10-Q 1 a36448.txt METALLURG, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to METALLURG, INC. (Exact name of registrant as specified in its charter) Delaware 13-1661467 (State of organization) (I.R.S. Employer Identification No.) 6 East 43rd Street (212) 835-0200 New York, New York 10017 (Registrant's telephone number, (Address of principal executive offices) including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X] The number of shares of common stock, $0.01 par value, issued and outstanding as of November 10, 2003 was 5,000,000. METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES INDEX

1 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED) (In thousands)

See notes to condensed unaudited consolidated financial statements. 2 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)

See notes to condensed unaudited consolidated financial statements. 3 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (In thousands)

See notes to condensed unaudited consolidated financial statements. 4 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying condensed unaudited consolidated financial statements include the accounts of Metallurg, Inc. and its majority-owned subsidiaries (collectively, "Metallurg"). These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information pursuant to Accounting Principles Board Opinion No. 28. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet as of December 31, 2002 was derived from audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements included in Metallurg's annual report on Form 10-K for the year ended December 31, 2002. Metallurg is a wholly owned subsidiary of Metallurg Holdings, Inc. ("Metallurg Holdings") since the acquisition date of July 13, 1998. The financial statements do not reflect the pushdown of purchase accounting adjustments recorded by Metallurg Holdings. Effective September 30, 2003, Metallurg, Inc. and its wholly owned subsidiary, Metallurg Holdings Corporation, sold all of its ownership interests in its Weisweiler, Germany manufacturing facility and its Turkish chrome ore mines. (See "Note 3. Change in Reporting Entity"). As the above transactions were between members of a common controlled group, as defined for accounting purposes, they are accounted for on an historical basis with no gain or loss being recorded, and the results presented herein have been restated to exclude the financial results of the companies sold and to reflect the new reporting entity. The financial statements for all prior periods have also been restated to exclude certain subsidiaries sold at December 31, 2002. See "Note 2. Change in Reporting Entity" to Metallurg's annual report on Form 10-K for the year ended December 31, 2002. 2. Segments and Related Information Metallurg operates in one significant industry segment, the manufacture and sale of performance-enhancing additives mainly for the metallurgical industry. Metallurg is organized around its major production facilities in the U.K., the U.S. and Brazil, which are supported by an established worldwide sales network. In addition to its own products, Metallurg distributes complementary products manufactured by third parties. Reportable Segments London & Scandinavian Metallurgical Co Limited and its subsidiaries (collectively, "LSM") - This unit is comprised mainly of three production facilities in the U.K. and another in Norway which manufactures and sells 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. Shieldalloy Metallurgical Corporation ("SMC") - This unit is comprised of two production facilities in the U.S. The Ohio plant manufactures and sells ferrovanadium and vanadium-based chemicals used mostly in the steel and petrochemical industries. The New Jersey plant currently manufactures and sells alloying tablets for the aluminum industry and metal powders for the welding industry. Companhia Industrial Fluminense ("CIF") - This unit is comprised mainly of two production facilities in Brazil. The Sao Joao del Rei plant manufactures and sells aluminum alloy grain refiners and alloying tablets for the aluminum industry and metal oxides used in the telecommunications, superalloy and specialty metal industries. The Nazareno mine extracts and concentrates ores containing tantalum and niobium that are processed, along with other raw materials, into metal oxides at the Sao Joao del Rei plant. 5 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Segments and Related Information - (Continued) In addition to their manufacturing operations, LSM and SMC import and distribute complementary products manufactured by affiliates and third parties. 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 and results of subsidiaries not 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. The accounting policies of the segments are the same as those for the consolidated group. Transactions among segments are established based on negotiation among the parties.

