EX-99 3 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 Metallurg Holdings, Inc. Consolidated Financial Statements December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 REPORT OF INDEPENDENT AUDITORS 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. and its subsidiaries ("the Company") at December 31, 2003 and December 31, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. As discussed in Note 3 to the consolidated financial statements, on September 30, 2003 and December 31, 2002, the Company sold production facilities and certain sales offices to entities under the common control of the Company's shareholder. These dispositions have been accounted for as a change in reporting entity, which requires that the financial statements be restated to exclude the sold entities from all periods. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not currently have sufficient cash on hand to make the interest payments due in 2004 on its senior discount notes, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP New York, New York March 5, 2004 1 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS (In thousands)

See notes to consolidated financial statements. 2 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

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

See notes to consolidated financial statements. 4 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Going Concern The accompanying consolidated financial statements have been prepared assuming that Metallurg Holdings, Inc. ("Metallurg Holdings") and its consolidated subsidiaries, (collectively, the "Company") will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's financial performance over the past year, however, has been adversely impacted by increased competition, lower overall demand from customers and lackluster economic conditions worldwide, which put significant downward pressure on the selling price of the Company's products. As a result of these circumstances, the Company has entered into amendments to its revolving credit facility in the U.S. and its term loan facilities in the U.K. Certain of these amendments provide additional availability, more flexible financial covenant requirements and extended terms. See "Note 12. Borrowings". Metallurg Holdings currently does not expect to have sufficient cash on hand to make the interest payments due on $121 million of 12 3/4% Senior Discount Notes due 2008 (the "Senior Discount Notes"). Metallurg Holdings' balance sheet is comprised primarily of its equity, the Senior Discount Notes and its investment in Metallurg, Inc. As 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 interest payments when due, it could lead to a foreclosure on its assets, principally the equity of Metallurg, Inc. Such foreclosure would create a default in accordance with the indenture terms of Metallurg, Inc.'s 11% Senior Notes due 2007 (the "Senior Notes") and result in an acceleration of $100 million of Senior Note indebtedness. The Company is highly leveraged. Interest payments of $2.6 million are due in both January and July 2004 on the Senior Discount Notes and payments of $5.5 million are due in both June and December 2004 on the Senior Notes. In addition, Metallurg, Inc.'s Revolving Credit Facility, as described in Note 12, with an outstanding amount of $21.1 million at December 31, 2003, consisting of outstanding letters of credit, is scheduled to expire on October 29, 2004. Metallurg, Inc. is currently in compliance with the terms of the Revolving Credit Facility, as amended. In the event the Company does not succeed in its restructuring efforts, described below, it is likely that liquidity will be inadequate to enable the Company to continue to make the interest payments required with respect to the Senior Discount Notes and the Senior Notes and repay the Revolving Credit Facility. In March 2004, Metallurg, Inc. retained Compass Advisers, LLP, as financial advisors, and Paul, Weiss, Rifkind, Wharton & Garrison, LLP, as legal counsel, to assist the Company in analyzing and evaluating possible transactions for the principal purpose of restructuring the Company's balance sheet. The Company is currently engaged in discussions with potential lenders about the refinancing of its senior indebtedness. The Company neither expresses any opinion nor gives any assurances whatsoever regarding whether, when, or on what terms it will be able to refinance its outstanding senior indebtedness or complete any broader restructuring of its balance sheet. Management believes that the refinancing and restructuring of the Company's outstanding senior indebtedness and balance sheet is essential to the long-term viability of the Company. If the Company is not able to reach agreements that favorably resolve these issues, the Company likely will not have adequate liquidity to enable it to continue to make the interest payments required with respect to its Senior Discount Notes, its Senior Notes, or to repay its revolving credit facility with Fleet National Bank (which matures on October 29, 2004). In such event, the Company may have to resort to certain other measures to resolve its liquidity issues, including ultimately seeking the protection afforded under the United States Bankruptcy Code. Furthermore, any negotiated refinancing of the Company's senior indebtedness or negotiated restructuring of the Company's balance sheet may require that the Company seek the protection afforded under the reorganization provisions of the United States Bankruptcy Code. The consolidated financial statements do not include any adjustments, which could be significant, relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 5 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies 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. Metallurg, Inc. and its majority-owned subsidiaries (collectively, "Metallurg") manufactures and sells high-quality specialty metals, alloys and metallic chemicals which are essential to the production of high-performance aluminum and titanium alloys, superalloys, steel and certain non-metallic materials for various applications in the aerospace, power supply, automotive, petrochemical processing and telecommunications industries. Metallurg sells over 50 different product groups to over 1,500 customers worldwide (primarily in North America and Europe). Basis of Presentation and Consolidation - The consolidated financial statements include the accounts of Metallurg Holdings, Metallurg, Inc. and its majority-owned subsidiaries. Investments in companies where the Company has greater than 50% ownership interests are fully consolidated, with the equity owned by the respective partners shown as minority interest on the balance sheet and their portion of net income or loss shown separately in the statement of operations. All material intercompany transactions and balances have been eliminated in consolidation. 