries of Metallurg, Inc. on a senior unsecured basis. The Senior Note indenture contains limitations on, among other things, the ability of Metallurg to incur indebtedness and enter into certain mergers, consolidations or asset sales. In addition, Metallurg, Inc. is prohibited from making dividends in an amount greater than 50% of its net income under terms of the Senior Note indenture.
On October 29, 1999, Metallurg, Inc., Shieldalloy and certain of their subsidiaries (the "Borrowers") renewed their existing credit facility with certain financial institutions led by Fleet National Bank (formerly known as BankBoston, N.A.) as agent (the "Revolving Credit Facility") for a term of five years. This facility provides the Borrowers with up to $50,000,000 of financing resources and provides for a German subfacility (as discussed below). Interest is charged at a rate per annum equal to (i) LIBOR, plus 2.0% -- 2.5% or (ii) Prime, plus up to 1.0% based on the performance of Metallurg, Inc. and certain of its subsidiaries (the "North American Group"), as defined in the Revolving Credit Facility. Interest rates on amounts borrowed will be adjusted quarterly, commencing in the second quarter of 2000, based on the North American Group's fixed charge coverage ratio. The Revolving Credit Facility permits borrowings of up to $50,000,000 for working capital requirements and general corporate purposes, up to $35,000,000 of which may be used for letters of credit in the U.S. The Revolving Credit Facility continues to prohibit Metallurg, Inc. from making dividends prior to 2004 and requires the Borrowers and certain subsidiaries to comply with various covenants, including the maintenance of minimum liquidity, as defined in the agreement, at a $10,000,000 level.
The Borrowers are required to pay a fee of 0.375% per annum on the unused portion of the commitment. The total amount the Borrowers may borrow at any time is limited to a borrowing base calculation that is based on eligible accounts receivable, inventory and certain fixed assets. At January 31, 2000, there were no borrowings under this facility; however, outstanding letters of credit approximated $23,576,000. Substantially all assets of the North American Group are pledged as collateral under this agreement.
FOREIGN SUBSIDIARIES
Pursuant to the Revolving Credit Facility, Fleet National Bank, through its London office, makes available up to DM 20,500,000 (approximately $10,600,000) of financing to GfE (the "German Subfacility"), which is guaranteed by the Borrowers and certain subsidiaries under the Revolving Credit Facility. At January 31, 2000, borrowings under the German Subfacility were immaterial. Short-term secured borrowings of GfE with local banks totaled DM 500,000 (approximately $255,000) at January 31, 2000 at a weighted average interest rate of 5.1%. In August 1998, GfE entered into a term loan with IKB Deutsche Industrie Bank in the amount of DM 10,000,000 (approximately $5,100,000). The loan, which matures in 2008, bears interest at a rate of 3.9% and is secured by certain property of GfE. GfE also has secured term loans approximating DM 2,100,000 (approximately $1,100,000) maturing through 2004 and bearing interest at a weighted average rate of 6.1%.
LSM has two revolving credit facilities which provide LSM with up to L11,000,000 (approximately $17,800,000) of borrowings. A facility expiring in October 2000 provides up to L7,000,000 (approximately $11,300,000) of borrowings, up to L3,300,000 (approximately $5,300,000) of foreign exchange exposure and up to L2,300,000 (approximately $3,700,000) for other ancillary banking arrangements including bank METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
guarantees. Borrowings under this facility are payable on demand. Outstanding loans under this facility bear interest at the lender's base rate plus 1.0%. At January 31, 2000, there were no outstanding borrowings under the facility. A second revolving facility provides LSM with up to L4,000,000 (approximately $6,500,000) of borrowings and L10,300,000 (approximately $16,600,000) of forward exchange contracts. This facility, which expires in December 2000, is unsecured and borrowings bear interest at a rate of 1.0% over the bank's base rate. At January 31, 2000, there were no borrowings under this facility. On September 10, 1999, LSM entered into a term loan facility with HSBC Bank plc (formerly known as Midland Bank plc) in the amount L6,000,000 (approximately $9,700,000), the proceeds of which are to be used to finance capital expenditures. This facility, which is unsecured, expires in December 2006, seven years from the first drawing. Quarterly repayments commence in December 2002 and outstanding loans under this facility bear interest at LIBOR plus 1.0%. At January 31, 2000, outstanding borrowings under this facility were L1,250,000 (approximately $2,000,000).
EWW, has committed lines of credit with several banks in the aggregate amount of DM 15,200,000 (approximately $7,800,000). The credit facilities currently bear interest at rates from 7.8% to 8.4%. The credit agreements require EWW to pledge certain assets, which include accounts receivable, inventory and fixed assets. At January 31, 2000, there were no borrowings under these facilities. EWW also has a term loan of DM 1,644,000 (approximately $850,000) maturing in 2001. The term loan is secured by a mortgage on certain real property and bears interest at 4.5%. In 1998, EWW borrowed DM 1,478,000 (approximately $760,000) to fund capital additions. The loan, which matures in 2008, bears interest at 4.25%.
Metallurg, Inc.'s other foreign subsidiaries maintain short-term secured and unsecured borrowing arrangements, generally in local currencies, with various banks. Borrowings under these arrangements aggregated $837,000 at January 31, 2000 at a weighted average interest rate of 12.1%.
Interest expense totaled $22,772,000 and $11,832,000 for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999, respectively.
The scheduled maturities of long-term debt during the next five years are $833,000 in 2000, $1,472,000 in 2001, $1,604,000 in 2002, $2,301,000 in 2003, $778,000 in 2004 and $223,907,000 thereafter.
11. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, other current assets, accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.
Fair values for investments in affiliates are not readily available.
The aggregate fair value of short-term bank debt approximates its carrying amount because of recent and frequent repricing based on market conditions.
Based on quoted market prices, the fair value of Metallurg Holdings' Senior Discount Notes, issued in July 1998, approximates $39,000,000 and $40,000,000 at January 31, 2000 and 1999, respectively. Based on quoted market prices, the fair value of Metallurg, Inc.'s $100,000,000 Senior Notes, issued in November 1997, approximates $90,000,000 and $89,000,000 at January 31, 2000 and January 31, 1999, respectively. The carrying amount of other long-term debt approximates fair value.
Metallurg enters into foreign exchange contracts in the regular course of business to manage exposure against fluctuations on sales and raw material purchase transactions denominated in currencies other than the functional currencies of its businesses. The contracts mature at the anticipated cash requirement date, generally within 12 months, and are principally unsecured foreign exchange contracts with select banks. The notional values provide an indication of the extent of Metallurg's involvement in such instruments but do not represent its exposure to market risk, which is essentially limited to risk related to currency rate movements. The counterparties to these contractual arrangements are a diverse group of major financial institutions with METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which Metallurg also has other financial relationships. Metallurg is exposed to credit risk generally limited to unrealized gains in such contracts in the event of nonperformance by counterparties of those financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings.
At January 31, 2000, Metallurg had a total of $18,706,000 (of notional value) of foreign exchange forward purchase contacts with a deferred gain of $130,000 and $38,056,000 (of notional value) of foreign exchange forward sale contracts with a deferred gain of $344,000. The contracts are predominately denominated in the following currencies: Deutsche Marks, Euros and U.S. Dollars.
12. INCOME TAXES
For financial reporting purposes, (loss) income before income tax provision includes the following components (in thousands):
The reconciliation of income tax from continuing operations computed at the U.S. Federal statutory tax rate to the Company's effective tax rate is as follows (in thousands):
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision (benefit) represents the following (in thousands):
U.S. Federal income tax refunds receivable of $750,000 and $4,180,000 at January 31, 2000 and 1999, respectively, consist of carryback claims related to environmental expenses in the amount of $750,000. The balance at January 31, 1999 also consists of federal tax deposits in excess of estimated liabilities and federal income tax audit adjustments receivable which were subsequently collected.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
At January 31, 2000, the Company has net operating loss carryforwards relating to domestic operations of approximately $19,588,000 (subject to certain limitations relative to utilization) which expire through 2020 and Alternative Minimum Tax Credit carryforwards of approximately $700,000 which can be carried forward indefinitely. The Company's consolidated foreign subsidiaries have income tax loss carryforwards aggregating approximately $81,616,000, a substantial portion of which relates to German operations which do not expire under current regulations and certain Brazilian operations which partially expire through 2004. Due to significant uncertainties surrounding the realization of certain loss carryforwards, the related deferred tax assets have been substantially provided for in the valuation allowance at January 31, 2000. However, during the period ended March 31, 1997, the Company determined that a German subsidiary has sufficiently demonstrated the ability to generate earnings and the valuation allowance of $6,032,000 relating to that subsidiary was appropriately reversed. Such benefit from a reduction in valuation allowance was partly offset by a deferred tax provision relating to an adjustment of U.K. pension liabilities. Included within the deferred tax benefit are the deferred tax effects of certain deferred tax assets for which a corresponding debit has been recorded to "Additional paid-in capital" approximating $960,000 and the deferred tax effects of certain deferred tax assets, primarily foreign net operating losses, for which a benefit has previously been recognized in the amount of $287,000.
