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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended OCTOBER 31, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBER 333-52285
THE DOE RUN RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1255630
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1801 PARK 270 DRIVE, SUITE 300
St. Louis, Missouri 63146
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (314) 453-7100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of Class)
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.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Number of shares outstanding of each of the issuer's classes of common stock,
as of January 28, 1999:
COMMON STOCK, $.10 PAR VALUE 1,000 SHARES
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $0; all shares of the voting stock of the registrant are owned by
its parent, DR Acquisition Corp.
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THE DOE RUN RESOURCES CORPORATION
INDEX TO FORM 10-K
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PAGE NO.
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PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matter 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 92
PART III
Item 10. Directors and Executive Officers of the Registrant 92
Item 11. Executive Compensation 93
Item 12. Security Ownership of Certain Beneficial Owners and Management 95
Item 13. Certain Relationships and Related Transactions 96
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 98
SIGNATURES 101
EXHIBIT INDEX 102
</TABLE>
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PART I
ITEM 1. BUSINESS
The Doe Run Resources Corporation (the Company) is a producer of base
and precious metals with operations in the U.S. and Peru. The Company is the
largest integrated lead producer in North America and the largest primary
lead producer in the western world. In Peru, the Company operates the La
Oroya smelter (La Oroya), one of the largest polymetallic processing
facilities in the world offering an extensive product mix of non-ferrous and
precious metals, including copper, silver, lead, zinc and gold.
All of the Company's issued and outstanding capital stock is indirectly
owned by The Renco Group, Inc. (Renco). Renco is 97.9% owned by trusts
established by Mr. Ira Leon Rennert, Renco's Chairman and Chief Executive
Officer, for himself and members of his family. As a result of such
ownership, Mr. Rennert controls the Company and its subsidiaries. The Company
owns 100% of Doe Run Cayman Ltd. (Doe Run Cayman), a Cayman Island
corporation. Doe Run Cayman indirectly owns in excess of 99% of the interest
in Doe Run Peru S.R.L (Doe Run Peru) through Doe Run Mining S.R.L (Doe Run
Mining), with a DE MINIMIS number of shares owned by employees of both Doe
Run Peru and Empresa Minera del Centro del Peru S.A. (Centromin) pursuant to
Peruvian law. Centromin is the Peruvian government entity whose Subsidiary
held the assets and liabilities of La Oroya which was purchased on October
23, 1997 by Doe Run Peru. Doe Run Mining and Doe Run Peru are Peruvian
corporations.
The Company maintains its principal executive offices at 1801 Park 270
Drive, St. Louis, Missouri 63146. The Company's phone number is (314)
453-7100.
The Company operates in one industry segment, the non-ferrous metals
industry, for financial reporting purposes. Reference is hereby made to
"Item 8. Financial Statements and Supplementary Data", Note 14 to the
Company's Consolidated Financial Statements. The Company's business does not
involve i) seasonal fluctuations; ii) unusual working capital requirements
iii) significant order backlog; or iv) federal contracting.
RECENT TRANSACTIONS
On March 12, 1998, the Company completed the sale of $200 million,
11.25% Senior Notes due 2005 and $55 million Floating Interest Rate Senior
Notes due 2003 (collectively, the Unsecured Notes). The net proceesds of these
notes were primarily used to retire existing term loans, redeem preferred
stock and pay associated fees and expenses. On September 1, 1998, the Company
completed the sale of $50 million, 11.25% Senior Secured Notes due 2005 (the
Secured Notes). The proceeds of the Secured Notes were used to acquire
certain assets of the ASARCO Incorporated's Missouri Lead Division (MLD) as
described below.
The September 1, 1998 acquisition from MLD included a primary lead smelter,
the lead mining operations at the Westfork and Sweetwater production shafts and
associated equipment, licenses, permits and leases, pursuant to the Asset
Purchase Agreement, dated July 28, 1998 (the Asset Purchase Agreement). The
$54.4 million purchase price for these assets was paid with the net proceeds of
the Secured Notes and borrowings under a revolving credit facility. In
addition, the Asset Purchase Agreement provides for contingent deferred payments
if the annual, average LME spot lead price exceeds $.285 per pound, with such
payments not to exceed $12.5 million in the aggregate.
On August 31, 1998, the Company acquired, through Doe Run Mining for
$7.5 million the stock of Empresa Minera Cobriza S.A. (Cobriza), from
Centromin. The Cobriza mine and mill supply La Oroya with approximately 40%
of its annual copper concentrate requirements. The Cobriza mill has a
throughput capacity of approximately 10,500 tons per day of ore from which
the mill produces a copper/silver concentrate, all of which is shipped by
truck to the La Oroya smelter.
OVERVIEW -- U.S. OPERATIONS
The Company's U.S. operations consist of eight production shafts, six
mills, two primary smelters, and one secondary smelter in Missouri and
fabrication facilities in Arizona, Washington and Texas. These integrated
operations permit it to participate in and manage the entire lead life cycle
from mining lead ore, to producing refined lead metal, to fabricating
value-added lead products, to recycling lead-bearing materials such as spent
lead-acid batteries.
The Company conducts its U.S. mining operations along approximately 40
miles of the Viburnum Trend in Southeastern Missouri, one of the world's most
productive lead deposits. As of October 31, 1998, the Company's U.S.
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ore reserves consisted of approximately 71 million proven and probable tons,
containing grades of 5.83% lead, 1.21% zinc and .23% copper.
In fiscal 1998, the Company shipped approximately 375,000 tons of refined
lead metal and lead alloy products, including recycled lead, representing
approximately 18.4% of North American consumption and 6.5% of western world
consumption. In fiscal 1998, the Company's U.S. operations generated net sales
of $261.6 million and a net loss of $28.2 million. Refined lead metal sales
accounted for approximately 68% of fiscal 1998 net sales. Providing tolling
services to major U.S. lead-acid battery manufacturers, producing lead
by-products, such as zinc and copper concentrates, and fabricating value-added
lead products, such as lead sheet and bricks, comprised the balance of the
Company's net sales in the U.S. Exports represented approximately 2% of the U.S.
operations' 1998 net sales.
Fluctuations in lead and other base metal prices could have a material
adverse effect on the results of operations, financial condition and liquidity
of the Company. These prices are affected by numerous factors beyond the
Company's control, including expectations for inflation, speculative activities,
global and regional demand and production, political and economic conditions and
production costs in major producing regions. The aggregate effect of these
factors is impossible for the Company to predict. The Company, by taking
advantage of its extensive polymetallic ore resources, is somewhat able to
reduce its exposure to metal price volatility through adjustments to its mining
and milling plans to take advantage of prevailing market conditions for lead,
zinc and copper. In addition, sales from tolling services, by-products and
fabricated products provide the Company with sources of revenue largely
independent of lead prices. For the year ended October 31, 1998, approximately
80% of the Company's net sales, inclusive of La Oroya, were derived from tolling
services and other sources less sensitive to lead metal price fluctuations.
The average LME price for refined lead was $.24 per pound in fiscal 1998.
As of December 31, 1998, the LME price for lead had declined to just under $.23
per pound. Over the past ten years, the average price of lead has been
approximately $.28 per pound. Management believes that lead prices over the long
term will reflect the historical industry average. Due to the recent decreases
in lead prices, the Company's U.S. operations incurred an operating loss in
fiscal 1998. While the Company expects to reduce certain costs and achieve
certain operating efficiencies during fiscal 1999 in an effort to mitigate the
impact of low metal prices, lead metal prices could decrease further in the
future to levels resulting in operating losses.
The lead-acid battery remains the most cost competitive technology for
starting, lighting and ignition (SLI) batteries, primarily automotive, and
management believes this trend will continue. Refined lead is also used in
products such as computer and television screens, ammunition, stationary
batteries used as backup power sources and rolled and extruded lead products
used in radiation shielding and roofing materials. The market for refined lead
continues to grow primarily as a result of worldwide economic growth.
Management believes that this growth will accelerate in the future as batteries
become an even larger portion of the lead market, particularly in light of the
expected economic growth in developing countries leading to increased vehicle
population in those economies.
OVERVIEW -- PERUVIAN OPERATIONS
The Company's Peruvian operations consist of the La Oroya smelting complex
and the Cobriza mine and mill. La Oroya's unique combination of base metal
smelters, refineries and by-product circuits enable it to process complex
polymetallic concentrates and to deliver finished metals and by-products that
meet international quality standards. For the year ended October 31, 1998, net
sales and net income were $455.0 million and $35.3 million, respectively.
Refined copper, silver, zinc, lead and gold accounted for 24%, 34%, 17%, 13% and
4%, respectively, of fiscal 1998 net sales. Sales of various by-products
accounted for the balance of fiscal 1998 sales. For the year ended October 31,
1998, La Oroya was one of Peru's largest exporters, exporting approximately 74%
of its total shipments to North America, Europe and Asia, as well as other Latin
American countries. Its customers include end-users of base metals and metal
by-products, as well as international metal trading companies.
La Oroya's operations consist of the smelting and refining of complex
concentrates obtained from Cobriza and other unaffiliated mining operations.
La Oroya typically purchases concentrate feedstock pursuant to annual
contracts where the price is based on a percentage of the payable base metal
and precious metal content of the concentrates, reduced by processing fees,
treatment charges to refine the concentrates, and penalties for impurities
within the concentrates, such as arsenic, antimony and bismuth, which are
sold as by-products . Base metal prices, treatment charges and penalties are
generally established by reference to prevailing market prices. Currently, La
Oroya has contracted for approximately 80%-90% of its concentrate
requirements for fiscal 1999 through the acquisition of Cobriza and contracts
with suppliers. For the year ended October 31, 1998, approximately 40% of the
La Oroya smelter's copper concentrate requirements were met by Cobriza,
representing 100% of Cobriza's output.
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Because La Oroya pays for the majority of the metal content of the
concentrates purchased, it derives its operating profit primarily from treatment
charges and penalties. Additional operating profit is generated from the sale of
by-products, as well as from premiums over market prices received on its refined
metal sales. Since La Oroya's metallurgical recoveries are typically greater
than the percentage of metal content paid for, it is able to sell the excess
recoveries and increase its operating profit.
The markets for La Oroya's products are global and continue to grow as a
result of worldwide economic growth. Given the diversity of its products and
by-products, the Company's financial performance is not solely dependent upon
any single product or by-product. Also, since the La Oroya smelter is
primarily a processor of complex concentrates that are purchased based on
market prices, its financial performance is less sensitive to the volatility
of base metal prices.
BUSINESS STRATEGY
The Company's business strategy is to improve its operations and financial
performance by focusing on the following principal elements: (i) increasing
capacity and improving operating efficiencies; (ii) maintaining and building
strong relationships with strategic customers; (iii) optimizing La Oroya's
concentrate supplies; (iv) growing its core lead business; and (v) broadening
the Company's revenue sources through strategic acquisitions.
THE COMPANY'S U.S. OPERATIONS
PRODUCTS AND SERVICES
The principal products produced by the Company's U.S. operations include
refined lead from primary and secondary sources, zinc and copper concentrates,
fabricated lead products and other by-products. Secondary source revenue is
generated primarily from tolling fees received for recycling spent lead-acid
batteries and other lead-bearing materials. The following table sets forth net
sales for the Company's products and services:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Primary Lead. . . . . . . . . . . . . . . . . . . . . $146,227 $156,077 $165,932
Secondary Lead:
Tolling. . . . . . . . . . . . . . . . . . . . . 21,892 22,369 15,119
Metal Sales. . . . . . . . . . . . . . . . . . . 31,110 29,039 29,782
Other. . . . . . . . . . . . . . . . . . . . . . 6,547 6,063 3,910
Zinc Concentrates . . . . . . . . . . . . . . . . . . 25,472 24,772 22,363
Copper Concentrates . . . . . . . . . . . . . . . . . 3,679 8,822 12,431
Fabricated Products . . . . . . . . . . . . . . . . . 17,442 24,121 9,294
Other . . . . . . . . . . . . . . . . . . . . . . . . 9,232 6,633 16,099
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Total. . . . . . . . . . . . . . . . . . . . . . $261,601 $277,896 $274,930
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</TABLE>
CUSTOMERS
The Company had approximately 159 lead metal customers in fiscal 1998, of
which the five largest accounted for approximately 42% of lead metal net sales.
Approximately 70% of lead metal net sales were pursuant to contractual
agreements, typically one year or less. Such contracts generally set forth
minimum volume and pricing terms. The Company's customers include six of the
seven largest lead-acid battery manufacturers in the world. These six customers
accounted for approximately 41% of net sales in fiscal 1998. Johnson Controls,
Inc., represented approximately 10% of fiscal 1998 U.S. sales. The loss of any
of these large customers or curtailment of purchases by such customers could
have a material adverse effect on the results of operations, financial condition
and liquidity of the Company. As a result of the acquisition of La Oroya,
however, no single customer accounted for more than 10% of the Company's
consolidated fiscal 1998 net sales.
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COMPETITION
The Company's U.S. operation is the largest integrated lead producer in North
America and the largest primary producer in the western world. The Company
competes primarily in the North American market where its competitors are other
major primary and secondary lead producers. Competition within the North
American market is based primarily on quality, price, service, timely delivery
and reliability. Since lead is generally sold on a delivered basis with freight
charges included, the Company's central U.S. location allows it to have
transportation costs significantly lower than its major competitors with
operations outside of North America. Due to its location, the Company is also
able to provide its customers just-in-time delivery at a lower cost than most of
its competitors. In addition, management believes the Company's primary and
secondary production capacities and focus on the lead business as its core
business provide the Company with additional competitive advantages.
RAW MATERIALS
The Company's U.S. operations utilize various raw materials, principally
coke, electricity, natural gas, propane and spent batteries. These raw materials
are secured from external sources, primarily under contracts that are awarded on
the basis of competitive bid. In addition, lead concentrates are supplied by the
Company's mining operations and purchased from third parties. The Company
believes that it has adequate sources of these raw materials to meet its present
production needs. For a discussion of the Company's mineral reserves, see "Item
2. Properties -- Ore Reserves."
ELECTRICAL POWER
The electric power source for the majority of the Company's U.S. operations
is Ameren UE, a public utility headquartered in St. Louis, Missouri. Viburnum-35
and Glover obtain their electric power from Black River Co-op.
ENVIRONMENTAL MATTERS
The Company's U.S. operations are subject to numerous federal, state and
local environmental laws and regulations governing, among other things, air
emissions, waste water discharge, solid and hazardous waste treatment, and
storage, disposal and remediation of releases of hazardous materials. In common
with much of the mining industry, the Company's facilities are located on sites
that have been used for heavy industrial purposes for decades and may require
remediation. Environmental laws and regulations may become more stringent in the
future which could increase costs of compliance. See "Item 8. Financial
Statements and Supplementary Data", Note 16 to the Company's Consolidated
Financial Statements.
EXPLORATION
The Company continues to explore actively within the Viburnum Trend.
Historically, such exploration has replaced a substantial portion of the annual
production with additional reserves. Currently, exploration drilling is being
conducted in the vicinity of all eight of the Company's mines in the Viburnum
Trend district, both from the surface and from underground, with a view to
delineating additional ore reserves. In addition, drilling work is being
pursued in most of the mines to access ore beyond the present areas. Most
notably, a drift is being advanced to access reserves between the Fletcher and
Sweetwater mines that have potential mineralization. The Company also holds
exploration tracts outside the Viburnum Trend in the U.S. and in the Republic of
South Africa that are being actively explored. In South Africa, the Company is
in the advanced stage of exploring a lead and zinc deposit approximately 100
miles from Kimberly, in the center of the country. The Company is performing
geological and geochemical surveys, surface drilling and underground work in an
area covering approximately 150,000 acres. In fiscal 1998, 1997 and 1996, the
Company spent $5.3 million, $6.2 million and $4.9 million, respectively, on
exploration activities, including $4.1 million, $2.6 million and $2.9 million,
respectively, outside the Viburnum Trend.
SAFETY
Throughout its operations, the Company strongly emphasizes providing
employees a safe working environment through extensive training to ensure safe
work practices and worker knowledge of proper equipment operation. In the U.S.,
the Company's mining and milling operations are regulated by the Mine Safety and
Health Administration of the Department of Labor (MSHA) and its smelting and
fabricating operations by the Occupational Safety and Health Administration of
the Department of Labor (OSHA). The Company believes it has achieved safety
results that are among the best in its industry classifications. Each year since
1973, one of the mining units has been named either the safest or second safest
underground metal mine in the United States by MSHA. The Company has
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achieved the top award 11 times in the last 25 years. The smelting operations
have achieved a strong safety record as well, with typical loss time accident
rates averaging approximately three to four times better than industry
averages in recent years.
EMPLOYEES
As of October 31, 1998, the Company had 430 active salaried employees and
1,359 active hourly employees in the U.S. Management believes that its labor
relations are good. At October 31, 1998, 127 hourly employees were represented
by Local 7450 of the United Steelworkers of America (USWA). The Company has
recognized the USWA to the extent required by law, and has begun negotiating a
collective bargaining agreement. Although the Company anticipates that an
acceptable agreement can be negotiated with the USWA, there is no assurance that
such an agreement will be reached.
THE COMPANY'S PERUVIAN OPERATIONS
PRODUCTS
La Oroya's principal products include refined copper, silver, zinc, lead and
gold. In addition, La Oroya produces a variety of by-products, including
bismuth, indium, tellurium, antimony, cadmium, selenium, sulfuric acid,
zinc-silver concentrate, zinc sulfate, copper sulfate, arsenic trioxide and
others. The following table sets forth net sales for each of La Oroya's
principal products. The 1996 and 1997 figures reflect activity preceding the
Company's acquisition of La Oroya.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED OCTOBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Copper. . . . . . . . . . . . . . . . . . . . . . . . $111,398 $148,898 $155,641
Silver. . . . . . . . . . . . . . . . . . . . . . . . 157,857 98,006 114,544
Zinc. . . . . . . . . . . . . . . . . . . . . . . . . 76,370 83,521 74,855
Lead. . . . . . . . . . . . . . . . . . . . . . . . . 60,782 65,385 74,648
Gold Bullion. . . . . . . . . . . . . . . . . . . . . 18,533 14,605 21,084
By-Products . . . . . . . . . . . . . . . . . . . . . 30,040 21,469 19,869
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Total. . . . . . . . . . . . . . . . . . . . . . . $454,980 $431,884 $460,641
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</TABLE>
CUSTOMERS
La Oroya had approximately 430 customers in 1998, including a wide variety
of industrial and international trading companies, of which the five largest
accounted for approximately 29% of its net sales. In 1998, approximately 74% of
net sales were exported, with sales/shipments to North American countries
representing approximately 35% of net sales, followed by Latin America, Asia and
Europe with 19%, 12% and 8% of net sales, respectively. Substantially all of La
Oroya's 1998 metal sales were pursuant to contractual agreements, typically one
year or less. Such contracts generally set forth minimum volumes and pricing
mechanisms. Substantially all of La Oroya's sales were denominated in U.S.
dollars.
COMPETITION
La Oroya is among the largest metal processing facilities in the world. Its
unique combination of base metal smelters, refineries and by-product circuits
capable of processing complex concentrates into base and precious metals and
various by-products enable it to meet stringent international quality standards.
Only three other facilities in the western world have the capability to treat
lead and copper concentrates containing high antimony, arsenic, bismuth and
precious metal values in addition to a variety of residues. Unlike La Oroya,
none of these facilities has a dedicated zinc production circuit. As a result of
La Oroya's proximity to significant sources of concentrates, management believes
that it operates at a geographic competitive advantage. In addition, La Oroya's
proximity to Lima's Callao port provides ready access to major world markets.
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RAW MATERIALS
La Oroya's primary raw material is concentrate feedstock. In addition to
concentrate feedstock, the Company utilizes various raw materials, principally
water, electricity, oxygen, coal and fluxes.
COPPER. During 1998, approximately 73% of the copper concentrates
processed at La Oroya was obtained from the Peruvian domestic market,
approximately 52% of which was supplied by Cobriza. In fiscal 1999, La Oroya
expects to obtain approximately 70% of its copper concentrates from the Peruvian
domestic market, 50% of which will be sourced from Cobriza. The balance of its
copper concentrate requirements will be obtained primarily from neighboring
Latin American countries. The Company believes that sufficient concentrates will
be available to meet its requirements for the foreseeable future.
ZINC. All of the zinc concentrates processed at La Oroya, during 1998, were
secured from the Peruvian domestic market. La Oroya requires approximately
84,000 tons of zinc metal contained in concentrates per year to maximize
production capacity. With present mine production, the Company believes that
sufficient concentrates will be available to meet its requirements for the
foreseeable future.
LEAD. Approximately 98% of La Oroya's 1998 lead concentrates was obtained
from the Peruvian domestic market, with Centromin's mines accounting for
approximately half of the total feedstock. Since La Oroya has no local Peruvian
competitors in lead smelting, all of the concentrates produced in Peru, the
total of which far exceeds La Oroya's requirements, are available to La Oroya.
WATER. Water for the La Oroya facility is obtained from three main
sources: the Mantaro River; the Tishgo River; and the Cuchimachay Spring.
Management believes these three sources, in addition to numerous adjacent
springs and wells, provide adequate water supplies for the facility.
OTHER. La Oroya installed an oxygen plant in 1994 with a capacity of 353
tons per day. The oxygen plant supplies oxygen for the oxy-fuel burners of the
reverberatory furnace of the copper smelter and for the blast furnaces of the
lead smelter. Coal is imported to produce metallurgic coke for the lead circuit
blast furnaces. Fluxes consumed in the smelting process are supplied from La
Oroya's limestone and silica deposits adjacent to the facility. Management
believes that its sources of these materials are adequate to support operations
for the foreseeable future.
ELECTRICAL POWER
La Oroya receives electric power from Electroandes and consumes
approximately 63 megawatts of ongoing load. The 63 megawatts represents
approximately one-third of the capacity of Electroandes. La Oroya has a nine
year power supply contract with Electroandes, which management believes will
provide sufficient power to La Oroya over the life of the contract at
satisfactory long-term rates. Most of Cobriza's electrical power is also
provided Electroandes. Cobriza's requirements do not represent a significant
portion of Electroandes' capacity.
ENVIRONMENTAL MATTERS
Modern environmental legislation has been introduced only in the last
decade in Peru. For mining and metallurgical activities, the Ministry of Energy
and Mines (MEM) is the principal regulatory authority. The MEM has issued
"maximum permissible limits" for liquid effluent, air emissions and ambient air
quality. In addition, the Consejo Nacional del Ambiente (National Environmental
Council) coordinates government regulations and policies. The Direccion General
de Salud Ambiental (Directorate General of Environmental Health) (DIGESA), a
division of the Ministerio de Salud (Ministry of Health), issues waste water
discharge permits based on standards governing receiving water quality. Peruvian
law requires all new mining or metallurgical operations, and existing operations
that are undergoing an expansion of over 50% of installed capacity, to submit to
the MEM an Estudio de Impacto Ambiental (Environmental Impact Study).
For mining and metallurgical operations in existence prior to 1994,
concession holders (i.e. owner/operators) were required to submit to the MEM
an Evaluacion Ambiental Preliminar (Preliminary Environmental Assessment)
(EVAP) that identified environmental impacts and twelve months of baseline
monitoring. Based on the results of the EVAP, the operator was to submit to
the MEM a Programa de Adecuacion y Manejo Ambiental (Environmental
Remediation and Management Program) (PAMA) that consisted of an environmental
impact analysis, monitoring plan and data, mitigation measures and closure
plan. The PAMA also sets forth the actions and corresponding annual
investments the concession holder agrees to undertake in order to achieve
compliance with the applicable standards prior to expiration of the PAMA (ten
years for smelters, such as La Oroya's operations, and five years for any
other type
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of mining or metallurgical operation, like Cobriza). The required amount of
annual investment must not be less than 1% of annual sales. Once approved,
the PAMA functions as the equivalent of an operating permit with which the
operator must comply. After expiration of the PAMA, the operator must comply
with all applicable standards and requirements. Mining, metallurgical and
processing operators must present annual sworn statements to the MEM that
describe their operations and resultant emissions. In addition, Peruvian
environmental law allows operators to enter into a Contrato de Estabilidad
Administrativa Ambiental (Contract for Administrative Environmental
Stabilization) (Environmental Stabilization Agreement) in order to provide
some potential limit to the applicability of new laws during the life of the
PAMA.
The initial PAMA for La Oroya's predecessor was submitted by Centromin and
approved by the MEM on January 13, 1996. The PAMA was modified in connection
with the acquisition of La Oroya to reflect a reallocation of environmental
responsibilities between Centromin and the Company, and corresponding revisions
were made to the investment schedule. The MEM approved separate PAMAs for
Centromin and the Company and an Environmental Stabilization Agreement for the
Company. Centromin has committed under its PAMA to implement the following
projects over the next eight years, estimated to cost approximately $24 million:
(i) remediation of areas impacted by emissions during its period of operations;
(ii) closure of the lead and copper slag deposits (at Huanchan); (iii) improved
management of the Huanchan deposit (E.G. storm water diversion and slope
stability); and (iv) closure of the arsenic trioxide deposits (at Malpaso and
Vado).