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 for all periods presented 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. On December 23, 2003, the Company committed to a plan to sell its South African sales office to a group of investors, including local management. Accordingly, the operating results for this entity have been reported as discontinued operations for all periods presented. See "Note 4. Discontinued Operations". Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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. They may also affect the reported amount of revenues and expenses during the reporting period. Amounts affected include, but are not limited to, allowances for doubtful accounts, inventories, allowances for recoverable taxes, environmental remediation costs, restructuring and asset impairment charges, deferred income tax asset valuation allowances, pension plan obligations and contingent liabilities. Actual results could differ from those estimates. Foreign Currency Translation - For foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates; income and expenses are translated using weighted-average exchange rates. Resulting translation adjustments are reported in a separate component of shareholder's equity. Translation adjustments for operations in highly inflationary economies and exchange gains and losses on transactions are included in earnings, and amounted to gains (losses) of $22,000, $(1,106,000), and $714,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 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, cost being determined using principally the average cost and specific identification methods. The Company estimates the net realizable value of its inventories at least quarterly and adjusts the carrying amount of these inventories to its market value, less a normal profit margin, as necessary. 6 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies - (Continued) 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. Where management does not exercise significant influence and where the Company has less than a 20% interest, the investment is carried at cost. Goodwill and Other Intangible Assets - The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill is no longer amortized but is tested for impairment using a fair value approach at the "reporting unit" level. A reporting unit is the operating segment, or a business one level below that operating segment (the "component" level) if discrete financial information is prepared and regularly reviewed by management at the component level. An impairment loss is recognized for any amount by which the carrying amount of a reporting unit's goodwill exceeds its fair value. The Company uses discounted cash flows to establish fair values and uses comparative market multiples, where available and as appropriate, to corroborate discounted cash flow results. When a reporting unit, or a business within a reporting unit, is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value method. SFAS No. 142 requires goodwill to be tested for impairment annually at the same time every year, and also when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The Company selected December 31 as its annual testing date. As a result of continuing operating losses at all of the production facilities, Metallurg Holdings has determined that it will be unable to recover the carrying value of its goodwill at December 31, 2003 and recorded an impairment of the goodwill of $32,486,000. See "Note 9. Goodwill and Other Intangible Assets". The Company's finite-lived acquired intangible assets, comprised of technical know-how, are amortized on a straight-line basis over 3 or 10 years. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on discounted cash flows. There was no impairment charge relating to these assets in 2003. Property and Depreciation - Depreciation is computed using principally the straight-line method over the estimated useful lives of the assets. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. 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. Recoverability of Long-Lived Assets - The Company annually, or sooner if circumstances warrant, 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 flows from such asset are 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. Discontinued Operations - At the time that management formally commits to a plan to divest of a business, such business is classified as discontinued operations. The balance sheet amounts and income statements results are reclassified from their historical presentation to assets and liabilities of discontinued operations on the Consolidated Balance Sheet and to discontinued operations in the Statement of Consolidated Operations for all periods presented. Revenue Recognition - Revenue is recognized when the earnings process is complete and the risks and rewards of ownership have transferred to the customer. In certain instances, the Company arranges sales for which the supplier invoices the customer directly. In such cases, the Company receives commission income, in its role as agent, which is recognized when the supplier passes title to the customer. The Company assumes no significant credit or other risk with such transactions. 7 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies - (Continued) Environmental Remediation Costs and Recoveries - 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 not discounted to their present value. Environmental expense recoveries are generally recognized in income upon final settlement with the Company's insurance carriers. Income Taxes - The Company uses the asset and 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 $16,700,000 at December 31, 2003. These earnings have been invested in facilities and other assets of the Company 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 - Metallurg maintains defined benefit plans for its employees in the U.S., the U.K. and Norway. Several statistical and other factors, including assumptions about the discount rate, expected return on plan assets, rate of future compensation increases, employee turnover and mortality rates, are used in calculating the expense and liability related to the plans. The rate to discount future estimated liabilities is determined considering the rates available at year-end on long-term, high quality corporate bonds that could be used to settle the obligations of the plans. The long-term rate of return is estimated considering historical returns and expected returns on current and projected asset allocations. A liability is recognized on the balance sheet for each pension plan where the fair value of the assets of that pension plan is less than the accumulated benefit obligation. This liability is called a "minimum pension liability" and is recorded by a charge to Accumulated Other Comprehensive Loss in Shareholder's Deficit. Stock-Based Compensation - Metallurg has a stock-based compensation plan, which is described in "Note 15. Shareholder's (Deficit) Equity". Metallurg accounts for this 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 SFAS No. 123, "Accounting for Stock-Based Compensation" to record expense for stock option compensation (in thousands):