6 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Change in Reporting Entity Effective September 30, 2003, Metallurg completed the sale of certain subsidiaries as described below. As these transactions were between members of a common controlled group, as defined for accounting purposes, Metallurg has restated its financial statements for all periods to reflect a new reporting entity that excludes these subsidiaries. As a result, there is no gain or loss recorded and any proceeds received have been recorded as capital contributions from members of the common controlled group. Metallurg, Inc. and its wholly owned subsidiary, Metallurg Holdings Corporation, sold all of its interests in (a) Elektrowerk Weisweiler GmbH ("EWW"), a German corporation engaged in the manufacture of low carbon ferrochrome; and (b) Turk Maadin Sirketi A.S. ("TMS"), a Turkish corporation engaged in the mining of chrome ore. The shares and assets of EWW and TMS were sold to, and certain liabilities assumed by, LAGO Vierundzwanzigste GmbH ("LAGO"), a German company, for an aggregate purchase price of $10,000,000 in cash. The net book value of the entities sold was $12,612,000 at September 30, 2003. Revenue and net income (loss) for the three quarters ended September 30, 2003 were $27,887,000 and $106,000, respectively, for EWW and $2,942,000 and $(324,000), respectively, for TMS. LAGO is a wholly owned subsidiary of Sudamin Recycling GmbH & Co. KG ("Sudamin"), a German company. At September 30, 2003, Sudamin was an affiliate of Safeguard International Fund, L.P., the majority owner of Metallurg's parent, Metallurg Holdings, Inc. Dr. Heinz C. Schimmelbusch and Mr. Arthur Spector, both of whom are directors and officers of Metallurg, were also directors of Sudamin through the transaction date of September 30, 2003. 4. Restructuring Charges and Asset Impairment As a result of continuing weakness in operating performance, LSM announced on September 1, 2003 its intention to implement a restructuring plan designed to streamline production, improve productivity and reduce costs. Due to a significant deterioration in its metal catalyst business, LSM determined that certain of its plant assets were impaired because recovery of the net book values from projected future undiscounted cash flows could no longer be expected. In the third quarter of 2003, LSM recognized a $2,256,000 ($1,579,000 after-tax) non-cash impairment loss, which reduced the carrying value of these assets to nil. Plant operations will cease in the fourth quarter of 2003 and the plant assets will be abandoned. LSM expects to incur additional restructuring charges in the fourth quarter of 2003, relating to workforce reductions upon finalization of an overall restructuring plan. In the third quarter of 2003, a plan was implemented to consolidate sales and administrative functions performed by Metallurg's Canadian operations into the New Jersey operations of SMC. As a result of this plan, Metallurg recognized a pre-tax restructuring charge of $403,000, consisting of employee separation costs. Metallurg will incur additional costs of approximately $75,000 (primarily lease termination costs and professional fees) until activities cease completely in the first quarter of 2004. 7 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Stock-Based Compensation Metallurg accounts for its stock-based compensation plan using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation cost is reflected in net income, as all options granted under this plan had an exercise price at least equal to the estimated market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income if Metallurg had applied the fair value measurement and recognition methods prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" to record expense for stock option compensation (in thousands):

6. Inventories Inventories consist of the following (in thousands):

7. Borrowings On September 30, 2003, Metallurg received $10.0 million cash upon the sale of EWW and TMS. Metallurg believes it will have sufficient resources to fund the current and anticipated future requirements of debt service, working capital, capital expenditures, pension benefits and environmental expenditures for the next twelve months. In September 2003, LSM received a waiver from Barclays Bank plc regarding the minimum interest coverage ratio covenant on its revolving term loans for the period ended September 30, 2003. As LSM anticipates that it would not be in compliance with the existing covenant at December 31, 2003, it is currently in discussions with its lenders to restructure its facilities prior to that date, thereby extending