The adoption of fresh-start reporting results in an increase of additional paid-in capital, rather than an income tax benefit, as the benefits relating to existing deferred tax assets are recognized.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SHAREHOLDERS' EQUITY
Metallurg Holdings was formed on June 10, 1998 with 1,000 shares of common stock, par value $.01, authorized. On June 29, 1998, the Company issued 350 such shares. At the time of the Merger, this common stock was cancelled and the total number of shares of all classes of stock which Metallurg Holdings was authorized to issue was changed to 50,000 shares, of which 30,000 shares are Common Stock, $.01 par value ("Common Stock") 10,000 shares are Series A Voting Convertible Preferred Stock, $.01 par value ("Series A Preferred Stock") and 10,000 shares are Series B Non-Voting Preferred Stock, $.01 par value ("Series B Preferred Stock").
In connection with the Merger, 5,202.335 shares of Series A Preferred Stock and 4,500 shares of Series B Preferred Stock were issued. In December 1998, an additional 24 shares of Series B Preferred Stock were issued to investors. At January 31, 2000, no Common Stock was issued and outstanding; however 5,202.335 shares of Series A Preferred Stock and 4,524 shares of Series B Preferred Stock were issued and outstanding.
Total comprehensive loss was $34,750,000 and $15,450,000 for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999.
STOCK COMPENSATION PLANS
Metallurg, Inc. 1998 Equity Compensation Plan (the "ECP") -- On November 20, 1998, 500,000 shares of common stock were made available for stock awards and stock options under the ECP. Options issued have a term of ten years and vest in virtually all cases 20% on the date of grant and 20% on each of the first four anniversaries of the date of grant. The weighted average remaining life of options outstanding at January 31, 2000 was 8.8 years.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions under the ECP are summarized as follows:
Had compensation cost for Metallurg, Inc.'s stock option plan been determined based upon the fair value at the grant date, consistent with SFAS No. 123, Metallurg, Inc.'s net income would have been reduced by approximately $385,000 and $557,000 in the years ended January 31, 2000 and 1999, respectively. Principal assumptions used in applying the Black-Scholes model for options granted in the periods presented were as follows:
Metallurg, Inc. Management Stock Award and Stock Option Plan (the "SASOP") -- On April 14, 1997, Metallurg, Inc. had adopted the SASOP. Certain eligible employees were granted options to purchase 167,000 shares of common stock at $11.38 (fair market value on the date of grant), effective as of September 1, 1997 and 20,000 shares of common stock at $8.43 (fair market value on the date of grant), effective as of April 1, 1998. Such options vested 33 1/3% on the date of grant and 33 1/3% were to vest on the first and second anniversary of the date of grant. At the time of the Merger, outstanding stock options became fully vested and holders were therefore entitled to receive $30 per share as part of the purchase of Metallurg, Inc. Metallurg, Inc. recorded compensation expense of $3,541,000, which represented the excess of the $30 per share purchase price over the exercise prices noted above. Metallurg, Inc. was reimbursed for such stock option cancellation costs by a capital contribution from Safeguard International at the time of the Merger.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER (EXPENSE) INCOME, NET
Other (expense) income, net consists of the following (in thousands):
In the period June 10, 1998 (inception) to January 31, 1999, GfE was successful in recovering approximately $1,351,000 of additional proceeds from a government-owned insurance agency representing final settlement for claims under GfE's political risk insurance policy related to an investment in the former Zaire.
15. ENVIRONMENTAL LIABILITIES
Metallurg's alloy manufacturing operations in Newfield, New Jersey; Cambridge, Ohio; Nuremberg and Weiswieler, Germany; and Sao Joao del Rei, Brazil are subject to environmental laws and regulations for which Metallurg has incurred environmental liabilities. These liabilities are primarily related to the investigation and remediation of contamination resulting from historic operations.
Total environmental liabilities consist of the following (in thousands):
Shieldalloy entered into administrative consent orders with the New Jersey Department of Environmental Protection, under which Shieldalloy must conduct remediation activities at the Newfield facility. These obligations, which were reaffirmed as part of the Fourth Amended and Restated Joint Plan of Reorganization (the "Reorganization Plan") of Metallurg, Inc. and Shieldalloy, include the closure of wastewater lagoons, the decontamination of groundwater, soil remediation, surface water and sediment clean up, wetlands restoration and related operation and maintenance activities. Shieldalloy accrued its best estimate of the associated costs with respect to remedial activities at the site, which it expects to disburse over the next 10-15 years. During the quarter ended March 31, 1997, prepetition letters of credit, in the amount of $8,200,000, were drawn upon and deposited in a trust fund. Subsequently, pursuant to an agreement with the State of New Jersey, Shieldalloy was permitted to withdraw cash from the environmental trust and substitute letters of credit in an
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalent dollar amount. At January 31, 2000, outstanding letters of credit issued as financial assurances in favor of various environmental agencies total $21,419,000. The costs of providing financial assurance over the term of the remediation activities have been contemplated in the accrued amounts.
Historic manufacturing processes at both Newfield and Cambridge have resulted in on-site slag piles containing naturally-occurring radioactivity. Shieldalloy is not under any regulatory obligation to decommission the slag pile at the Newfield site. However, as related production has ceased at the Cambridge site, Shieldalloy plans to decommission and to cap the slag piles on-site. Financial assurance for implementation of such plans is partially assured by cash funds held in trust. As a condition precedent to consummation of the Reorganization Plan, $1,500,000 in a prepetition letter of credit, relating to both the Newfield and Cambridge facilities, was drawn upon and deposited in a trust fund.
Shieldalloy and Cyprus Foote Mineral Company ("Cyprus Foote"), the former owner of the Cambridge site, entered into a consent order with the State of Ohio in December 1996. Shieldalloy and Cyprus Foote agreed in the consent order to conduct remediation and decommissioning activities at the Cambridge site. Additionally, Shieldalloy and Cyprus Foote agreed to enhance, restore and preserve certain wetlands in the vicinity of the Cambridge site. Pursuant to the consent order, Shieldalloy and Cyprus Foote are jointly and severally liable to the State of Ohio in respect of these obligations. However, Shieldalloy has agreed with Cyprus Foote that it shall perform and be liable for the performance of these remedial obligations. Therefore, Shieldalloy has accrued its best estimate of associated costs which it expects to substantially disburse over the next five years.
With respect to the financial assurance obligations to the State of Ohio, Cyprus Foote has agreed to provide financial assurance of approximately $9,000,000 as required by the State of Ohio and Shieldalloy has purchased an annuity contract which will provide for future payments into the trust fund to cover certain of the estimated operation and maintenance costs over the next 100 years.
Metallurg, Inc.'s German subsidiaries have accrued environmental liabilities in the amounts of $3,349,000 and $4,443,000 at January 31, 2000 and January 31, 1999, respectively, to cover the costs of closing an off-site dump and for certain environmental conditions at a subsidiary's Nuremberg site. In Brazil, costs of $216,000 and $389,000 have been accrued at January 31, 2000 and January 31, 1999, respectively, to cover reclamation costs of the closed mine sites.
In June 1999, Shieldalloy recognized an environmental expense recovery of $5,500,000 upon settlement with an insurance company relating to coverage for certain environmental claims stemming from the 1960's and forward. These claims relate mostly to the historical costs of remedial activities at Shieldalloy's Newfield, New Jersey site.
16. CONTINGENT LIABILITIES
In addition to environmental matters, which are discussed in Note 15, the Company continues defending various claims and legal actions arising in the normal course of business. Management believes, based on the advice of counsel, that the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that existing or future litigation will not result in an adverse judgment against the Company which could have a material adverse effect on the Company's future results of operations or cash flows.
17. LEASES
Metallurg leases office space, facilities and equipment. The leases generally provide that Metallurg pays the tax, insurance and maintenance expenses related to the leased assets. At January 31, 2000, future
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum lease payments required under non-cancelable operating leases having remaining lease terms in excess of one year are as follows (in thousands):
Rent expense under operating leases for the year ended January 31, 2000 and the period June 10, 1998 (inception) to January 31, 1999, was $1,453,000 and $885,000, respectively.