8 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies - (Continued) Derivative Instruments and Hedging Activities - Metallurg uses derivative instruments, primarily forward contracts, to manage certain foreign currency, interest rate and commodity price exposures. Derivative instruments are viewed as risk management tools by Metallurg and are not used for trading or speculative purposes. Derivative instruments are recorded on the balance sheet at fair value. Changes in derivatives used to hedge foreign-currency-denominated balance sheet items are reported directly in earnings along with offsetting gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases are accounted for as cash flow hedges. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, and gains and losses on foreign currency transactions not designated as hedges are recognized currently in income. Recent Accounting Pronouncements - Effective January 1, 2003, the Company 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 the Company'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 the Company'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 the Company's consolidated financial statements. FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46R"), replaces FIN 46, "Consolidation of Variable Interest Entities", which had been issued in January 2003. FIN 46R changes the criteria for including certain non-controlled affiliates, defined as variable interest entities ("VIE"), in a company's consolidated financial statements. FIN 46R addresses consolidation of VIEs which have one or more of the following characteristics: the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, the equity investors lack some essential characteristics of a controlling financial interest, and the equity investors have voting rights that are not proportionate to their economic interests. Application of FIN 46R is required in financial statements of companies that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004; however, early adoption is allowed. The Company has elected to early adopt the provisions of FIN 46R effective December 31, 2003. The adoption of this Statement did not have a material impact on the Company's consolidated financial position or results of operations, as none of its non-controlled affiliates require consolidation under FIN 46. In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised standard requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. As revised, SFAS No. 132 is effective for financial statements with fiscal years ending after December 15, 2003 and its disclosure provisions are reflected in these footnotes. The interim-period disclosures required by this standard are effective for interim periods beginning after December 15, 2003. 9 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies - (Continued) 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. 3. Change in Reporting Entity Effective September 30, 2003, the Company 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, the Company has restated its financial statements for all periods presented 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 Holdings. Dr. Heinz C. Schimmelbusch and Mr. Arthur Spector, both of whom are directors and officers of Metallurg Holdings were also directors of Sudamin through the transaction date of September 30, 2003. On December 31, 2002, the Company completed a similar sale of subsidiaries to members of a common controlled group, as defined for accounting purposes, and restated its financial statements for all previous periods to reflect a new reporting entity that excludes these subsidiaries. See "Note 2 - Change in Reporting Entity" to Metallurg Holdings, Inc.'s 10-K for the year ended December 31, 2002. 4. Discontinued Operations On December 23, 2003, the Company committed to a plan to sell its South African sales office to a group of investors, including local management. Accordingly, the operating results for this entity have been reported as discontinued operations for all periods presented. The transaction closed on March 8, 2004. The total purchase price was $9,100,000, consisting of $7,730,000 in cash and a note receivable for $1,370,000, to be repaid in three equal installments plus interest at LIBOR plus 1% over two years. The Company will record income from discontinued operations of $338,000 and a loss on the sale of discontinued operations of approximately $1,000,000 in the first quarter of 2004. 10 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Discontinued Operations - (Continued) The following table summarizes certain financial information related to these discontinued operations (in thousands):

5. Extraordinary Items Effective December 31, 2002, the Company sold its ownership interests in GfE and certain trading companies. See "Note 3. Change in Reporting Entity". In conjunction with the sale, the Company received $4,600,000 in face amount of Metallurg Holdings' Senior Discount Notes from Sudamin, the purchaser. The acquired Senior Discount Notes had a book value on that date of $4,302,000. On a consolidated basis the Company wrote off $74,000 of related deferred issuance costs and recognized an extraordinary gain on the extinguishment of debt of $2,227,000, net of nil tax. 11 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. 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. In addition to its own products, Metallurg distributes complementary products manufactured by third parties. The results of Metallurg Holdings consist primarily of interest expense related to the Senior Discount Notes, general overhead expenses, goodwill impairment (see Note 9) and income tax expense. The results on Metallurg Holdings are included in "Other" below. 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 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. As a result of continuing weakness in operating performance, LSM commenced a restructuring program in the second half of 2003. LSM discontinued its metal catalyst business in the fourth quarter of 2003 and announced the closure of its Norwegian production facility in 2004. See Note 7. "Restructuring and Asset Impairment Charges". As the decision to close its Norwegian production facility did not take place until 2004, no costs have been accrued for such closure costs as of December 31, 2003. 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 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. 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 described in "Note 2. Summary of Significant Accounting Policies". Transactions among segments are established based on negotiation among the parties. 12 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Segments and Related Information - (Continued)

13 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Segments and Related Information - (Continued)

The Company sells its products in over 50 countries. The following table presents revenue by country based on the location of the user of the product (in thousands):

The following table presents property, plant and equipment by country based on the location of the assets (in thousands):