the terms of the loans due in 2004 and adjusting the financial covenants. Metallurg believes that it will complete the restructuring of these facilities prior to December 31, 2003. See "Note 8. Borrowings" to Metallurg's annual report on Form 10-K for the year ended December 31, 2002. Metallurg Holdings, Metallurg, Inc.'s parent, does not have sufficient cash on hand to make its interest payment due in January 2004 on its Senior Discount Notes. While Metallurg, Inc. is permitted under the terms of its Senior Notes indenture to distribute cash to Metallurg Holdings for the purpose of making the January 2004 interest payment, Metallurg, Inc. could be prohibited from making cash distributions at such time under the restrictive covenants of its revolving credit facility. All of Metallurg, Inc.'s outstanding common stock has been pledged as collateral for Metallurg Holdings' obligations under the Senior Discount Notes. If Metallurg Holdings were unable to make its interest payment when due, it could lead to a foreclosure on its assets, principally the equity of Metallurg, Inc., and create a default under the terms of Metallurg, Inc.'s Senior Notes indenture. 8 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Contingent Liabilities Metallurg defends, from time to time, various claims and legal actions arising in the normal course of business, including those relating to environmental matters. Management believes, based on the advice of counsel, that the outcome of such matters 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 future litigation or proceedings will not result in an adverse judgment against Metallurg that could have a material adverse effect on Metallurg's future results of operations or cash flows. 9. Environmental Expense Recovery SMC realized an environmental expense recovery of $3,000,000 in 2002 upon receipt of a settlement with an insurance company relating to coverage for certain environmental claims. 10. Earnings Per Share Earnings per share is not presented since Metallurg, Inc. is a wholly owned subsidiary of Metallurg Holdings. 11. Recent Accounting Pronouncements Effective January 1, 2003, Metallurg adopted SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement covers all legally enforceable obligations associated with the retirement of tangible long-lived assets and provides the accounting and reporting requirements for such obligations. The adoption of SFAS No. 143 did not have a material impact on Metallurg's consolidated financial statements. Effective January 1, 2003, Metallurg adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity", under which a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value only once the liability is incurred. The adoption of SFAS No. 146 did not have a material impact on Metallurg's consolidated financial statements. In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued. The standard amends and clarifies financial reporting for derivative instruments and for hedging activities accounted for under SFAS No. 133 and is effective for contracts entered into or modified, and for hedges designated, after June 30, 2003. Adoption of SFAS No. 149 did not have a material impact on Metallurg's consolidated financial statements. In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the initial recognition and initial measurement, on a prospective basis only, of guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements are effective for financial statements ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on Metallurg's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which changes the criteria for including certain non-controlled affiliates, defined as variable interest entities ("VIE"), in a company's consolidated financial statements. FIN 46 requires consolidation of a VIE if the company is subject to a majority of the risk of loss or entitled to receive a majority of the residual returns of the VIE. Metallurg does not expect its non-controlled affiliates to require consolidation under FIN 46. 9 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Supplemental Guarantor Information In November 1997, Metallurg, Inc. issued $100 million principal amount of its Senior Notes. Under the terms of the Senior Notes, SMC, Metallurg Holdings Corporation, Metallurg Services, Inc., Metallurg International Resources, LLC 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, Inc.'s obligations to pay principal, premium and interest relative to the Senior Notes. 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. Condensed Consolidating Statement of Operations (Unaudited) Quarter Ended September 30, 2003 (In thousands)