The Company has committed under its PAMA to implement the following
projects with an estimated cost of $164.5 million over the next eight years:
(i) new sulfuric acid plants; (ii) elimination of fugitive gases from the coke
plant; (iii) use of oxygenated gases in the anodic residue plant; (iv) water
treatment plant for the copper refinery; (v) a recirculation system for cooling
waters at the smelter; (vi) management and disposal of acidic solutions at the
silver refinery; (vii) industrial waste water treatment plant for the smelter
and refinery; (viii) containment dam for the lead muds near the zileret plant;
(ix) granulation process water at the lead smelter; (x) anode washing system at
the zinc refinery; (xi) management and disposal of lead and copper slag wastes;
and (xii) domestic waste water treatment and domestic waste disposal. The actual
current estimate for the environmental projects and related process changes for
the Company is $195.0 million.
La Oroya's operations historically and currently exceed some of the
applicable MEM maximum permissible limits pertaining to air emissions, ambient
air quality and waste water effluent quality. The PAMA projects, which are more
fully discussed below, have been designed to achieve compliance with such
requirements prior to the expiration of the PAMA on January 13, 2007. No
assurance can be given that implementation of the PAMA projects is feasible or
that their implementation will achieve compliance with the applicable legal
requirements by the end of the PAMA period. The Company has advised the MEM that
it intends to seek changes to certain PAMA projects that it believes will more
effectively achieve compliance. However, there can be no assurance that the MEM
will approve proposed changes to the PAMA or that implementation of the changes
will not increase the cost of compliance. Further, there can be no assurance
that the Peruvian government will not in the future require compliance with
additional environmental obligations that could adversely affect the Company's
business, financial condition or results of operations. Under the Subscription
Agreement, Centromin agreed to indemnify the Company against environmental
liability arising out of its prior operations, and performance of the indemnity
has been guaranteed by the Peruvian government through the enactment of the
Supreme Decree No. 042-97-PCM. However, there can be no assurance that Centromin
will satisfy its environmental obligations and investment requirements,
including those in its PAMA, or that the guarantee will be honored. Any failure
by Centromin to satisfy its environmental obligations could adversely affect the
Company's business, financial condition or results of operations.
As part of the acquisitions of La Oroya and Cobriza, the Company entered
into certain agreements with MEM to expand and modernize the operations of La
Oroya and Cobriza, including expenditures to comply with environmental
regulations in Peru, such as those governing the treatment, handling and
disposal of solid wastes, liquid effluent discharges and gaseous emissions.
Principal projects related to environmental matters at the La Oroya smelter
include building sulfuric acid plants for the metal circuits, new converter and
roaster technology for the copper circuit, replacement of the roaster equipment
for the zinc circuit, water and sewage treatment facilities, and slag and slimes
handling equipment and disposal facilities. The Company estimates that
expenditures related to environmental matters will be approximately
$195.0 million through fiscal 2007. Under its agreement with the MEM, the
Company is required to make certain improvements by May 2002 at Cobriza at an
estimated cost of approximately $5.0 million. No assurance can be given that
implementation of the PAMA projects at Cobriza is feasible or that
implementation will achieve compliance with the applicable standards by the end
of the PAMA period.
In conjunction with the MEM agreement, the Company has undertaken a
ten-year capital investment program to enhance various elements of its
operations. The objective of the capital investment program is to increase
net sales by
7
<PAGE>
improving product quality, increasing production capacity and reducing unit
costs. In addition, through planned environmental expenditures, the Company
will endeavor to achieve compliance with environmental regulations in Peru.
Management believes that cash flow from operations in addition to lines of
credit available to the Company through its revolving credit facilities will
be sufficient to fund the capital investment program. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources."
SAFETY
Peru's Ministerio de Trabajo y Promocion Social (Ministry of Industrial
Safety) is responsible for regulating measures to minimize work-related
illnesses and accidents through continuous inspections to ensure compliance
with numerous safety standards. The Company's Peruvian operations' safety
performance improved significantly in 1998 and with further assistance and
direction provided by the Company, the Company's Peruvian operations will
continue to maintain a high regard for safety and hygiene.
EMPLOYEES
As of October 31, 1998, the Company's Peruvian employees included 901
active salaried employees, 2,057 active hourly employees, and 1,833 people on
a contract basis. There are two unions for hourly employees and two unions
for salaried employees. The principal union representing 90.4% of the hourly
employees is the Sindicato de Trabajadores Metalurgicos La Oroya (La Oroya
Metallurgic Workers Union). The Sindicato de Trabajadores Ferroviarios La
Oroya (La Oroya Railway Workers Union) represents 3.8% of the hourly workers,
the remaining hourly workers (5.8%) are not affiliated with either union. On
July 26, 1998, the Company entered into a five-year labor agreement with the
hourly unions, effective through July 25, 2003. The salaried employees are
represented by the Sindicato de Empleados Yauli-La Oroya (Yauli-La Oroya
Employees Union), representing 64.9% of the salaried employees and by the
Sindicato de Empleados Ferroviarios La Oroya (La Oroya Railway Employees
Union), representing 9.0% of salaried employees. The remaining salaried
employees, 26.1%, are not affiliated with either union. The current salaried
employees' labor agreement continues until December 31, 2002. Management
believes the Company's labor relations are good, as evidenced by the recent
agreements reached with the unions.
ITEM 2. PROPERTIES
U.S. OPERATIONS
The Company's Missouri mining operations utilize eight production shafts
that form a north-south line along approximately 40 miles of the Viburnum
Trend ore body. Three production shafts, Viburnum-28, Viburnum-29 and
Viburnum-35, lie within a five-mile radius east, north and south,
respectively, of Viburnum, Missouri. Viburnum is located approximately 125
miles southwest of St. Louis, Missouri. The Buick, Brushy Creek, West Fork,
Fletcher and Sweetwater production shafts are eight miles, 16 miles, 18
miles, 20 miles and 29 miles, respectively, south of Viburnum, Missouri.
The Company also operates six grinding/floatation mills. The Viburnum
mill is located on the eastern edge of Viburnum, Missouri, and has the
largest capacity of any mill in the area with its 12,000 ton per day
concentrator. The Buick mill is located at the site of the Buick production
shaft, and its concentrator has a capacity of 7,200 tons per day. The
Fletcher mill is located at the site of the Fletcher production shaft, and
its concentrator has a capacity of 5,000 tons per day. The Brushy Creek mill
is located at the site of the Brushy Creek production shaft, and its
concentrator has a capacity of 5,000 tons per day. The West Fork mill is
located at the site of the West Fork production shaft and its concentrator
has a capacity of 4,000 tons per day. The Sweetwater mill is located at the
site of the Sweetwater production shaft and has a capacity of 6,800 tons per
day. All of the mining and milling facilities are accessible by state or
county roads or Company-owned haul roads. Products are shipped by truck over
public roads or by rail. The Viburnum and Buick mills have rail access.
The Herculaneum primary lead smelter, with a capacity of 250,000 tons
per year, is located approximately 35 miles south of St. Louis on the
Mississippi River in Herculaneum, Missouri. The Company owns the property.
The Herculaneum smelter is the largest primary lead smelter in North America
and the second largest in the world.
Located in Glover, Missouri, approximately 20 miles southeast of the
Sweetwater production shaft, the Glover primary smelter has a capacity of
135,000 tons per year. The property is owned by the Company.
8
<PAGE>
The lead recycling smelter, is located in Boss, Missouri approximately
ten miles south of Viburnum, Missouri. The Company owns the property. The
annual capacity of the facility was recently increased to 110,000 tons from
its original 60,000 ton capacity. The facility operates under a Resource
Conservation and Recovery Act (RCRA) permit allowing it handle waste,
primarily lead bearing material.
The following table sets forth the location of and certain other
information about the Company's U.S. facilities:
<TABLE>
<CAPTION>
FACILITY LOCATION LAND FACILITY
-------- -------- ---- --------
(ACRES) (SQ. FEET)
<S> <C> <C> <C>
MINING AND MILLING:
Viburnum (three production shafts). . . . Viburnum, Missouri 679 139,000
Buick . . . . . . . . . . . . . . . . . . Boss, Missouri 82 144,000
Brushy Creek. . . . . . . . . . . . . . . Bunker, Missouri 400 92,000
West Fork . . . . . . . . . . . . . . . . Bunker, Missouri 475 79,700
Fletcher. . . . . . . . . . . . . . . . . Bunker, Missouri 162 88,000
Sweetwater. . . . . . . . . . . . . . . . Ellington, Missouri 1,015 131,074
SMELTING:
Herculaneum--Primary. . . . . . . . . . . Herculaneum, Missouri 235 365,000
Glover--Primary . . . . . . . . . . . . . Glover, Missouri 1,080 347,000
Buick--Secondary. . . . . . . . . . . . . Boss, Missouri 193 200,000
FABRICATING:
Fabricated Products, Inc. . . . . . . . . Casa Grande, Arizona (a) 75,000
Vancouver, Washington (a) 15,000
Houston, Texas (a) 33,000
</TABLE>
___________
(a) This facility is leased.
The Company owns the property where the necessary surface structures for
mining and milling are located. The mineral rights are held either by fee title
or mineral leases with either private landowners or the federal government.
There are also numerous prospecting permits, most of which are for exploration
of new mineral ore deposits. Five of the production leases are private leases,
and 11 are government leases. The mineral leases with private landowners have no
expiration periods. The government leases are for a period of either ten or 20
years and are renewable. The related mining operations are conducted pursuant to
four development contracts, which also are for ten or 20, as the case may be,
years subject to renewal. The Viburnum, Fletcher, Buick and Brushy Creek
development contracts consist of four, two, one and two leases, respectively,
which are due for renewal March 31, 2018, May 31, 2003, October 31, 2004 and
May 31, 2003, respectively. West Fork and Sweetwater are each producing under a
single lease, due to expire January 31, 2003 and June 30, 2000, respectively.
The government has not yet assigned development contracts to these leases. The
Company is required to make royalty payments under the leases.
The Secured Notes are secured by a first priority lien in the MLD assets
acquired, which include the Sweetwater and West Fork mine and mill properties
and the Glover smelter property.
9
<PAGE>
ORE RESERVES
The following table sets forth the mineable reserves as of October 31, 1998
for the Viburnum Trend mineral deposits and the Higdon deposit, which is outside
the Viburnum Trend. The mineral reserves have been audited by Pincock, Allen &
Holt, Lakewood, Colorado, an international mineral industry consulting firm.
RESERVE AUDIT --MINEABLE RESERVES
AS OF OCTOBER 31, 1998
<TABLE>
<CAPTION>
GRADE+
----------------------------
MINE TONS LEAD ZINC COPPER
- ---- ------------ ---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proven. . . . . . . . . . . . . . . . . . . . 14,742 7.30% 1.52% .29%
Probable. . . . . . . . . . . . . . . . . . . 56,217 5.45% 1.12% .20%
------
Total Proven and Probable . . . . . . . . . . 70,959 5.83% 1.21% .23%
------
------
</TABLE>
___________
+ The estimated average extraction recovery after allowing for expected
dilution for lead, zinc and copper are 89.8%, 88.8% and 88.3%,
respectively. These losses are included in the above reserve table.
Estimated average metallurgical recoveries for lead, zinc and copper are
96.5%, 82.0% and 52.1%, respectively. Metallurgical recovery losses have
not been included in the above reserve table.
The term "reserve" means that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the reserve
determination. The term "proven (measured) reserves" means reserves for which
(a) quantity is computed from dimensions revealed in outcrops, trenches,
workings or drill holes; grade and/or quality are computed from the results of
detailed sampling and (b) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is so well defined that size,
shape, depth and mineral content of reserves are well-established. The term
"probable (indicated) reserves" means reserves for which quantity and grade
and/or quality are computed from information similar to that used for proven
(measured) reserves, but the sites for inspection, sampling, and measurement are
farther apart or are otherwise less adequately spaced. The degree of assurance,
although lower than that for proven (measured) reserves, is high enough to
assume continuity between points of observation.
PERUVIAN OPERATIONS
La Oroya's operations are located in central Peruvian Andes town of La
Oroya, approximately 110 miles from the Peruvian capital of Lima and at an
altitude of approximately 12,000 feet above sea level. The complex is linked to
port facilities by highway and railroad service. Most supply sources also have
rail service. The facilities consist of a copper smelter, lead smelter, copper
refinery, lead refinery, copper fabricating plant, zinc refinery, precious
metals refinery, antimony plant, arsenic plant, coke plant, cadmium plant,
maintenance shops and other support facilities. Current production capacities of
primary products are as follows:
<TABLE>
<CAPTION>
PRODUCT ANNUAL CAPACITY
------- ---------------
<S> <C>
Copper (tons) 77,000
Lead (tons) 121,000
Zinc (tons) 81,000
Silver (thousands of troy ounces) 35,000
Gold Bullion (thousands of troy ounces) 64
</TABLE>
10
<PAGE>
The following table sets forth the total land area and facility size of La
Oroya's facilities:
<TABLE>
<CAPTION>
FACILITY LAND FACILITY
-------- ---- --------
(ACRES) (SQ. FEET)
<S> <C> <C>
Copper Smelter.................. 3.5 302,000
Lead Smelter.................... 3.1 262,000
Copper and Lead Refinery........ 6.9 311,000
Zinc Refinery................... 4.3 258,000
Solid Disposal Area............. 110.3 --
Other Areas..................... 11.4 554,000
</TABLE>
The Cobriza mine is located approximately 250 miles southeast of Lima in
the district of San Pedro de Coris, Chucampa Province. Access to the site is by
improved dirt road through rugged topography. Concentrates produced at the mine
are trucked 130 miles over dirt road to Huancayo, and then an additional 190
miles over paved road to the La Oroya smelter. Cobriza's mill has a capacity of
10,500 tons per day and its current throughput is approximately 6,000 tons per
day.
Landholdings at Cobriza include approximately 2,600 acres of surface
ownership and approximately 125,000 acres of mining concessions. The current
mining operation is located on a portion of the area held. Economic
mineralization outside the existing mining area has not been confirmed. The
Company's estimates, which have not been audited, indicate proven and probable
reserves sufficient for approximately five years of production at approximately
2.5 million tons per year. The surface structures of the Cobriza mining
operations cover approximately 200,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
In the U.S., the Company is involved in various claims and lawsuits
incidental to the ordinary course of its business that are not expected to have
a material adverse effect on the results of operations and financial condition
of the Company. For a description of pending litigation related to
environmental matters, see "Item 8. Financial Statements and Supplementary
Data", Note 16 to the Company's Consolidated Financial Statements.
All existing litigation of La Oroya at the time of the acquisition was
retained by Centromin. In Peru, the Company is involved in various claims and
lawsuits incidental to the ordinary course of its business that are not expected
to have a material adverse effect on the business, financial condition and
results of operations of the Company. For a description of pending litigation
related to Peruvian environmental matters, see "Item 1. Business -- The
Company's Peruvian Operations -- Environmental Matters" and "Item 8. Financial
Statements and Supplementary Data", Note 16 to the Company's Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended October 31, 1998.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's issued and outstanding common equity, 1000 shares of
common stock, $.10 par value, are owned by a single stockholder, DR Acquisition
Corp., a wholly-owned subsidiary of Renco, which Mr. Rennert controls. There is
no established public trading market for these shares.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth historical financial data of (i) the
Company's predecessor as of and for the five months ended March 31, 1994, which
have been derived from the predecessor's unaudited consolidated financial
statements, (ii) The Doe Run Resources Corporation and subsidiaries as of and
for the seven months ended October 31, 1994 and as of and for each of the four
fiscal years ended October 31, 1998, which have been derived from the Company's
audited consolidated financial statements, (iii) La Oroya's predecessor as of
and for each of the two fiscal years ended December 31, 1996 and for the period
January 1, 1997 to October 23, 1997 (the date the acquisition of La Oroya was
completed), which have been derived from the predecessor's audited consolidated
financial statements, and for the period November 1, 1996 to October 23, 1997,
which is unaudited, (iv) Doe Run Cayman as of and for the eight day period from
October 24, 1997 to October 31, 1997 (from the date of acquisition to Doe Run
Cayman's fiscal year-end) and (v) Doe Run Cayman as of and for the fiscal year
ended October 31, 1998. It is important that the selected historical
consolidated financial data presented below be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's and La Oroya's predecessor's audited financial
statements and the notes thereto included elsewhere herein.
12
<PAGE>
THE DOE RUN RESOURCES CORPORATION AND SUBSIDIARIES AND PREDECESSOR
<TABLE>
<CAPTION>
PREDECESSOR(a) THE DOE RUN RESOURCES CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------
FIVE SEVEN
MONTHS MONTHS
ENDED ENDED YEAR ENDED OCTOBER 31,
MARCH 31, OCTOBER 31, ----------------------------------------------------
1994 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . $70,668 $123,335 $225,143 $274,930 $280,467 $716,581
Cost of sales . . . . . . . . . . . . . . . . 65,511 102,582 180,398 215,489 234,351 599,522
Depletion, depreciation and amortization. . . 8,808 6,251 12,486 13,654 14,718 24,540
Selling, general and administrative expenses. 3,295 4,360 8,405 10,079 10,959 34,816
Exploration expense . . . . . . . . . . . . . 271 912 1,926 2,912 2,705 4,312
------------------------------------------------------------------------------
Operating income (loss) . . . . . . . . . . . (7,217) 9,230 21,928 32,796 17,734 53,391
Interest expense. . . . . . . . . . . . . . . 65 8,375 14,361 14,348 13,740 40,659
Interest income . . . . . . . . . . . . . . . 31 12 140 113 21 9,586
Other income (expense). . . . . . . . . . . . (652) 151 (132) 355 (37) 561
------------------------------------------------------------------------------
Income (loss) before income tax expense
and extraordinary item . . . . . . . . . . . (7,903) 1,018 7,575 18,916 3,978 22,879
Income tax expense. . . . . . . . . . . . . . -- 2,523 3,252 6,451 4,331 11,398
------------------------------------------------------------------------------
Income (loss) before extraordinary item . . . (7,903) (1,505) 4,323 12,465 (353) 11,481
Extraordinary item net of income tax benefit. -- -- -- -- (1,062) (4,388)
------------------------------------------------------------------------------
Net income (loss) . . . . . . . . . . . . . . $(7,903) $(1,505) $4,323 $12,465 $(1,415) $7,093
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
THE DOE RUN RESOURCES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . . . . . . -- -- -- $8,943 $4,646
Working capital . . . . . . . . . . . . . . . $35,373 $32,571 $33,989 65,588 138,741
Property, plant and equipment, net. . . . . . 109,700 102,606 104,162 206,348 265,283
Total assets. . . . . . . . . . . . . . . . . 197,563 195,246 203,914 384,440 663,639
Total debt (including current portion). . . . 98,834 90,645 82,791 234,740 478,302
Shareholders' equity. . . . . . . . . . . . . 5,995 10,318 20,830 14,174 18,578
</TABLE>
13
<PAGE>
LA OROYA'S PREDECESSOR AND DOE RUN CAYMAN
<TABLE>
<CAPTION>
LA OROYA'S PREDECESSOR(b) DOE RUN CAYMAN(c)
--------------------------------------------------------------------------------
PERIOD PERIOD PERIOD
JANUARY 1, NOVEMBER 1, OCTOBER 24, YEAR
YEAR ENDED 1997 TO 1996 TO 1997 TO ENDED
DECEMBER 31, OCTOBER 23, OCTOBER 23, OCTOBER 31, OCTOBER 31,
1995 1996 1997 1997 1997 1998
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . $450,929 $456,797 $352,805 $429,313 $2,571 $458,291
Cost of sales . . . . . . . . . . . . . . . . 397,524 397,158 305,959 364,901 2,027 371,552
Depreciation and amortization . . . . . . . . 4,729 5,353 4,730 5,623 151 6,814
Selling, general and administrative expenses. 15,950 17,420 13,805 18,524 34 33,734
-----------------------------------------------------------------------------
Operating income. . . . . . . . . . . . . . . 32,726 36,866 28,311 40,265 359 46,191
Interest expense. . . . . . . . . . . . . . . 2,100 3,332 832 1,211 257 13,929
Interest income . . . . . . . . . . . . . . . -- -- -- -- -- 609
Other income (expense). . . . . . . . . . . . (1,798) (23,517) (1,217) (863) (28) 1,500
-----------------------------------------------------------------------------
Income before income tax expense and
extraordinary item . . . . . . . . . . . . 28,828 10,017 26,262 38,191 74 34,371
Income tax expense. . . . . . . . . . . . . . 10,332 4,128 7,879 11,513 350 12,670
Income (loss) before extraordinary item . . . 18,496 5,889 18,383 26,678 (276) 21,701
Extraordinary item net of income tax benefit. -- -- -- -- -- (2,369)
-----------------------------------------------------------------------------
Net income (loss) . . . . . . . . . . . . . . $18,496 $5,889 $18,383 $26,678 (276) $19,332
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
LA OROYA'S PREDECESSOR AND DOE RUN CAYMAN
<TABLE>
<CAPTION>
LA OROYA'S DOE RUN
PREDECESSOR(b) CAYMAN(c)
AS OF DECEMBER 31, AS OF OCTOBER 31,
----------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash. . . . . . . . . . . . . . . . . . $62 $582 $7,364 $4,646
Working capital . . . . . . . . . . . . 54,208 44,319 7,713 80,483
Property, plant and equipment, net. . . 55,557 50,814 97,739 105,210
Total assets. . . . . . . . . . . . . . 188,474 148,314 170,969 251,363
Total debt (including current portion). 19,626 15,068 103,000 156,718
Net assets. . . . . . . . . . . . . . . 107,667 78,575 1,729 21,061
</TABLE>
----------------------------------------
(a) The Doe Run Resources Corporation was acquired by Renco effective as of
April 1, 1994.
(b) La Oroya was acquired by the Company effective October 23, 1997.
(c) Doe Run Cayman, one of the Company's wholly-owned subsidiaries, is the
parent company of Doe Run Mining and currently has no independent
operations.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis includes the Company, the U.S.
operations of the Company, including Fabricated Products, Inc. (FPI), and the
Peruvian operations of the Company, including Doe Run Cayman and its Peruvian
subsidiaries, and should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto, and other financial information
included herein. Unless otherwise indicated, references to a year are to the
Company's fiscal year ended October 31.
CONSOLIDATED FINANCIAL POSITION
During 1998, total debt increased by approximately $243.6 million and
noncurrent assets, in the form of a $125 million deposit made in a foreign
bank as collateral for a loan made to Doe Run Mining (Special Term Deposit),
increased by that amount. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." In addition, the Company increased working capital in Peru
primarily due to the October 23, 1997 acquisition of La Oroya (La Oroya
Acquisition) from Centromin. La Oroya increased accounts receivable,
work-in-process inventories and prepaid taxes during 1998 in support of
ongoing operations. The increase in trade accounts receivable was primarily
due to an adjustment to normal operating levels because there were no trade
accounts receivable at the time of the La Oroya Acquisition. The inventory
increase was primarily the result of higher market prices for feed materials
and increased production of silver and lead. The Company's U.S. operations
also increased working capital mainly due to the September 1, 1998
acquisition of the assets of the MLD (MLD Acquisition). Increases in
consolidated accounts receivable, inventories and other current assets of
$33.9 million, $37.0 million and $25.0 million, respectively, were offset by
increases of $12.6 million in accounts payable and $21.8 million in accrued
liabilities. Management believes the current working capital levels are
adequate to support ongoing operations.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
In 1998, the Company reported net earnings of $7.1 million compared to a
net loss of $1.4 million for 1997. Extraordinary charges related to the early
retirement of debt were $4.3 million and $1.1 million for 1998 and 1997,
respectively net of income tax benefit. The Company's U.S. operations
reported a net loss of $28.2 million for 1998 compared to a net loss of $1.1
million in 1997. This decrease in earnings was primarily due to the lower
lead, copper and zinc prices, partially offset by improved production volume
and reduced operating costs. Peruvian operations contributed $35.3 million
to 1998 net earnings (excluding intercompany fees of $16.1 million).
Results for the year ended October 31, 1998 reflect sharp declines in the
market prices of lead, copper and zinc from 1997 levels. During the second
quarter of 1998, the Company implemented plans to minimize the impact of
these declines through cost reductions and productivity and revenue
enhancements. These plans included maintenance and other expense reductions,
selective mining of higher grade ores, increased primary and secondary
smelter production and increased production, primarily of silver and lead, at
La Oroya. The favorable results from these plans combined with certain
production efficiencies realized as a result of the MLD Acquisition are
reflected in the results for 1998.