18. SUPPLEMENTAL GUARANTOR INFORMATION
In November 1997, Metallurg, Inc. issued $100 million principal amount of its 11% Senior Notes due 2007. Under the terms of the Senior Notes, Shieldalloy, Metallurg Holdings Corporation, Metallurg Services, Inc., Metallurg International Resources, Inc. ("MIR, Inc.") and MIR (China), Inc. (collectively, the "Guarantors"), wholly owned subsidiaries of Metallurg, Inc., have fully and unconditionally guaranteed on a joint and several basis Metallurg's obligations to pay principal, premium and interest relative to the Senior Notes. During the second quarter of 1999, Metallurg, Inc. established MIR, Inc. as a wholly owned subsidiary and a guarantor of the Senior Notes. Certain commercial activities previously carried out by Metallurg, Inc. are now being carried out by MIR, Inc. Management has determined that separate, full financial statements of the Guarantors would not be material to potential investors and, accordingly, such financial statements are not provided. Supplemental financial information of the Guarantors is presented below.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 2000 (IN THOUSANDS)
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 31, 2000 (IN THOUSANDS)
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2000 (IN THOUSANDS)
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1999 (IN THOUSANDS)
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 31, 1999 (IN THOUSANDS)
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 1999 (IN THOUSANDS)
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. RELATED PARTY TRANSACTION
The management company of Safeguard International was paid a one-time financial advisory fee in 1998 of $2,500,000 for services performed and reimbursed for various expenses incurred, in connection with the acquisition of Metallurg, Inc. See "Note 2. Acquisition Transactions." Dr. Schimmelbusch and Messrs. Spector and Holly each received $400,000 of the proceeds from the financial advisory fee in their capacities as members of the management company. Dr. Schimmelbusch and Messrs. Plum, Holly, and Spector, all of whom are directors of Metallurg Holdings, and Mr. Fastuca, who was an executive officer of Metallurg Holdings until April 2000, are or were directors and/or officers of various companies that are associated, directly or indirectly, with Safeguard Scientifics, Inc., which has an ownership interest in Safeguard International. Pursuant to these positions, they receive or received compensation from such entities.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS)
- --------------- (a) Includes environmental expense recovery of $5,501 in the 2nd quarter and $4,386 and $2,150 of restructuring charges in the 2nd and 4th quarters, respectively.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Metallurg Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report dated March 17, 2000 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP New York, New York March 17, 2000
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
- ---------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Metallurg, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of Metallurg, Inc. and its subsidiaries ("Metallurg") at January 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended January 31, 2000 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Metallurg, Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated statements of operations and cash flows for the three quarters ended January 31, 1998 (Reorganized Company) and the quarter ended March 31, 1997 (Predecessor Company) were audited by other independent accountants whose report dated April 1, 1998 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP New York, New York March 17, 2000
INDEPENDENT AUDITORS' REPORT
Metallurg, Inc.:
We have audited the accompanying statements of consolidated operations and of consolidated cash flows of Metallurg, Inc. and consolidated subsidiaries ("Metallurg") for the three quarters ended January 31, 1998 (Reorganized Company operations) and the quarter ended March 31, 1997 (Predecessor Company operations). Our audits also included the financial statement schedule, Schedule II -- Valuation and Qualifying Accounts and Reserves, for the three quarters ended January 31, 1998 (Reorganized Company) and the quarter ended March 31, 1997 (Predecessor Company) appearing on page 102. These consolidated financial statements and financial statement schedule are the responsibility of Metallurg, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements 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.
As discussed in Notes 1 and 3 to the consolidated financial statements, on April 14, 1997, the U.S. Bankruptcy Court for the Southern District of New York entered an order confirming Metallurg, Inc.'s plan of reorganization which became effective after the close of business on that day. Accordingly, the accompanying statements of consolidated operations and of consolidated cash flows for the three quarters ended January 31, 1998 have been prepared in conformity with the American Institute of Certified Public Accountants Statement of Position No. 90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy Code," for Metallurg as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with the prior periods as described in Notes 1 and 3.
In our opinion, the Reorganized Company's statements of consolidated operations and of consolidated cash flows present fairly, in all material respects, the results of their consolidated operations and their consolidated cash flows for the three quarters ended January 31, 1998, and the Predecessor Company statements of consolidated operations and of consolidated cash flows, referred to above, present fairly, in all material respects, the results of their consolidated operations and their consolidated cash flows for the quarter ended March 31, 1997 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 New York, New York April 1, 1998
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS (IN THOUSANDS)
See notes to consolidated financial statements.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (IN THOUSANDS)
See notes to consolidated financial statements.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metallurg, Inc. and its majority-owned subsidiaries (collectively, "Metallurg") manufacture and sell high quality metal alloys and specialty metals used by manufacturers of steel, aluminum, superalloys, titanium alloys, chemicals and other metal consuming industries. Metallurg sells more than 500 different products to over 3,000 customers worldwide (primarily in North America and Europe).
Basis of Presentation and Consolidation -- The consolidated financial statements include the accounts of Metallurg, Inc. and its majority-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The accounts of foreign subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52.
On July 13, 1998, Metallurg, Inc. was acquired by a group of institutional co-investors led by Safeguard International Fund, L.P. ("Safeguard International"). Metallurg, Inc. is now a wholly owned subsidiary of Metallurg Holdings, Inc., ("Metallurg Holdings") a Delaware corporation formed on June 10, 1998 by Safeguard International to effect the acquisition. The financial statements do not reflect the pushdown of purchase accounting adjustments recorded by Metallurg Holdings.
On February 26, 1997, the Fourth Amended and Restated Joint Plan of Reorganization (the "Reorganization Plan") of Metallurg, Inc. and one of its subsidiaries, Shieldalloy Metallurgical Corporation ("Shieldalloy") (collectively, the "Debtors"), was confirmed by the U.S. Bankruptcy Court for the Southern District of New York. Transactions contemplated by the Reorganization Plan were consummated on April 14, 1997 (the "Effective Date"). For financial reporting purposes, Metallurg has reflected the effects of the Reorganization Plan consummation as of March 31, 1997. As a result of the consummation of the Reorganization Plan and the adoption of fresh-start reporting under the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", Metallurg was required to report its financial results for the period ended January 31, 1998 in two separate periods. One period contains financial statements for the quarter ended March 31, 1997, which includes the effects of the adoption of fresh-start reporting and consummation of the Reorganization Plan and is referred to as the "Predecessor Company". The other period contains financial statements for the three quarters ended January 31, 1998 for the "Reorganized Company". The financial statements of Metallurg after consummation of the Reorganization Plan are not directly comparable to Metallurg's financial statements of prior periods.
Effective April 1, 1997, the reporting period of Metallurg, Inc. was changed from a calendar year ending December 31 to a fiscal year ending January 31 and Metallurg, Inc. began reporting the results of its operating subsidiaries, which retained a calendar year-end, on a one-month lag. As a result of this change, the three quarters ended January 31, 1998 include the results of Metallurg, Inc. for the ten months ended January 31, 1998 and the results of its operating subsidiaries for the nine months ended December 31, 1997.
Accounting 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 at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- Metallurg presents all highly liquid instruments, maturing within 30 days or less when purchased, as cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market. The cost of inventories is determined using principally the average cost and specific identification methods.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in Affiliates -- Investments in affiliates in which Metallurg has a 20% to 50% ownership interest and exercises significant management influence are accounted for in accordance with the equity method. Investments in which Metallurg has less than a 20% interest are carried at cost.
Property and Depreciation -- In accordance with fresh-start reporting, property, plant and equipment previously stated at cost were recorded at the estimated fair value as of March 31, 1997 and historical accumulated depreciation was eliminated at that date. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed using principally the straight-line method over the estimated useful lives of the assets. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in income.
Revenue Recognition -- Sales represent amounts invoiced to customers by Metallurg and such revenue is recognized when the product is shipped and title to the product passes to the customer. In certain instances, Metallurg arranges sales for which the supplier invoices the customer directly. In such cases, Metallurg receives commission income, which is recognized when the supplier passes title to the customer.
Environmental Remediation Costs -- In accordance with SOP No. 96-1, "Environmental Remediation Liabilities", losses associated with environmental remediation obligations are accrued when such losses are deemed probable and reasonably estimable. Such accruals generally are recognized no later than the completion of the remedial feasibility study and are adjusted as further information develops or circumstances change. Cost of future expenditures for environmental remediation obligations are generally not discounted to their present value.
Valuation of Long-Lived Assets -- In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", Metallurg periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
Income Taxes -- Metallurg uses the liability method whereby deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of Metallurg's assets and liabilities. Metallurg does not provide for U.S. Federal income taxes on the accumulated earnings considered permanently reinvested in certain of its foreign subsidiaries which approximated $38,900,000, $40,000,000 and $37,000,000 at January 31, 2000, January 31, 1999 and January 31, 1998, respectively.
These earnings have been invested in facilities and other assets and have been subject to substantial foreign income taxes, which may or could offset a major portion of any tax liability resulting from their remittance and inclusion in U.S. taxable income. Accordingly, Metallurg does not provide for U.S. income taxes on foreign currency translation adjustments related to these foreign subsidiaries.
Retirement Plans -- Pension costs of Metallurg, Inc. and its domestic consolidated subsidiaries are funded or accrued currently. Metallurg's foreign subsidiaries maintain separate pension plans for their employees. Such foreign plans are either funded currently or accruals are recorded in the respective balance sheets to reflect pension plan liabilities.
Stock-Based Compensation -- Metallurg accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25. Accordingly, compensa-
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tion cost for stock options is measured as the excess, if any, of the market price of Metallurg, Inc.'s common stock at the date of grant over the amount an employee must pay to acquire the stock. Disclosures required with respect to alternative fair value measurement and recognition methods prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" are presented in Note 13.
Foreign Exchange Gains and Losses -- Foreign exchange transaction gains of $954,000, $618,000, $987,000 and $712,000 were recorded for the years ended January 31, 2000 and 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997, respectively. Translation gains and losses resulting from reporting foreign subsidiaries in U.S. dollars are recorded directly to shareholders' equity.