(a) Reflects the 'L'1,768,000 ($3,176,000) write-down in December 2003 of LSM's production facilities in Norway. See "Note 7. Restructuring and Asset Impairment Charges". 14 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Restructuring and Asset Impairment Charges As a result of continuing weakness in operating performance, particularly in its metal catalyst and aluminum businesses, LSM announced on September 1, 2003 its intention to implement a restructuring plan designed to streamline production, improve productivity and reduce costs. Also in 2003, in order to reduce operating expenses, the Company consolidated sales and administrative functions with those in its other production facilities. Details of the restructuring and asset impairment charges are as follows (in thousands):

2003 - In December 2003, Metallurg Holdings recorded impairment to goodwill in the amount of $32,486,000. See "Note 9. Goodwill and Other Intangible Assets". In 2003, LSM recorded a restructuring charge of 'L'5,977,000 ($10,358,000), consisting of (i) 'L'2,122,000 ($3,652,000) of severance costs for 62 employees, (ii) asset impairment charges of 'L'1,341,000 ($2,235,000) relating to its metal catalyst business, and (iii) asset impairment charges of 'L'2,514,000 ($4,471,000) relating to its production facilities in Norway. Of this amount, 'L'1,530,000 ($2,502,000) was paid as of December 31, 2003. In a continuing effort to improve Metallurg's competitive position and to reduce costs, a plan was implemented in the third quarter of 2003 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's Canadian subsidiary recognized a restructuring charge of $417,000 for severance costs of seven employees. Of this amount, $88,000 was paid as of December 31, 2003. Restructuring activities will be completed in the first quarter of 2004. Also in 2003, Metallurg transferred certain sales and administrative functions for tantalum and niobium products from its headquarters location to its production facilities in Brazil. As a result, severance costs of $120,000 for two employees were recorded at December 31, 2003. 15 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Restructuring and Asset Impairment Charges - (Continued) 2002 - During 2002, Metallurg carried out a restructuring program intended to reduce the cost structure at LSM, SMC and corporate headquarters. LSM recorded a restructuring charge of 'L'710,000 ($1,068,000) for severance costs of 29 employees who were terminated and paid during the year. SMC recorded a restructuring charge of $453,000, of which $350,000 was for severance costs of 26 employees terminated during the year. The entire amount was paid out as of December 31, 2003. SMC also recorded a charge of $103,000 for the write-down of property and equipment no longer used in operations. Metallurg, Inc. recorded a restructuring charge of $1,989,000 for severance costs of nine employees terminated during the year at its headquarters location. Under the terms of certain executive employment and severance agreements, the severance was to be paid over a period of up to 18 months. Of this amount, $1,731,000 was paid as of December 31, 2003. 8. Inventories Inventories consist of the following (in thousands):

9. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses the accounting and reporting of acquired goodwill and other intangible assets. SFAS No. 142 eliminates the amortization of goodwill and requires an evaluation of potential goodwill impairment on adoption and annually thereafter, as well as on occasions when circumstances indicate a possible impairment. The Company completed an evaluation as of December 31, 2003 and concluded that as a result of continuing operating losses at all of the production facilities, it will be unable to recover the carrying value of its goodwill and recorded an impairment of the goodwill of $32,486,000. This impairment was included in restructuring and asset impairment charges in the Statement of Consolidated Operations and has not been allocated to the segments for financial reporting purposes. They are associated with the segments as follows: LSM.............................. $ 6,317 SMC.............................. 3,710 CIF.............................. 22,459 ------- Total goodwill impairment.... $32,486 =======

The effect of goodwill amortization on net loss was as follows (in thousands):

16 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 9. Goodwill and Other Intangible Assets - (Continued) The carrying values and accumulated amortization of goodwill and other amortizable intangible assets are as follows (in thousands):

The Company's other intangible assets, all comprised of technical know-how, are amortized on a straight-line basis over three years. The amortization of intangible assets subject to amortization was $101,000 in the year ended December 31, 2003. All of such assets are now fully amortized. The changes in goodwill are the result of goodwill impairment recoded in 2003 and differences in exchange rates. The changes in other intangible assets are the result of differences in exchange rates. 10. 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 was $7,627,000, $6,920,000, and $6,484,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 17 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Retirement Plans Metallurg Holdings does not have any retirement plans. Metallurg, Inc. and Domestic Subsidiaries Metallurg, Inc. and its domestic subsidiaries have tax qualified, noncontributory 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. Metallurg, Inc.'s best estimate of the expected contributions into these plans for 2004 is $790,000. Substantially all plan assets are invested in cash and short-term investments or listed stocks and bonds. Metallurg, Inc. also maintains tax qualified defined contribution plans covering substantially all of the salaried employees of Metallurg, Inc. and its domestic subsidiaries. All contributions, including a portion that represents a company match, are made in cash into mutual fund accounts in accordance with the participants' investment elections. Foreign Subsidiaries LSM's defined benefit pension plans cover all eligible employees in the U.K. and Norway. Substantially all plan assets are invested in listed stocks and bonds. Benefits under these plans are based on years of service and the employee's compensation. Benefits are paid either from plan assets or, if necessary, directly by Metallurg. LSM's best estimate of the expected contributions in 2004 is $3,904,000. The range of assumptions that are used for these plans reflect the different economic environments within the different countries. Several of Metallurg's other foreign subsidiaries have retirement plans that cover certain eligible employees. Net pension cost consisted of the following for the years ended December 31, 2003, 2002 and 2001, respectively (in thousands):

18 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Retirement Plans - (Continued) The following table summarizes the changes in benefit obligation and changes in plan assets for Metallurg's principle defined benefit plans (in thousands).