The following table sets forth average LME prices for lead, copper and
zinc and the average London Bullion Market Association (LBMA) price for
silver for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1998 1997 1996
Average Prices ---- ---- ----
--------------
<S> <C> <C> <C>
Lead ($/ton) $ 486.40 $ 589.40 $ 704.80
Copper ($/ton) 1,546.40 2,124.80 2,181.00
Zinc ($/ton) 954.20 1,181.80 872.60
Silver ($/troy ounce) 5.63 4.80 5.27
</TABLE>
15
<PAGE>
The following table sets forth the Company's production for the periods
indicated (includes the production of La Oroya's predecessor in 1997 and
1996):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Production
---------------
Lead metal - primary (short tons) 266,739 241,143 210,517
Lead metal - secondary (short tons) 109,788 100,415 88,887
Lead concentrates (metal content, short ton) 262,684 247,187 234,077
Ore Grade 5.52% 5.17% 5.43%
Peruvian Production
-------------------
Refined copper (short tons) 70,343 71,099 72,371
Refined lead (short tons) 118,408 107,963 103,388
Refined zinc (short tons) 78,687 75,217 76,527
Refined silver (thousands of troy ounces) 27,730 21,622 21,464
Refined gold (thousands of troy ounces) 63 42 54
</TABLE>
Mine production of lead metal contained in concentrates for 1998 increased
6.3% over 1997 primarily due to the MLD Acquisition and an increase in the grade
of ore mined from 5.17% in 1997 to 5.52% in 1998. Primary smelter production for
1998 increased 10.6% over 1997, with 68.7% of this increase resulting from the
MLD Acquisition. The Herculaneum Smelter increased the throughput of its blast
furnaces during 1998 compared to 1997 as a result of installation of improved
equipment and maintenance procedures, which accounted for the remainder of the
increase in primary smelter production. Secondary smelter production in 1998
exceeded the prior year by 9.3% due to increased cable strip, a feed material
that requires less processing, and improved smelter operating efficiencies.
During the third quarter of 1998, La Oroya installed equipment that
increased the capacity of its silver and lead refineries by approximately 25.0%
and 4.8%, respectively. These improvements along with improvements in operating
efficiency are reflected in the production results for 1998. Refined silver
production exceeded the prior year by 28.2% in 1998, while refined lead
production was up 9.7%. Copper production was slightly lower than the prior year
primarily due to the reduced availability of suitable concentrates. These
results were accomplished in spite of the flooding caused by El Nino, which
caused supply and shipment problems, as well as the failure of the main turbine
of La Oroya's oxygen plant that was inoperative for approximately six weeks
during the year.
Results of operations for the year ended October 31, 1998 include the
results of the Company's U.S. and Peruvian operations. However, since the La
Oroya Acquisition occurred on October 23, 1997, results of the Peruvian
operations for 1997 include the results of La Oroya for only eight days of
operations. In order to provide a more meaningful analysis, the results of
operations attributable to Peruvian operations will be noted and discussed
separately under "Results of Peruvian Operations." This discussion will include
a comparison for the twelve months ended October 31, 1997, which includes the
results of La Oroya's predecessor.
16
<PAGE>
NET SALES were $716.6 million in 1998 compared to $280.5 million in 1997.
Of this increase, $452.4 million was attributable to Peruvian operations. U.S.
net sales for 1998 were $16.3 million less than the 1997 period primarily due to
lower lead, zinc and copper prices offset by improved lead metal volume. The
following table sets forth the sales volumes and realized prices of the
Company's U.S. operations for the periods indicated:
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales volumes (short tons)
--------------------------
Lead metal 312,448 284,711 267,665
Zinc concentrates 76,515 69,734 68,321
Copper concentrates 17,753 26,613 31,253
Realized Prices ($/ton)
-----------------------
Lead metal $567.57 $650.19 $731.19
Zinc concentrates 332.90 355.24 327.32
Copper concentrates 207.23 331.49 397.75
</TABLE>
Lead metal net sales decreased 4.2% from $185.1 million in 1997 to
$177.3 million in 1998. The average LME price for lead metal decreased 17.5%
in 1998 compared to 1997. Although the Company was able to obtain higher
premiums for lead metal sold, the net realized price was 12.7% lower in 1998,
decreasing net sales by $25.8 million. Net realized prices for lead metal
include the effects of changes in premiums received as well as net hedging
activity. The impact of lower lead prices was partially offset by a 9.7%
increase in lead metal sales volume, which increased net sales, by $18.0
million. This volume increase was due to the MLD Acquisition, improved
production volume at the Company's Herculaneum and Buick smelters and
continued strong demand. Copper concentrate net sales were lower by $5.1
million in 1998 compared to 1997 due to lower prices and volume. The copper
concentrate volume decrease was primarily due to the Company's focus on lead
production while the decrease in the net realized selling price was
primarily attributable to the 27.2% decrease in the average LME price of
copper. Net realized prices for copper concentrates and other by-products
are net of adjustments for provisionally priced sales and hedging activities.
Sales by the Seafab Metals Company (Seafab), a division of FPI, were $5.7
million lower in 1998 than in 1997, primarily due to the planned relocation
of the fabrication plant from Seattle, Washington to Casa Grande, Arizona and
Vancouver, Washington.
COST OF SALES for 1998 was $599.5 million compared to $234.3 million for
1997. Of this increase, $366.3 million was attributable to Peruvian
operations. U.S. cost of sales was $231.2 million for 1998 compared to $232.3
million for 1997. The higher volume of lead metal sales, discussed
previously, increased cost of sales by $16.6 million in 1998, compared to
1997. However, this increase was more than offset by lower unit production
costs for lead metal and other cost reductions. The cost per ton of lead
metal produced was 6.6% lower in 1998 compared to 1997, primarily as a result
of the Company's initiatives to reduce maintenance and other expenses and
mine higher grade ore.
DEPLETION, DEPRECIATION AND AMORTIZATION for 1998 increased by $9.8
million compared to 1997. Of this increase, $6.7 million and $1.4 million
was attributable to the La Oroya and MLD Acquisitions, respectively. The
remainder of the increase was primarily due to depreciation of plant and
equipment on recent capital additions.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased by $23.9 million in
1998 compared to 1997. Peruvian operations accounted for $17.6 million of this
increase. Increased U.S. general and administrative expenses associated with
Peruvian operations totaled $4.9 million for 1998. The cost of selling and
administrative services provided by the Company to its Peruvian subsidiaries was
reimbursed by fees collected under various services and agency agreements. These
fees have been eliminated from the Company's consolidated financial statements.
Other expenses, primarily salaries, wages and benefits, net worth appreciation,
management fees, consulting fees and other were $1.4 million higher than the
prior year.
EXPLORATION expense for 1998 increased $1.6 million or 59.4% compared to
1997 due to the more extensive exploration of potential minerals properties in
Missouri and the Republic of South Africa.
17
<PAGE>
INCOME FROM OPERATIONS for 1998 was $53.4 million compared to $17.7
million for 1997. Peruvian operations accounted for $61.8 million of this
amount. The remainder of the change was due to the factors discussed above.
INTEREST EXPENSE increased by $26.9 million for the year ended October
31, 1998, compared to 1997 due to an increase in the Company's average
outstanding debt balance, partially offset by lower average interest rates.
The increase in the Company's average outstanding debt balance, which
approximated $351.1 million for the year, was primarily associated with the
La Oroya and MLD Acquisitions and the working capital required for the
associated operations.
INTEREST INCOME increased by $9.6 million in 1998, compared to 1997,
primarily due to interest income on the $125.0 million Special Term Deposit.
INCOME TAX EXPENSE reflected an effective rate of 50% for the year ended
October 31, 1998, which differed from the statutory federal rate of 35%
primarily due to a valuation allowance recorded against a deferred tax asset
for the future federal tax benefit of deferred foreign taxes liabilities that
may be taken as foreign tax credits when paid in the future.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES in fiscal 1997 including the results for La Oroya for the
eight-day period October 23, 1997 (the date of the Acquisition) to October
31, 1997 (the Acquisition Stub Period) were $280.5 million compared to $274.9
million in fiscal 1996, an increase of 2.0%. Lead metal net sales decreased
from $195.7 million to $185.1 million, a decrease of 5.4%. This change was
attributable to an increase in lead metal sales volume of 17,046 tons or 6.4%
offset by a $23.1 million reduction due to lower realized prices. The average
LME price for lead metal decreased by $.0577 per pound or 16.4% from fiscal
1996 to fiscal 1997. As a result, the Company's net realized price was 11.1%
less than fiscal 1996. Net sales of lead concentrates to third parties were
reduced by $8.3 million in fiscal 1997 from fiscal 1996, as these lead
concentrates were used in the Company's production. Tolling net sales for
fiscal 1997 increased $7.3 million from fiscal 1996 due to a 17.9% increase
in volume, as well as 25.5% increase in tolling processing charges per ton.
Zinc concentrate net sales in fiscal 1997 increased $2.4 million or 10.8%
from fiscal 1996 due primarily to higher realized prices. Copper concentrate
net sales in fiscal 1997 decreased $3.6 million or 29.0% from fiscal 1996,
and $1.8 million of this decrease was attributable to lower realized prices
and $1.8 million was due to lower volume resulting from an emphasis on
production of lead/zinc ore. The addition of Seafab, resulting from an
acquisition of assets from Seafab Metal Corporation in August 1996 added
$15.9 million to net sales and the inclusion of La Oroya from October 23,
1997, the acquisition date, through October 31, 1997 added $2.6 million.
COST OF SALES for fiscal 1997 (including the results for La Oroya for
the Acquisition Stub Period) was $234.4 million, an increase of $18.9 million
or 8.8% compared to fiscal 1996. Increased volumes of lead metal, tolling and
zinc concentrates offset by lower copper and lead concentrate volumes
accounted for $6.8 million of the increase. Higher costs of salaries and
wages, materials and supplies, and purchased feed, primarily related to
increased production, were more than offset by reduced costs of purchased
lead and the impact of greater production volume. As a result, the average
cost per ton produced was approximately 1.1% lower than the prior year
reducing cost of sales by $3.1 million. The addition of Seafab contributed
$13.0 million to the cost of sales increase while the inclusion of La Oroya
added $2.0 million to cost of sales.
DEPLETION, DEPRECIATION AND AMORTIZATION for fiscal 1997 (including the
results of La Oroya for the Acquisition Stub Period) increased by 7.8% primarily
due to depreciation of property, plant and equipment on recent capital
additions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for fiscal 1997 (including
the results of La Oroya for the Acquisition Stub Period) increased by $.9
million or 8.7% compared to fiscal 1996, primarily due to the addition of
Seafab.
EXPLORATION EXPENSE for fiscal 1997 was $2.7 million, a decrease of 7.1%
from fiscal 1996. This change was attributable to less drilling on potential
mineral properties.
OPERATING INCOME for fiscal 1997 (including the results of La Oroya for
the Acquisition Stub Period) was $17.7 million compared to $32.8 million for
fiscal 1996. This decrease was attributable to the factors discussed above.
18
<PAGE>
INTEREST EXPENSE for fiscal 1997 (including the results of La Oroya for the
Acquisition Stub Period) was $13.7 million or 4.2% less than fiscal 1996
primarily due to lower outstanding balances than in the prior year on certain
subordinated notes.
INCOME TAX EXPENSE reflected an effective tax rate of 109% in fiscal 1997
and 34% in fiscal 1996. In both years, the income tax expense was provided on
the basis of alternative minimum taxes paid, which exceeded the income tax
provision based on pre-tax book income. Higher pre-tax book income in fiscal
1996 reduced the impact of the alternative minimum taxes paid on the effective
tax rate for that year. Because of the uncertainty of the future benefit of net
deferred tax assets, the Company has recorded a valuation allowance against its
net deferred tax assets.
RESULTS OF PERUVIAN OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997 (INCLUDING LA OROYA'S PREDECESSOR FOR
THE PERIOD NOVEMBER 1,1996 TO OCTOBER 23, 1997)
The following table set forth the sales volumes and realized prices of
Peruvian operations for the periods indicated (includes the results of La
Oroya's predecessor in 1997 and 1996):
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------
1998 1997
--------- ----------
<S> <C> <C>
Sales Volumes
- -------------
Copper (short tons) 70,629 69,484
Lead (short tons) 30,635 119,022 106,690
Zinc (short tons) 18,943 79,291 71,024
Silver (thousands of troy ounces) 27,957 20,822
Gold bullion (thousands of troy ounces) 63 42
Realized Prices
- ---------------
Copper ($/ton) $1,538.73 $2,127.51
Lead ($/ton) 518.19 612.97
Zinc ($/ton) 939.50 991.23 1,159.97
Silver ($/troy ounce) 5.65 4.80
Gold bullion ($/troy ounce) 296.41 348.12
</TABLE>
NET SALES for 1998 were $458.3 million compared to $431.9 million for
1997. The increase was due primarily to higher prices and volumes for silver
offset by lower copper prices. The production improvements previously
discussed increased silver sales volume by 7.1 million ounces or 34.5% in the
1998 period contributing $34.2 million to the net sales increase. The
average LBMA price for silver was 17.3% higher in 1998 compared to 1997. As
a result, the net realized price for refined silver increased by $.85 per
ounce or 17.7%, increasing net sales by $23.8 million. Net sales of refined
copper were 26.5% or $39.1 million lower in 1998 due to lower prices
partially offset by increased volume. The net realized price for refined
copper was lower by 27.7%, which reduced net sales by $41.6 million. Bullion
lead net sales were higher by $8.2 million in 1998 compared to 1997 due to a
225.6% increase in volume and a 29.1% increase in net realized price. The
volume increase resulted from increased lead and silver production while the
price increase was due to increased silver content in the lead bullion .
COST OF SALES increased by just 1.3% in 1998 compared to 1997, in spite
of the significant increases in volume discussed above and higher power cost
of $10.1 million resulting from the new electricity contract implemented on
October 23, 1997. These increases were offset by the impact of improved
metallurgical recoveries and decreased feed cost resulting from lower average
prices of copper, gold and lead.
DEPRECIATION AND AMORTIZATION expense was $6.8 million in 1998 and $5.8
million in 1997. The increase was primarily due to the change in asset basis
resulting from the purchase accounting for the La Oroya Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE expenses (excluding $16.1 million of
intercompany fees in 1998) decreased 5.0% from $18.6 million in 1997 to
$17.6 million in 1998. Increased audit and legal fees, salaries and other
administrative costs were offset by a $2.0 million reduction in costs
associated with the completion of Centromin's
19
<PAGE>
personnel reduction program during 1997, and a $3.3 million decrease
resulting from the reclassification of workers' profit sharing to cost of
sales.
INCOME FROM OPERATIONS increased $5.6 million for 1998 compared to 1997
due to the factors discussed above.
INTEREST EXPENSE increased by $12.5 million for 1998, compared to 1997,
due primarily to the increases in long-term debt associated with the La Oroya
Acquisition and the working capital required for the associated operations.
OTHER INCOME, NET for 1998 increased by $2.4 million from 1997 to 1998,
due to increases in various miscellaneous income items offset by a reduction
in: (i) translation gains and losses; (ii) costs associated with the El Nino
flooding caused by El Nino, primarily road and rail repairs; and (iii) a
reduction of $3.2 million related to Centromin's privatization program which
was completed in 1997.
INCOME TAXES reflect the statutory rate of 30%. Differences between the
effective and statutory rate were due primarily to book losses at certain of
the Company's Peruvian subsidiaries that could not be offset against the book
income of the Company's other Peruvian subsidiary for Peruvian income tax
purposes.
PERIOD FROM JANUARY 1, 1997 TO OCTOBER 23, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
The results of operations for the period January 1, 1997 to October 23,
1997 are not necessarily comparable with the results of operations for the
year ended December 31, 1996 due to the shorter period included in the 1997
results.
NET SALES decreased 22.8% from $456.8 million in 1996 to $352.8 million
in the 1997 period, due principally to the shorter period in 1997, changes in
the mix of existing products and a significant blister copper sale made in
1996. Net sales of copper decreased 17.8% due primarily to a volume decrease
of 20.4%. This decrease included copper blister sales, which were 186 tons in
1997 compared to 5,537 tons in 1996 when two years' of accumulated stock was
sold. Net sales of silver decreased from $111.0 million in 1996 to $82.2
million in the 1997 period, due to a volume decrease of 18.4% as well as a
decrease in the average price per ounce of 10.2% from $5.23 in 1996 to $4.70
in the 1997 period. Net sales of gold decreased 42.2% from $20.4 million in
1996 to $11.8 million in the 1997 period, due to a volume decrease of 34.4%
from 52,277 ounces in 1996 to 34,305 ounces in the 1997 period and a decrease
in the average price per ounce of 11.9% from $389.5 in 1996 to $342.9 in the
1997 period. Refined lead net sales decreased 31.6% from $76.3 million in
1996 to $52.2 million in the 1997 period, due to a volume decrease of 16.3%
from 104,063 tons in 1996 to 87,135 tons in the 1997 period and a decrease in
the average price per pound of 18.9% from $.37 in 1996 to $.30 in the 1997
period.
COST OF SALES decreased 23.0% from $397.2 million in 1996 to $305.9
million in the 1997 period, due principally to the shorter period, 18.1%, as
well as lower labor expenses resulting from the personnel reduction costs
carried out in 1996.
DEPRECIATION AND AMORTIZATION EXPENSES decreased 13.0% from $5.4 million
in 1996 to $4.7 million in the 1997 period, due primarily to the shorter
period in 1997 as well as the adjustment to the depreciation of initial
balances of fixed assets made in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased 20.7% from the
1996 period to the 1997 period. Personnel reduction costs decreased 61.5%
from $3.9 million in 1996 to $1.5 million in the 1997 period, as Centromin
had substantially completed its personnel reduction program in 1996. Selling,
marketing and administrative expenses were lower by 18.6% in the 1997 period,
primarily due to the shorter period in 1997. Worker's profit sharing was
greater by $1.1 million in the 1997 period due primarily to improved
profitability.
OPERATING INCOME declined from $36.9 million in 1996 to $28.3 million in
the 1997 period due to the factors discussed above.
INTEREST EXPENSE AND BANK CHARGES decreased from $3.3 million in 1996 to
$0.8 million in the 1997 period, due primarily to a decrease of debt levels
through 1997, which was offset by the effects of a slight increase in the
weighted average interest rate in the 1997 period.
OTHER, NET decreased 94.9% from $23.5 million in 1996 to $1.2 million in
the 1997 period. In 1996, the Company incurred special charges related
primarily to (i) costs related to relocating residents away from the
20
<PAGE>
metallurgical complex of La Oroya, such as demolition, and construction of
apartments, schools and parks at a new location and (ii) an accrual to
provide for estimated future expenditures under the PAMA of $21.5 million.
INCOME TAX increased 92.7% from $4.1 million in 1996 to $7.9 million in
the 1997 period as a result of the increase in pretax income due to reasons
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from its working capital
requirements, and capital investment and debt service obligations. The
Company's primary available sources of liquidity are cash provided by
operating activities and two revolving credit facilities. In the U.S., the
Company has available a revolving credit facility (the Doe Run Revolving
Credit Facility) that provides for advances by the lender to a maximum of
$100.0 million less outstanding letters of credit, based on specific
percentages of eligible receivables and inventories. As of October 31, 1998,
$20.8 million was outstanding, exclusive of $4.9 million of letters of
credit, under the Doe Run Revolving Credit Facility. Similarly, in Peru, the
Company has available a revolving credit facility (the Doe Run Peru Revolving
Credit Facility) that provides for advances by the lender to a maximum of
$40.0 million less outstanding letters of credit and customs bonds, based
upon specific percentages of eligible receivables and inventories. At
October 31, 1998, $28.0 million, exclusive of $8.2 million of letters of
credit and customs bonds, was outstanding under the Doe Run Peru Revolving
Credit Facility. Net unused availability under these facilities at October
31, 1998 was $34.8 million and $3.8 million, respectively.
On August 31, 1998, the Company purchased substantially all of the
outstanding shares of Cobriza. The operating assets of Cobriza include a
copper mine and mill, which supply copper concentrates to La Oroya. Of the
$7.5 million purchase price, $3 million was paid at closing and the remainder
will be paid in three annual installments of $1.5 million.
On September 1, 1998, the Company purchased the MLD assets, including a
smelter and refinery and two mines. Proceeds of $43.4 million from the
offering of $50.0 million of Secured Notes plus additional amounts borrowed
under the Doe Run Revolving Credit Facility of $12.4 million financed the
payment made at closing.
For the year ended October 31, 1998, $13.8 million was used in operating
activities, and $211.7 million was used in investing activities (this
included $58.2 million for the acquisitions discussed above and the $125.0
million Special Term Deposit, see discussion of financing activities below).
Financing activities provided $221.2 million.
As part of its financing activities, on March 12, 1998, the Company
issued $255 million of Unsecured Notes. The net proceeds from these
Unsecured Notes were primarily used to retire existing term loans, redeem
preferred stock and pay associated fees and expenses.
In the U.S., the Company had capital expenditures of $16.8 million
during 1998 and have projected capital expenditures of approximately $9.5
million for 1999, primarily for support of ongoing operations and operational
and environmental improvements. In addition to these capital investments,
the Company's U.S. operations have expended an average of approximately $63.4
million per year on repairs and maintenance from fiscal 1996 through fiscal
1998. As a result of these expenditures, the Company believes that it
operates and will continue to maintain modern and efficient facilities.
As part of the La Oroya Acquisition, the Company has undertaken a
capital investment program, in part to satisfy an investment commitment of
$120.0 million as set forth in the purchase agreement. Reference is hereby
made to "Item 8. Financial Statements and Supplementary Data", Note 15 to
the Company's Consolidated Financial Statements. The Peruvian operations had
capital expenditures of $11.7 million in 1998 and have projected capital
expenditures of approximately $31.1 million for 1999, primarily for support
of ongoing operations and operational and environmental improvements.
The Company has substantial indebtedness and debt service requirements.
As of October 31, 1998, on a consolidated basis, the Company had $478.3
million of indebtedness outstanding, or $353.3 million net of the Special
Term Deposit. Management believes that cash flows from operations, in
addition to availability under the revolving credit facilities, will be
sufficient to meet for the Company's liquidity needs for the foreseeable
future.
On January 15, 1999, Renco filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable status
from that of a C corporation to that of a S corporation, effective November
1, 1998. At the same time, Renco designated the Company as a qualified
Subchapter S subsidiary.
21
<PAGE>
As a result of such designation, generally, no provision for federal income
taxes will be included in the Company's statements of income for periods
beginning after October 31, 1998. See "Item 8. Financial Statements and
Supplementary ata--Note 17 to the Company's Consolidated Financial
Statements" and "Item 13. Certain Relationships and Related Transactions."
On January 20, 1999, Doe Run Peru executed a sale and leaseback
agreement with two Peruvian financial institutions. The main oxygen plant at
La Oroya was sold at fair market value as determined by an independent
appraisal. The proceeds, net of value added tax, of $18.6 million were used
to reduce the outstanding balance on the Doe Run Peru Revolving Credit
Facility and to pay the outstanding balance with the Company of $3.8 million.
The lease requires monthly payments of approximately $0.4 million and has a
bargain purchase option of $0.2 million at the end its five-year term.
The Doe Run Revolving Credit Facility, the Doe Run Peru Revolving Credit
Facility, and the indentures governing the Unsecured Notes and the Secured
Notes contain numerous covenants and restrictions including requirements that
the Company satisfy certain financial ratios in order to incur additional
indebtedness. The ability of the Company to meet its debt service
requirements and to comply with such covenants will be dependant upon future
operating performance and financial results which are subject to financial,
economic, political, competitive and other factors affecting the Company,
many of which are beyond the Company's control.
YEAR 2000 MATTERS
Many information and process control systems used in the current
business environment were designed to use only two digits in the date field,
and therefore may not function properly in the year 2000. Any of the
Company's programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
a major system failure or in miscalculations. The Company has conducted a
comprehensive review of its computerized information systems (IS) to identify
systems that could be affected by the year 2000 problem and has implemented a
plan to resolve the issues identified. Currently, most of the major IS of the
Company have been modified to be year 2000 compliant. The Company
anticipates that appropriate modifications to IS will be completed by
mid-year 1999.
Process controls and other systems are being evaluated individually and
may require replacement software, reprogramming and other corrective actions.
The Company has not completed an evaluation of the status of these systems,
and is unable at this time to estimate the required actions, if any, and
related costs of making these systems year 2000 compliant.
The Company's operations depend on the availability of utility services,
primarily electricity and transportation services. A substantial disruption
in any of these services due to providers of these services failing to
achieve year 2000 compliance could have a significant impact on the Company's
financial results. The Company intends to assess possible modifications to
mitigate the risk of disruption to its operations.
The cost of achieving year 2000 compliance is included in the
Company's operating and administrative expenses.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties, and
other important factors include, among others: general economic and business
conditions; increasing industry capacity and levels of imports of non-ferrous
metals or non-ferrous metals products; industry trends, including product
pricing; competition; currency fluctuations; the loss of any significant
customer; availability of qualified personnel; effects of future collective
bargaining agreements; major equipment failures; unanticipated problems
encountered in the year 2000 readiness program; and availability of
replacement equipment to achieve year 2000 readiness. These forward-looking
statements speak only as of the date of this report. The Company expressly
disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions, or circumstances on which any such statement is based.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of its business, the Company has used in the past,
and may use in the future, forward sales commitments and commodity put and call
option contracts to manage its exposure to fluctuations in the prices of lead,
copper, zinc and silver. Contract positions are designed to ensure the Company
will receive a defined minimum price for certain quantities of its production.