Financial Instruments -- Metallurg enters into foreign exchange contracts in the regular course of business to manage exposure against fluctuations on sales and raw material purchase transactions denominated in currencies other than the functional currencies of its businesses. Unrealized gains and losses are deferred and recognized in income or as adjustments of carrying amounts when the hedged transactions are included in income. Gains and losses on unhedged foreign currency transactions are included in income. Metallurg does not hold or issue financial instruments for trading purposes.
Extraordinary Item -- In November 1997, Metallurg recognized an extraordinary charge of $792,000, net of tax of $473,600, as a result of the early retirement of Metallurg, Inc.'s 12% senior-secured notes due 2007 and the United Kingdom subsidiary's term loan due 2000. The notes were redeemed at 103% and 101% of principal amount, respectively, with accrued interest to the date of redemption.
Recently Issued Accounting Pronouncements -- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Metallurg is currently evaluating the impact SFAS No. 133 will have on its financial statements.
Earnings Per Share -- Earnings per share is not presented since Metallurg, Inc. is a wholly owned subsidiary of Metallurg Holdings.
Reclassification -- Certain prior year amounts were reclassified to conform to 2000 presentations.
2. MERGER
On July 13, 1998, Metallurg, Inc. was acquired by a group of investors led by Safeguard International. The acquisition was accomplished by Metallurg Acquisition Corp., a wholly owned subsidiary of Metallurg Holdings, a Delaware corporation, merging with and into Metallurg, Inc., with Metallurg, Inc. being the surviving company and Metallurg Holdings becoming the sole parent of Metallurg, Inc. (the "Merger"). Metallurg Holdings was formed on June 10, 1998 and is owned by Safeguard International, an international private equity fund that invests primarily in equity securities of companies in process industries, certain limited partners of Safeguard International, certain individuals and a private equity fund.
In connection with the Merger, Metallurg, Inc. received the consents of 100% of the registered holders of its $100,000,000 senior notes (the "Senior Notes") to a one-time waiver of the change of control provisions of the Senior Note indenture to make such provisions inapplicable to the Merger and to amend the definition of "Permitted Holders" under the Senior Note indenture to reflect the post-merger ownership of Metallurg, Inc.. No other modifications to terms of outstanding debt were affected in this regard. At the time of the Merger, each outstanding share of Metallurg, Inc. common stock was converted into the right to receive $30 in cash. As of July 13, 1998, in connection with the Merger, all of the then outstanding shares of common stock of
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Metallurg, Inc. were cancelled and 100 shares of common stock, $0.01 par value, were issued to Metallurg Holdings.
Merger-related costs of $7,888,000 were incurred, and recorded as expense by Metallurg, Inc., in the year ended January 31, 1999 and included (a) $3,541,000 for payments to cancel compensatory stock options; (b) $625,000 in consent fees incurred in order to obtain the one-time waiver of the change of control provisions of the Senior Note indenture; (c) $2,822,000 for payments made pursuant to existing employment agreements with Metallurg, Inc. management and (d) $900,000 of other merger-related costs.
3. PLAN OF REORGANIZATION AND FRESH-START REPORTING
Costs of administration of the Chapter 11 proceedings approximating $2,663,000 were recorded by the Debtors during the quarter ended March 31, 1997 and have been included as reorganization expense in the Statements of Consolidated Operations. Those expenses consisted primarily of legal, administration, consulting and other similar expenses.
Condensed financial statements for the Debtors follow (in thousands):
METALLURG, INC. AND SHIELDALLOY METALLURGICAL CORP. CONDENSED STATEMENT OF OPERATIONS
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
METALLURG, INC. AND SHIELDALLOY METALLURGICAL CORP.
CONDENSED BALANCE SHEET
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
METALLURG, INC. AND SHIELDALLOY METALLURGICAL CORP.
CONDENSED STATEMENT OF CASH FLOWS
On the Effective Date, claims related to prepetition liabilities and administrative expenses were discharged through distributions of $59,366,000 in cash, the issuance of $39,461,000 of senior-secured notes and 4,706,406 shares of new common stock. The value of the cash and securities distributed was less than the recorded liabilities and the resultant net gain of $47,211,000 was recorded as an extraordinary item, net of tax effects of nil due to statutory exemption and utilization of net operating loss carryforwards. Such net operating loss carryforwards had previously been offset in full by a valuation allowance.
Metallurg was required to adopt fresh-start reporting because the holders of the existing voting shares immediately prior to filing and confirmation of the Reorganization Plan received less than 50% of the voting shares of the emerging entity and its reorganization value was less than the total of its post-petition liabilities and allowed claims. SOP 90-7 required Metallurg to revalue its assets and liabilities to their estimated fair value and to recognize as a reduction of long-term assets the excess of the fair value of its identifiable assets over the total reorganization value of its assets as of the Effective Date. Accordingly, Metallurg's property, plant and equipment and other noncurrent assets were reduced by approximately $5,520,000. In addition, Metallurg's accumulated equity of approximately $4,733,000 and cumulative foreign currency translation adjustment of approximately $14,587,000 were eliminated. As a result of the adjustments made to reflect fresh-start reporting, a pre-tax revaluation credit of $5,107,000 is included in Metallurg's results of operations for the quarter ended March 31, 1997.
The total reorganization value assigned to Metallurg's assets was estimated by calculating projected cash flows before debt service requirements for a three-year period, plus an estimated terminal value of Metallurg calculated using an estimate of normalized operating performance and discount rates ranging from 13.5% to 16.5%. This amount was increased by (i) the estimated net realizable value of assets to be sold and (ii) estimated cash in excess of normal operating requirements.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of the Reorganization Plan and the implementation of fresh-start reporting on Metallurg's consolidated balance sheet as of March 31, 1997 were as follows (in thousands):
- --------------- Notes:
(a) To record the distribution of cash and securities, the settlement of liabilities subject to compromise and other transactions in accordance with the Reorganization Plan.
(b) To adjust assets and liabilities to their estimated fair value.
(c) To reduce long-term assets for the excess of the fair value of identifiable net assets over the total reorganization value as of the Effective Date.
(d) To eliminate the accumulated deficit and cumulative foreign currency translation adjustment in accordance with fresh-start reporting.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SEGMENTS AND RELATED INFORMATION
Metallurg adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" in the year ended January 31, 1999 which changes the way Metallurg reports information about its reportable segments. The accounting policies of the reportable segments are the same as those described in Note 1. Information for prior periods presented have been restated in order to conform to the current year presentation.
Metallurg operates in one significant industry segment, the manufacture and sale of ferrous and non-ferrous metals and alloys. Metallurg is organized geographically, having established a worldwide sales network built around Metallurg's core production facilities in the United States, the United Kingdom and Germany. In addition to selling products manufactured by Metallurg, Metallurg distributes complementary products manufactured by third parties.
REPORTABLE SEGMENTS
Shieldalloy -- This unit is comprised of two production facilities in the U.S. The New Jersey plant manufactures and sells aluminum alloy grain refiners and alloying tablets for the aluminum industry, metal powders for the welding industry and specialty ferroalloys for the superalloy and steel industries. The Ohio plant manufactures and sells ferrovanadium and vanadium based chemicals used mostly in the steel and petrochemical industries. In addition to its manufacturing operations, Shieldalloy imports and distributes complementary products manufactured by affiliates and third parties.
London & Scandinavian Metallurgical Co., Ltd. and its subsidiaries (collectively, "LSM") -- This unit is comprised mainly of three production facilities in the UK which manufacture and sell aluminum alloy grain refiners and alloying tablets for the aluminum industry, chromium metal and specialty ferroalloys for the steel and superalloy industries and aluminum powder for various metal powder consuming industries.
Gesellschaft fur Elektrometallurgie mbH and its subsidiaries (collectively, "GfE") -- This unit is comprised of two production facilities and a sales office in Germany. The Nuremburg plant manufactures and sells a wide variety of specialty products, including vanadium based chemicals and sophisticated metals, alloys and powders used in the titanium, superalloy, electronics, steel, biomedical and optics industries. The Morsdorf plant produces medical prostheses, implants and surgical instruments for orthopedic applications.
Elektrowerk Weisweiler GmbH ("EWW") -- This production unit, also located in Germany, produces various grades of low carbon ferrochrome used in the superalloy, welding and steel industries.