19 METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Retirement Plans - (Continued) The following table summarizes the fair value of plan assets, by major category, and the actual and weighted average target allocation percentages of total plan assets as of December 31, 2003 and 2002, respectively (dollars in thousands):

Metallurg's investment strategy is to achieve long-term capital appreciation, while reducing risk through diversification in order to meet the obligations of the plans. The following table indicates the weighted-average assumptions made for Metallurg's defined benefit plans:

The expected return on plan assets assumption for U.S. plans reflects the average rate of earnings expected on the funds invested using weighted average historical returns of approximately 12% for equities and approximately 6% for debt. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension benefit plans with accumulated benefit obligations in excess of plan assets as of December 31, 2003 and 2002 were as follows (in thousands):

20 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Borrowings Long-term debt consists of the following (in thousands):

Metallurg Holdings In July 1998, 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. On October 17, 2000, Metallurg, Inc. completed the purchase of $76,065,000 in face amount of the Senior Discount Notes of Metallurg Holdings, its parent company, for $19,714,000 in cash. On December 31, 2002, Metallurg, Inc. acquired an additional $4,600,000 in face amount of the Senior Discount Notes in conjunction with the sale of certain subsidiaries. As these Senior Discount Notes were not subsequently retired, they eliminate on consolidation with Metallurg. See "Note 5. Extraordinary Items". The Senior Discount Notes accreted interest at a rate of 12 3/4%, to July 15, 2003. 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. The Senior Discount Notes are senior, collateralized 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. On January 15, 2004, Metallurg, Inc. loaned Metallurg Holdings $1,494,000 to pay interest on the Senior Discount Notes held by non-related parties. In addition, Metallurg and another related party holding Senior Discount Notes, agreed to purchase $5,142,000 and $1,077,000 of new notes with the proceeds of the interest payment due to them. The Senior Discount Notes are collateralized 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. 21 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Borrowings - (Continued) 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 tangible assets other than the common stock of Metallurg, Inc. Metallurg, Inc. and its subsidiaries are parties to various credit agreements, including Metallurg, Inc.'s Senior Note indenture and the Revolving Credit Facility, which impose substantial restrictions on Metallurg, Inc.'s ability to pay dividends to Metallurg Holdings. Metallurg Holdings does not currently have sufficient cash on hand to make the interest payments due on the Senior Discount Notes. As 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 interest payments when due, it could lead to a foreclosure on its assets, principally the equity of Metallurg, Inc. Such foreclosure would create a default in accordance with the indenture terms of the Senior Notes and result in an acceleration of $100 million of Senior Note indebtedness. See "Note. 1 Going Concern". Metallurg, Inc. and Domestic Subsidiaries Senior Notes - In November 1997, Metallurg, Inc. issued its Senior Notes. Interest is payable semi-annually. The Senior Notes are redeemable at the option of Metallurg, Inc., in whole or in part, and 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, under the terms of the indenture, Metallurg, Inc. is limited in its ability to make restricted payments, as defined and including, among other things, minority investments in subsidiaries and dividend payments, to a formula based on the cumulative net income since November 1, 1997 and certain specified allowances. As a result of this limitation, Metallurg, Inc. was permitted to make future restricted payments in the amount of $7,494,000 as of December 31, 2003. As a result of the two transactions on January 15, 2004, discussed above, Metallurg's ability to make future restricted payments is currently limited to $858,000. Revolving Credit Facility - Metallurg, Inc., SMC and certain of Metallurg, Inc.'s other subsidiaries (the "Borrowers") have a credit facility with certain financial institutions led by Fleet National Bank as agent (the "Revolving Credit Facility"), which expires in October 2004. This facility, as amended in October 2003 and in January 2004, provides the Borrowers with up to $27,000,000 for working capital requirements and general corporate purposes. Interest is charged at a rate per annum equal to (i) LIBOR, plus 2.0% - 3.5% 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 0.25% - 0.50% 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 special cash collateral, as defined. At December 31, 2003, there were no borrowings under this facility; however, outstanding letters of credit totaled $21,136,000. In addition, the Borrowers had unused borrowing capacity of $488,000 under this facility. 22 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Borrowings - (Continued) The Revolving Credit Facility limits Metallurg, Inc.'s ability to make dividend payments and other payments to Metallurg Holdings. In addition, the Borrowers and certain subsidiaries were required to comply with various covenants, including the maintenance of minimum liquidity, as defined in the agreement, at a $10,000,000 level. Liquidity, as defined, was $10,466,000 at December 31, 2003. On January 14, 2004, the Revolving Credit Facility was amended and the minimum liquidity covenant was eliminated. In its place, Metallurg was required to deposit $4,000,000 into a special cash collateral account on the amendment date and an additional $3,000,000 on the closing date of the sale of its South African sales office. See "Note 4. Discontinued Operations". Foreign Subsidiaries LSM Revolving Credit Facilities - LSM has revolving credit facilities with Barclays Bank plc ("Barclays") and HSBC Bank plc ("HSBC"). In 2003, these overdraft facilities were reduced by 'L'2,000,000 ($3,557,000). These facilities now provide LSM with up to 'L'5,500,000 ($9,782,000) of borrowings, 'L'40,300,000 ($71,674,000) of foreign exchange contracts and options and 'L'4,000,000 ($7,114,000) for other ancillary banking arrangements, including bank guarantees. Borrowings under these facilities are secured by the assets of LSM and are repayable on demand. Outstanding loans under these facilities bear interest at rates of LIBOR plus 1.5% to 1.75%. At December 31, 2003, there were no borrowings under these facilities. LSM's Norwegian subsidiary has an unsecured overdraft facility of NOK 15,000,000 ($2,239,000). Borrowings under this facility bear interest at a rate of NIBOR plus 1.25%. At December 31, 2003, there was NOK 9,779,000 ($1,463,000) outstanding under this facility. LSM Term Loans - In December 2003, LSM refinanced its four revolving term loan facilities with Barclays and HSBC into two new term loans. The loan with Barclays is for 'L'6,000,000 ($10,671,000) for a term of three years and bears interest at LIBOR plus 1.75%. Quarterly repayments of 'L'150,000 ($267,000) commence in June 2004. The loan with HSBC is for 'L'6,000,000 ($10,671,000) for a term of five years and bears interest at LIBOR plus 1.65%. Quarterly repayments of 'L'195,000 ($347,000) commence in July 2004. These term loan facilities are secured by the assets of LSM and require LSM to comply with various covenants, including the maintenance of minimum tangible net worth and interest coverage. The Norwegian subsidiary has an unsecured term loan with a remaining balance of NOK 6,804,000 ($1,018,000). This term loan incurs interest at NIBOR plus 1.25% and will be repaid in 2004 after the closure of this facility. Other - CIF maintains short-term secured and unsecured borrowing arrangements with various banks totaling $5,413,000. Borrowings under these arrangements aggregated $4,327,000 at December 31, 2003 at a weighted-average interest rate of 9.9%. Interest expense totaled $19,133,000, $19,013,000, and $18,161,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The scheduled maturities of long-term debt during the next five years are as follows (in thousands):