Gains and losses, and the related costs paid or premiums received, for option
contracts which hedge the sales prices of commodities are recognized in net
sales when the related production is sold.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data follow immediately and are
listed in ITEM 14 of Part IV of this report.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Doe Run Resources Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Doe Run
Resources Corporation and subsidiaries as of October 31, 1998 and 1997, and the
related consolidated statements of income and shareholders' equity and cash
flows for each of the years in the three-year period ended October 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of Doe Run Cayman Ltd., a wholly-owned subsidiary, as of
and for the year ended October 31, 1997, which statements reflected total assets
constituting 45% and total revenues constituting 1% in 1997, of the related
consolidated totals. Those consolidated statements were audited by other
auditors whose report was furnished to us, and our opinion, insofar as it
relates to the amounts included for Doe Run Cayman Ltd. and its subsidiaries as
of and for the year ended October 31, 1997, is based solely on the reports of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors as of
and for the year ended October 31, 1997, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of The Doe Run Resources Corporation and subsidiaries as of October 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the years in the three-year period ended October 31, 1998, in conformity with
generally accepted accounting principles.
(signed) KPMG LLP
December 18, 1998
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Doe Run Cayman Ltd.:
We have audited the accompanying consolidated balance sheet of Doe Run Cayman
Ltd. (a company incorporated in Cayman Islands) as of October 31, 1997 and the
related consolidated statements of operations, changes in shareholder's equity
and cash flows for the period from October 23, 1997 (inception date) to October
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of Doe Run
Cayman Ltd. as of October 31, 1997, and its consolidated results of operations
and cash flows for the period from October 23, 1997 (inception date) to October
31, 1997, in conformity with accounting principles generally accepted in the
United States of America.
MEDINA, ZALDIVAR Y ASOCIADOS
A member firm of Andersen Worldwide SC
Countersigned by:
- ---------------------------------
Marco Antonio Zaldivar
C.P.C. Register 12477
Lima, Peru
December 5, 1997
25
<PAGE>
THE DOE RUN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
OCTOBER 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,646 $ 8,943
Trade accounts receivable, net of allowance for doubtful accounts
of $876 and $729 at October 31, 1998 and 1997, respectively 86,338 52,470
Inventories 125,652 88,648
Prepaid expenses and other current assets 30,306 5,263
Net deferred tax assets - 69
---------- ---------
Total current assets 246,942 155,393
Property, plant and equipment, net 265,283 206,348
Special term deposit 125,000 -
Net deferred tax assets 8,015 7,481
Other noncurrent assets, net 18,399 15,218
---------- ---------
Total assets $ 663,639 $ 384,440
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt $ 2,018 $ 12,345
Accounts payable 53,698 41,086
Accrued liabilities 50,670 28,893
Net deferred tax liabilities 1,815 7,481
---------- ---------
Total current liabilities 108,201 89,805
Long-term debt, less current maturities 476,284 222,395
Net deferred tax liabilities - -
Postretirement benefits 12,227 12,455
Reclamation and environmental costs 32,474 31,685
Net deferred tax liabilities 2,571 -
Other noncurrent liabilities 13,304 13,926
---------- ---------
Total liabilities 645,061 370,266
Shareholders' equity:
Preferred stock, $1,000 par value, 2,500 shares issued, authorized and
outstanding; liquidation and redemption value of $2,618
at October 31, 1997 - 2,500
Common stock, $.10 par value, 1,000 shares authorized,
issued, and outstanding - -
Additional paid-in capital 5,000 5,000
Retained earnings 13,578 6,674
---------- ---------
Total shareholders' equity 18,578 14,174
---------- ---------
Total liabilities and shareholders' equity $ 663,639 $ 384,440
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
THE DOE RUN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
YEAR ENDED OCTOBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 716,581 $ 280,467 $ 274,930
Costs and expenses:
Cost of sales 599,522 234,351 215,489
Depletion, depreciation and amortization 24,540 14,718 13,654
Selling, general and administrative 34,816 10,959 10,079
Exploration 4,312 2,705 2,912
--------- --------- ---------
Total costs and expenses 663,190 262,733 242,134
--------- --------- ---------
Income from operations 53,391 17,734 32,796
Other income (expense):
Interest expense (40,659) (13,740) (14,348)
Interest income 9,586 21 113
Other, net 561 (37) 355
--------- --------- ---------
(30,512) (13,756) (13,880)
--------- --------- ---------
Income before income tax expense
and extraordinary item 22,879 3,978 18,916
Income tax expense 11,398 4,331 6,451
--------- --------- ---------
Income (loss) before extraordinary item 11,481 (353) 12,465
Extraordinary item related to early retirement
of debt, net of income tax benefit (4,388) (1,062) -
--------- --------- ---------
Net income (loss) 7,093 (1,415) 12,465
Shareholders' equity, beginning of year 14,174 20,830 10,318
Less dividends declared and paid:
Preferred stock - $76, $100 and $140 per share, respectively (189) (250) (350)
Common stock - $0, $4,991 and $1,603 per share, respectively - (4,991) (1,603)
Redemption of preferred stock (2,500) - -
--------- --------- ---------
Shareholders' equity, end of year $ 18,578 $ 14,174 $ 20,830
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
THE DOE RUN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1998 1997 1996
---------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,093 $ (1,415) $ 12,465
Extraordinary item related to retirement of debt 6,750 1,327 -
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depletion, depreciation and amortization 24,540 14,718 13,654
Amortization of deferred financing fees and bond issue costs 2,259 257 898
Deferred income taxes (3,560) - -
Imputed interest 29 5,635 6,617
Increase (decrease) resulting from changes in:
Trade accounts receivable (30,967) 2,023 (10,291)
Inventories (24,251) (3,062) 3,209
Prepaid expenses and other current assets (24,044) (1,201) (339)
Accounts payable 12,128 6,636 771
Accrued liabilities 15,048 (1,939) 1,492
Other noncurrent assets and liabilities, net 1,218 (4,959) (526)
---------------- -------------- ---------------
Net cash provided by (used in) operating activities (13,757) 18,020 27,950
---------------- -------------- ---------------
Cash flows from investing activities:
Special term deposit (125,000) - -
Purchases of property, plant and equipment (28,504) (13,476) (10,534)
Payment for acquisitions, net of cash acquired (58,189) (128,242) (1,742)
---------------- -------------- ---------------
Net cash used in investing activities (211,693) (141,718) (12,276)
---------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from (payments on) loans under revolving credit
facilities and short-term borrowings, net 45,842 (6,399) 1,044
Proceeds from long-term debt 424,713 365,945 -
Payments on long-term debt (230,845) (212,453) (14,765)
Payment of deferred financing costs (15,868) (8,573) -
Extraordinary item related to retirement of debt - (638) -
Payment of dividends (189) (5,241) (1,953)
Redemption of preferred stock (2,500) - -
---------------- -------------- ---------------
Net cash provided by (used in) financing activities 221,153 132,641 (15,674)
---------------- -------------- ---------------
Net increase (decrease) in cash (4,297) 8,943 -
Cash at beginning of year 8,943 - -
---------------- -------------- ---------------
Cash at end of year $ 4,646 $ 8,943 $ -
================ ============== ===============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest, net of capitalized interest $ 32,653 $ 9,196 $ 6,575
================ ============== ===============
Income taxes $ 19,524 $ 3,480 $ 6,787
================ ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of The Doe
Run Resources Corporation and its wholly owned subsidiaries (the
Company). All material intercompany balances and transactions have been
eliminated.
NATURE OF BUSINESS
The principal domestic business of the Company is the exploration,
development, mining and processing of base metals, primarily lead, and
recycling of lead-acid batteries and other lead-bearing materials. The
Company's fabrication businesses fabricate lead products used in
radiation and X-ray shielding, pollution control devices, and medical
equipment; produce lead oxide for use in automotive batteries and
fabricate and repair lead-lined process equipment. In Peru, the Company
is engaged in the mining, smelting and refining of polymetallic
concentrates, mainly copper, lead and zinc, which are sold as refined
metals primarily to customers located outside of Peru.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the
U.S. Dollar. Accordingly, translation gains and losses are included
in determining net income.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
INVENTORIES
Finished metals and concentrates, metals and concentrates in process and
raw materials are stated at the lower of cost or market. The last-in,
first-out (LIFO) method of determining cost is used for the majority of
the Company's U.S. inventories. Effective November 1, 1997, the cost of
refined metals and concentrates for sale, as well as metal and
concentrates in process, of the Company's foreign subsidiaries is
determined using the LIFO method. Previously, these inventories were
determined using the first-in, first out (FIFO) method. The pro forma
effect of the retroactive application of LIFO is not significant, as the
Company's foreign operations began October 23, 1997 (see Note 2).
Inventory costs include labor, material and other production costs.
Supplies and repair parts are principally stated at average cost, net of
reserves for obsolescence.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Major additions and
improvements to property, plant and equipment are capitalized, at cost,
when they significantly increase the productive capacity or the life of
the asset.
29
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Routine or unanticipated repair and maintenance expenditures, which do
not extend the useful life or increase the productive capacity of the
asset, are charged to operations as incurred. Major expenditures required
to maintain the originally anticipated productive capacity and life of
the asset (such as furnace rebuilds), for which both the amount and
timing can be reasonably estimated, are accrued and charged to operations
over the period through the next anticipated maintenance date.
Mineral interests are amortized using the units of production method.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings and improvements 3 to 20 years
Machinery and equipment 2 to 15 years
</TABLE>
Facilities at which operations have temporarily ceased may be placed on a
standby care and maintenance basis. The Company continues to depreciate
the related assets during the standby period and the expected useful
lives are adjusted prospectively to reflect the reduced usage. During the
standby period all care and maintenance expenditures incurred are
expensed.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1997, the Company adopted SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. The statement requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets be reviewed for
impairment when events or circumstances indicate that the carrying amount
of the assets may not be recoverable. The impairment loss on such assets,
as well as long-lived assets and certain identifiable intangibles to be
disposed of, is measured as the amount by which the carrying value of the
assets exceeds the fair value of the assets. No impairment losses have
been recognized.
DEFERRED FINANCING COSTS
Deferred financing costs represent fees paid in conjunction with the
acquisition of long-term debt and are amortized using the interest method
over the term of the respective debt.
EXPLORATION AND DEVELOPMENT COSTS
All exploration costs are charged to operations as incurred. Development
costs incurred to maintain production at operating mines are charged to
operations as incurred. Development expenditures for mining properties
that are considered to be commercially feasible, but are not yet
producing, and major development expenditures at operating mines that are
expected to benefit future production are capitalized and amortized using
the units of production method over the estimated proven ore reserves to
be benefited.
RECLAMATION COSTS
The Company's mines and related processing facilities are subject to
governance by various agencies that have established minimum standards
for reclamation. Company estimates of mine closure costs are accrued and
charged to expense using the units of production method during the
estimated life of the operations. A
30
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
reserve for reclamation costs has been established for the restoration
of certain abandoned mining and processing sites based on current
estimates of the cost to comply with existing standards. Routine
environmental expenditures are expensed as incurred or capitalized
and depreciated depending on their future economic benefit.
COMMITMENTS AND CONTINGENCIES
The Company accrues for loss contingencies, including costs associated
with environmental remediation obligations, when such costs are probable
and reasonably estimable. Accruals are reviewed and adjusted as
circumstances change. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value.
REVENUE RECOGNITION
Sales are recorded as products are shipped to customers. Concentrate and
certain smelter product sales are recorded based on estimated weights,
metal contents and prices using applicable customer agreements and hedge
contracts. All such sales are adjusted when final weights, metal contents
and prices are determined.
RISK MANAGEMENT
The Company's use of derivative financial instruments is limited to
managing well-defined commodity price risks related to inventories and
future production. Derivative financial instruments are not used for
trading purposes. The Company may, from time to time, enter into forward
physical sales agreements with customers or futures contracts, which fix
prices for a portion of its anticipated future production, generally for
periods not exceeding twelve months. The Company may also periodically
buy futures contracts to offset the effect of certain fixed-price forward
physical sales commitments. In addition, the Company may employ the use
of commodity options to obtain the aforementioned transactions. Since
these transactions meet the requirements for hedge accounting, gains and
losses realized on such transactions, as well as any cost or revenue
associated therewith, are recognized in net sales when the related
production is sold. If an instrument does not meet the requirements for
hedge accounting, gains and losses are recognized immediately.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred and are
included in selling, general and administrative expenses on the
consolidated statements of operations. Research and development costs are
not significant.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. See
Note 17 - Subsequent Event.
(2) BUSINESS ACQUISITIONS
31
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DOE RUN PERU
Doe Run Cayman Ltd. (Doe Run Cayman), a Cayman Islands corporation and a
wholly owned subsidiary of the Company, was incorporated on September 10,
1997. Doe Run Cayman had no business activity until October 23, 1997. Doe
Run Mining S.R.L (Doe Run Mining), a Peruvian subsidiary of Doe Run
Cayman, owns substantially all of the outstanding shares of Doe Run Peru
S.R.L. (Doe Run Peru). Doe Run Peru acquired substantially all of the
outstanding shares of Empresa Metalurgica La Oroya S.A. from Empresa
Minera del Centro del Peru S.A. (Centromin) an entity owned by the
Peruvian government.
The acquisition was made through a Contract of Stock Transfer, Capital
Increase and Stock Subscription (the Contract). Peruvian law required a
capital contribution to Doe Run Peru of $126,500 in exchange for 51% of
the shares and a payment of $120,515 for the transfer of the remaining
49%. Subsequent to the acquisition, utilizing the proceeds from the
capital contribution, Doe Run Peru repaid $125,000 on the $225,000 term
loan used to finance the transaction.
The acquisition has been accounted for as a purchase and the effective
purchase price of $123,015, including transaction costs of approximately
$2,500, was allocated to the fair value of the assets acquired and
liabilities assumed as follows:
<TABLE>
<S> <C>
Inventories $ 55,567
Other current assets 1,382
Property, plant and equipment 97,761
Accounts payable and other accrued liabilities (24,495)
Environmental contingency (7,200)
--------
$ 123,015
--------
--------
</TABLE>
The excess of the fair value of the net assets acquired over the purchase
price, approximately $157,000, reduced the value of the fixed assets
acquired. The results of the operations of Doe Run Cayman and its
subsidiaries have been included with those of the Company since the date
of acquisition.
MISSOURI LEAD OPERATIONS
On September 1, 1998, the Company purchased certain assets of ASARCO
Incorporated's Missouri Lead Division (MLD), including a lead smelter and
two mines. The acquisition was accounted for under the purchase method
and the purchase price was allocated to the fair value of the assets
acquired and liabilities assumed as follows:
<TABLE>
<S> <C>
Inventories and other current assets $ 6,068
Property, plant and equipment 52,369
Accounts payable and other accrued liabilities (1,106)
Reserve for reclamation costs (2,690)
-------
$ 54,641
---------
---------
</TABLE>
In addition, the Company will be required to pay additional consideration
to ASARCO Incorporated if in any of the five calendar years beginning
January 1, 1999 the London Metal Exchange spot lead price exceeds $.285
per pound. The maximum contingent consideration to be paid under the
agreement is $12,500.
The following unaudited pro forma results of operations for the years
ended October 31, 1998 and 1997 assume that the acquisition of Doe Run
Peru and the MLD occurred as of the beginning of the respective
32
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
periods. The pro forma information does not purport to be indicative
of the results of operations that would have occurred had the
acquisition occurred at the beginning of the periods presented or of
the future results of operations.
<TABLE>
<CAPTION>
Year ended October 31,
-----------------------
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Net sales $ 775,465 $ 709,780
Income before extraordinary item 2,768 15,195
Net income (1,620) 14,133
</TABLE>
In addition, on August 31, 1998, Doe Run acquired the stock of Empresa
Minera Cobriza S.A. (Cobriza) from Centromin. The assets purchased
included a copper mine and other assets related to the operation of the
mine. The purchase price was $7,500, of which approximately $3,000 was
paid at closing and the remainder will be paid in three annual
installments of $1,495 beginning August 31, 1999. The pro-forma results
of operations of Cobriza have not been presented as they were not
significant, and all of Cobriza's production is sold to Doe Run Peru.
(3) RELATED PARTY TRANSACTIONS
The Company has entered into a management consulting agreement with The
Renco Group, Inc. (Renco). Renco's subsidiary, DR Acquisition Corp. holds
all of the Company's common stock. Under the agreement, Renco will
provide the Company with management services for an annual fee. The
agreement was amended in 1998 to increase the annual fee from $1,200 to
$2,400. The agreement expires October 31, 2000. Fees expensed under this
agreement were $2,000, $1,200 and $1,200 for each of the years ended
October 31, 1998, 1997 and 1996, respectively.
In addition to these fees, in conjunction with the financing transactions
discussed in Note 8, the Company paid Renco $2,311 in 1998 which was
accounted for as a deferred financing cost and is being amortized
according to the policy described in Note 1.
To obtain the advantages of volume, Renco purchases certain categories of
property and casualty insurance for a number of its subsidiaries,
including the Company, and the actual cost of such insurance, without
markup, is reimbursed by the covered subsidiaries. For the years ended
October 31, 1998, 1997 and 1996, the Company reimbursed Renco for costs
of approximately $4,352, $2,473 and $1,821, respectively, under the Renco
insurance program.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Finished metals and concentrates $ 10,954 $ 11,460
Metals and concentrates in process 55,647 51,129
Materials, supplies and repair parts 59,051 26,059
-------- ------
$ 125,652 $ 88,648
-------- ------
-------- ------
</TABLE>
33
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Materials, supplies and repair parts are stated net of reserves for
obsolescence of $4,559 and $4,977 at October 31, 1998 and 1997,
respectively.
The FIFO cost of inventories valued under the LIFO cost method were
$82,271 and $20,311 at October 31, 1998 and 1997, respectively. If the
FIFO cost method had been used to determine cost, inventories would have
been $1,578 and $5,996 higher at October 31, 1998 and 1997, respectively.
As a result of reducing certain inventory quantities valued on the LIFO
basis, lower inventory costs prevailing in previous years were charged to
cost of sales in 1997 and 1996. In 1996, the Company adopted a policy of
calculating the effect of LIFO liquidations on net income based on the
current cost method. The effect was an increase in net income of $899 and
$542 and for the years ended October 31, 1997 and 1996, respectively.
(5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
<TABLE>
<CAPTION>
October 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land $ 11,949 $ 9,371
Buildings and improvements 61,966 45,286
Machinery and equipment 223,391 172,246
Mineral interests 29,899 22,005
Construction in progress 8,587 3,588
--------- ---------
335,792 252,496
Less accumulated depreciation and depletion 70,509 46,148
-------- --------
$ 265,283 $ 206,348
-------- --------
-------- --------
</TABLE>
Rental expense applicable to minimum rentals under operating leases was
$6,883, $5,543 and $3,101 for the years ended October 31, 1998, 1997 and
1996, respectively. Contingent rental payments, based primarily on
equipment usage, were $532, $674 and $554, respectively.
The Company's operating leases relate primarily to operating equipment,
office facilities and office equipment. The minimum rental commitments
under noncancellable leases, with terms in excess of one year, are as
follows:
<TABLE>
Fiscal year ending October 31:
<S> <C>
1999 $ 5,679
2000 4,705
2001 3,319
2002 1,986
2003 1,299
---------
$ 16,988
---------
---------
</TABLE>
34
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(6) SPECIAL TERM DEPOSIT
The Special Term Deposit represents a deposit made in a foreign bank as
collateral for a loan made to Doe Run Mining. See further discussion in
Note 8.
(7) ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consist of the following:
October 31,
----------------------
1998 1997
--------- --------
<S> <C> <C>
Interest $ 6,412 $ 546
Reclamation and environmental 3,422 3,842
Property taxes 3,671 3,299
Payroll, related taxes and employee benefits 20,489 15,943
Other 16,676 5,263
------ -------
$ 50,670 $ 28,893
------ -------
------ -------
</TABLE>
Reclamation and environmental costs represents the estimate of
reclamation and environmental spending for the following fiscal year.
These costs relate primarily to the historical operations of the Company.
See Note 16.
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revolving credit facilities $ 48,842 $ 3,000
11.25% unsecured senior notes due March 15, 2005 200,000 -
Floating interest rate unsecured senior notes due March 15, 2003,
effective rate of 11.70% at October 31, 1998 55,000 -
11.25% secured senior notes due March 15, 2005, less unamortized
discount of $5,153 at October 31, 1998 44,847 -
Note payable to foreign bank 125,000 -
$130,000 term loan, effective rate of 8.64% at October 31, 1997 - 130,000
$225,000 term loan, effective rate of 9.14% at October 31, 1997 - 100,000
Pollution control financing, maturing December 15,1998, annual
principal payments due on December 15, interest at 5.75%,
payable semiannually 895 1,740
Deferred purchase price obligation, no stated interest rate 3,718 -
--------- --------
478,302 234,740
Less current maturities 2,018 12,345
--------- --------
Long-term debt, less current maturities $ 476,284 $ 222,395
--------- --------
--------- --------
</TABLE>
35
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Revolving credit facilities provide for borrowing under two credit
facilities. The first facility allows the Company to borrow up to
$100,000 and expires March 12, 2001, at which time it may be renewed
annually. The availability of loans under the facility is limited to a
percentage of eligible U.S. accounts receivable and inventories, less any
outstanding loans and letters of credit. Actual availability was $34,801
at October 31, 1998. The facility bears interest at the prime rate plus
.75% per annum and the effective rate at October 31, 1998 was 9.00%. The
Company is also obligated to pay an unused line fee equal to .25% on the
amount by which the maximum credit of $100,000 exceeds the average daily
balance of outstanding loans and letters of credit. The facility is
secured by accounts receivable and inventories generated by the Company's
U.S. operations. All cash received from the Company's domestic operations
is wired daily to the financial institutions to pay down the outstanding
loan balance, if any. Revolving loans outstanding under this facility
were $20,842 at October 31, 1998.
The second facility allows Doe Run Peru to borrow up to $40,000 and
expires June 19, 2002. The facility bears interest at LIBOR (1-month,
3-month or 6-month rate, depending on the term of the loan) plus 1.5% per
annum, and the effective rate was 9.68% at October 31, 1998. Individual
loans must be greater than $1,000. An unused line fee of .375% per annum
on the average unused portion of the line is payable quarterly, in
arrears. Availability of loans under the facility is limited to a
percentage of eligible accounts receivable and inventories, less any
outstanding loans and letters of credit. Actual availability was $3,797
at October 31, 1998. Revolving loans outstanding under this facility were
$28,000 at October 31, 1998. The facility is secured by Doe Run Peru's
accounts receivable and inventories.
On March 12, 1998, the Company completed the sale of $200,000 11.25%
senior notes (the Fixed Rate Notes) and $55,000 Floating Interest Rate
Senior Notes due 2003 (collectively, the Unsecured Notes). The Unsecured
Notes are guaranteed by certain subsidiaries of the Company. See Note 18
for disclosures regarding guarantor subsidiaries. The Company used
$125,000 of the proceeds from the Unsecured Notes to make the Special
Term Deposit into a foreign bank, which in turn loaned such amount to Doe
Run Mining. The Special Term Deposit and note payable to the foreign bank
have payment terms that match the timing and amount of the payments on
$125,000 of the Fixed Rate Notes, except that additional interest of
0.50% for the first six months and 0.25% thereafter through September 11,
2004 is payable on the note payable to the foreign bank. The note payable
to the foreign bank is collateralized by the Special Term Deposit. Doe
Run Mining used the proceeds of the note payable to the foreign bank to
repay the $100,000 balance on the $225,000 term loan, plus accrued
interest thereon of $1,004, repay a $23,000 subordinated note to the
Company and pay fees of $313.
The remaining $130,000 of the proceeds of the Unsecured Notes, plus the
$23,000 repayment of the subordinated note by Doe Run Mining, were used
by the Company to: (i) repay principal and interest on the $130,000 term
loan of $128,125 and $1,127, respectively, (ii) repay balances under
existing revolving credit facilities of $14,444, (iii) pay Renco $5,000
to redeem the $2,500 preferred stock, plus accrued dividends thereon of
$189, and a transaction fee of $2,311 and (iv) pay related fees and
expenses of $6,553.
On September 1, 1998, the Company completed the sale of $50,000 11.25%
senior secured notes (the Secured Notes). Proceeds of $43,400, net of
issue discount of $5,287 and fees of $1,313, were used to finance the
acquisition of the MLD, as discussed in Note 2. The notes are secured by
the property, plant and equipment acquired and are guaranteed by certain
subsidiaries of the Company. See Note 18.
On October 23, 1997 the Company and Doe Run Mining borrowed $130,000 and
$225,000, respectively, under credit agreements with a group of financial
institutions. The proceeds were used to retire all of the Company's
outstanding debt, except for the Pollution Control Bonds, and to finance
the acquisition and capital contribution discussed in Note 2.
36
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Pollution control financing represents the outstanding balances of
revenue bonds issued to provide funding for pollution control facilities
at the Company's domestic primary lead smelter. The debt is guaranteed by
the former owner of the Company.
The deferred purchase price obligation is payable to Centromin for the
assets of the Cobriza mine purchased in the current year as discussed in
Note 2. Payments of $1,495 are due annually for three years beginning
August 31, 1999. The note has no stated interest rate and has been
discounted to an effective rate of 10%.
In conjunction with early extinguishments of long-term debt, the Company
recognized extraordinary charges of $4,388 and $1,062, net of income tax
benefits of $2,362 and $265, in 1998 and 1997, respectively.