Summarized financial information concerning Metallurg's reportable segments is shown in the following table (in thousands). Each segment records direct expenses related to its employees and operations. The "Other" column includes corporate related items, fresh start adjustments and results of subsidiaries not
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
meeting the quantitative thresholds as prescribed by applicable accounting rules for determining reportable segments. Metallurg does not allocate general corporate overhead expenses to operating segments.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents revenue by region based on the location of the user of the product (in thousands):
Metallurg sells its products in over 50 countries. Information regarding sales by country is not available for the three quarters ended January 31, 1998 and the quarter ended March 31, 1997, respectively. In the years ended January 31, 2000 and 1999, however, sales by country include (in thousands):
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents property, plant and equipment by country based on the location of the assets (in thousands):
5. RESTRUCTURING
During the second quarter of 1999, Metallurg initiated a restructuring program. The restructuring is intended to reduce Metallurg's cost structure, to streamline management and production functions and focus resources in support of higher margin products at core production units. The restructuring plan includes the discontinuation of certain production activities, termination of employees, a facility closing and the write-down of certain redundant plant and equipment and related spare parts and supplies. The restructuring predominantly affects Metallurg's operations in Europe. Details of the restructuring charge are as follows (in thousands):
During 1999, a charge of approximately $4,179,000 was recorded with respect to the restructuring of Metallurg's German operations (GfE and EWW). Approximately 94 employees were notified of terminations as operations were curtailed in line with current demands for Metallurg's products. Provisions of $2,393,000 for severance costs, $1,223,000, primarily for the write-down of redundant fixed assets, and $563,000 of other costs were recorded. During 1999, 49 employees terminated service pursuant to the restructuring plan and payments totaling $1,038,000 were made in respect of these severance costs. The balance of such costs will be substantially disbursed by the end of 2001, when certain production activities are permanently closed down. Additionally, fixed assets and spare parts with an aggregate net book value of approximately $863,000 were taken out of service during the year.
During the fourth quarter of 1999, a charge of approximately $2,357,000 was recorded with respect to the restructuring of Metallurg's UK operations (LSM). Fifty-five employees were notified of terminations as part of LSM's plan to simplify its organization and reduce costs by restructuring its businesses into fewer operating divisions. In addition, administrative functions are to be relocated to its Rotherham plant site from its London office, which will be closed. Provisions of $2,145,000 for severance costs and $212,000 related to the costs of the office closing were recorded. During 1999, 27 employees were terminated and payments of approximately $998,000 were made in respect of these severance costs. The restructuring is to be completed and substantially all remaining costs are to be paid during 2000.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS
MINORITY INTEREST
In September 1999, GfE established a 60% controlling interest in a new facility to be built in Italy to recover vanadium from residues generated by power plants. An EU grant will provide a major part of the capital cost of the plant, which should be on-stream in mid-2001. Amounts related to the 40% ownership interests are reported as Minority Interest in the consolidated financial statements.
INVESTMENTS IN AFFILIATES
In February 1998, Metallurg purchased a second 5% interest in Solikamsk Magnesium Works, a Russian magnesium metal producer, for approximately $2,000,000. Also during March 1998, Metallurg, Inc. sold its minority investment in Compagnie des Mines et Metaux S.A., a Luxembourg affiliate, for proceeds of approximately $1,100,000, resulting in a gain of approximately $900,000.
In March 1997, Metallurg, Inc. sold its 50% interest in AMPAL, Inc. for proceeds approximating book value of $1,200,000.
7. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
8. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows (in thousands):
Depreciation expense related to property, plant and equipment charged to operations for the years ended January 31, 2000 and 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997 was $7,660,000, $7,959,000, $5,320,000 and $2,126,000, respectively.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RETIREMENT PLANS
DEFINED BENEFIT PLANS
The following table summarizes the changes in benefit obligation and changes in plan assets for Metallurg's operations in the U.S., UK and Germany in the periods presented (in thousands). Summary data for the other foreign subsidiaries is included below under the caption "Other Benefit Plans".
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the components of net periodic benefit cost (in thousands):
The following tables summarize the funded/unfunded status of Metallurg's pension plans in the U.S., UK and Germany.
Metallurg, Inc. and its domestic consolidated subsidiaries have defined benefit pension plans covering substantially all salaried and certain hourly paid employees. The plans generally provide benefit payments using a formula based on an employee's compensation and length of service. These plans are funded in amounts equal to the minimum funding requirements of the Employee Retirement Income Security Act. Substantially all plan assets are invested in cash and short-term investments or listed stocks and bonds. The funded status of these plans is as follows (in thousands):
LSM maintains a defined benefit pension plan covering all eligible employees. Substantially all plan assets are invested in listed stocks and bonds. The funded status of this plan is as follows (in thousands):
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Metallurg's German subsidiaries maintain defined benefit pension plans covering substantially all eligible employees. The funded status of these plans is as follows (in thousands):
OTHER BENEFIT PLANS
Metallurg, Inc. maintains a discretionary defined contribution profit sharing plan covering substantially all of the salaried employees of Metallurg, Inc. and its domestic consolidated subsidiaries. The related expense, net of forfeitures, was $15,000, $207,000, $165,000 and $62,000 in the years ended January 31, 2000 and 1999, the three quarters ended January 31,1998 and the quarter ended March 31, 1997, respectively.
Balance sheet accruals for pension plans of Metallurg, Inc.'s other foreign subsidiaries approximate or exceed the related actuarially computed value of accumulated benefit obligations. Accrued pension liabilities for these plans were $479,000 and $506,000 at January 31, 2000 and January 31, 1999, respectively. Pension expense relating to these plans was $74,000, $213,000, $353,000 and $96,000 for the years ended January 31, 2000 and 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997, respectively.
10. BORROWINGS
Long-term debt consists of the following (in thousands):
METALLURG, INC. AND DOMESTIC SUBSIDIARIES
In November 1997, Metallurg, Inc. sold the $100,000,000 Senior Notes which mature in 2007 and accrue interest at a rate of 11% per annum, payable semi-annually commencing in June 1998. The Senior Notes are redeemable at the option of Metallurg, Inc., in whole or in part, at any time on or after December 2002. Prior to December 1, 2000, a maximum of 34% of the Senior Notes may be redeemed with net proceeds of one or more public equity offerings of Metallurg, Inc. The Senior Notes are fully and unconditionally guaranteed by
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the U.S. subsidiaries of Metallurg, Inc. on a senior unsecured basis. The Senior Note indenture contains limitations on, among other things, the ability of Metallurg to incur indebtedness and enter into certain mergers, consolidations or asset sales. In addition, Metallurg, Inc. is prohibited from making dividends in an amount greater than 50% of its net income under terms of the Senior Note indenture.
On October 29, 1999, Metallurg, Inc., Shieldalloy and certain of their subsidiaries (the "Borrowers") renewed their existing credit facility with certain financial institutions led by Fleet National Bank (formerly known as BankBoston, N.A.) as agent (the "Revolving Credit Facility") for a term of five years. This facility provides the Borrowers with up to $50,000,000 of financing resources and provides for a German subfacility (as discussed below). Interest is charged at a rate per annum equal to (i) LIBOR, plus 2.0% - 2.5% or (ii) Prime, plus up to 1.0% based on the performance of Metallurg, Inc. and certain of its subsidiaries (the "North American Group"), as defined in the Revolving Credit Facility. Interest rates on amounts borrowed will be adjusted quarterly, commencing in the second quarter of 2000, based on the North American Group's fixed charge coverage ratio. The Revolving Credit Facility permits borrowings of up to $50,000,000 for working capital requirements and general corporate purposes, up to $35,000,000 of which may be used for letters of credit in the U.S. The Revolving Credit Facility continues to prohibit Metallurg, Inc. from making dividends prior to 2004 and requires the Borrowers and certain subsidiaries to comply with various covenants, including the maintenance of minimum liquidity, as defined in the agreement, at a $10,000,000 level.
The Borrowers are required to pay a fee of 0.375% per annum on the unused portion of the commitment. The total amount the Borrowers may borrow at any time is limited to a borrowing base calculation that is based on eligible accounts receivable, inventory and certain fixed assets. At January 31, 2000, there were no borrowings under this facility; however, outstanding letters of credit approximated $23,576,000. Substantially all assets of the North American Group are pledged as collateral under this agreement.
At September 2, 1993 (the "Petition Date"), the Debtors were in default of certain provisions of certain debt agreements. With minor exceptions, repayment of the amounts outstanding at that date had been deferred pursuant to the Chapter 11 proceedings. Subsequent to the Chapter 11 filings, the Debtors did not accrue interest on any of these obligations, except for secured debt, incurred on or before the Petition Date. Contractual interest on these unsecured obligations approximated $2,136,000 in excess of interest expense reflected in the Statements of Consolidated Operations for the quarter ended March 31, 1997.
FOREIGN SUBSIDIARIES
Pursuant to the Revolving Credit Facility, Fleet National Bank, through its London office, makes available up to DM 20,500,000 (approximately $10,600,000) of financing to GfE (the "German Subfacility"), which is guaranteed by the Borrowers and certain subsidiaries under the Revolving Credit Facility. At January 31, 2000, borrowings under the German Subfacility were immaterial. Short-term secured borrowings of GfE with local banks totaled DM 500,000 (approximately $255,000) at January 31, 2000 at a weighted average interest rate of 5.1%. In August 1998, GfE entered into a term loan with IKB Deutsche Industrie Bank in the amount of DM 10,000,000 (approximately $5,100,000). The loan, which matures in 2008, bears interest at a rate of 3.9% and is secured by certain property of GfE. GfE also has secured term loans approximating DM 2,100,000 (approximately $1,100,000) maturing through 2004 and bearing interest at a weighted average rate of 6.1%.