23 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Financial Instruments The carrying amounts and fair values of financial instruments are as follows (in thousands):

(a) Includes notional amounts of $3,853 and $2,872 and market values of $(557) and $(280) at December 31, 2003 and 2002, respectively, relating to discontinued operations. The carrying amount of cash and cash equivalents and short-term debt approximates fair value due to their liquidity and short-term maturities. All investments purchased with maturities of three months or less are considered cash equivalents. Fair values of investments in affiliates are not readily available. The fair value of Metallurg, Holdings' Senior Discount Notes is based on quoted market prices. The fair value of Metallurg, Inc.'s Senior Notes is based on quoted market prices. The Company's other long-term debt includes floating-rate debt, the carrying amount of which approximates fair value. The Company does not use financial instruments for trading or other speculative purposes. The Company does not hedge the net investment in its subsidiaries. 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 predominantly denominated in U.S. Dollars and Euros. 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 non-performance by counterparties of those financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. 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 estimated fair value of foreign exchange contracts is based on estimated amounts at which they could be settled based on market exchange rates and include all foreign exchange contracts regardless of hedge designation. 24 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Financial Instruments - (Continued) In December 2003, in conjunction with the refinancing of its revolving term loan facilities, LSM terminated the zero premium interest rate collar it had entered into in 2001 relating to such debt. The notional principal amount of the collar was 'L'12,000,000 ($21,342,000) and the fair value presented at December 31, 2002 was based on the amount at which it could be settled with the counterparty. The contract was deemed as a hedge transaction under prescribed accounting rules and as such, the loss on terminating this contract was included as additional interest expense. Metallurg is exposed to volatility in the prices of raw materials used in some of its products and uses forward contracts to manage some of these exposures. As the hedging documentation requirements are not currently being met, gains and losses on these derivatives are recognized currently in earnings. The estimated fair value of the forward contracts is based on estimated amounts at which they could be settled based on market prices and include all forward contracts regardless of hedge designation. 14. Income Taxes For financial reporting purposes, (loss) income before income tax (benefit) provision, minority interest and discontinued operations 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 (dollars in thousands):

25 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Income Taxes - (Continued) The income tax (benefit) provision represents the following (in thousands):