The aggregate estimated amounts of long-term debt maturing after October
31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 2,018
2000 1,236
2001 50,201
2002 -
2003 55,000
Thereafter 369,847
-------
$ 478,302
-------
-------
</TABLE>
The Company's various debt agreements contain certain requirements with
respect to net worth and coverage of fixed charges. These agreements also
place limitations on dividend payments and other outside borrowings. The
Company was in compliance with all debt covenants at October 31, 1998,
and accordingly, the related debt is classified long term.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1998 and 1997, the fair values of the Company's financial
instruments, except for long-term debt and the hedge positions described
in Note 15, were not materially different from their carrying amounts.
The fair values of the Company's long-term debt were based on the
estimates of incremental borrowing rates for similar types of borrowing
arrangements or dealer quotes. At October 31, 1998 the fair value of the
Company's long term debt was $429,852. At October 31, 1997, the fair
value of long-term debt was not materially different from the carrying
amount.
(10) INCOME TAXES
The Company files a consolidated federal income tax return with Renco.
Pursuant to a tax sharing agreement with Renco, the Company provides for
federal income taxes as if the Company filed separate income tax returns
except that, generally, no carryforward of net operating losses is
permitted, unless such losses are generated by net tax temporary
differences. Under the terms of the agreement, the Company is required to
remit annually to Renco the amount of federal income taxes provided.
Renco files the Company's state income tax returns, and the Company
remits the resulting tax to Renco. Doe Run Mining and its subsidiaries
pay taxes directly to their respective jurisdictions in which income and
other similar taxes arise. It is the Company's policy to recognize an
income tax benefit for foreign income taxes only when taxes are paid.
37
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Doe Run Cayman is subject to the regulations of the Cayman Islands, which
currently have no corporate income or capital gains tax. Doe Run Cayman's
subsidiaries located in Peru are subject to Peruvian taxation. The
statutory income tax rate in Peru is 30%. Doe Run Peru has obtained to a
ten-year tax stabilization agreement with the Peruvian government, which
provides for Peruvian taxation based on tax statutes and regulations
prevailing on November 6, 1997, beginning with the Peruvian tax year
ending on December 31, 1997 through December 31, 2006.
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 3,446 $ 3,882 $ 6,383
State 529 99 68
Foreign 10,983 419 -
--------- ------- -------
14,958 4,400 6,451
Deferred:
Federal (6,200) - -
Foreign 2,640 (69) -
--------- ------- -------
(3,560) (69) -
--------- ------- -------
$ 11,398 $ 4,331 $ 6,451
--------- ------- -------
--------- ------- -------
</TABLE>
Income tax expense differed from the amount computed by applying the
statutory federal corporate income tax rate of 35% to income before
income tax expense as a result of the following:
<TABLE>
<CAPTION>
Year ended October 31,
---------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Income tax expense at statutory rate $ 8,008 $ 1,392 $ 6,620
Increase (reduction) in income tax expense resulting from:
Percentage depletion in excess of basis - (2,532) (4,583)
Change in the balance of the valuation allowance for
deferred tax assets 1,786 4,487 4,095
Nondeductible expenses 894 477 385
State income taxes, net of federal benefit 344 64 56
Foreign income taxes at effective rates in excess of
the statutory rate - 324 -
Other, net 366 119 (122)
-------- ------- -------
$ 11,398 $ 4,331 $ 6,451
-------- ------- -------
-------- ------- -------
</TABLE>
38
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
October 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets
Accounts receivable and other current assets $ 318 $ 275
Accrued liabilities 5,319 3,274
Postretirement benefits 4,591 4,689
Reclamation and environmental costs 11,793 12,360
Alternative minimum tax credit carryforward 8,981 10,188
Other noncurrent assets and liabilities 7,782 4,563
----- -------
38,784 35,349
Less valuation allowance (15,114) (13,328)
------ ------
Total deferred tax assets 23,670 22,021
------ ------
Deferred tax liabilities:
Inventories and other current assets (7,921) (11,129)
Property, plant and equipment (5,394) (3,398)
Mineral properties (4,579) (4,856)
Pension asset (2,147) (2,569)
------- --------
Total deferred tax liabilities (20,041) (21,952)
------ ------
Net deferred tax assets $ 3,629 $ 69
--------- ---------
--------- ---------
</TABLE>
The deferred tax liabilities related to inventories and other current
assets and property, plant and equipment are principally due to
differences in book and tax allocations of the excess of the fair value
of the sum of assets acquired, less liabilities assumed over the purchase
price paid. Accruals for financial reporting purposes, which have no tax
basis, gave rise to a significant portion of the other temporary
differences.
The alternative minimum tax carryforward is available to reduce future
federal regular income taxes, if any, over an indefinite period.
Management has provided a valuation allowance against certain domestic
deferred tax assets, to the extent that it is unlikely that the benefits
of those assets will be realized.
(11) EMPLOYEE BENEFITS
DOMESTIC PLANS
DEFINED BENEFIT PLANS
The Company sponsors a noncontributory defined benefit plan for its
U.S. and expatriate employees.
39
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Benefits provided to salaried employees under the defined benefit plan
are based on final average compensation and years of service. Benefits
provided to hourly employees are based on a flat rate and years of
service. Net periodic pension expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended October 31,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost $ 1,754 $ 1,508 $ 1,342
Interest cost on projected benefit obligation 4,040 3,762 3,506
Actual return on assets (4,504) (4,161) (4,168)
Net amortization and deferral of unrecognized net losses 269 276 176
------- ------- -------
Net periodic pension expense $ 1,559 $ 1,385 $ 856
------- ------- -------
------- ------- -------
</TABLE>
The following assumptions were used in the determination of net periodic
pension expense:
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Discount rates 7.50% 7.75% 7.50%
Rate of increase in compensation levels 3.00% 3.00% 3.00%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
The following table sets forth the funded status of the Company's defined
benefit plan:
<TABLE>
<CAPTION>
October 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(54,641) $(43,417)
Non-vested obligation (3,776) (2,758)
--------- ---------
Accumulated benefit obligation $(58,417) $(46,175)
--------- ---------
--------- ---------
Projected benefit obligation (63,998) (51,748)
Less plan assets at fair value, primarily investments
in common stock and corporate bonds 52,722 51,359
--------- ---------
Projected benefit obligation in excess of plan assets (11,276) (389)
Unrecognized net loss 15,528 6,457
--------- ---------
Net pension asset $ 4,252 $ 6,068
--------- ---------
--------- ---------
</TABLE>
The weighted average discount rate used in determining the projected
benefit obligation was 6.75% and 7.50% as of October 31, 1998 and 1997,
respectively. The unrecognized net loss is amortized over the average
remaining service period of employees expected to receive benefits under
the plan.
The Company has also adopted a supplemental defined benefit plan, The
Supplemental Employee Retirement Plan (SERP), effective November 1, 1996.
The SERP provides benefits to those participants of the defined benefit
plan whose benefits under the plan are limited by Sections 401(a)(17) or
415 of the Internal Revenue Code.
40
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Benefits under the SERP represent the amount by which the benefits
under the defined benefit plan, if such benefits were not limited,
exceed those benefits the participants are entitled to receive. The
SERP is unfunded. The Company recorded pension expense with respect to
the SERP plan of $243 and $259 for the years ended October 31, 1998
and 1997, respectively, which is included in the previous disclosures
of net periodic pension expense.
The amounts recognized in the statements of financial position as of
October 31, 1998 and 1997 include prepaid benefit costs of $4,751 and
$6,067, an intangible asset relating to the SERP plan of $843 and $624
and an accrued benefit liability of $1,342 and $883, respectively.
POSTRETIREMENT BENEFIT PLANS
The Company sponsors three postretirement medical plans for its U.S. and
expatriate employees. Two of these plans are self-insured plans. The
plans generally cover medical expenses subject to deductibles, copayments
and limits on specified coverage. For persons retired on or before
January 1, 1992, the retiree's contribution to the cost of these plans
varies primarily based upon the date of retirement and the respective
plan. Effective January 1, 1992, the Company's contribution to the cost
of coverage of employees retiring after that date has decreased
gradually, until, beginning in 1997, retirees pay 100% of the cost of
coverage. The Company maintains stop-loss insurance for claims exceeding
$200 per person in any calendar year for those plans that are
self-insured.
The postretirement benefit plans are unfunded. The following illustrates
the Company's postretirement benefit obligation:
<TABLE>
<CAPTION>
October 31,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 10,447 $ 10,169
Fully eligible active participants 191 135
Other actives 296 248
-------- -------
10,934 10,552
Unrecognized net gain 2,208 2,818
-------- -------
Postretirement benefit obligation $ 13,142 $ 13,370
-------- -------
-------- -------
</TABLE>
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Service cost $ 41 $ 34 $ 23
Interest cost 754 789 886
Amortization of gains (91) (104) (23)
------ ------ ------
Net periodic postretirement benefit cost $ 704 $ 719 $ 886
------ ------ ------
------ ------ ------
</TABLE>
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) for the
medical plans was 8% for fiscal 1998, and is assumed to decrease
gradually to 5% by the year 2001, and remain at that level thereafter. A
one percentage point increase in each year would increase the accumulated
postretirement benefit obligation and the net periodic postretirement
benefit cost by $678 and $49, respectively.
41
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75% and 7.50% at October 31, 1998
and 1997, respectively.
DEFINED CONTRIBUTION PLANS AND PROFIT SHARING PROGRAM
The Company sponsors a 401(k) plan that covers substantially all U.S. and
expatriate employees. Participants can contribute up to 15% of
compensation on a before-tax basis. The Company matches 25% of the first
6% of a participant's before-tax contribution. The Company's expense
representing its matching contribution was $495, $499 and $360 for the
years ended October 31, 1998, 1997 and 1996, respectively. Plan assets
consist primarily of investments in common stock and debt securities.
On February 28, 1995, the Company adopted a profit sharing program, which
covers substantially all U.S. employees. The program provides for a
distribution to employees equal to 15% of U.S. income before income tax
expense, plus any extraordinary items, excluding the related tax effect.
At management's discretion, a portion of the distribution may be made in
the form of a contribution to the 401(k) plan. The remainder is paid in
cash to employees. The Company's expense for the years ended October 31,
1998, 1997 and 1996 was $0, $493 and $3,492, respectively.
FOREIGN PLANS
Doe Run Peru is required to make semiannual deposits into a bank account
for severance indemnity benefits for Peruvian employees under Peruvian
government regulations. The balance in the account represents the full
benefit due to such employees upon termination. The Company accrues for
the additional amount that would be contributed to the account since the
last deposit date as if all such employees were to terminate as of the
balance sheet date. The Company's expense related to severance indemnity
benefits was $2,988 for the year ended October 31, 1998.
In accordance with government regulations in Peru, employees are entitled
to receive 8% of the Doe Run Peru's taxable income, 50% of which is
distributed to employees based on number of days worked, and the
remaining distributed in proportion to their salaries. The Company's
expense relating to workers' profit sharing was $3,672 for the year ended
October 31, 1998.
(12) PREFERRED STOCK (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company had 2,500 shares of preferred stock with $1,000 par value
authorized, issued and outstanding at October 31, 1997. The shares were
owned by Renco. The shares were redeemed at the option of the Company on
March 12, 1998 at $1,000 per share plus unpaid dividends of $189, or $76
per share.
(13) BUSINESS AND CREDIT CONCENTRATIONS
Lead prices fluctuate and are affected by numerous factors beyond the
Company's control, including expectations for inflation, speculative
activities, the relative exchange rate of the U.S. dollar, global and
regional demand and production, political and economic conditions and
production costs in major producing regions. The aggregate effect of
these factors makes it impossible for the Company to predict lead prices.
Fluctuations in the lead price could have a material adverse effect on
the results of operations, financial condition and liquidity of the
Company.
For the years ended October 31, 1998, 1997 and 1996, approximately 67%,
63% and 67%, respectively, of the Company's domestic revenues from
unaffiliated customers were from U.S. battery manufacturers (primarily
42
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
automotive) or their suppliers. At October 31, 1998 and 1997, the
accounts receivable balances related to these U.S. battery manufacturers
were $40,547 and $35,162, respectively.
For the years ended October 31, 1997 and 1996, the Company relied on one
customer, Johnson Controls, Inc., a battery manufacturer, for
approximately 12% and 14% of its revenue, respectively. The related
accounts receivable balance was $6,501 at October 31, 1997. An additional
10% of revenues were attributed to East Penn Manufacturing Co., Inc., a
battery manufacturer, for the year ended October 31, 1996, and Big River
Zinc Corporation for the year ended October 31, 1997. No single customer
accounted for greater than 10% of revenues for the year ended October 31,
1998.
(14) SEGMENT INFORMATION
The Company operates in one industry segment for financial reporting
purposes.
Information about the Company's operations in different geographic areas
is as follows for the year ended October 31, 1998:
<TABLE>
<CAPTION>
United Elimi- Consoli-
States Peru nations dated
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 261,601 $ 454,980 $ - $ 716,581
Transfers between geographic areas 16,089 3,311 (19,400) -
--------- --------- ---------- ---------
Total revenues $ 277,690 $ 458,291 $ (19,400) $ 716,581
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Income from operations $ 7,315 $ 46,191 $ (115) $ 53,391
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Identifiable assets at October 31, 1998 $ 424,723 $ 251,363 $ (12,447) $ 663,639
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
Sales to unaffiliated customers and income from operations from Peru were
$2,571 and $359, respectively, for the year ended October 31, 1997.
Identifiable assets in Peru were $171,000 at October 31, 1997. There were
no transfers between geographic areas for the year ended October 31,
1997.
Transfers between geographic areas include sales of metal and revenue
recognized for agency and management services provided to Peruvian
subsidiaries. These transfers are recorded based on metal sales
contracts, which are negotiated on an arms-length basis, and established
fees under agency and services contracts. Operating profit is total
revenue less operating expenses. Identifiable assets are those assets of
the Company that are identified with the operations in each geographic
area, and exclude investments in subsidiaries.
(15) COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENT
According to the Contract described in Note 2, Doe Run Peru is obligated
to invest $120,000 through October 23, 2002 to expand and modernize its
operations, including certain expenditures to comply with environmental
regulations in Peru, as discussed in Note 16. In the event Doe Run Peru
has not fulfilled its obligations under the Contract, it will be
obligated to pay in 2002 a penalty to Centromin Peru S.A. equal to 30% of
any shortfall. Management plans to fund its commitments through future
operating cash flows.
43
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
TOLLING
The Company has entered into a tolling arrangement with a major battery
manufacturer whereby the manufacturer will deliver spent lead-acid
batteries and other lead-bearing material to the Company's recycling
facility and, for a processing fee, the Company will return finished lead
metal. The agreement, which expires in September 2001, covers
approximately 8% of the Company's anticipated domestic lead metal
production.
SALES
The Company has commitments to sell approximately 65%,75%, 65% and 73% of
its anticipated 1999 lead, copper, zinc and silver metal production,
respectively under agreements, with terms of generally less than one
year. Sales prices are generally based on the London Metal Exchange
prices at the time of shipment, plus a premium.
HEDGING
The fair market value of the Company's hedging positions at October 31,
1998 and 1997, is the difference between quoted prices at the respective
period-end and the contract settlement value. The fair market value
represents the estimated net cash the Company would receive (pay) if the
contracts were canceled on the respective dates. As management has
designated these contracts as hedges, the related gains and losses will
be recognized in net sales when the related production is sold.
The Company's open hedging positions at October 31, 1998 were:
FUTURES SALES (PURCHASE) CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR MARKET
METAL QUANTITY PRICE RANGE VALUE PERIOD
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Lead (28,605) tons $0.2200/lb. to $0.2971/lb. $ (1,475,279) Nov. 98 to Sept. 99
Copper 1,185 tons $0.7189/lb. to $0.7607/lb. $ 30,110 Nov. 98 to Feb. 99
Silver 260,000 oz $4.97/oz. to $5.13/oz. $ (200) Nov. 98
</TABLE>
SOLD CALL OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR MARKET
METAL QUANTITY PRICE RANGE VALUE PERIOD
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Copper 3,583 tons $0.7484/lb. to $0.8391/lb. $ (11,058) Nov. 98 to Dec. 98
Lead 2,370 tons $0.2313/lb. to $0.2812/lb. $ (46,805) Nov. 98 to June 99
Zinc 1,653 tons $0.4535/lb. to $0.4990/lb. $ (11,250) Nov. 98 to Dec. 98
Silver 325,000 oz $5.00/oz. To $6.00/oz. $ (120,017) Nov. 98 to June 99
Gold 1,500 oz $300.00/oz. $ - Dec. 98
</TABLE>
44
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
SOLD (PURCHASED) PUT OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR MARKET
METAL QUANTITY PRICE RANGE VALUE PERIOD
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Silver 370,000 oz $4.50/oz. To $5.25/oz. $(128,000) Nov. 98 to June 99
Zinc 2,480 tons $0.4400/lb. to $0.4536/lb. $(117,274) Nov. 98 to Dec. 98
Lead (5,512) tons $0.2268/lb. $ 155,360 Feb. 99 to June 99
</TABLE>
The Company's open hedging positions at October 31, 1997 were (numbers
not in thousands):
FUTURES SALES CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR MARKET
METAL QUANTITY PRICE RANGE VALUE PERIOD
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Lead 5,594 tons $0.2716/lb. To $0.3243/lb. $253,391 Nov. 97 to Dec. 98
Copper 1,213 tons $0.9525/lb. To $1.0097/lb. $142,174 Nov. 97 to Feb. 98
Zinc 2,535 tons $0.6001/lb. To $0.6652/lb. $210,744 Nov. 97 to May 98
</TABLE>
The Company is exposed to risk from market price fluctuations to the
extent it cannot meet anticipated sales.
The Company does not obtain collateral or other security to support hedge
instruments subject to credit risk, but assesses the reliability and
reputation of its counterparties before contracts are established.
LETTERS OF CREDIT
At October 31, 1998, the Company had issued irrevocable standby letters
of credit totaling $4,868 in connection with the Company's insurance and
bonding activities. The Company also had outstanding standby letters of
credit and customs bonds of $1,161 and $9,308, respectively, relating to
concentrate and other purchases and a custom bond of $4,485 as collateral
for the deferred purchase price obligation discussed in Note 8.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with a number of its senior
executives through October 31, 1999.
ADDITIONAL PAYMENTS RELATED TO ACQUISITIONS
Pursuant to an Asset Purchase Agreement (the Purchase Agreement),
additional consideration may be due to the former owners of Seafab Metals
Company, one of the Company's subsidiaries, if certain earnings levels
are met for the five-year period beginning November 1, 1996. Payments
made in fiscal 1998 and 1997 totaled $181.
(16) ENVIRONMENTAL AND LITIGATION MATTERS
ENVIRONMENTAL
45
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The Company has recorded a liability of $35,896 as of October 31, 1998,
which represents management's best estimate of known obligations relating
to environmental and reclamation matters, which are discussed below.
DOMESTIC OPERATIONS
The Company is subject to numerous federal, state and local environmental
laws and regulations governing, among other things, air emissions, waste
water discharge, solid and hazardous waste treatment, and storage,
disposal and remediation of releases of hazardous materials. In common
with much of the mining industry, The Company's facilities are located on
sites that have been used for heavy industrial purposes for decades and
may require remediation. The Company has made and intends to continue
making the necessary expenditures for environmental remediation and
compliance with environmental laws and regulations. Environmental laws
and regulations may become more stringent in the future which could
increase costs of compliance.
Primary smelter slag produced by and stored at the primary smelter in
Herculaneum, Missouri is currently exempt from hazardous waste regulation
under the Resource Conservation and Recovery Act of 1976, as amended
(RCRA). The Company has accrued approximately $1,200 related to the
Herculaneum smelter's operations, primarily for closure obligations. If
the slag or other wastes at the smelter were to be regulated as hazardous
waste, the Company may be required to take corrective action under RCRA
at the smelter, as well as to adopt stricter management practices for
these wastes.
The Company is working with regulators at the Herculaneum smelter to
develop a new three-year compliance plan to meet the ambient air quality
standard for lead promulgated under the federal Clean Air Act. The plan
will take effect after fiscal 1998 to implement control measures
identified in the plan. The Company expects to make capital expenditures
for control measures totaling approximately $2,900 for fiscal 1999 while
the plan is developed and anticipates additional future cash requirements
of $3,000 during the three-year compliance period.
The Company has received notice that it is a potentially responsible
party (PRP) subject to liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (CERCLA), at
the following sites: four sites in St. Francois County, Missouri,
including the Big River Mine Tailings site, the Bonne Terre site, the
Federal site and the National site; the Oronogo-Durenweg site in Jasper
County, Missouri; the Cherokee County site in Cherokee County, Kansas;
the Tar Creek site in Ottawa County, Oklahoma; the Block "P" site in
Cascade County, Montana; and the Missouri Electric Works site in Cape
Girardeau, Missouri. There are four additional sites in St. Francois
County for which the EPA has indicated it will issue notice. These sites
involve historical operations of predecessors of The Company. CERCLA
provides for strict and, in certain circumstances, joint and several
liability for response costs and natural resource damages. The Company
has a reserve as of October 31, 1998 of $15,900 for these sites,
including the four additional sites in St. Francois County, which The
Company believes is adequate based on its investigations to date.
However, depending upon the types of remediation required and certain
other factors, costs at these sites, individually or collectively, could
have a material adverse effect on the results of operations, financial
condition and liquidity of The Company.
The Company signed a voluntary Administrative Order of Consent (AOC) in
1994 with the EPA to remediate the Big River Mine Tailings site. In
February 1997, The Company signed an AOC to perform an Engineering
Evaluation/Cost Analysis (EE/CA) on the Bonne Terre site. In March 1998,
an AOC was signed to perform on EE/CA on the National site. In addition
to remediating the mine waste areas at these sites, The Company has
signed an AOC with the EPA to conduct a Remedial
Investigation/Feasibility Study (RIFS) to assess potential off-site
impacts of site operations on and the need for remediation regarding
groundwater, residential soils, several creeks and a river. The RIFS is
being conducted by a third party and is approximately one-half complete,
with completion expected within two years. The Company believes the
current reserves assigned to these sites are
46
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
adequate. However, should remediation goals or areas change, requiring
substantially increased measures, there can be no assurance that the
reserves would be adequate.
The Company has been advised by the EPA that it is considering taking
certain response actions at a mine site in Madison County, Missouri known
as the LaMotte Site. A predecessor of the Company was a former operator
of the site. The EPA has not decided whether any action will be taken,
but held a meeting with the Company and two other PRPs at the site on
June 17, 1998 to discuss possible future response actions. The EPA has
requested that the Company participate in a remedial investigation at the
site. This site is substantially smaller than the sites in St. Francois
County where the Company has been named a PRP, and the potential issues
are less complex. At this time, based on this preliminary meeting and an
inspection of the site, management does not believe that any future
action will result in a material adverse impact to the results of
operations, financial condition and liquidity of the Company.
The Company's recycling facility is subject to corrective action
requirements under RCRA, as a result of a storage permit for certain
wastes issued in 1989. This has required and may involve future
remediation of solid waste management units at the site. Although it is
not possible to predict whether completed actions will be approved or new
actions required, the Company has reserves as of October 31, 1998 of
approximately $1,800 for future corrective actions and $2,600 for closure
costs for the permitted storage area.
The Company's domestic operating facilities have wastewater discharge
permits issued under the federal Clean Water Act, as amended. It is
expected that stricter discharge limits than previously in effect will be
included in permits now subject to renewal. As a result, there will be
additional treatment facilities required, with anticipated total capital
expenditures of $4,000 over the next five years to meet applicable permit
requirements. There will be no appreciable increase in operating costs.
The Company's mining and milling operations include seven mine waste
disposal facilities that are subject to Missouri mine closure permit
requirements. The total expected cost of closure is $14,600. The Company
has begun certain closure requirements ahead of closure and will accrue
for the cost of ultimate closure at a rate of approximately $450 per
year. The Company's mine closure reserves were approximately $7,200 as of
October 31, 1998.
FOREIGN OPERATIONS
Doe Run Peru has submitted to and received approval from the Peruvian
government for the Programa de Adecuacion y Manejo Ambiental
(Environmental Adjustment and Management Program) (the PAMA) that
consisted of an environmental impact analysis, monitoring plan and data,
mitigation measures and closure plan. The PAMA also sets forth the
actions and corresponding annual investments the concession holder agrees
to undertake in order to achieve compliance with the maximum applicable
limits prior to expiration of the PAMA (ten years for smelters, such as
Doe Run Peru's operations, and five years for any other type of mining or
metallurgical operation). The required amount of annual investment must
not be less than one percent of annual sales. Once approved, the PAMA
functions as the equivalent of an operating permit with which the
operator must comply. After expiration of the PAMA, the operator must
comply with all applicable standards and requirements.
Doe Run Peru has committed under its PAMA to implement the following
projects over the next nine years: (i) new sulfuric acid plants; (ii)
elimination of fugitive gases from the coke plant; (iii) use of
oxygenated gases in the anodic residue plant; (iv) water treatment plant
for the copper refinery; (v) a recirculation system for cooling waters at
the smelter; (vi) management and disposal of acidic solutions at the
silver refinery; (vii) industrial waste water treatment plant for the
smelter and refinery; (viii) containment dam for the lead muds near the
zileret plant; (ix) granulation process water at the lead smelter; (x)
anode washing system at the zinc refinery; (xi) management
47
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
and disposal of lead and copper slag wastes; and (xii) domestic waste
water treatment and domestic waste disposal. Annual spending on a
calendar year basis approved in the PAMA is as follows:
<TABLE>
<CAPTION>
Estimated
YEAR Costs
---- ---------
<S> <C>
1999 $ 5,050
2000 11,265
2001 13,800
2002 14,300
2003 13,180
2004 30,055
2005 34,790
2006 42,040
---------
$164,480
---------
---------
</TABLE>
The current estimate for the environmental projects under the PAMA and
additional related process changes for Doe Run Peru is approximately
$195,000.