10 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Supplemental Guarantor Information - (Continued) Condensed Consolidating Statement of Operations (Unaudited) Three Quarters Ended September 30, 2003 (In thousands)

11 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Supplemental Guarantor Information - (Continued) Condensed Consolidating Balance Sheet (Unaudited) September 30, 2003 (In thousands)

12 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Supplemental Guarantor Information - (Continued) Condensed Consolidating Statement of Cash Flows (Unaudited) Three Quarters Ended September 30, 2003 (In thousands)

13. Related Party Transactions During the quarter ended June 30, 2003, a group of equity investors of Metallurg Holdings, the parent company, purchased approximately $9 million face amount of the Senior Notes on the open market. In the three quarters ended September 30, 2003 and 2002, Metallurg received repayments of loans to a former subsidiary that was sold on December 31, 2002, in the amounts of $1,000,000 and $4,000,000, respectively. See "Note 1. Basis of Presentation" and "Note 3. Change in Reporting Entity" regarding the disposition of EWW and TMS to an affiliate. 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as "plans", "expect", "believe", "should", "could", "anticipate", "intend" and other expressions that indicate future events or trends. All statements that address expectations or projections about the future, including statements about Metallurg's strategy for growth, product development, market position, expenditures and financial results are forward-looking statements and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of Metallurg to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Factors that may cause Metallurg's results to be materially different include: o The cyclical nature of Metallurg's business. o Metallurg's dependence on foreign customers. Metallurg operates throughout the world and derives a significant amount of its revenues from outside of the U.S. o The impact of changes in foreign exchange rates and foreign trade regulations on Metallurg's competitive standing. Revenues and earnings from outside the U.S. could be materially affected by exchange rate fluctuations. o The availability of raw materials, particularly vanadium-containing materials. o Labor relations. o The impact of worldwide competition. o The economic strength of Metallurg's markets generally and particularly the strength of the demand for aluminum, superalloys, titanium alloys, iron and steel in those markets. o The accuracy of Metallurg's estimates of the costs of environmental remediation. o The extension or expiration of existing anti-dumping duties. o The performance of world financial markets and the resulting effect on pension expense of Metallurg's defined benefit plans. o The ability to meet debt service and financial covenant requirements. o The adequacy of capital resources to fund operations and growth. o The possible disruption of business or increases in the cost of doing business resulting from terrorist activities or global conflicts. o Changes in tax laws, including changes related to taxation of foreign earnings. o Changes in accounting standards. Critical Accounting Estimates For a discussion of the critical accounting estimates affecting Metallurg, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Estimates" beginning on page 21 of Metallurg's annual report on Form 10-K for the year ended December 31, 2002. The critical accounting estimates affecting Metallurg have not changed since December 31, 2002. Overview Metallurg is a leading international producer and seller of high-quality specialty metals and metal alloys which are essential to the production of high-performance aluminum and titanium alloys, superalloys, specialty steels and certain non-metallic materials for various applications in the aerospace, power supply, automotive, petrochemical processing, capital equipment and construction industries. Metallurg operates production facilities in the U.K., the U.S. and Brazil. Metallurg's products are primarily sold to one of three major market sectors: the aluminum industry, the superalloy industry and the steel industry. Conditions in each of these sectors have remained quite challenging for several quarters and these challenging conditions are expected to continue for the foreseeable future. Below is a general overview of each of the major market sectors: 14 Overall, the aluminum market is seeing relatively low demand from customers due to subdued worldwide economic growth, especially in the U.S. On the supply side, there exists a significant amount of excess, as well as idle, capacity in the industry waiting to be restarted when demand increases. This has resulted in a weak pricing environment for aluminum producers and processors in general and contributed to a decline in the selling price of products supplied by Metallurg to the aluminum industry. Metallurg has implemented significant cost reduction initiatives to partially offset the price declines that have been experienced. Metallurg believes it is well positioned to benefit from such initiatives when markets recover. The superalloy industry has been hit hard by the downturn in the commercial aerospace industry, as well as a reduction in power generation projects and services (i.e., land-based turbines). Commercial production build rates for aerospace are significantly below forecasts, especially in the U.S. Due to the long lead times in this market, excess inventory has been a factor leading to lower prices and volumes for products supplied to this industry. Metallurg does not expect the superalloy sector to show signs of recovery this year. The domestic steel industry is operating at moderate levels of production. However, prices have weakened from the peak levels experienced in the third quarter of 2002. Industry fundamentals for the steel sector have improved from the difficult conditions seen over the past few years, particularly as a result of lower imports following the introduction of protective tariffs and the consolidation of a number of producers within the industry. In the first nine months of 2003, following a reduction in worldwide supply, ferrovanadium prices rebounded from the very low levels that have been experienced over the last few years. However, due to a shortage of raw materials, Metallurg was unable to take full advantage of increased selling prices. Efforts are being made to secure additional economic sources of raw materials to further reduce production costs and enhance profitability. Results of Operations - The Quarter Ended September 30, 2003 Compared to the Quarter Ended September 30, 2002 Metallurg operates in one significant industry segment, the manufacture and sale of performance-enhancing additives mainly for the metallurgical industry. Metallurg is organized around its major production facilities in the U.K., the U.S. and Brazil. In addition to its own products, Metallurg distributes products manufactured by third parties. Summarized financial information concerning Metallurg's reportable segments is shown in the following tables (in thousands). Each segment records direct expenses related to its employees and operations. The "Other" column includes corporate related items and results of subsidiaries not 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. The accounting policies of the segments are the same as those of the consolidated group. Transactions among segments are established based on negotiation among the parties. There have been no material changes in segment assets from the amounts disclosed in Metallurg, Inc.'s annual report for the year ended December 31, 2002, other than the sale of EWW and TMS (See "Note 3. Change in Reporting Entity").