U.S. federal income tax refunds receivable of $243,000 and $208,000 at December 31, 2003 and 2002, respectively, consist of carryback claims related to environmental expenses. 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 the Company's deferred tax assets and liabilities are as follows (in thousands):

26 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Income Taxes - (Continued) At December 31, 2003, the Company has net operating loss carryforwards relating to domestic operations of $60,603,000 (of which $3,300,000 is subject to certain limitations relative to utilization), which expire through 2023, and alternative minimum tax credit carryforwards of $953,000, which can be carried forward indefinitely. Metallurg, Inc.'s consolidated foreign subsidiaries have income tax loss carryforwards aggregating $9,460,000, a substantial portion of which relates to U.K and Norwegian operations, which expire through 2013. 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 December 31, 2003. Deferred tax assets that are not fully valued are mainly Federal AMT credits available in the U.S of $953,000 and deferred tax assets at LSM of $4,087,000. 15. Shareholders' (Deficit) Equity

27 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 15. Shareholders' (Deficit) Equity - (Continued) Common and Preferred Stock At December 31, 2003, no common stock was issued and outstanding; however 5,202.335 shares of Series A Voting Convertible Preferred Stock and 4,524 shares of Series B Non-Voting Convertible Preferred Stock were issued and outstanding. Additional Paid-in Capital Effective September 30, 2003, the Company completed the sale of certain subsidiaries. As these transactions were between members of a common controlled group, as defined for accounting purposes, no gain or loss was recorded and cash proceeds received of $10,000,000 have been recorded as capital contributions from members of the common controlled group. These amounts, together with dividends paid by these subsidiaries prior to their sale, have been recorded as capital contributions. In 2002, Metallurg completed similar sales of subsidiaries to members of a common controlled group, and related proceeds and dividends paid by these subsidiaries were recorded as capital contributions. See "Note 3. Change in Reporting Entity". Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows (in thousands):

Retained Deficit Under the terms of the Senior Discount Note indenture, Metallurg Holdings is limited in its ability to make restricted payments, as defined and including, among other things, minority investments in subsidiaries and dividend payments, to a formula based on cumulative net income since November 1, 1997 and certain specified allowances. As a result of this limitation, Metallurg Holdings was permitted to make future restricted payments in the amount of $7,494,000 as of December 31, 2003. Stock Compensation Plan On November 20, 1998, 500,000 shares of common stock were made available for stock awards and stock options under the 1998 Equity Compensation Plan (the "ECP"). Options issued have a term of ten years and vest, in most 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 December 31, 2003 was 5.49 years. 28 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 15. Shareholder's (Deficit) Equity - (Continued) Stock option transactions under the ECP are summarized as follows:

Had the 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, "Accounting for Stock-Based Compensation", Metallurg, Inc.'s net income would have been reduced by $39,000, $263,000, and $454,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Principal assumptions used in applying the Black-Scholes model for options granted in the periods presented are as follows:

---------- (a) No options were granted in 2003 and 2002. 29 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. Environmental Liabilities Metallurg's manufacturing operations in Cambridge, Ohio; Newfield, New Jersey; 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):

SMC 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. SMC and Cyprus Foote agreed in the consent order to conduct remediation and decommissioning activities at the Cambridge site. Additionally, SMC and Cyprus Foote agreed to enhance, restore and preserve certain wetlands in the vicinity of the Cambridge site. Pursuant to the consent order, SMC and Cyprus Foote are jointly and severally liable to the State of Ohio in respect of these obligations. However, SMC has agreed with Cyprus Foote that it shall perform and be liable for the performance of these remedial obligations. Therefore, SMC has accrued its best estimate of associated costs that it expects to substantially disburse over the next 5 years. With respect to the financial assurance obligations to the State of Ohio, Cyprus Foote has agreed to provide a substantial portion of the financial assurance required by the State of Ohio. SMC, in addition to agreeing to provide the balance thereof, 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 approximately the next 100 years. Historic manufacturing processes at both Cambridge and Newfield have resulted in on-site slag piles containing naturally occurring radioactivity. At the Cambridge site, SMC plans to decommission and to cap the slag piles on-site. In August 2002, SMC filed a decommissioning plan for its Newfield facility with the U.S. Nuclear Regulatory Commission (the "NRC"). At the same time SMC requested an amendment to the authorized use of the Newfield facility, as permitted by the NRC, to "storage only pending decommissioning". Financial assurance for implementation and ongoing maintenance of such decommissioning plans is partially assured by cash funds held in trust, letters of credit and an annuity contract. SMC entered into administrative consent orders with the New Jersey Department of Environmental Protection under which SMC must conduct remediation activities at the Newfield facility. These obligations 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. SMC accrued its best estimate of the associated costs with respect to remedial activities at the site, which it expects to disburse over the next 15 years. At December 31, 2003, outstanding letters of credit issued as financial assurances in favor of various environmental agencies totaled $19,069,000. These letters of credit were issued under the Revolving Credit Facility. See "Note 12. Borrowings". The cost of providing financial assurance over the term of the remediation activities has been contemplated in the accrued amounts. 30 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. Environmental Liabilities - (Continued) CIF has accrued environmental liabilities in the amounts of $121,000 and $147,000 at December 31, 2003 and 2002, respectively, to cover reclamation costs of closed mine sites. In 2002 and 2001, SMC recognized environmental expense recoveries of $3,000,000 and $631,000, respectively, upon settlement with insurance companies 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 SMC's Newfield, New Jersey site. 17. Contingent Liabilities In addition to environmental matters, which are discussed in Note 16, the Company defends, from time to time, 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 matters 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 that could have a material adverse effect on the Company's future results of operations or cash flows. 18. 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 December 31, 2003, 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 was $1,197,000, $1,162,000 and $1,093,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 31 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. 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, SMC, Metallurg Holdings Corporation, Metallurg Services, Inc., Metallurg International Resources, LLC ("MIR, 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. Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Statement of Operations Year Ended December 31, 2003 (In thousands)