Doe Run Peru's operations historically and currently exceed some of the
applicable MEM maximum permissible limits pertaining to air emissions,
ambient air quality and waste water effluent quality. The PAMA projects,
which are more fully discussed below, have been designed to achieve
compliance with such requirements prior to the expiration of the PAMA on
January 13, 2007. No assurance can be given that implementation of the
PAMA projects is feasible or that their implementation will achieve
compliance with the applicable legal requirements by the end of the PAMA
period. Doe Run Peru has advised the MEM that it intends to seek changes
in certain PAMA projects that it believes will more effectively achieve
compliance. However, there can be no assurance that the MEM will approve
proposed changes to the PAMA or that implementation of the changes will
not increase the cost of compliance. Further, there can be no assurance
that the Peruvian government will not in the future require compliance
with additional environmental obligations that could adversely affect Doe
Run Peru's business, financial condition or results of operations. Under
the Subscription Agreement, Centromin agreed to indemnify Doe Run Peru
against environmental liability arising out of its prior operations, and
performance of the indemnity has been guaranteed by the Peruvian
government through the enactment of the Supreme Decree No. 042-97-PCM.
However, there can be no assurance that Centromin will satisfy its
environmental obligations and investment requirements, including those in
its PAMA, or that the guarantee will be honored. Any failure by Centromin
to satisfy its environmental obligations could adversely affect Doe Run
Peru's business, financial condition or results of operations.
According to the Contract, the Company has the option to continue the use
of Doe Run Peru's existing zinc ferrite disposal site for three years,
after which it can take ownership of the site or create a new site. If
the Company chooses to take ownership of the site, it will be responsible
for its closure costs. The Company has accrued for management's estimate
of the closure costs, or $7,200. If the Company abandons the ferrite
site, it must pay this amount to Centromin.
CONSOLIDATED
The Company believes its reserves for domestic and foreign environmental
and reclamation matters are adequate, based on the information available.
Depending upon the type and extent of remediation activities required,
costs in excess of established reserves are reasonably possible.
Therefore, there can be no assurance that additional costs, both
individually and in the aggregate, would not have a material adverse
effect on the results of operations, financial condition and liquidity of
the Company.
48
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
LITIGATION
The Company is a defendant in several lawsuits alleging certain damages
stemming from the operations at the Herculaneum smelter. Two of these
cases are class action lawsuits. In one case, the plaintiffs seek to have
certified two separate classes. The first class would consist of property
owners in a certain section of Herculaneum, alleging that property values
have been damaged due to the operations of the smelter. The second class
would be comprised of children who lived in Herculaneum during a period
of time when they were six months to six years old, and the remedy sought
is medical monitoring for the class. The second class action similarly is
seeking certification of a class of property owners allegedly damaged by
operations from the smelter, but the purported size of the class is every
home in Herculaneum, Missouri. The other two cases are personal injury
actions by fourteen individuals who allege damages from the effects of
lead poisoning due to operations at the smelter. Punitive damages also
are being sought in each case. The Company is vigorously defending all of
these claims.
Preliminary investigation and research by the Company indicates property
values in Herculaneum are consistent with those of surrounding
communities and have not been affected by the smelter. Finally, based on
rules for class certification, the Company believes class certification
is not appropriate. However, because the cases are in discovery, the
Company is unable at this time to state with certainty the expected
outcome of and the final costs of any of these cases. Therefore, there
can be no assurance that these cases would not have a material adverse
effect, both individually and in the aggregate, on the results of
operations, financial condition and liquidity of the Company.
(17) SUBSEQUENT EVENT (UNAUDITED)
On January 15, 1999, Renco filed an election, with the consent of
shareholders, with the Internal Revenue Service to change its taxable
status from that of a subchapter C corporation to that of a subchapter S
corporation, effective November 1, 1998. At the same time, Renco elected
for the Company to be treated as a qualified subchapter S subsidiary
(QSSS). Most states in which the Company operates will follow similar tax
treatment. QSSS status requires the ultimate shareholders to include
their pro rata share of the Company's income or loss in their individual
tax returns. The election does not affect foreign income taxes related to
the Company's foreign subsidiaries. As a result of this change in tax
status, the elimination of federal and most state deferred tax assets and
liabilities for income tax purposes will be recorded as income tax
benefit or expense as of the effective date of the change.
(18) GUARANTOR SUBSIDIARIES
The Guarantor Subsidiaries (Fabricated Products, Inc. (FPI), Doe Run
Cayman and its wholly-owned subsidiary, Doe Run Mining, and Doe Run Peru)
have jointly and severally, fully, unconditionally and irrevocably
guaranteed the Notes. Each of the Guarantor Subsidiaries is a wholly
owned direct or indirect subsidiary of the Company, except Doe Run Peru
which is over 99.97% indirectly owned by the Company, with the remainder
of a de minimis number of shares owned by employees of Centromin pursuant
to Peruvian law. Separate financial statements of Doe Run Peru have been
presented to fulfill the disclosure requirement for guarantor
subsidiaries that are not wholly-owned. FPI was incorporated in August
1996, and its operations were not material to the results of operations
of the Company for the year ended October 31, 1996. The results of
operations of Doe Run Peru for the eight-day period from October 24 to
October 31, 1997 were not material to results of operations of the
Company for the year ended October 31, 1997.
49
<PAGE>
(18) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Doe Run
The Company Cayman
Excluding and Wholly
Guarantor -Owned Doe Run The
Subsidiaries FPI Subsidiary Peru S.R.L. Eliminations Company
------------ --------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ -- $ -- $ 89 $ 4,557 $ -- $ 4,646
Trade accounts receivable, net of allowance
for doubtful accounts 51,387 5,127 4,374 30,935 (5,485) 86,338
Inventories 39,545 1,735 6,506 77,335 531 125,652
Prepaid expenses and other current assets 6,966 134 3,366 21,923 (2,083) 30,306
Due from subsidiaries 20,434 -- 10,388 85 (30,907) --
Due from parent -- -- -- 147,144 (147,144) --
--------- --------- --------- --------- ---------- ---------
Total current assets 118,332 6,996 24,723 281,979 (185,088) 246,942
Property, plant and equipment, net 151,255 8,818 3,634 101,576 -- 265,283
Special term deposit 125,000 -- -- -- -- 125,000
Net deferred tax assets 8,015 -- -- -- -- 8,015
Other noncurrent assets, net 17,274 391 286 448 -- 18,399
Investment in subsidiaries 20,776 -- 281,174 -- (301,950) --
--------- --------- --------- --------- ---------- ---------
Total assets $ 440,652 $ 16,205 $ 309,817 $ 384,003 $(487,038) $ 663,639
========= ========= ========= ========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities of
long-term debt $ 895 $ -- $ 1,123 $ -- $ -- $ 2,018
Accounts payable 21,120 2,937 4,971 30,155 (5,485) 53,698
Accrued liabilities 28,692 366 7,107 16,588 (2,083) 50,670
Net deferred tax liabilities 1,815 -- -- -- -- 1,815
Due to subsidiaries -- -- 147,144 -- (147,144) --
Due to parent -- 11,068 811 19,028 (30,907) --
--------- --------- --------- --------- ---------- ---------
Total current liabilities 52,522 14,371 161,156 65,771 (185,619) 108,201
Long-term debt, less current maturities 320,689 -- 127,595 28,000 -- 476,284
Net deferred tax liabilities -- -- 5 2,566 -- 2,571
Other noncurrent liabilities 48,863 1,942 -- 7,200 -- 58,005
--------- --------- --------- --------- ---------- ---------
Total liabilities 422,074 16,313 288,756 103,537 (185,619) 645,061
Shareholders' equity:
Common stock, $.10 par value, 1,000 shares
authorized, issued, and outstanding -- -- -- -- -- --
Common stock, $1 par value, 1,000 shares
authorized, issued, and outstanding -- 1 -- -- (1) --
Common stock, $1 par value, 2,005,000 shares
authorized, issued and outstanding -- -- 2,005 -- (2,005) --
Common stock, one nuevos soles par value,
648,672,941 shares authorized, issued
and outstanding -- -- -- 247,926 (247,926) --
Additional paid in capital 5,000 935 -- -- (935) 5,000
Retained earnings 13,578 (1,044) 19,056 32,540 (50,552) 13,578
--------- --------- --------- --------- ---------- ---------
Total shareholders' equity 18,578 (108) 21,061 280,466 (301,419) 18,578
--------- --------- --------- --------- ---------- ---------
Total liabilities and shareholders' equity $ 440,652 $ 16,205 $ 309,817 $ 384,003 $(487,038) $ 663,639
========= ========= ========= ========= ========== =========
</TABLE>
50
<PAGE>
(18) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Doe Run
The Company Cayman
Excluding and Wholly
Guarantor -Owned Doe Run The
Subsidiaries FPI Subsidiary Peru S.R.L. Eliminations Company
------------ --------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 1,579 $ -- $ 2,351 $ 5,013 $ -- $ 8,943
Trade accounts receivable, net of allowance
for doubtful accounts 46,016 6,416 -- 390 (352) 52,470
Inventories 27,597 2,104 -- 59,032 (85) 88,648
Prepaid expenses and other current assets 2,272 239 183 2,569 -- 5,263
Due from subsidiaries 29,878 -- 78 -- (29,956) --
Due from parent -- -- -- 125,000 (125,000) --
Net deferred tax assets -- -- (91) 160 -- 69
--------- --------- ---------- --------- ---------- --------
Total current assets 107,342 8,759 2,521 192,164 (155,393) 155,393
Property, plant and equipment, net 104,822 3,787 -- 97,739 -- 206,348
Net deferred tax assets 7,481 -- -- -- -- 7,481
Other noncurrent assets, net 11,260 335 3,623 -- -- 15,218
Investment in subsidiaries 3,915 -- 247,817 -- (251,732) --
--------- --------- ---------- --------- ---------- --------
Total assets $ 234,820 $ 12,881 $ 253,961 $289,903 $(407,125) $384,440
========= ========= ========== ========= ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,345 $ -- $ 4,000 $ -- -- 12,345
Accounts payable 15,583 2,704 -- 23,151 (352) 41,086
Accrued liabilities 18,510 383 625 9,375 -- 28,893
Net deferred tax liabilities 7,481 -- -- -- -- 7,481
Due to subsidiaries -- -- 125,000 -- (125,000) --
Due to parent -- -- 23,607 1,214 (24,821) --
--------- --------- ---------- --------- ---------- --------
Total current liabilities 49,919 3,087 153,232 33,740 (150,173) 89,805
Long-term debt, less current maturities 123,395 -- 99,000 -- -- 222,395
Due to parent -- 5,135 -- -- (5,135) --
Other noncurrent liabilities 47,332 2,388 -- 8,346 -- 58,066
--------- -------- ---------- --------- ---------- --------
Total liabilities 220,646 10,610 252,232 42,086 (155,308) 370,266
Shareholders' equity:
Preferred stock,$1,000 par value, 2,500 shares
authorized, issued and outstanding;
liquidation and redemption value of
$2,618 on October 31, 1997 2,500 -- -- -- -- 2,500
Common stock, $.10 par value, 1,000 shares
authorized, issued, and outstanding -- -- -- -- -- --
Common stock, $1 par value, 1,000 shares
authorized, issued, and outstanding -- 1 -- -- (1) --
Common stock, $1 par value, 2,005,000 shares
authorized, issued and outstanding -- -- 2,005 -- (2,005) --
Common stock, one nuevos soles par value,
648,672,941 shares authorized, issued and
outstanding -- -- -- 247,926 (247,926) --
Additional paid in capital 5,000 935 -- -- (935) 5,000
Retained earnings 6,674 1,335 (276) (109) (950) 6,674
--------- -------- ---------- --------- ---------- --------
Total shareholders' equity 14,174 2,271 1,729 247,817 (251,817) 14,174
--------- -------- ---------- --------- ---------- --------
Total liabilities and shareholders' equit $ 234,820 $ 12,881 $ 253,961 $289,903 $(407,125) $384,440
========= ======== ========== ========= ========== ========
</TABLE>
51
<PAGE>
(18) GUARANTOR SUBSIDIARIES (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Doe Run
The Company Cayman
Excluding and Wholly
Guarantor -Owned Doe Run The
Subsidiaries FPI Subsidiary Peru S.R.L. Eliminations Company
------------ --------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $261,454 $ 17,462 $ 11,006 $ 458,291 $(31,632) $ 716,581
Costs and expenses:
Cost of sales 215,885 16,530 3,645 371,589 (8,127) 599,522
Depletion, depreciation and amortization 16,621 1,105 63 6,751 -- 24,540
Selling, general and administrative 15,874 1,297 6,217 35,549 (24,121) 34,816
Exploration 4,312 -- -- -- -- 4,312
--------- --------- -------- --------- --------- ----------
Total costs and expenses 252,692 18,932 9,925 413,889 (32,248) 663,190
--------- --------- -------- --------- --------- ----------
Income (loss) from operations 8,762 (1,470) 1,081 44,402 616 53,391
Other income (expense):
Interest expense (26,730) (798) (13,175) (754) 798 (40,659)
Interest income 9,775 -- 151 458 (798) 9,586
Other, net (846) (93) 363 1,137 -- 561
Equity in earnings of subsidiaries 16,861 -- 33,357 -- (50,218) --
--------- --------- -------- --------- --------- ----------
(940) (891) 20,696 841 (50,218) (30,512)
--------- --------- -------- --------- --------- ----------
Income (loss) before income tax
and extraordinary item 7,822 (2,361) 21,777 45,243 (49,602) 22,879
Income tax expense (benefit) (1,290) 18 76 12,594 -- 11,398
--------- --------- -------- --------- --------- ----------
Income (loss) before extraordinary item 9,112 (2,379) 21,701 32,649 (49,602) 11,481
Extraordinary item (2,019) -- (2,369) -- -- (4,388)
--------- --------- -------- --------- --------- ----------
Net income (loss) $ 7,093 $ (2,379) $ 19,332 $ 32,649 $(49,602) $ 7,093
========= ========== ========== ========= ========= ==========
</TABLE>
52
<PAGE>
(18) GUARANTOR SUBSIDIARIES (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Doe Run
The Company Cayman
Excluding and Wholly
Guarantor -Owned The
Subsidiaries FPI Subsidiary Eliminations Company
------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 257,243 $ 23,338 $ 2,571 $ (2,685) $280,467
Costs and expenses:
Cost of sales 214,742 20,194 2,027 (2,612) 234,351
Depletion, depreciation and amortization 14,091 476 151 -- 14,718
Selling, general and administrative 10,005 920 34 -- 10,959
Exploration 2,705 -- -- -- 2,705
---------- --------- --------- --------- --------
Total costs and expenses 241,543 21,590 2,212 (2,612) 262,733
---------- --------- --------- --------- --------
Income (loss) from operations 15,700 1,748 359 (73) 17,734
Other income (expense):
Interest expense (13,038) (445) (257) -- (13,740)
Interest income 21 -- -- -- 21
Other, net 127 (136) (28) -- (37)
Equity in earnings of subsidiaries 887 -- -- (887) --
---------- --------- --------- --------- ---------
(12,003) (581) (285) (887) (13,756)
---------- --------- --------- --------- ---------
Income (loss) before income tax
and extraordinary item 3,697 1,167 74 (960) 3,978
Income tax expense 3,977 4 350 -- 4,331
---------- --------- --------- --------- --------
Income (loss) before extraordinary item (280) 1,163 (276) (960) (353)
Extraordinary item (1,062) -- -- -- (1,062)
---------- --------- --------- --------- ---------
Net income (loss) $ (1,342) $ 1,163 $ (276) $ (960) $ (1,415)
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
53
<PAGE>
(18) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
Doe Run
The Company Cayman
Excluding and Wholly
Guarantor -Owned Doe Run The
Subsidiaries FPI Subsidiary Peru S.R.L. Eliminations Company
------------ --------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 24,261 $ 132 $ 23,876 $ (11,808) $(50,218) $ (13,757)
Cash flows from investing activities:
Special term deposit (125,000) -- -- -- -- (125,000)
Purchases of property, plant and equipment (10,748) (6,065) -- (11,691) -- (28,504)
Payment for acquisitions (54,640) -- (3,507) (42) -- (58,189)
Investment in subsidiaries (16,861) -- (33,357) -- 50,218 --
---------- --------- ---------- ---------- --------- ----------
Net cash provided by (used in)
investing activities (207,249) (6,065) (36,864) (11,733) 50,218 (211,693)
Cash flows from financing activities:
Proceeds from revolving loan
and short-term borrowings, net 20,842 -- (3,000) 28,000 -- 45,842
Proceeds from long-term debt 299,713 -- 125,000 -- -- 424,713
Payments on long-term debt (130,845) -- (100,000) -- -- (230,845)
Payment of deferred financing costs (15,056) -- (312) (500) -- (15,868)
Loans from parent/subsidiaries 9,444 5,933 (10,962) (4,415) -- --
Payment of dividends (189) -- -- -- -- (189)
Redemption of preferred stock (2,500) -- -- -- -- (2,500)
---------- --------- ---------- ---------- --------- ----------
Net cash provided by financing activities 181,409 5,933 10,726 23,085 -- 221,153
---------- --------- ---------- ---------- --------- ----------
Net increase (decrease) in cash (1,579) -- (2,262) (456) -- (4,297)
Cash at beginning of period 1,579 -- 2,351 5,013 -- 8,943
---------- --------- ---------- ---------- --------- ----------
Cash at end of period $ -- $ -- $ 89 $ 4,557 $ -- $ 4,646
---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- ---------- --------- ----------
</TABLE>
54
<PAGE>
(18) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
Doe Run
The Company Cayman
Excluding and Wholly
Guarantor -Owned The
Subsidiaries FPI Subsidiary Eliminations Company
------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 12,040 $ 1,585 $ 4,395 $ -- $ 18,020
Cash flows from investing activities:
Purchases of property, plant and equipment (12,414) (933) (129) -- (13,476)
Payment for acquisitions (5,227) -- (123,015) -- (128,242)
Investment in subsidiary (2,005) -- -- 2,005 --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities (19,646) (933) (123,144) 2,005 (141,718)
Cash flows from financing activities:
Proceeds from/(payments on) revolving loan and
short-term borrowings, net (9,399) -- 3,000 -- (6,399)
Proceeds from long-term debt 140,945 -- 225,000 -- 365,945
Payments on long-term debt (87,453) -- (125,000) -- (212,453)
Payment of deferred financing costs (4,938) -- (3,635) -- (8,573)
Loans from parent/susidiaries (24,091) (652) 24,743 -- --
Extraordinary item related to retirement of debt (638) -- -- -- (638)
Cash received from issuance of stock -- -- 2,005 (2,005) --
Payment of dividends (5,241) -- -- -- (5,241)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 9,185 (652) 126,113 (2,005) 132,641
---------- ---------- ---------- ---------- ----------
Net increase in cash 1,579 -- 7,364 -- 8,943
Cash at beginning of period -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Cash at end of period $ 1,579 $ -- $ 7,364 $ -- $ 8,943
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Doe Run Peru S.R.L.:
We have audited the accompanying consolidated balance sheets of Doe Run Peru
S.R.L. (a Peruvian company) and its subsidiary as of October 31, 1998 and
1997 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year ended October 31, 1998 and
for the period from October 23, 1997 to October 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Peru, which are substantially equivalent to those applied in the
United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Doe Run Peru S.R.L. and its subsidiary as of October 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for the
year ended October 31, 1998 and for the period from October 23, 1997 to
October 31, 1997, in conformity with accounting principles generally accepted
in the United States of America.
Countersigned by:
- ----------------------
Marco Antonio Zaldivar
C.P.C. Register 12477
Lima, Peru
November 25, 1998
56
<PAGE>
DOE RUN PERU S.R.L.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
As of October 31,
----------------------------
1998 1997
---- ----
A S S E T S
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,557 $ 5,013
Trade accounts receivable 30,935 390
Due from related parties 22,229 -
Inventories 77,335 59,032
Prepaid expenses and other current assets 21,923 2,729
--------- ---------
Total current assets 156,979 67,164
Property, plant and equipment, net 101,576 97,739
Deferred financing fees, net 448 -
--------- ---------
Total assets $ 259,003 $ 164,903
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 30,155 $ 23,151
Due to related parties 19,028 1,214
Accrued liabilities 16,588 9,373
--------- ---------
Total current liabilities 65,771 33,738
Revolving loans 28,000 -
Deferred income tax 2,566 2
Other long-term liabilities 7,200 8,346
--------- ---------
Total liabilities 103,537 42,086
--------- ---------
SHAREHOLDERS' EQUITY:
Capital stock, S/1 par value, 648,672,941 shares 247,926 247,926
authorized, issued and outstanding
Due from shareholder (125,000) (125,000)
Retained earnings (deficit) 32,540 (109)
--------- ---------
Total shareholders' equity 155,466 122,817
--------- ---------
Total liabilities and shareholders' equity $ 259,003 $ 164,903
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
57
<PAGE>
DOE RUN PERU S.R.L.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31,1998 AND FOR THE PERIOD
FROM OCTOBER 23, 1997 TO OCTOBER 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $458,291 $2,571
-------- ------
OPERATING COSTS AND EXPENSES:
Costs of sales 371,589 2,048
Fees and commissions to related parties 20,333 -
Selling, general and administrative expenses 15,216 32
Depreciation 6,751 151
------- -----
Total costs and expenses 413,889 2,231
------- -----
Income from operations 44,402 340
------- -----
OTHER INCOME (EXPENSE):
Interest expense (754) -
Interest income 458 -
Exchange difference (225) (28)
Other, net 1,362 -
------- -----
841 (28)
------- -----
Income before income tax 45,243 312
Income tax 12,594 421
------- -----
Net income (loss) $ 32,649 $ (109)
-------- ------
-------- ------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
58
<PAGE>
DOE RUN PERU S.R.L.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31,1998 AND FOR THE PERIOD
FROM OCTOBER 23, 1997 TO OCTOBER 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
Due from Retained earnings
Capital stock shareholder (deficit)
------------- ----------- -----------------
<S> <C> <C> <C>
Capital contributions $247,924 $ - $ -
Due from shareholder - (125,000) -
Net loss - - (109)
-------- --------- -------
BALANCE AS OF OCTOBER 31, 1997 247,924 $(125,000) $ (109)
Net income - - 32,649
-------- --------- -------
BALANCE AS OF OCTOBER 31, 1998 $247,924 $(125,000) $32,540
-------- --------- -------
-------- --------- -------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
59
<PAGE>
DOE RUN PERU S.R.L.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31,1998 AND FOR THE PERIOD
FROM OCTOBER 23, 1997 TO OCTOBER 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 32,649 $ (109)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred provision of income tax
and workers' profit sharing 3,306 3
Depreciation 6,751 151
Amortization of deferred financing fees 52 -
NET CHANGES IN ASSETS AND LIABILITIES:
Increase in trade accounts receivable (30,545) (390)
Increase in inventories (18,304) (3,465)
Increase in prepaid expenses and other
current assets (19,194) (1,347)
Increase in trade accounts payable 7,004 5,025
Increase in due to related parties 17,814 -
Increase in accrued liabilities 6,473 3,005
Increase in other long-term liabilities - 1,146
-------- -------
Net cash provided by operating activities 6,006 4,019
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of fixed assets (11,733) (129)
Acquisition of net assets of Metaloroya - (123,015)
-------- -------
Net cash used in investing activities (11,733) (123,144)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving loans 28,000 -
Increase in due from related parties (22,229) (123,786)
Payment of deferred financing fees (500) -
Capital contributions - 247,924
-------- -------
Net cash provided by financing activities 5,271 124,138
-------- -------
Net increase (decrease) in cash (456) 5,013
Cash at beginning of period 5,013 -
-------- -------
Cash at end of period $ 4,557 $ 5,013
-------- -------
-------- -------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 754 $ -
-------- -------
-------- -------
Peruvian income tax $ 16,951 -
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
60
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF OCTOBER 31, 1998 AND 1997
1. NATURE OF BUSINESS
Doe Run Peru S.R.L. (Doe Run Peru or the Company), is a Peruvian company
incorporated on September 8, 1997 and 99.9% owned by Doe Run Mining
S.R.L. (Doe Run Mining). See Note 2.
Doe Run Peru is engaged in the smelting and refining of polymetallic
concentrates, mainly copper, lead and zinc, which are sold primarily to
customers located outside of Peru as refined metals.
2. BUSINESS ACQUISITION
On October 23, 1997, Doe Run Peru acquired substantially all of the
outstanding shares of Empresa Metalurgica La Oroya S.A. (Metaloroya), a
Peruvian corporation which was formed for purposes of consummating the
sale of certain assets and liabilities of La Oroya, a division of
Centromin Peru S.A. (Centromin), an entity owned by the Peruvian
government.