LSM has two revolving credit facilities which provide LSM with up to L11,000,000 (approximately $17,800,000) of borrowings. A facility expiring in October 2000 provides up to L7,000,000 (approximately $11,300,000) of borrowings, up to L3,300,000 (approximately $5,300,000) of foreign exchange exposure and up to L2,300,000 (approximately $3,700,000) for other ancillary banking arrangements including bank guarantees. Borrowings under this facility are payable on demand. Outstanding loans under this facility bear
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at the lender's base rate plus 1.0%. At January 31, 2000, there were no outstanding borrowings under the facility. A second revolving facility provides LSM with up to L4,000,000 (approximately $6,500,000) of borrowings and L10,300,000 (approximately $16,600,000) of forward exchange contracts. This facility, which expires in December 2000, is unsecured and borrowings bear interest at a rate of 1.0% over the bank's base rate. At January 31, 2000, there were no borrowings under this facility. On September 10, 1999, LSM entered into a term loan facility with HSBC Bank plc (formerly known as Midland Bank plc) in the amount L6,000,000 (approximately $9,700,000), the proceeds of which are to be used to finance capital expenditures. This facility, which is unsecured, expires in December 2006, seven years from the first drawing. Quarterly repayments commence in December 2002 and outstanding loans under this facility bear interest at LIBOR plus 1.0%. At January 31, 2000, outstanding borrowings under this facility were L1,250,000 (approximately $2,000,000).
EWW, has committed lines of credit with several banks in the aggregate amount of DM 15,200,000 (approximately $7,800,000). The credit facilities currently bear interest at rates from 7.8% to 8.4%. The credit agreements require EWW to pledge certain assets, which include accounts receivable, inventory and fixed assets. At January 31, 2000, there were no borrowings under these facilities. EWW also has a term loan of DM 1,644,000 (approximately $850,000) maturing in 2001. The term loan is secured by a mortgage on certain real property and bears interest at 4.5%. In 1998, EWW borrowed DM 1,478,000 (approximately $760,000) to fund capital additions. The loan, which matures in 2008, bears interest at 4.25%.
Metallurg, Inc.'s other foreign subsidiaries maintain short-term secured and unsecured borrowing arrangements, generally in local currencies, with various banks. Borrowings under these arrangements aggregated $837,000 at January 31, 2000 at a weighted average interest rate of 12.1%.
Interest expense totaled $13,255,000, $12,833,000, $8,270,000 and $1,706,000 for the years ended January 31, 2000 and 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997, respectively.
The scheduled maturities of long-term debt during the next five years are $833,000 in 2000, $1,472,000 in 2001, $1,604,000 in 2002, $2,301,000 in 2003, $778,000 in 2004 and $102,907,000 thereafter.
11. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, other current assets, accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.
Fair values for investments in affiliates are not readily available.
The aggregate fair value of short-term bank debt approximates its carrying amount because of recent and frequent repricing based on market conditions.
Based on quoted market prices, the fair value of Metallurg, Inc.'s $100,000,000 Senior Notes, issued in November 1997, approximates $90,000,000 and $89,000,000 at January 31, 2000 and January 31, 1999, respectively. The carrying amount of other long-term debt approximates fair value.
Metallurg enters into foreign exchange contracts in the regular course of business to manage exposure against fluctuations on sales and raw material purchase transactions denominated in currencies other than the functional currencies of its businesses. The contracts mature at the anticipated cash requirement date, generally within 12 months, and are principally unsecured foreign exchange contracts with select banks. The notional values provide an indication of the extent of Metallurg's involvement in such instruments but do not represent its exposure to market risk, which is essentially limited to risk related to currency rate movements. The counterparties to these contractual arrangements are a diverse group of major financial institutions with which Metallurg also has other financial relationships. Metallurg is exposed to credit risk generally limited to unrealized gains in such contracts in the event of nonperformance by counterparties of those financial METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings.
At January 31, 2000, Metallurg had a total of $18,706,000 (of notional value) of foreign exchange forward purchase contacts with a deferred gain of $130,000 and $38,056,000 (of notional value) of foreign exchange forward sale contracts with a deferred gain of $344,000. The contracts are predominately denominated in the following currencies: Deutsche Marks, Euros and U.S. Dollars.
12. INCOME TAXES
For financial reporting purposes, (loss) income before income tax provision and extraordinary item includes the following components (in thousands):
The reconciliation of income tax from continuing operations computed at the U.S. Federal statutory tax rate to Metallurg's effective tax rate is as follows (dollars in thousands):
The income tax provision (benefit) represents the following (in thousands):
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. Federal income tax refunds receivable of $750,000 and $4,180,000, at January 31, 2000 and January 31, 1999, respectively, consists of carryback claims related to environmental expenses in the amount of $750,000. The balance at January 31, 1999 also consists of Federal tax deposits in excess of estimated liabilities and Federal income tax audit adjustments receivable which were subsequently collected. These receivables are reflected in prepaid expenses in the accompanying Consolidated Balance Sheets.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of Metallurg's deferred tax assets and liabilities are as follows (in thousands):
At January 31, 2000, Metallurg has net operating loss carryforwards relating to domestic operations of approximately $18,842,000 (subject to certain limitations relative to utilization) which expire through 2020 and Alternative Minimum Tax Credit carryforwards of approximately $700,000 which can be carried forward indefinitely. Metallurg, Inc.'s consolidated foreign subsidiaries have income tax loss carryforwards aggregating approximately $81,616,000, a substantial portion of which relates to German operations which do not expire under current regulations and certain Brazilian operations which partially expire through 2005. Due to significant uncertainties surrounding the realization of certain loss carryforwards, the related deferred tax assets have been substantially provided for in the valuation allowance at January 31, 2000. However, during the period ended March 31, 1997, Metallurg determined that a German subsidiary has sufficiently demonstrated the ability to generate earnings and the valuation allowance of $6,032,000 relating to that subsidiary was appropriately reversed. Such benefit from a reduction in valuation allowance was partly offset by a deferred tax provision relating to an adjustment of UK pension liabilities. Included within the deferred tax benefit are the deferred tax effects of certain deferred tax assets for which a corresponding credit has been recorded to "Additional paid-in capital" approximat-
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ing $960,000 and the deferred tax effects of certain deferred tax assets, primarily foreign net operating losses, for which a benefit has previously been recognized in the amount of $287,000.
The adoption of fresh-start reporting results in an increase of additional paid-in capital, rather than an income tax benefit, as the benefits relating to existing deferred tax assets are recognized.
13. SHAREHOLDER'S EQUITY (DEFICIT)
At December 31, 1996, 10,000 shares of common stock were authorized, of which 2,005 shares were outstanding. This stock had no par value and a stated value of $10 per share. In addition, 300,000 shares of preferred stock were authorized, having a par value of $100 per share, of which no shares were outstanding at December 31, 1996.
Effective April 14, 1997, the Certificate of Incorporation of Metallurg, Inc. was amended, where by the authorized number of shares of common stock was increased to 15,000,000 shares with a par value of $.01 per share, and each original outstanding share of common stock of Metallurg, Inc. was subsequently cancelled. In addition, in accordance with the Reorganization Plan, 4,706,406 shares were issued to prepetition unsecured claimholders. Metallurg, Inc. was subsequently merged into a new corporation, organized under the laws of the State of Delaware, and all common shares then outstanding were exchanged on a one-for-one basis for shares in the new corporation.
At the time of the Merger, each outstanding share of Metallurg, Inc. common stock was converted into the right to receive $30 in cash. As of July 13, 1998, in connection with the Merger, all of the then outstanding
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock of Metallurg, Inc. were cancelled and 100 shares of common stock, $0.01 par value, were issued to Metallurg Holdings. In November 1998, the Certificate of Incorporation of Metallurg, Inc. was amended to provide for 10,000,000 authorized shares of common stock and Metallurg, Inc. consummated a 50,000 for 1 stock split and, as a result, Metallurg, Inc. has 5,000,000 shares of common stock, $0.01 par value, outstanding, all of which are owned by Metallurg Holdings.
Metallurg, Inc. is restricted from paying to its shareholders as a result of the Senior Note indenture related to the Senior Notes offering, which, in general, prohibits Metallurg, Inc. from making dividends in an amount greater than 50% of its net income, as defined in the Senior Note indenture. In addition, Metallurg, Inc.'s revolving credit facility with Fleet National Bank limits the payment of dividends.
Total comprehensive (loss) income totaled $(20,173,000), $871,000, $6,945,000, $56,730,000 for the years ended January 31, 2000 and 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997, respectively.
STOCK COMPENSATION PLANS
1998 Equity Compensation Plan (the "ECP") -- On November 20, 1998, 500,000 shares of common stock were made available for stock awards and stock options under the ECP. Options issued have a term of ten years and vest in virtually all cases 20% on the date of grant and 20% on each of the first four anniversaries of the date of grant. The weighted average remaining life of options outstanding at January 31, 2000 was 8.8 years.