32 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Balance Sheet at December 31, 2003 (In thousands)

33 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2003 (In thousands)

34 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Statement of Operations Year Ended December 31, 2002 (In thousands)

35 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Balance Sheet at December 31, 2002 (In thousands)

36 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2002 (In thousands)

37 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Statement of Operations Year Ended December 31, 2001 (In thousands)

38 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Supplemental Guarantor Information - (Continued) Metallurg, Inc. and its Consolidated Subsidiaries Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2001 (In thousands)

39 METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 20. Related Party Transactions In September 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 to LAGO, a German company and an affiliate of Safeguard International, the majority owner of Metallurg's parent, Metallurg Holdings, Inc. In December 2002, Metallurg completed sales of a production facility and a sales office in Germany and a number of its European sales offices to affiliates of Safeguard International. See "Note 3. Change in Reporting Entity". Accounts receivable and payable balances between the Company and affiliates of Safeguard International are shown as related party balances on the Company's Consolidated Balance Sheet. A note receivable from the German subsidiary sold in 2002 is shown as a related party balance on the Company's Consolidated Balance Sheet. This note is subordinated and accrues interest at a rate of 10% per annum. Principal and interest payments are due from 2006 through 2010 and may be repaid prior to maturity under certain circumstances. During 2002, companies under the control of Safeguard International purchased $21,500,000 face amount of the Senior Discount Notes on the open market. Of these Senior Discount notes, $4,600,000 were subsequently used by Sudamin as part of the consideration in its purchase of certain of Metallurg's sales offices. See "Note 5. Extraordinary Items". Effective July 1, 2000, an Advisory Agreement between Safeguard International Management, L.L.C. ("Safeguard LLC") and Metallurg, Inc. was amended, whereby Metallurg, Inc. was to pay $15,000 per month to Safeguard LLC for certain advisory and other services. Under this Agreement, Metallurg paid $150,000 and $90,000 in 2002 and 2001, respectively. Effective October 31, 2002, this advisory agreement was terminated and two members of Safeguard LLC, Dr. Heinz C. Schimmelbusch and Mr. Arthur R. Spector, were employed by Metallurg, Inc. on November 11, 2002 as Chief Executive Officer and Executive Vice Chairman, respectively. See "Item 10. Directors and Executive Officers of Metallurg, Inc.". During 2001, Metallurg Holdings recognized cross charges from Safeguard LLC of $34,000 representing reimbursement of direct costs incurred by Safeguard LLC in connection with pursuing and negotiating potential transactions on Metallurg Holdings' behalf. Dr. Schimmelbusch and Mr. Spector are managing directors of Safeguard LLC, which is the management company for Safeguard International, the majority owner of Metallurg Holdings, and in these positions receive compensation from this entity. 21. Subsequent Events On January 15, 2004, Metallurg, Inc. loaned Metallurg Holdings, $1,494,000 in order for Metallurg Holdings to make the interest payment on its Senior Discount Notes to non-related parties. In addition, Metallurg and another related party bought a $5,142,000 note and a $1,077,000 note, respectively, from Metallurg Holdings with the proceeds of the interest payment due to them as a holder of Senior Discount Notes. During February 2004, SMC was awarded a five-year supply contract by Comision Federal de Electricidad, the national electric utility company of Mexico, for vanadium-containing raw materials for its Cambridge, Ohio plant. The terms of the contract required an upfront payment of approximately $9 million. Safeguard International and SCP Private Equity Partners, L.P., another shareholder of Metallurg Holdings, provided an $8 million loan so that SMC can complete the purchase. The loan bears interest at 8% and is secured by a second lien on all of the assets of the Borrowers and Guarantors under the Revolving Credit Facility. During March 2004, Metallurg completed the sale of its South African sales office. See "Note 4. Discontinued Operations". 40

METALLURG HOLDINGS INC 8-K