The acquisition was made through a Contract of Stock Transfer, Capital
Increase and Stock Subscription (the Metaloroya Contract), which required
a capital increase in Metaloroya of US$126.5 million in exchange for 51%
of the shares and a payment of US$121.4 million for the transfer of the
remaining 49%. The acquisition has been accounted for as a purchase and
the effective purchase price of US$123 million, including transaction
costs of approximately US$2.5 million, has been allocated to the fair
value of the assets acquired and liabilities assumed. Because of the
bargain purchase inherent in the acquisition, the excess of the fair
value of the net assets acquired over the purchase price of approximately
US$157 million has been mainly used to reduce the value of the fixed
assets acquired.
On November 3, 1997, in the Extraordinary Shareholders' Meeting of Doe
Run Peru and Metaloroya the merger of Metaloroya into Doe Run Peru, the
surviving company, was approved. The merger was effective on December 30,
1997.
3. BASIS OF PRESENTATION
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The consolidated financial statements of the Company have been prepared
in accordance with the accounting principles generally accepted in the
United States of America (U.S. GAAP).
Unless otherwise indicated, all amounts in the financial statements and
in these notes are presented in thousands of U.S. dollars (US$).
61
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include all the accounts of the
Company and its wholly owned subsidiary, Doe Run Air S.A.C., after
eliminating intercompany balances and transactions, including gains and
losses resulting from such transactions. The minority interest is not
significant.
Doe Run Peru had no operations prior to the acquisition of Metaloroya.
Accordingly, the accompanying 1997 consolidated statements of operations
and cash flows reflect the results of operations for the period from
October 23, 1997 to October 31, 1997.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or net realizable value.
Effective November 1, 1997, the cost of refined metals and concentrates
for sale, as well as metals and concentrates in process are determined
under the last-in, first-out method (LIFO). For the period from October
23, 1997 to October 31, 1997, the Company used the FIFO method. The pro
forma effect of the retroactive application of LIFO is not material,
considering that the Company started operations on October 23, 1997. The
effect of the change in 1998 was to increase net income by US$2,160.
Inventory costs include concentrates purchased, labor, depreciation and
other production costs. Materials, supplies and spare parts are
principally stated at average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
calculated on a straight-line basis at the rates indicated in Note 9.
Material improvements and renewals are capitalized.
Routine or unanticipated repair and maintenance expenditures, which do
not extend the useful life or increase the productive capacity of the
asset, are charged to operations as incurred. Major expenditures required
to maintain the originally anticipated productive capacity and life of
the assets, for which both the amount and timing can be reasonably
estimated, are deferred and charged to operations over the period through
the next anticipated maintenance date.
DEFERRED FINANCING FEES
Deferred financing fees represent fees paid in conjunction with the
acquisition of revolving loans and are amortized using the interest
method over the term of the respective line of credit.
REVENUE RECOGNITION
Sales are recorded when title passes to the customer, which typically
occurs at the time of shipment. Sales are recorded based on estimated
weights, assays and prices using applicable customer agreements and hedge
contracts. All such sales are adjusted when final weights, assays and
prices are determined. Adjustments to provisional billings are made in
the period during which additional information becomes available.
INCOME TAX
Under Statement of Financial Accounting Standard N(0)109, "Accounting for
Income Taxes" (SFAS 109), which designates the liability method as the
required accounting method for taxes under U.S. GAAP, the Company
recognizes the tax effect of the temporary differences between the
financial reporting basis of assets and liabilities and the related tax
basis.
62
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. REMEASUREMENT INTO U.S. DOLLARS
The accounting records of Doe Run Peru and its subsidiary, which are kept
in Peruvian nuevos soles, have been re-measured into U.S. dollars, their
functional currency, following the methodology established by SFAS 52:
(a) Non-monetary accounts have been re-measured at historical exchange
rates.
(b) Monetary accounts in Peruvian currency have been re-measured at free
market average exchange rates in effect at October 31, 1998, which
are S/3.060 per each US$1 for assets and S/3.072 per each US$1 for
liabilities as per Superintendency of Banks and Insurances. The
exchange rates in effect at October 31, 1997 were S/2.698 for assets
and S/2.714 for liabilities.
(c) Income and expenses have been re-measured at the average monthly
exchange rates. Cost of sales was determined from its components
once re-measured. The net effect of foreign exchange difference
has been reflected in the accompanying statement of income.
6. FOREIGN CURRENCY TRANSACTION AND EXCHANGE RISK EXPOSURE
Under current law, foreign currency transactions are made through the
Peruvian financial banking system at free market exchange rates.
As of October 31,1998 and 1997, the assets and liabilities denominated in
Peruvian nuevos soles are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
Cash S/ 369 S/ -
Prepaid expenses and other current
Assets 58,584 7,396
------- -----
58,953 7,396
------- -----
Liabilities:
Accrued liabilities 48,495 6,229
------- -----
48,495 6,229
------- -----
Net position S/10,458 S/1,167
------- -----
------- -----
</TABLE>
The net effects of exchange differences applicable to the net asset
positions denominated in Peruvian Nuevos Soles were losses of US$225 and
US$28 for the year ended October 31, 1998 and for the period from October
23, 1997 to October 31, 1997, respectively, which have been reflected in
the accompanying consolidated statements of operations.
63
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES
Inventories consist of the following as of October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Refined metals and concentrates for sale $ 3,857 $ 5,324
Metals and concentrates in process 54,534 43,188
Materials, supplies and spare parts 18,944 10,520
------- ------
$77,335 $59,032
------- ------
------- ------
</TABLE>
Management believes that there is no need to provide a reserve for
obsolescence for materials, supplies and spare parts as of October 31,
1998. As part of the acquisition described in Note 2, Centromin did not
transfer to the Company obsolete materials as of October 23, 1997.
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of
October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Credit on Peruvian value added tax $10,323 $ 385
Prepaid Peruvian income tax 6,896 -
Other 4,704 2,344
------- ------
$21,923 $2,729
------- ------
------- ------
</TABLE>
The Company may recover the value added tax (VAT) related to exports. The
VAT paid on purchases can be offset against the VAT resulting from local
sales, Peruvian income tax and other taxes collected by the Peruvian
Public Treasury. In addition, the Company may apply for a refund in the
form of cash or negotiable credit notes from the tax authorities.
64
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following as of October 31,
1998 and 1997:
<TABLE>
<CAPTION>
Annual
Depreciation
Rate 1998 1997
------------------- ---- ----
<S> <C> <C> <C>
Costs-
Land - $ 5,866 $ 5,866
Buildings and improvements 5% and 10% 16,619 16,619
Machinery and equipment 6.67% 73,722 70,388
Transportation units 33.33% 2,016 1,955
Other equipment 10% 6,311 2,933
Construction in progress - 3,943 129
-------- ------
108,477 97,890
Less - Accumulated depreciation (6,901) (151)
-------- ------
$101,576 $97,739
-------- ------
-------- ------
</TABLE>
10. REVOLVING LOAN
Doe Run Peru entered into a revolving credit facility, dated June 11,
1998 (the Doe Run Peru Revolving Credit Facility), with a Peruvian bank.
Under the terms of this facility, Doe Run Peru may borrow up to US$40
million. Availability under the facility is limited to a percentage of
eligible accounts receivable and inventory. Actual availability at
October 31, 1998, after deducting the outstanding revolving loan of US$28
million and letters of credit and customs bonds of US$8.2 million was
US$3.8 million. Individual loans under the facility must be US$1 million
or more. The Doe Run Peru Revolving Credit Facility has a term of four
years.
Interest is payable at LIBOR (1-month, 3-month or 6-month, depending on
the length of the loan) plus 1.5% per annum for the first year of the
term of the facility. In the event of nonpayment of any part of the
principal or interest owed, Doe Run Peru would pay additional interest of
3% per annum. The average interest rate as of October 31, 1998 was 7.02%.
The Revolving Credit Facility is guaranteed with first and preferred
pledge on inventories (except for materials, supplies and spare parts)
and future collections from customers.
The Doe Run Peru Revolving Credit Facility contains certain covenants
that limit indebtedness, capital expenditures, investments and restrict
the payment of dividends in case of default. If Doe Run Peru were to fail
to comply with these conditions and such noncompliance were not cured
within the applicable cure period, such noncompliance would constitute an
event of default that could result in the termination of the Revolving
Credit Facility and/or the acceleration of all amounts due thereunder.
Management believes that the Company is in compliance with the covenants
as of October 31, 1998.
65
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of October 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Salaries, wages and fringes $ 4,841 $3,822
Workers' profit sharing 2,762 35
Due to power company 1,895 -
Accounts payable to contractors 1,476 -
Taxes payable 1,419 1,777
Severance indemnities 1,294 1,238
Other accrued liabilities 2,901 2,501
------- ------
$16,588 $9,373
------- ------
------- ------
</TABLE>
In accordance with current workers' profit sharing governmental
regulations in Peru, the Company's workers have the right to receive
eight percent of the taxable income (determined on individual and not
consolidated basis), of which 50 percent is distributed among all
employees based on the number of days worked by each employee and the
remaining amount is distributed in proportion to their salaries. Such
profit sharing, which is tax deductible, is limited to 18 times the
annual salary for each worker. Any excess is to be reserved and used for
training of the workers.
12. OTHER LONG-TERM LIABILITIES
Other long-term liabilities include estimated closure cost of a zinc
ferrite site of US$7.2 million, as explained in Note 15.
13. TAXATION
(a) Doe Run Peru and its subsidiary are subject to the Peruvian
regulations. The statutory income tax rate of 30% is applied on
the taxable income of each company and not on the consolidated
taxable basis.
(b) Doe Run Peru is a party to a Tax Stabilization Agreement and a
Contract of Guarantees and Measures to Promote Investments with
the Peruvian Government as follows:
TAX STABILIZATION AGREEMENT
The Tax Stabilization Agreement expires on December 31, 2006.
Under this agreement, Doe Run Peru will use tax rules prevailing
on November 6, 1997. The benefits are the following:
- Utilization of the tax rules prevailing on April 25, 1994.
In exercise of the regulation permitted in the tenth clause
of the Tax Stabilization Agreement, Doe Run Peru adopted
the tax rules prevailing on November 6, 1997.
- Custom duties will be calculated at rates ranging from 15%
to 25%
66
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- Free commercialization of its products.
- No restrictions on the use of proceeds from export sales.
- Free conversion of foreign currency generated by local
sales.
- No discrimination in foreign currency transactions.
CONTRACT OF GUARANTEES AND MEASURES TO PROMOTE INVESTMENTS
On December 30, 1997, Doe Run Peru signed a Contract of Guarantees
and Measures to Promote Investments. This agreement is effective
beginning in the calendar year ended December 31, 2007, provided
that Doe Run Peru complies with the committed investments related
to the improvements of the facilities [see note 15(b)]. The
benefits are similar to those established in the Tax Stabilization
Agreement, except for the fact that Doe Run Peru will use the tax
rules prevailing on December 23, 1997.
(c) The provision for Peruvian income tax is comprised of the
following for the year ended on October 31, 1998 and for the
period from October 23, 1997 to October 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current provision $10,030 $419
Deferred provision 2,564 2
------- ----
Total $12,594 $421
------- ----
------- ----
</TABLE>
Peruvian income tax expense differed from the amount computed by
applying the statutory income tax rate of 30% to income before
income tax expense as a result of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income tax expense at statutory rate $13,573 $ 93
Increase (reduction) in income tax expense
Resulting from:
Depreciation of the tax basis in fixed assets
that exceeds the U.S.GAAP book basis (5,584) -
Effect of converting Peruvian nuevos soles into U.S.
dollars 2,877 180
Nondeductible expenses 1,134 148
Other, net 594 -
------- ----
$12,594 $421
------- ----
------- ----
</TABLE>
67
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liability, included in
the deferred income tax caption of the consolidated balance sheet,
are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability:
Property, plant and equipment $2,640 $ 2
Inventories 397
------ ---
3,037 2
------ ---
Deferred tax asset:
Accrued liabilities (248) -
Deferred workers' profit sharing (223) -
---- ---
(471) -
------ ---
Deferred tax liability, net $2,566 $ 2
------ ---
------ ---
</TABLE>
14. SHAREHOLDERS' EQUITY
The capital stock is comprised of 648,678,241 authorized common shares,
all of which have been subscribed and paid-in, with a face value of one
Peruvian nuevos soles each.
Under current Peruvian regulations, there are no restrictions on dividend
remittance abroad or the repatriation of foreign capital. Dividend
distribution is exempt from Peruvian income tax.
15. COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENTS
(a) According to the Contract described in Note 2, Doe Run Peru
is obligated to expend US$120 million through October 23, 2002
to expand and modernize its operations, including certain
expenditures to comply with environmental regulations within
Peru, as discussed below. In the event that Doe Run Peru has
not fulfilled its obligations under the investment commitment
by the end of October 23, 2002, it will be obligated to pay in
2002 a penalty to Centromin equal to 30% of any shortfall. As
of October 31, 1998, Doe Run Peru has expended approximately
US$10.6 million.
(b) According to the Contract of Guarantees and Measures to Promote
Investments mentioned in Note 13(b), Doe Run Peru is obligated to
expend US$85.5 million through December 31, 2006 to expand and
modernize its facilities, including environmental expenditures.
The related investments can be considered as part of the US$120
million investment discussed in the above paragraph. Through
October 31, 1998, Doe Run Peru has invested US$4.7 million.
ENVIRONMENTAL MATTERS
On October 17, 1997, Doe Run Peru signed with the Peruvian government an
Administrative Environmental Stabilization Contract, the purpose of which
is to provide environmental stability to resolve the environmental
matters included in the Environmental Management and Adequation Program
(PAMA). Accordingly, future
68
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
changes in legal rules and maximum permissible levels in the matters
covered in the PAMA would not affect Doe Run Peru for the remaining nine
years in which the PAMA is in effect.
Doe Run Peru's management estimates that it will expend US$165.6 million
through the year 2006 in order to meet its obligations under the PAMA.
Through October 31, 1998, Doe Run Peru had expended approximately US$2.7
million. Management expects that the cost of future investments will be
capitalized in future periods and depreciated over periods to be
benefited.
In accordance with the Contract described in Note 2, damages caused to
the environment on or prior to October 23, 1997, as well as any future
claims originated by those damages are the responsibility of Centromin.
These obligations of Centromin have been guaranteed by the Republic of
Peru through a Supreme Decree.
POTENTIAL TAX ASSESSMENTS
All existing and pending tax contingencies at the time of the acquisition
of Metaloroya were retained by Centromin.
Peruvian income tax returns from October 24, 1997 to the date of this
report are pending examination by the tax authorities. If tax assessments
were made, any taxes or surcharges that must be paid would be charged to
expenses in the years in which they are assessed. In the opinion of the
Company's management, there are no matters that should result in
significant tax contingencies.
LITIGATION
All existing and pending litigation at the time of the acquisition of
Metaloroya was retained by Centromin. The Company is from time to time, a
party to litigation arising in normal course of its business. Management
believes that none of these actions will have a material adverse effect
on the financial position or results of operation of the Company.
SALES COMMITMENTS AND CONCENTRATION
Doe Run Peru derives its revenue from the sale of its refined metals and
other products to numerous customers. Doe Run Peru's three largest
customers accounted for: 9%, 6% and 5%, respectively, of net sales in the
year ended October 31, 1998. The percentages in the period from October
23, 1997 to October 31, 1997 were 20%, 19% and 17%. The customers have
sales contracts, under which the Company will supply products at prices
based on international market quotations.
69
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
HEDGING
The Company utilizes derivative financial instruments to reduce certain
market risks and to protect its Peruvian source income. These markets
risk consist of the impact of changes in prices of base and precious
metals. The world market prices for the Company's products fluctuate
widely and its revenues and expenses are directly related to those
prices.
The Company's derivative activities are limited in volume and confined to
risk management activities. The Company does not hold or issue financial
instruments for trading purposes.
The Company enters into futures contracts and options to manage
well-defined commodity price risks related to its inventories and future
production. The fair market value of the Company's hedging positions as
of October 31, 1998 is the difference between quoted prices at the
respective period-end and the contract settlement value and represents
the estimated net cash the Company would receive (pay) if the contracts
were canceled on the respective dates. As management has designated these
contracts as hedges, the related gains and losses will be recognized in
net sales when the related production is sold. The Company's open hedging
positions as of October 31, 1998 were (numbers not in thousands):
Call options contracts
<TABLE>
<CAPTION>
Fair market
Metal Quantity Price range Value Period
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Copper 3,583 tons $0.7484/lb to $0.8391/lb ($11,058) Nov 98/Dec 98
Lead 992 tons $0.2381/lb to $0.2812/lb ($1,900) Nov 98/Dec 98
Zinc 1,102 tons $0.4535/lb to $0.4990/lb ($2,000) Dec 98
Silver 325,000 oz $5.00/oz to $6.00/oz ($120,017) Nov 98/Jun 99
Gold 1,500 oz $300.0/oz to $300.0/oz - Dec 98
Put options contracts
<CAPTION>
Fair market
Metal Quantity Price range Value Period
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Silver 370,000 Oz $4.50/oz to $5.25/oz ($128,000) Nov 98/Jun 99
Zinc 2,480 tons $0.4400/lb to $0.4536/lb ($117,274) Nov 98/Dec 98
Forward contracts
<CAPTION>
Fair market
Metal Quantity Price range Value Period
----- -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Silver 260,000 Oz $4.97/oz to $5.13/oz ($200) Nov 98
</TABLE>
ZINC FERRITE DISPOSAL
70
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
According to the Contract described in Note 2, the Company has the option
to continue to use the existing zinc ferrite disposal site until October
23, 2000, after which it can either take ownership of the site or develop
a new site. If the Company decides to take ownership of the site, it will
be responsible for its ultimate closure costs which have been estimated
at US$7.2 million and recorded as a reserve in the caption other
long-term liabilities in the accompanying consolidated balance sheets. If
the Company decides to develop a new site, it is required to pay to
Centromin the US$7.2 million estimated closure costs.
PURCHASE OPTION
In accordance with the contract discussed in Note 2, Centromin granted to
Doe Run Peru an option to purchase up to 30% of the shares of Empresa
Minera Paragsha S.A. (a lead and zinc mine located in the highlands of
Peru) or up to 30% of the shares in Empresa de Electricidad de los Andes
S.A. (a Peruvian power company) at fair market value. Currently, the
option has not been exercised.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt were estimated using
discounted cash flow analysis, based on the estimates of incremental
borrowing rates for similar types of borrowing arrangements. At October
31, 1998 and 1997, the fair values of the Company's financial
instruments, except for the hedge positions described in Note 15, were
not materially different from their carrying amounts.
17. RELATED PARTY TRANSACTIONS
The Company has signed the following agreements with Doe Run Mining and
Doe Run Resources Corporation (Doe Run Resources), indirect parent of Doe
Run Mining through its subsidiary Doe Run Cayman Ltd.:
(a) Effective October 23, 1997, Doe Run Peru entered into a Technical,
Managerial and Professional Agreement with Doe Run Resources.
Pursuant to this agreement, Doe Run Resources provided to Doe Run
Peru professional staffing and equipment for performing technical,
managerial and professional services for the period from October
23, 1997 to March 8, 1998. The agreed fee was US$3.8 million.
(b) On March 9, 1998, Doe Run Peru entered into a Technical,
Managerial and Professional Agreement with Doe Run Mining.
Pursuant to this agreement, Doe Run Mining provides to Doe Run
Peru staffing and equipment for performing technical, managerial
and professional services. Doe Run Peru pays 2% of Doe Run Peru's
cash operating expenses (excluding the sales agency commissions to
Doe Run Resources and Doe Run Mining) and 10% of Doe Run Peru's
capital expenditures. The amount expensed for the period from
March 9 to October 31, 1998 is US$5.8 million.
(c) On January 1, 1998, Doe Run Peru entered into a Foreign Sales
Agency and Hedging Services Agreement. Pursuant to the terms and
conditions included in the agreement, Doe Run Resources agreed to
perform marketing and selling of metallurgical products and
trading and hedging services for the period from January 1, 1998
to March 8, 1998. The commission was 3% of the foreign sales and
amounted to US$1.6 million.
On March 9, 1998, Doe Run Peru entered into an agreement with
conditions similar to the above-described agreement. The amount
expensed for the period March 9 to October 31, 1998 was US$6.8
million.
71
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(d) On March 9, 1998, Doe Run Peru entered into a Domestic Sales
Agency Agreement. Pursuant to the terms and conditions included in
the agreement, Doe Run Mining agreed to perform marketing and
selling of metallurgical products and trading. The commission is
3% of the domestic sales. The amount expensed for the period March
9 to October 31, 1998 was US$2.3 million.
In addition to the above described, the following intercompany
transactions occurred during the periods ended October 31, 1998 and 1997:
(a) On October 23, 1997, Doe Run Peru granted to its shareholder, Doe
Run Mining, a US$125 million loan which does not accrue interest
and matures in October 23, 2002. This receivable is shown net of
the shareholders'equity.
(b) As of October 31, 1998 the Company has a receivable from Doe Run
Mining of US$17.6 million related to payments made on behalf of
this entity (primarily, interest on loans and repayments of a
revolving loan) and a receivable from Cobriza of US$4.6 million
related to payments made on behalf of this company in connection
with its current operations.
(c) As of October 31, 1998, Doe Run Peru had a payable to Doe Run
Resources of US$2.5 million (US$1.2 million as of October 31,
1997) related to payments made on behalf of the Company for the
acquisition of Metaloroya. This payable did not accrue interest
and was paid during 1998.
As a result of these transactions, the Company has accounts receivable
and payable as of October 31, 1998 of US$22,229 and US$19,028 (US$1,214
as of October 31, 1997), respectively, which are shown separately in the
consolidated balance sheets.
Doe Run Cayman and its wholly-owned subsidiary, Doe Run Mining, and Doe
Run Peru have jointly and severally, fully, unconditionally guaranteed
US$200 million 11.25% senior notes due 2005 and US$55 million floating
interest rate senior notes due 2003, issued by Doe Run Resources
(collectively, the Unsecured Notes). Additionally, the above-referred
companies together with Doe Run Air S.A.C., Doe Run Development S.A.C.
and Empresa Minera Cobriza S.A. have jointly and severally, fully,
unconditionally guaranteed US$50 million aggregate principal amount of
11.25% senior Secured Notes due 2005, issued by Doe Run Resources (the
Secured Notes).
The guarantee of Doe Run Peru is contractually subordinated to the
indebtedness of Doe Run Peru under the Revolving Credit Facility
described in Note 10.
The Secured Notes and the Unsecured Notes contain certain covenants that
limit the ability of Doe Run Peru and its subsidiary to, among other
things, incur additional indebtedness, make certain restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to Doe Run Resources
and its subsidiaries, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets. Management believes that the Company is
in compliance with these covenants as of October 31, 1998.
72
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. GEOGRAPHIC DATA
The following is an analysis of net sales by geographic region for the
year ended October 31, 1998 and for the period from October 23 to October
31, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
USA $159,725 $ -
Latin America 208,516 2,571
Asia 55,376 -
Europe 34,674 -
------- -----
$458,291 $2,571
------- -----
------- -----
</TABLE>
19. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(a) The Financial Accounting Standards Board has issued a new
statement. Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), introduces a new model for segment
reporting, called "management approach".
The management approach is based on the way management organizes
segments within a company for making operating decisions and
assessing performance. SFAS 131 will be effective for the company
in fiscal 1999 with restatement of prior period. Management
believes that adoption of SFAS 131 will not have an impact on its
method of reporting since it believes that its business operates
in one reportable segment.
(b) In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivatives Instrument and Hedging activities" (SFAS 133)
which establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its
fair value. SFAS 133 requires that changes in the derivatives
fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivatives gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge
accounting.
SFAS 133 is effective for the Company's fiscal 2000. A company may
also implement SFAS 133 as of beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS 133 can not be applied retroactively and
must be applied to (i) derivative instruments, (ii) certain
derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31,
1997 (and, at the Company's election before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS 133
on the financial statements and has not determined the timing of
or method of adoption. Management believes that the Company's
derivative financial instruments qualify as hedges, therefore,
such adoption is not likely to increase the volatility of earnings
or other comprehensive income.
73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Empresa Minera del Centro del Peru S.A. -Centromin Peru S.A.:
We have audited the accompanying statements of assets and liabilities
of La Oroya Metallurgical Complex (La Oroya), a division of the Peruvian
state-owned corporation Empresa Minera del Centro del Peru S.A.- Centromin Peru
S.A. (Centromin), as of December 31, 1996 and October 23, 1997 and the related
statements of revenues and expenses, changes in net assets and cash flows for
each of the years in the two-year period ended December 31, 1996 and the period
from January 1 to October 23, 1997. These financial statements are the
responsibility of Centromin's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 2, the above financial statements which have been
prepared from Centromin's accounting records, remeasured into U.S. dollars and
prepared following generally accepted accounting principles in the United States
of America, are intended to reflect separately the assets, liabilities, revenues
and expenses of La Oroya, as if La Oroya had operated as a separate entity and
applying certain allocations by Centromin on the basis described in Note 4 and
therefore, they may not necessarily reflect the financial position and results
of operations of La Oroya as if it were effectively a separate legal entity for
the periods indicated above.