Stock option transactions under the ECP are summarized as follows:
Had compensation cost for Metallurg, Inc.'s stock option plan been determined based upon the fair value at the grant date, consistent with SFAS No. 123, Metallurg, Inc.'s net income would have been reduced by approximately $385,000 and $557,000 in the years ended January 31, 2000 and 1999, respectively. Principal
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumptions used in applying the Black-Scholes model for options granted in the periods presented were as follows:
Management Stock Award and Stock Option Plan (the "SASOP") -- On April 14, 1997, 500,000 shares of common stock were made available for stock awards and stock options under the SASOP. Pursuant to the Plan, the Board granted to eligible executives 250,000 shares of common stock (the "Initial Stock Awards"). Twenty percent of each Initial Stock Award was transferable on the date of grant and 40 percent was to become transferable on the first and second anniversary of the date of grant. Additionally, the Board granted to eligible employees options to purchase 167,000 shares of common stock at $11.38 (fair market value on the date of grant), effective as of September 1, 1997, and 20,000 shares of common stock at $8.43 (fair market value on the date of grant), effective as of April 1, 1998. Such options vested 33 1/3% on the date of grant and 33 1/3% were to vest on the first and second anniversary of the date of grant. At the time of the Merger, the Initial Stock Awards then outstanding became fully vested and Metallurg, Inc. recorded additional compensation expense of approximately $355,000. In addition, outstanding stock options became fully vested and holders were therefore entitled to receive $30 per share as part of the purchase of Metallurg, Inc. Metallurg, Inc. recorded compensation expense of $3,541,000, which represents the excess of the $30 per share purchase price over the exercise prices noted above. Metallurg, Inc. was reimbursed for such stock option cancellation costs by a capital contribution from Safeguard International at the time of the Merger. This plan terminated in 1998.
Metallurg, Inc. accounted for the SASOP using the intrinsic value method in accordance with APB No. 25. Accordingly, compensation expense related to the Initial Stock Awards of $750,000, $1,250,000 and $500,000 was recognized in the year ended January 31, 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997, respectively, and no compensation expense was recognized for the stock options granted. Had compensation cost for Metallurg, Inc.'s stock option plan been determined based upon the fair value at the grant date, consistent with SFAS No. 123, Metallurg, Inc.'s net income would have been reduced by approximately $246,000 in the three quarters ended January 31, 1998. The estimated fair value of options granted during the three quarters ended January 31, 1998 was $1.47 at the date of grant. Principal assumptions used in applying the Black-Scholes model for options granted in this period were as follows: (i) expected volatility 13%; (ii) no expected dividend yield; (iii) expected life of 2 years and (iv) a risk-free interest rate of 5.25%.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER (EXPENSE) INCOME, NET
Other (expense) income, net consists of the following (in thousands):
In the year ended January 31, 1999, GfE was successful in recovering approximately $1,351,000 of additional proceeds from a government-owned insurance agency representing final settlement for claims under GfE's political risk insurance policy related to an investment in the former Zaire.
In the three quarters ended January 31, 1998, GfE sold certain plant assets no longer in productive use and recorded a gain of approximately $1,700,000.
During 1997, Metallurg, Inc. sold one of its commercial real estate properties located in New York City in contemplation of the Reorganization Plan. A gain of $2,747,000 is reflected in other income in the quarter ended March 31, 1997.
15. ENVIRONMENTAL LIABILITIES
Metallurg's alloy manufacturing operations in Newfield, New Jersey; Cambridge, Ohio; Nuremberg and Weiswieler, Germany; and Sao Joao del Rei, Brazil are subject to environmental laws and regulations for which Metallurg has incurred environmental liabilities. These liabilities are primarily related to the investigation and remediation of contamination resulting from historic operations.
Total environmental liabilities consist of the following (in thousands):
Shieldalloy entered into administrative consent orders with the New Jersey Department of Environmental Protection, under which Shieldalloy must conduct remediation activities at the Newfield facility. These obligations, which were reaffirmed as part of the Reorganization Plan, include the closure of wastewater lagoons, the decontamination of groundwater, soil remediation, surface water and sediment clean up, wetlands restoration and related operation and maintenance activities. Shieldalloy accrued its best estimate of the
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
associated costs with respect to remedial activities at the site, which it expects to disburse over the next 10-15 years. During the quarter ended March 31, 1997, prepetition letters of credit, in the amount of $8,200,000, were drawn upon and deposited in a trust fund. Subsequently, pursuant to an agreement with the State of New Jersey, Shieldalloy was permitted to withdraw cash from the environmental trust and substitute letters of credit in an equivalent dollar amount. At January 31, 2000, outstanding letters of credit issued as financial assurances in favor of various environmental agencies total $21,419,000. The costs of providing financial assurance over the term of the remediation activities have been contemplated in the accrued amounts.
Historic manufacturing processes at both Newfield and Cambridge have resulted in on-site slag piles containing naturally-occurring radioactivity. Shieldalloy is not under any regulatory obligation to decommission the slag pile at the Newfield site. However, as related production has ceased at the Cambridge site, Shieldalloy plans to decommission and to cap the slag piles on-site. Financial assurance for implementation of such plans is partially assured by cash funds held in trust. As a condition precedent to consummation of the Reorganization Plan, $1,500,000 in a prepetition letter of credit, relating to both the Newfield and Cambridge facilities, was drawn upon and deposited in a trust fund.
Shieldalloy and Cyprus Foote Mineral Company ("Cyprus Foote"), the former owner of the Cambridge site, entered into a consent order with the State of Ohio in December 1996. Shieldalloy and Cyprus Foote agreed in the consent order to conduct remediation and decommissioning activities at the Cambridge site. Additionally, Shieldalloy and Cyprus Foote agreed to enhance, restore and preserve certain wetlands in the vicinity of the Cambridge site. Pursuant to the consent order, Shieldalloy and Cyprus Foote are jointly and severally liable to the State of Ohio in respect of these obligations. However, Shieldalloy has agreed with Cyprus Foote that it shall perform and be liable for the performance of these remedial obligations. Therefore, Shieldalloy has accrued its best estimate of associated costs which it expects to substantially disburse over the next five years.
With respect to the financial assurance obligations to the State of Ohio, Cyprus Foote has agreed to provide financial assurance of approximately $9,000,000 as required by the State of Ohio and Shieldalloy has purchased an annuity contract which will provide for future payments into the trust fund to cover certain of the estimated operation and maintenance costs over the next 100 years.
Metallurg, Inc.'s German subsidiaries have accrued environmental liabilities in the amounts of $3,349,000 and $4,443,000 at January 31, 2000 and January 31, 1999, respectively, to cover the costs of closing an off-site dump and for certain environmental conditions at a subsidiary's Nuremberg site. In Brazil, costs of $216,000 and $389,000 have been accrued at January 31, 2000 and January 31, 1999, respectively, to cover reclamation costs of the closed mine sites.
In June 1999, Shieldalloy recognized an environmental expense recovery of $5,500,000 upon settlement with an insurance company relating to coverage for certain environmental claims stemming from the 1960's and forward. These claims relate mostly to the historical costs of remedial activities at Shieldalloy's Newfield, New Jersey site.
16. CONTINGENT LIABILITIES
In addition to environmental matters, which are discussed in Note 15, Metallurg continues defending various claims and legal actions arising in the normal course of business. Management believes, based on the advice of counsel, that the outcome of such litigation will not have a material adverse effect on Metallurg's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that existing or future litigation will not result in an adverse judgment against Metallurg which could have a material adverse effect on Metallurg's future results of operations or cash flows.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. LEASES
Metallurg leases office space, facilities and equipment. The leases generally provide that Metallurg pays the tax, insurance and maintenance expenses related to the leased assets. At January 31, 2000, future minimum lease payments required under non-cancelable operating leases having remaining lease terms in excess of one year are as follows (in thousands):
Rent expense under operating leases for the years ended January 31, 2000 and 1999, the three quarters ended January 31, 1998 and the quarter ended March 31, 1997 was $1,453,000, $1,756,000, $938,000 and $511,000, respectively.
18. SUPPLEMENTAL GUARANTOR INFORMATION
In November 1997, Metallurg, Inc. issued $100 million principal amount of its 11% Senior Notes due 2007. Under the terms of the Senior Notes, Shieldalloy, Metallurg Holdings Corporation, Metallurg Services, Inc., Metallurg International Resources, Inc. ("MIR, Inc.") and MIR (China), Inc. (collectively, the "Guarantors"), wholly owned subsidiaries of Metallurg, Inc., have fully and unconditionally guaranteed on a joint and several basis Metallurg's obligations to pay principal, premium and interest relative to the Senior Notes. During the second quarter of 1999, Metallurg, Inc. established MIR, Inc. as a wholly owned subsidiary and a guarantor of the Senior Notes. Certain commercial activities previously carried out by Metallurg, Inc. are now being carried out by MIR, Inc. Management has determined that separate, full financial statements of the Guarantors would not be material to potential investors and, accordingly, such financial statements are not provided. Supplemental financial information of the Guarantors is presented below.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 2000 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 31, 2000 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2000 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1999 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 31, 1999 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 1999 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE QUARTERS ENDED JANUARY 31, 1998 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE QUARTERS ENDED JANUARY 31, 1998 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 1997 (IN THOUSANDS)
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS)
- --------------- (a) Includes environmental expense recovery of $5,501 in the 2nd quarter and $4,386 and $2,150 of restructuring charges in the 2nd and 4th quarters, respectively.