Total Revenue Consolidated total revenue decreased by $0.8 million (1%) in the quarter ended September 30, 2003. LSM revenue was $5.4 million (12%) lower than the quarter ended September 30, 2002. Sales of aluminum master alloys and compacted products decreased by $1.5 million, primarily as a result of decreased sales volume and selling prices. Sales of aluminum powder decreased by $1.7 million, reflecting a 39% decrease in volume, offset somewhat by an increase of 19% in selling prices. Sales of chrome products, primarily chrome metal, decreased by $1.3 million due to a drop in shipments. Sales of ferrotitanium were $0.9 million lower, due primarily to a 27% decrease in volume. SMC revenue was $2.1 million (10%) higher than the quarter ended September 30, 2002. Sales of chrome products increased by $1.3 million, due to an increase in sales volume and selling prices. Sales of aluminum products increased by $0.8 million, reflecting a 33% increase in sales volume, primarily compacted products, which was partially offset by a 17% decrease in selling prices. Sales of vanadium products increased by $0.3 million due to an increase of 27% in average selling prices, offset somewhat by a 17% drop in volume due to limited availability of raw materials. Sales of niobium products fell by $0.2 million, primarily as a result of a drop in shipments of ferroniobium to the steel industry. CIF revenue was $1.3 million (15%) higher than the quarter ended September 30, 2002, due primarily to an increase in shipments of aluminum products. Gross Profit Consolidated gross profit decreased to $5.7 million (6.8% of total revenue) for the quarter ended September 30, 2003 from $8.7 million (10.3% of total revenue) for the quarter ended September 30, 2002. LSM gross profit was $1.2 million (30%) lower than the quarter ended September 30, 2002. A decrease of $2.4 million in gross profit from aluminum products was offset somewhat by an increase in gross profit from chrome products. SMC gross profit was $0.3 million (47%) lower than the quarter ended September 30, 2002. Gross profit from aluminum products decreased by $0.3 million, due to lower selling prices. Gross profit from vanadium products decreased by $0.2 million, reflecting decreased sales volume and higher-cost raw materials. CIF gross profit was $0.5 million (43%) lower than the quarter ended September 30, 2002, due primarily to lower selling prices of aluminum products. 16 Selling, General and Administrative Expenses ("SG&A") SG&A increased to $8.4 million for the quarter ended September 30, 2003 from $7.7 million for the quarter ended September 30, 2002. An increase in pension expense, primarily $1.2 million at LSM, due to decreases in plan asset values resulting from declines in equity markets and interest rates, was offset somewhat by reductions in compensation and other expenses resulting from restructuring programs. For the quarter ended September 30, 2003, SG&A represented 10.0% of total revenue compared to 9.1% for the quarter ended September 30, 2002. Restructuring Charges and Asset Impairment Due to a significant deterioration in its metal catalyst business, LSM determined that certain of its plant assets were impaired because recovery of the net book values from projected future undiscounted cash flows could no longer be expected. In the third quarter of 2003, LSM recognized a $2.3 million asset impairment loss, which reduced the carrying value of these assets to nil. Plant operations will cease in the fourth quarter of 2003 and the plant assets will be abandoned. In the third quarter of 2003, a plan was implemented to consolidate sales and administrative functions performed by Metallurg's Canadian operations into the New Jersey operations of SMC. As a result of this plan, Metallurg recognized a restructuring charge of $0.4 million, consisting of employee separation costs. During the third quarter of 2002, Metallurg continued its restructuring program to reduce the cost structure at corporate headquarters, SMC and LSM. A charge of $1.0 million was incurred in the third quarter, all of which was for severance costs of terminated employees. Operating (Loss) Income Metallurg's consolidated operating loss was $5.3 million for the quarter ended September 30, 2003 compared to operating income of $0.1 million for the quarter ended September 30, 2002, primarily due to the restructuring charges, asset impairment and decrease in gross profit, discussed above. Interest Expense, Net Interest expense, net, was as follows (in thousands):

Income Tax (Benefit) Provision, Net Income tax (benefit) provision, net, was as follows (in thousands):

The difference between the statutory federal income tax rate and Metallurg's effective rate for the quarter ended September 30, 2003 is principally due to: (i) certain deductible temporary differences, principally domestic net operating losses, which in other circumstances would have generated a deferred tax benefit, have been fully provided for in a valuation allowance; (ii) taxes paid on foreign dividends; and (iii) the excess of foreign tax rates over the statutory federal income tax rate. 17 Net Loss Metallurg had a net loss of $7.8 million for the quarter ended September 30, 2003 compared to a net loss of $4.1 million for the quarter ended September 30, 2002, due primarily to the decrease in gross profit and the restructuring and asset impairment charges, discussed above. Results of Operations - The Three Quarters Ended September 30, 2003 Compared to the Three Quarters Ended September 30, 2002

Total Revenue Consolidated total revenue increased by $13.6 million (6%) in the three quarters ended September 30, 2003. LSM revenue was $8.2 million (7%) higher than the three quarters ended September 30, 2002. Sales of aluminum master alloys and compacted products increased by $4.6 million, primarily as a result of a 9% increase in sales volume. Sales of aluminum powder rose by $0.9 million, due to an improved product mix, which resulted in higher average selling price. Sales of ferrotitanium were $1.9 million higher, due to a 21% increase in average unit selling prices and a 3% decrease in sales volumes. Sales of metal powders rose by $2.2 million as a result of increases in both sales volume and average selling prices. SMC revenue was $2.4 million (3%) higher than the three quarters ended September 30, 2002. Sales of compacted aluminum products increased by $3.7 million, despite a drop in average selling prices, as a result of an increase of 51% in shipments. Sales of vanadium products, produced in SMC's Ohio plant, increased by $1.3 million, despite a drop in sales volume, as a result of an increase in average selling prices. Sales of niobium products fell by $3.5 million, primarily as a result of a drop in shipments of ferroniobium to the steel industry. 18 CIF revenue was $0.6 million (2%) lower than the three quarters ended September 30, 2002. Sales of tantalum and niobium products decreased by $1.1 million, due to lower selling prices. Gross Profit Consolidated gross profit increased to $23.3 million (9.3% of total revenue) for the three quarters ended September 30, 2003 from $21.8 million (9.2% of total revenue) for the three quarters ended September 30, 2002. LSM gross profit was $2.1 million (22%) higher than the three quarters ended September 30, 2002. Gross profits from aluminum master alloys and compacted aluminum products increased by $0.4 million, due to increased volumes and lower plant costs following the restructuring of operations in 2002. Gross profits from chrome products increased by $1.1 million as a result of the improved product costs. SMC gross profit was $2.9 million in the three quarters ended September 30, 2003, compared to nil for the three quarters ended September 30, 2002. Gross profit from aluminum products rose by $2.4 million, due to increased shipments and lower costs resulting from the restructuring of operations during 2002. Gross profit from chrome products rose by $0.6 million, due to improved volume and selling prices, particularly from lower grade products sold to the steel industry. Gross profit from vanadium products improved by $0.1 million, despite a drop in volume, as a result of an increase in average selling prices. CIF gross profit was $1.0 million (35%) lower than the three quarters ended September 30, 2002, due to lower selling prices of niobium products. Selling, General and Administrative Expenses SG&A decreased to $25.7 million for the three quarters ended September 30, 2003 from $25.8 million for the three quarters ended September 30, 2002. An increase in pension expense, primarily $2.3 million at LSM, due to decreases in plan asset values resulting from declines in equity markets and interest rates, was offset by reductions in compensation and other expenses resulting from restructuring programs and lower bad debt expense. For the three quarters ended September 30, 2003, SG&A represented 10.2% of total revenue compared to 10.9% for the three quarters ended September 30, 2002. Restructuring Charges and Asset Impairment Due to a significant deterioration in its metal catalyst business, LSM determined that certain of its plant assets were impaired because recovery of the net book values from projected future undiscounted cash flows could no longer be expected. In the period ended September 30, 2003, LSM recognized a $2.3 million asset impairment loss, which reduced the carrying value of these assets to nil. Plant operations will cease in the fourth quarter of 2003 and the plant assets will be abandoned. In the period ended September 30, 2003, a plan was implemented to consolidate sales and administrative functions performed by Metallurg's Canadian operations into the New Jersey operations of SMC. As a result of this plan, Metallurg recognized a restructuring charge of $0.4 million, consisting of employee separation costs. During the second and third quarters of 2002, Metallurg carried out a restructuring program intended to reduce the cost structure at corporate headquarters, SMC and LSM. Restructuring charges of $2.5 million, which covered the costs to discontinue certain production activities, terminate employees and write down redundant plant and equipment, were recognized during the period. Operating Loss Metallurg's consolidated operating loss was $5.1 million for the three quarters ended September 30, 2003 compared to $3.4 million for the three quarters ended September 30, 2002. The three quarters ended September 30, 2003 included $2.7 million of restructuring and asset impairment charges, which more than offset the increase in gross profit, discussed above. The three quarters ended September 30, 2002 included an environmental expense recovery of $3.0 million, recognized by SMC, and restructuring charges of $2.5 million. 19 Interest Expense, Net Interest expense, net, was as follows (in thousands):

Income Tax Benefit, Net Income tax (benefit) provision, net, was as follows (in thousands):