(b) Includes Merger-related costs of $4,416, $2,607 and $865 in the 2nd, 3rd and 4th quarters, respectively.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Metallurg, Inc.
Our audits of the consolidated financial statements referred to in our report dated March 17, 2000 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. The consolidated financial statements and financial statement schedule for periods prior to the period ended January 31, 1999 were audited by other independent accountants whose report dated April 1, 1998 expressed an unqualified opinion on those statements and related financial statement schedule.
PricewaterhouseCoopers LLP New York, New York March 17, 2000
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
- --------------- (a) Primarily the elimination of historical account upon revaluation of assets to fair value in accordance with fresh-start reporting at March 31, 1997.
(b) Foreign currency translation adjustments.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to the directors and executive officers of Metallurg Holdings:
Each director of Metallurg Holdings holds office until the next annual meeting of stockholders of Metallurg Holdings or until his or her successor has been elected and qualified. Officers of Metallurg Holdings are selected by the Board of Directors and serve at the discretion of the Board of Directors. Mr. Fastuca resigned as Chief Financial Officer and Treasurer of Metallurg Holdings in April 2000.
Heinz C. Schimmelbusch -- Dr. Schimmelbusch became Chief Executive Officer, President and a Director of Metallurg Holdings in July 1998, as well as Chairman of the Board and a Director of Metallurg, Inc. He is a Managing Director of the general partner and of the management company of Safeguard International. He is also Chairman of Allied Resource Corporation, a company he founded in 1994 to pursue technology-oriented, early-stage investment opportunities in process industries. Until 1994, Dr. Schimmelbusch was Chairman of the Management Board of Metallgesellschaft AG, Germany, a multibillion dollar, multinational company in the process industries, and Chairman of the Supervisory Board of LURGI AG, Germany's leading process engineering firm; of Buderus AG, a leading manufacturer of commercial and residential heating equipment; of Dynamit Nobel AG, a leading manufacturer of explosives and specialty chemicals; and of Norddeutsche Affinerie AG, Europe's largest copper producer. Dr. Schimmelbusch has also served on the Boards of several German and other foreign corporations and institutions, including Allianz Versicherungs AG, Munich; Philipp Holzmann AG, Frankfurt; Mobil Oil AG, Hamburg; Teck Corporation, Vancouver; and on the Advisory Boards of Dresdner Bank AG and the European Bank of Reconstruction and Development. Dr. Schimmelbusch has been the founder and Chairman of a number of public companies in the process industries, including: Inmet Corporation, Toronto, (formerly Metall Mining Corporation); Methanex Corporation, Vancouver; and B.U.S. Umweltservice AG, Frankfurt. Dr. Schimmelbusch is a Director of Safeguard Scientifics, Inc., a diversified information technology company, a position he has held since 1989; Becancour Silicon Inc., Montreal, a silicon metal producer; and ALD Vacuum Technology AG, Frankfurt, a global supplier of industrial vacuum technology.
Arthur R. Spector -- Mr. Spector was elected to serve as a Director of Metallurg Holdings and Metallurg, Inc. in July 1998. He has been an Executive Vice President of Metallurg Holdings since July 1998. He is a Managing Director of the general partner and of the management company of Safeguard International. From January 1997 to March 1998, Mr. Spector served as Managing Director of TL Ventures LLC, a venture capital management company organized to manage day-to-day operations of TL Ventures III L.P. and TL Ventures III Offshore L.P. From January 1995 through December 1996, Mr. Spector served as Director of Acquisitions of Safeguard Scientifics, Inc. From July 1992 until May 1995, Mr. Spector served as Vice Chairman and Secretary of Casino & Credit Services, Inc. He has also been an officer of Abraham Lincoln Federal Savings Bank and State National Bank of Maryland. Mr. Spector serves as Chairman of Neoware Systems, Inc., a developer of network software; and as a Director of USDATA Corporation, a company which produces factory and process automation software; and Docucorp International, a document automation company. Mr. Spector holds a B.S. degree in electronics from the Wharton School of the University of Pennsylvania and a J.D. from the University of Pennsylvania Law School.
Michael R. Holly -- Mr. Holly became a Director and Executive Vice President of Metallurg Holdings in July 1998. He is also a Managing Director of the general partner and of the management company of Safeguard International. Mr. Holly is also Executive Vice President and Chief Financial Officer of Puralube, Inc. a co-investment by Safeguard Scientifics, Inc. and Allied Resource Corporation, which is commercializing a technology on a worldwide basis that re-refines used oil into high-quality base lube oils. Mr. Holly is a senior executive with over 30 years of combined experience in the areas of finance operations, marketing and strategic planning. Mr. Holly has spent the last five years providing merger and acquisition advisory services to a variety of companies, including the last four years working in close association with Safeguard Scientifics, Inc. Mr. Holly is a Certified Public Accountant and spent 12 years with Price Waterhouse LLP and three years with Coopers & Lybrand. For ten years, Mr. Holly served as the combined Chief Operating and Chief Financial Officer of a national professional services organization.
Samuel A. Plum -- Mr. Plum was appointed a Director of Metallurg Holdings in October 1998 and was appointed a Director of Metallurg, Inc. in November 1998. He has been a Managing General Partner of the general partner of SCP Private Equity Partners, L.P. since its commencement in August 1996 and was an employee of Safeguard Scientifics, Inc. from 1993 to 1996. From February 1989 to January 1993, Mr. Plum served as President of Charterhouse, Inc. and Charterhouse North American Securities, Inc., the U.S. investment banking and broker-dealer divisions of Charterhouse PLC, a merchant bank located in the United Kingdom. From 1973 to 1989, he served in various capacities, including Managing Director and partner, at the investment banking divisions of Painewebber Inc. and Blyth Eastman Dillon & Co., Inc., respectively. Mr. Plum is also a Director of PacWest Telecomm, Inc. Past directorships include Tishman Holdings Corporation, Icon CMT Corp., Vortex Sound Communications, Inc., Index Stock Photography, Inc., the Philadelphia Zoological Society, Quaker Fabrics Corporation and the National Audobon Society, the latter two as Chairman. Mr. Plum holds a B.A. degree in history from Harvard University and an M.B.A. degree from the Harvard Graduate School of Business Administration.
Douglas A. Fastuca -- Mr. Fastuca was Chief Financial Officer and Treasurer of Metallurg Holdings from 1998 until April 2000. He also served as Vice President of Corporate Development of Metallurg, Inc. and as a Director of the management company of Safeguard International until such time. Before joining Safeguard International, Mr. Fastuca was Director of Business Development in SEI Investment's Global Asset Management Unit from 1993 to 1997. He started his business career with General Electric holding financial assignments in manufacturing and international operations at GE Lighting and as a corporate auditor at GE Capital. Mr. Fastuca has a B.A. degree from Bucknell University and an M.B.A. from the Harvard Graduate School of Business Administration.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
None of the executive officers or directors of Metallurg Holdings received compensation from Metallurg Holdings during the year ended January 31, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 15, 2000, information with respect to each person (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act of 1934, as amended) who is known to the Company to be the beneficial owner of more than 5% of any class of Metallurg Holding's voting securities).
None of the directors, officers or management of Metallurg Holdings own any equity securities of Metallurg Holdings.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Dr. Schimmelbusch and Messrs. Plum, Holly and Spector, all of whom are directors of Metallurg Holdings, and Mr. Fastuca, who was an executive officer of Metallurg Holdings, are or were directors and/or officers of various companies that are associated, directly or indirectly, with Safeguard Scientifics, Inc., which has an ownership interest in Safeguard International. Pursuant to these positions, they receive or have received compensation from such entities.
Pursuant to an Advisory Agreement entered into as of January 1, 1999, between Safeguard International Management LLC (of which certain directors of Metallurg Holdings, Messrs. Schimmelbusch and Spector, are members) and Metallurg, Inc., Metallurg, Inc. has agreed to pay $33,000 per month through June 2000 in connection with certain advisory and other services. Messrs Schimmelbusch, Plum, Messman, Spector and Kindwall, certain of whom are directors of Metallurg Holdings and all of whom are directors of Metallurg, Inc. are directors and/or officers of various companies that are associated, directly or indirectly, with Safeguard Scientifics, Inc., which has an ownership interest in Safeguard International. Pursuant to these positions, they receive compensation from such entities.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
(1) A list of the financial statements filed as part of this report appears on page 23.
(2) The financial statement schedule required to be filed as part of this report appears on page 59.
(3) The following exhibits are filed as part of this report:
- --------------- (b) No reports were filed on Form 8-K during 1999.
(c) The exhibits listed under Item 14(a)(3) are filed herewith or incorporated herein by reference.
(d) The Consolidated Financial Statements and the financial statement schedules listed under Item 14(a)(2) are filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the undersigned registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized as of the 27th day of April, 2000.
METALLURG HOLDINGS, INC.
By: /s/HEINZ C. SCHIMMELBUSCH ------------------------------------ Heinz C. Schimmelbusch President and Chief Executive Officer
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 and on the date indicated.