The difference between the statutory federal income tax rate and Metallurg's effective rate for the three quarters ended September 30, 2003 is principally due to: (i) certain deductible temporary differences, principally domestic net operating losses, which in other circumstances would have generated a deferred tax benefit, have been fully provided for in a valuation allowance; (ii) taxes paid on foreign dividends; and (iii) the excess of foreign tax rates over the statutory federal income tax rate. Net Loss Metallurg had a net loss of $14.9 million for the three quarters ended September 30, 2003 compared to a net loss of $14.2 million for the three quarters ended September 30, 2002. Liquidity and Financial Resources General Metallurg's sources of liquidity include cash and cash equivalents, cash from operations and amounts available under credit facilities. At September 30, 2003, Metallurg had $25.6 million in cash and cash equivalents and working capital of $76.0 million as compared to $24.3 million and $73.2 million, respectively, at December 31, 2002. On September 30, 2003, Metallurg received $10.0 million cash upon the sale of EWW and TMS. Together with the sources discussed below Metallurg believes it will have sufficient resources to fund the current and anticipated future requirements of Metallurg, Inc.'s debt obligations, working capital, capital expenditures, pension benefits and environmental expenditures for the next twelve months. Metallurg's long-term debt agreements contain numerous covenants and prohibitions that limit the financial activities of Metallurg, including requirements that Metallurg satisfy certain financial ratios and limitations on additional indebtedness and maintain a minimum liquidity level. While Metallurg is in compliance with all such covenants at September 30, 2003, the ability of Metallurg to meet its debt service requirements and to comply with such covenants will be dependent upon future operating performance and financial results of Metallurg, which will be subject to financial, economic, political, competitive and other factors affecting Metallurg, many of which are beyond its control. 20 Cash Flow Information Cash Flows from Operating Activities - Cash used in operating activities was $11.4 million for the three quarters ended September 30, 2003, compared to cash provided by operating activities of $4.1 million for the three quarters ended September 30, 2002. In 2003, the net loss and an increase in working capital contributed to the cash used in operating activities. In 2002, SMC realized an environmental expense recovery and receipt of $3.0 million upon a settlement with an insurance company relating to coverage for certain environmental claims. Cash Flows from Investing Activities - Cash used in investing activities was $1.3 million for the three quarters ended September 30, 2003, compared to $5.9 million for the three quarters ended September 30, 2002. Capital expenditures were $7.2 million lower in 2003 and loan repayments made to Metallurg by a former subsidiary were $1.0 million in 2003 compared to $4.0 million in 2002. Cash Flows from Financing Activities - Cash provided by financing activities was $13.7 million for the three quarters ended September 30, 2003, compared to $2.2 for the three quarters ended September 30, 2002. The sale of EWW and TMS (See "Note 3. Change in Reporting Entity") contributed $10.0 million to cash and Metallurg's foreign subsidiaries had net borrowings of $3.7 million of short-term debt in 2003. Credit Facilities and Other Financing Arrangements On October 29, 1999, Metallurg, Inc., SMC and certain of Metallurg, Inc.'s other 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. Effective October 1, 2003, following the sale of EWW and TMS, this facility was amended, thereby reducing the size of the facility from $30.0 million to $27.0 million. 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 are adjusted quarterly, based on the North American Group's fixed charge coverage ratio. The Borrowers are required to pay a fee of 0.375% per annum on the unused portion of the facility. 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 September 30, 2003, there were no borrowings under this facility; however, outstanding letters of credit totaled $21.2 million. The Borrowers had unused borrowing capacity of $3.7 million under this facility. The Revolving Credit Facility continues to prohibit Metallurg, Inc. from paying 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 $10.0 million level. Liquidity, as defined, was $18.7 million at September 30, 2003. LSM has revolving credit facilities with Barclays Bank plc ("Barclays") and HSBC Bank plc ("HSBC") that provide LSM with up to 'L'6.0 million ($10.0 million) of borrowings, 'L'43.3 million ($72.2 million) of foreign exchange contracts and options and 'L'4.0 million ($6.7 million) for other ancillary banking arrangements, including bank guarantees. Borrowings under these facilities are unsecured and payable on demand. Outstanding loans under this facility bear interest at a rate of 1.0% over the lender's base rate. At September 30, 2003, there were no borrowings under these facilities. LSM also has four revolving term loan facilities with Barclays and HSBC that provide for borrowings up to 'L'12.0 million ($20.0 million) at an interest rate of LIBOR plus 1.75%, all of which were outstanding at September 30, 2003. Two of the facilities expire during the second quarter of 2004 but, as LSM intends to renew these facilities and believes it has the ability to do so, amounts outstanding continue to be included in the balance sheet in long-term liabilities rather than current liabilities. The other two facilities expire during the second quarter of 2006. These term loan facilities are unsecured and require LSM to comply with various covenants, including the maintenance of minimum net worth and interest coverage. In September 2003, LSM received a waiver from Barclays regarding the minimum interest coverage ratio covenant on its revolving term loans for the period ended September 30, 2003. As LSM anticipates that it would not be in compliance with the existing covenant at December 31, 2003, it is currently in discussions with its lenders to restructure its facilities prior to that date, thereby extending the terms of the loans due in 2004 and adjusting the financial covenants. Metallurg believes that it will complete the restructuring of these facilities prior to December 31, 2003. 21 LSM's Norwegian subsidiary has an unsecured overdraft facility of NOK 15.0 million ($2.1 million). Borrowings under this facility bear interest at a rate of NIBOR plus 1.25%. At September 30, 2003, there was NOK 8.0 million ($1.1 million) outstanding under this facility. The Norwegian facility also has an unsecured term loan with a remaining balance of NOK 7.2 million ($1.0 million). Repayments continue until 2010 in equal monthly installments plus interest at NIBOR plus 1.25%. Metallurg, Inc.'s other foreign subsidiaries maintain short-term secured and unsecured borrowing arrangements, generally in local currencies, with various banks totaling $10.5 million. Borrowings under these arrangements aggregated $8.5 million at September 30, 2003 at a weighted-average interest rate of 11.1%. Capital Expenditures Metallurg invested $2.5 million in capital projects during the three quarters ended September 30, 2003. 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" below). Capital expenditures are projected to total approximately $4 million for the year ended December 31, 2003, approximately half of which Metallurg believes will result in decreased costs of production, improved efficiency and expanded production capacities. The remaining planned capital expenditures are primarily for replacement and repairs of existing facilities. Although Metallurg has projected these items for the year ended December 31, 2003, Metallurg has not committed purchases to vendors for all of these projects, as some projects remain contingent on final approvals and other conditions and the actual timing of expenditures may extend into 2004. Metallurg believes that these projects will be funded through existing and future internally generated cash and credit lines. Environmental Remediation Costs 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 three quarters ended September 30, 2003, Metallurg spent $1.7 million for environmental remediation. In 1997, SMC 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, SMC has agreed to perform environmental remediation, which, as of September 30, 2003, had an estimated net cost of completion of $26.3 million. Of this amount, SMC expects to spend $0.6 million in the fourth quarter of 2003, $3.9 million in 2004 and $1.7 million in 2005. These amounts have been accrued for in prior years and are reflected in Metallurg's balance sheet liabilities. Other Metallurg Holdings, Metallurg, Inc.'s parent, does not have sufficient cash on hand to make its interest payment due in January 2004 on its Senior Discount Notes. While Metallurg, Inc. is permitted under the terms of its Senior Notes indenture to distribute cash to Metallurg Holdings for the purpose of making the January 2004 interest payment, Metallurg, Inc. could be prohibited from making cash distributions at such time under the restrictive covenants of its revolving credit facility. All of Metallurg, Inc.'s outstanding common stock has been pledged as collateral for Metallurg Holdings' obligations under the Senior Discount Notes. If Metallurg Holdings were unable to make its interest payment when due, it could lead to a foreclosure on its assets, principally the equity of Metallurg, Inc., and create a default under the terms of Metallurg, Inc.'s Senior Notes indenture. SMC's collective bargaining agreement with the United Steelworkers of America (USW, Local 4836-02), which covered 69 employees at the Cambridge, Ohio plant, expired on June 6, 2003. Following negotiations, SMC and the union reached an impasse on June 15, 2003. The union employees are currently working under the terms of SMC's last offer for a proposed new contract. Metallurg does not believe that this dispute will have a material, adverse effect on its financial statements. 22 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK Refer to the Market Risk section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in Metallurg's annual report on Form 10-K for the year ended December 31, 2002, which is incorporated by reference herein. ITEM 4 - CONTROLS AND PROCEDURES As of the end of the period covered by this report, Metallurg carried out an evaluation, under the supervision of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Metallurg's disclosure controls and procedures are effective in timely alerting them to material information relating to Metallurg (including its consolidated subsidiaries) required to be included in its Exchange Act filings. There have been no significant changes in Metallurg's internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonable likely to materially affect, Metallurg's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Seventh Amendment to Amended and Restated Loan Agreement (dated as of October 29, 1999), dated as of October 1, 2003, by and among Metallurg, Inc., Shieldalloy Metallurgical Corporation and Metallurg International Resources, LLC, as Borrowers; Metallurg Services, Inc., MIR (China), Inc., Metallurg Holdings Corporation and Metallurg (Canada) Ltd., as Guarantors; and Fleet National Bank (formerly known as BankBoston, N.A.) as Agent for itself and the other financial institutions parties thereto, and the banks named therein. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) REPORTS ON FORM 8-K Metallurg, Inc. filed a Report on Form 8-K with the Securities and Exchange Commission on October 15, 2003, reporting the sale of certain subsidiaries to related parties. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 10, 2003 on its behalf by the undersigned thereunto duly authorized. METALLURG, INC. By: /s/ Barry C. Nuss ---------------------------- Barry C. Nuss Senior Vice President and Chief Financial Officer 24 STATEMENT OF DIFFERENCES The British pound sterling sign shall be expressed as..................'L' The section symbol shall be expressed as...............................'SS'

METALLURG INC 10-Q