In our opinion, the financial statements referred to above, present
fairly, for the purpose described in the preceding paragraph, the assets and
liabilities of La Oroya as of December 31, 1996 and October 23, 1997, and its
revenues and expenses and cash flows for each of the years in the two-year
period ended December 31, 1996 and the period from January 1 to October 23,
1997, in conformity with accounting principles generally accepted in the United
States of America.
MEDINA, ZALDIVAR Y ASOCIADOS,
a member firm of Andersen Worldwide SC
Countersigned by:
Marco Antonio Zaldivar
C.P.C. Register 12477
Lima, Peru
December 5, 1997
74
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A. - CENTROMIN PERU S.A.
LA OROYA DIVISION
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 23,
1996 1997
----- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and deposits in banks .................... $ 582 $ 79
Trade accounts receivable ..................... 30,277 10,423
Inventory:
Refined metals and concentrates for sale .... 8,930 14,115
Metal and concentrates in process ........... 43,555 43,007
Materials, supplies and spare parts ......... 8,303 11,226
-------- --------
60,788 68,348
-------- --------
Prepaid expenses .............................. 1,591 1,922
-------- --------
Total current assets ........................ 93,238 80,772
-------- --------
DEFERRED TAX AND WORKERS' PROFIT SHARING ........ 4,262 2,853
PROPERTY, PLANT AND EQUIPMENT, net .............. 50,814 46,145
-------- --------
Total assets .................................... $148,314 $129,770
-------- --------
-------- --------
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Bank loans .................................... $ 15,068 --
Accounts payable .............................. 9,026 $ 16,732
Remuneration and taxes payable ................ 4,709 4,535
Advances from customers ....................... 10,750 --
Accrued liabilities ........................... 4,477 2,369
Severance indemnities ......................... 2,186 1,185
Deposits of personnel's severance indemnities . 1,973 --
Current portion of environmental liabilities .. 730 2,530
-------- --------
Total current liabilities ................... 48,919 27,351
-------- --------
DEFERRED TAX AND WORKERS' PROFIT SHARING ........ -- --
ENVIRONMENTAL LIABILITIES, net of current
portion........................................ 20,820 19,020
-------- --------
Total liabilities ........................... 69,739 46,371
-------- --------
NET ASSETS ...................................... 78,575 83,399
-------- --------
Total liabilities and net assets ................ $148,314 $129,770
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A. - CENTROMIN PERU S.A.
LA OROYA DIVISION
STATEMENTS OF REVENUES AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD
DECEMBER 31, JANUARY 1 TO
---------------------- OCTOBER 23,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
NET SALES ............................ $450,929 $456,797 $352,805
OPERATING COSTS AND EXPENSES:
Costs of sales .................... 397,524 397,158 305,959
Depreciation and amortization ..... 4,729 5,353 4,730
Administrative and general ........ 4,479 5,660 5,223
Selling and marketing ............. 5,972 6,669 4,808
Workers' profit sharing ........... 2,995 1,197 2,284
Personnel reduction costs ......... 2,504 3,894 1,490
-------- -------- -------
418,203 419,931 324,494
-------- -------- -------
Operating income ..................... 32,726 36,866 28,311
-------- -------- -------
OTHER INCOME (EXPENSES):
Interest and bank charges ......... (2,100) (3,332) (832)
Exchange gains, net ............... 2,050 1,884 269
Other, net (see Note 15) .......... (3,848) (25,401) (1,486)
-------- -------- -------
(3,898) (26,849) (2,049)
-------- -------- -------
Income before provision for income
tax................................. 28,828 10,017 26,262
PROVISION FOR INCOME TAX ............. 10,332 4,128 7,879
-------- -------- -------
Net income ........................... $ 18,496 $ 5,889 $ 18,383
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
76
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A. - CENTROMIN PERU S.A.
LA OROYA DIVISION
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NET ASSETS
----------
<S> <C>
BALANCE AS OF JANUARY 1, 1995 $ 64,490
Net income 18,496
Transfers from Centromin 24,681
---------
BALANCE AS OF DECEMBER 31, 1995 107,667
Net income 5,889
Transfers to Centromin (34,981)
---------
BALANCE AS OF DECEMBER 31, 1996 78,575
Net income 18,383
Transfers to Centromin (13,559)
---------
BALANCE AS OF OCTOBER 23, 1997 $ 83,399
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A. - CENTROMIN PERU S.A.
LA OROYA DIVISION
STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD JANUARY 1 TO
DECEMBER 31, OCTOBER 23,
------------------- -------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 18,496 $ 5,889 $ 18,383
Add (less):
Depreciation and amortization 4,729 5,353 4,730
Deferred provision (benefit) of income tax and workers'
profit sharing 1,406 (6,360) 1,409
Increase in environmental liabilities - 21,550 -
Other (1,281) (610) (61)
Net changes in assets and liabilities:
Decrease (increase) in trade accounts receivables 1,679 (14,942) 19,854
Decrease (increase) in inventory (35,035) 54,208 (7,560)
Decrease (increase) in prepaid expenses 926 933 (331)
Increase (decrease) in accounts payable (8,786) (8,784) 7,706
Increase (decrease) in remuneration and taxes payable 1,210 (566) (174)
Advances from (payments to) customers, net (3,749) 2,825 (10,750)
Increase (decrease) in accrued liabilities 1,004 1,211 (2,108)
Decrease in severance indemnities (5,324) (19,042) (1,001)
Increase (decrease) in deposits of personnel's severance
indemnities 3,579 (1,606) (1,973)
-------- -------- --------
Net cash provided by (used in) operating activities (21,146) 40,059 28,124
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of bank loans, net (3,534) (4,558) (15,068)
Transfers (to) from Centromin 24,681 (34,981) (13,559)
-------- -------- --------
Net cash provided by (used in) financing activities 21,147 (39,539) (28,627)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND DEPOSITS IN BANKS
1 520 (503)
CASH AND DEPOSITS IN BANKS AT BEGINNING OF THE PERIOD
61 62 582
-------- -------- --------
CASH AND DEPOSITS IN BANKS AT THE END OF THE PERIOD
$ 62 $ 582 $ 79
-------- -------- --------
-------- -------- --------
CASH FLOWS ADDITIONAL INFORMATION
Interest paid $ 2,096 $ 3,017 $ 1,776
Income tax paid (see Note 3) $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
AS OF OCTOBER 23, 1997 AND DECEMBER 31, 1996 AND 1995
(1) BUSINESS AND DISPOSITION
The metallurgical complex of La Oroya (hereinafter "La Oroya") a
division of Empresa Minera del Centro del Peru S.A.?Centromin Peru S.A.
(hereinafter "Centromin") is engaged in the smelting and refining of polymetalic
concentrates and marketing and sale of refined metals. La Oroya primarily smelts
and refines the concentrates of polymetalic ores from the mining units of
Centromin, which include copper, lead and zinc. The operations of La Orya are
conducted through the Centromin organization systems, which include
administrative, legal, operating tasks, and all other necessary functions that
support its operations.
Centromin is engaged in mining activities as specified by the General
Mining Law (Supreme Decree 014-92-EM), as well as in industrial activities
necessary to sustain mining operations.
On October 23, 1997, Centromin Peru S.A. contributed certain assets and
liabilities of La Oroya to a newly formed company, Metaloroya S.A.
("Metaloroya"), in exchange for shares in Metaloroya. Concurrent with the
transfer, Centromin sold all of the shares received to Doe Run Peru S.R.L. ("Doe
Run Peru"), a wholly owned subsidiary of Doe Run Mining S.R.L., an indirect
wholly owned subsidiary of The Doe Run Resources Corporation.
(2) BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial statements of La Oroya division have been prepared in
accordance with the accounting principles generally accepted in the United
States of America ("U.S. GAAP"), which differ in certain significant respects
from generally accepted accounting principles in Peru. In addition, these
financial statements were prepared based on Centromin's accounting records
related to the metallurgical complex of La Oroya as if La Oroya had operated as
a separate entity and applying certain allocation methodologies, as specified in
Note 4.
Unless otherwise indicated, all amounts in the financial
statements and in these notes are presented in thousands of U.S. dollars
(US$).
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is stated at the lower of cost or net realized value. The
cost of refined metals and concentrates for sale, as well as metal and
concentrates for sale, as well as metal and concentrates in process is
determined under the first-in, first-out method ("FIFO"). The cost of materials,
supplies and spare parts is determined using the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated on a straight-line basis at the rates indicated in Note 8.
Maintenance and minor repairs are charged to expenses as incurred.
Material improvements and renewals are capitalized.
79
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
In accordance with the Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), La Oroya's management has determined
that there is no impairment of its long-lived assets.
SEVERANCE INDEMNITIES
Severance indemnities are determined according to governmental
regulations and are provided for on an accrual basis for the amount, which
would be paid if all personnel were to retire at the date of each statement
of assets and liabilities. Under Legislative Decree 650, an accrued liability
was established to recognize the liability for personnel severance
indemnities earned by employees prior to December 31, 1990. These severance
indemnities, which are adjusted for subsequent wage increases, are required
to be funded over a maximum term of ten years, beginning in June 1991. The
funding of this obligation eliminates any adjustment for subsequent wages
increases. In 1996, La Oroya fully funded this obligation. Liabilities
relating to personnel severance indemnities earned by employees after 1991
are accrued and semi-annually deposited into workers' individual bank
accounts.
REVENUE RECOGNITION
Sales are recorded when title passes to the customer, which occurs at
the time of shipment. With respect to concentrates, sales are recorded based on
estimated weights, assays and prices. All such concentrate sales are adjusted
when final weights, assays and prices are known. Adjustments to the provisional
billings are made in the period during which additional information becomes
available.
INTEREST CAPITALIZATION
Interest expense allocable to the construction of the oxygen plant of
US $4,297 was capitalized until the start-up of its operations in 1994.
Capitalized interest is expensed over the depreciable life of the asset to which
it relates.
INCOME TAX AND WORKERS' PROFIT SHARING
La Oroya is included in Centromin's income tax return. According, La
Oroya has provided income tax and remitted to Centromin any tax payable,
calculated as if it were filing separate tax returns.
Under Statement of Financial Accounting Standard No. 109, "Accounting
for Income taxes" ("SFAS 109"), which designates the liability method as the
required accounting method for taxes under U.S. GAAP, La Oroya recognizes the
tax effect of certain temporary differences between the financial reporting
basis of assets and liabilities and the related tax basis.
Likewise, La Oroya recognizes the effect of temporary differences
between book and tax basis of assets and liabilities related to workers' profit
sharing on a basis similar to that used for income taxes.
(4) ALLOCATION METHODOLOGIES
As described in Note 2, La Oroya's transactions are recorded in
Centromin's accounting systems. The operations of La Oroya conducted through
Centromin have been presented using assumptions and allocations which management
believes are reasonable. They include the following:
(a) Centromin's assets and liabilities not specifically
identifiable to La Oroya have not been allocated in the
accompanying financial statements. These are cash and bank
accounts, credit on value-added tax and liabilities to certain
suppliers of administrative services.
80
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
(b) Sales have been allocated based on the preliminary and final
billings of the exported refined metals and concentrates
identified with La Oroya.
(c) Costs of production have been allocated based on the
following:
- Concentrates acquired from Centromin's mining units
were transferred at market value as if La Oroya were
an independent party.
- The depreciation charge was based on the fixed
assets specifically identifiable to La Oroya.
- Other allocated costs, included power, were based on
the ratio of La Oroya's usage to total usage by
Centromin (mainly time incurred and consumption of
goods and services).
(d) Expenses relating to corporate accounting, finance and
administrative services provided by Centromin have been
allocated based on the ratio of La Oroya's usage to total
usage by Centromin.
(e) Selling and marketing expenses have been allocated based on
usage estimated by management.
(f) Interest and bank charges are those which are directly related
to La Oroya's bank loans and overdrafts obtained during the
year.
(g) Workers' profit sharing and income tax were provided based on
the actual results as if La Oroya had been operating as a
separate entity.
(5) REMEASUREMENT INTO U.S. DOLLAR
La Oroya maintains its accounting records in Peruvian Nuevos Soles.
Those financial statements have been remeasured into U.S. dollars, which is its
functional currency, for all periods presented, in accordance with SFAS 52 using
the following methodology:
(a) Non-monetary accounts have been remeasured at historical
exchange rates.
(b) Monetary accounts in Peruvian currency have been remeasured at
the following free market exchange rates for buying (assets)
and selling (liabilities) in effect at the end of the
respective period, which are in Peruvian Nuevos soles per U.S.
dollar:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
---------------- OCTOBER 23,
1995 1996 1997
---- ---- -----------
<S> <C> <C> <C>
Assets 2.299 2.596 2.667
Liabilities 2.322 2.603 2.669
</TABLE>
(c) Income and expenses, other than depreciation, that have
been remeasured at the historical exchange rates that applied
to the related assets, have been remeasured at average monthly
basis at average exchange rates. Cost of sales was determined
from its components once remeasured.
81
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
The net effect of foreign exchange difference for each period is reflected in
the accompanying statement of revenues and expenses.
(6) FOREIGN CURRENCY TRANSACTIONS AND EXCHANGE RISK EXPOSURE
Under current law, foreign currency transactions are made through the
financial banking system at free market exchange rates.
The assets and liabilities denominated in Peruvian Nuevos Soles are as
follows (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 23,
1996 1997
------------ -----------
<S> <C> <C>
Assets -
Cash and deposits in banks 184 169
Accounts receivable 1,602 3,698
--------- ---------
1,786 3,867
--------- ---------
Liabilities -
Trade accounts payable 6,919 6
Remuneration and taxes payable 12,257 15,298
Accrued liabilities 9,504 2,200
--------- ---------
28,680 17,504
--------- ---------
Net position (26,894) (13,637)
--------- ---------
--------- ---------
</TABLE>
The net effects of exchange differences were US$2,050 and
US$1,884 for the 1995 and 1996 years, respectively and US$269 for the
period from January 1 to October 23, 1997.
82
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
(7) MATERIALS, SUPPLIES AND SPARE PARTS
This account is comprised of the following:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 23,
1996 1997
------------ -----------
<S> <C> <C>
Materials, supplies and spare parts $8,335 $11,748
Supplies in transit 490 -
------ -------
8,825 11,748
------ -------
Less - allowance for obsolescence (522) (522)
------ -------
$8,303 $11,226
------ -------
------ -------
</TABLE>
In management's opinion, the balance of the allowance for obsolescence
adequately covers the related risk as of each statement of assets and
liabilities date.
(8) PROPERTY, PLANT AND EQUIPMENT AND ACCUMULATED DEPRECIATION
This account is comprised of the following:
<TABLE>
<CAPTION>
DESCRIPTION AS OF AS OF
- ----------- ANNUAL RATE OF DECEMBER 31, OCTOBER 23,
DEPRECIATION 1996 1997
-------------- ------------ -----------
<S> <C> <C> <C>
Land - $ 97 $ 97
Buildings and other premises 3% to 10% 21,335 21,335
Machinery and equipment 6.67% to 30% 112,072 112,072
Furniture and fixtures 10% to 15% 1,388 1,388
Other equipment 10% to 20% 13,153 13,153
Construction in progress - 3,005 3,005
--------- ---------
151,050 151,050
Accumulated depreciation (100,236) (104,905)
--------- ---------
$ 50,814 $ 46,145
--------- ---------
--------- ---------
</TABLE>
Fully depreciated assets amounted to US$80,857 and US$80,907 as of
December 31, 1996 and October 23, 1997.
There were no significant additions to property, plant and equipment
during the period presented above. The accounting records of Centromin do not
identify the minor additions to fixed assets (other than construction in
progress)
83
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
by specific year and, therefore, it is not possible to determine fixed asset
additions specifically related to La Oroya in each year. Accordingly, in the
preparation of the accompanying financial statements, the fixed assets in
service at October 23, 1997 have been assumed to be in service as of each
balance sheet date and for each period presented.
(9) BANK LOANS
Bank loans are short-term obligations, which were obtained from local
and foreign financial institutions for working capital purposes. As of December
31, 1996 and as of October 23, 1997, 100 percent of bank loans were denominated
in U.S. dollars. The fair value of these loans approximate their carrying value.
The loans bear interest at international market rates. The weighted
average interest rate on bank loans at December 31, 1996 and October 23, 1997
was 6.5 percent and 6.7 percent, respectively.
(10) REMUNERATIONS AND TAXES PAYABLE
This account is comprised of the following:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 23,
1996 1997
------------ -----------
<S> <C> <C>
Remunerations:
Bonus - $1,023
Vacations $1,465 1,248
Vacation bonus 1,229 1,109
Payroll and other 544 102
------ ------
3,238 3,482
------ ------
Taxes and contributions:
Social security 669 275
National housing fund 263 150
Private pension system 202 161
Income tax withholdings 211 240
Others 126 227
------ ------
1,471 1,053
------ ------
Total $4,709 $4,535
------ ------
------ ------
</TABLE>
84
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
(11) ADVANCES FROM CUSTOMERS
Advances from customers located abroad are denominated in U.S. dollars.
Advances bore interest at the rate of 8.5% per annum and are offset against
receivables resulting from subsequent sales. The fair value of these advances
approximate their carrying value at each date.
(12) ACCRUED LIABILITIES
This account is comprised of the following:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 23,
1996 1997
------------ -----------
<S> <C> <C>
Contingencies (see Note 17) $1,808 $1,706
Interest and bank charges payable $855 -
Withholdings to contractors 284 122
Personnel reduction accrual 953 -
Other 577 541
------ ------
$4,477 $2,369
------ ------
------ ------
</TABLE>
(13) SEVERANCE INDEMNITIES
According to current government regulations, the liability for
personnel severance indemnities earned by employees prior to December 31, 1990,
as adjusted for subsequent wage increases until such time as the liability is
funded, must be accrued and funded over a maximum term of 10 years, beginning in
June 1991. The funding of this obligation eliminates any retroactive adjustments
from subsequent wage increases. In 1996, La Oroya fully funded this obligation.
Obligations relating to personnel severance indemnities accrued subsequent to
1990 are paid semi-annually through deposits in workers' individual bank
accounts. The analysis of the account is as follows:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 23,
1996 1997
------------ ----------
<S> <C> <C>
Balance at the beginning of period $ 21,228 $ 2,186
Provision 5,926 2,154
Payments and advances (23,365) (2,960)
Exchange difference (1,603) (195)
--------- -------
Balance at the end of period $ 2,186 $ 1,185
--------- -------
--------- -------
</TABLE>
In addition, as of December 31, 1996, certain employees had elected to
deposit their indemnity payments amounting to US$1,973 respectively, with
Centromin. In 1997, all such indemnity liabilities were transferred to banks as
directed by each employee.
85
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
(14) TAXATION AND WORKERS' PROFIT SHARING
Centromin is subject to the Peruvian tax regulations, which require
that income tax be determined based on financial statements adjusted to reflect
the changes in the wholesale price level, following the methodology prescribed
by Legislative Decree 797. The statutory income tax rate in Peru is 30% of the
taxable income. In 1992, the Peruvian law established an alternative minimum tax
of 2 percent, which is calculated based on the total assets. Beginning in 1994,
exporting corporations may deduct from the minimum income tax base the accounts
receivable and inventories related to export activities and the value of fixed
assets acquired during the current year, for two consecutive years. In May 1997,
the minimum income tax was abrogated and an extraordinary tax was imposed equal
to 0.5% of the net assets declared in the 1996 income tax return. This tax
constitutes a credit against the monthly income tax prepayments made from July
through December 1997 and the regularization payment for the 1997 year.
La Oroya is included in Centromin's tax return. As such it has provided
income tax, and remitted any tax due to Centromin, based upon the statutory tax
rate in effect for each period, applied as if La Oroya filed a separate income
tax return.
In May 1994, Centromin signed a Tax Stabilization Agreement with the
Peruvian government for a ten-year period beginning in 1997.
The following conditions would be guaranteed to Centromin:
- Utilization of the tax rules prevailing on April 25, 1994.
- Custom duties will be calculated at rates ranging from 15% to
25%.
- Free commercialization of its products.
- No restriction in the use of proceeds from export sales.
- Free conversion of foreign currency generated by local sales.
- No discrimination in foreign currency transactions.
In accordance with current workers' profit sharing government
regulations, La Oroya's workers have the right to receive 8 percent of La
Oroya's taxable income, of which 50 percent is distributed among all employees
based on the number of days worked by each employee and the remaining amount is
distributed in proportion to their salaries. Such profit sharing is limited to
18 times the annual salary for each worker. Any excess is to be reserved and
expended for training of workers.
86
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
The provision for income tax and workers' profit sharing is comprised
of the following for each of the years in the period ended December 31, 1996 and
for the period from January 1 to October 23, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current provision $11,921 $11,685 $ 8,754
Deferred provision (benefit) 1,406 (6,360) 1,409
------- ------- -------
Total $13,327 $ 5,325 $10,163
------- ------- -------
------- ------- -------
Breakdown?
Income tax $10,332 $ 4,128 $ 7,879
Workers' profit sharing 2,995 1,197 2,284
------- ------- -------
$13,327 $5,325 $10,163
------- ------- -------
------- ------- -------
</TABLE>
The following are the components of deferred tax and workers' profit
sharing assets (liability) at December 31, 1996 and October 23, 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Environmental costs not deducted in tax return $ 7,672 $ 7,672
Tax depreciation in excess of book depreciation (4,104) (5,283)
Contingencies not deducted in tax return 644 644
Other 50 (180)
------- -------
$ 4,262 $ 2,853
------- -------
------- -------
</TABLE>
The reconciliation of the income tax provision computed at the
statutory Peruvian income tax rate to the provision for income tax recorded on a
U.S. GAAP basis in the statements of revenues and expenses is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income before income tax $28,828 $10,017 $26,262
Statutory tax rate 30% 30% 30%
------- ------- -------
Income tax provision at statutory tax rate 8,648 3,005 7,879
Effects of items increasing (decreasing) the effective tax
rate:
Permanent items
Write off of unrecoverable taxes 883 - -
Tax penalties and assessments - 335 -
Adjustment of inventory affecting years prior to 1994 1,270 - -
Adjustment of inventory affecting 1995 and 1996 (616) 616 -
Other 147 172 -
------- ------- -------
Actual provision for income tax $10,332 $ 4,128 $ 7,879
------- ------- -------
------- ------- -------
</TABLE>
87
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
(15) OTHER INCOME AND (EXPENSES)
This caption includes the following:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY 1 TO
FOR THE YEARS ENDED DECEMBER 31, OCTOBER 23,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income:
Storage and other services $ 470 $ 1,038 $ 1,226
Other 434 - 706
------- -------- -------
904 1,038 1,932
------- -------- -------
Expenses:
Privatization costs - (3,570) (3,200)
Environmental program - (21,550) -
Write off of unrecoverable taxes (2,944) - -
Contingencies (1,808) - -
Tax penalties and assessments - (1,116) -
Other - (203) (218)
------- -------- -------
(4,752) (26,439) (3,418)
------- -------- -------
Other, net $(3,848) $(25,401) $(1,486)
------- -------- -------
------- -------- -------
</TABLE>
The privatization costs include costs related to moving La Oroya's
personnel away from the metallurgical complex of Centromin. These costs consist
mainly of demolition and construction of apartments, colleges and parks at the
new location.
(16) PERSONNEL REDUCTION COSTS
La Oroya recognized a charge in 1995 of US$2,504 related to the first
part of its personnel reduction program. This amount was fully paid in 1995. In
January 1996, the Board of Directors approved a second personnel reduction
program which applied to an additional 600 workers. The estimated cost of
US$3,894 was recorded in expenses in 1996. An additional provision of US$1,490
was recorded in the period from January 1 to October 23, 1997, in connection
with the second personnel reduction program.
(17) COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
In 1995, in compliance with Supreme Decree 016-93-EM, amended by
Supreme Decree 059-93-EM, (Regulation for the Environmental Protection in the
Mining and Metallurgical Activities), Centromin filed a preliminary evaluation
of its mining units and of the smelter and refineries in La Oroya, which were
approved by the Ministry of Energy and Mining (the competent authority).
88
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
At the date of that report, in compliance with the provisions of such
decrees and according to the preliminary evaluation above mentioned, Centromin
prepared a Programa de Adecuacion y Manejo Ambiental (Environmental Adjustment
and Management Program) (the "PAMA") for La Oroya metallurgical complex. The
program comprises the development of engineering projects to remediate any
existing environmental problems and to comply with current environmental
regulations. This program, which was approved by the competent authority in
January 1997, establishes total future disbursements of US$21.5 million to
remediate the damages to the environment and to establish methods of compliance
with current environmental regulations. The Company recognized a charge to
operations in 1996 for the estimated cost of such remedial actions (see Note
15).
The remediation program and the investment in environmental control
equipment required to comply with current regulations is to be implemented over
a ten year period beginning in 1997. Management expects that the cost of future
investments, principally for pollution control equipment, will be capitalized in
future periods and depreciated over the periods to be benefited.
In accordance with a revised program approved by the Ministry of Energy
and Mining, the disbursements are estimated by management to be as follows:
<TABLE>
<CAPTION>
REMEDIATION FUTURE TOTAL
COSTS EXPENDITURE -----
----------- FOR CONTROL
EQUIPMENT
-----------
<S> <C> <C> <C>
1997 $730 - $730
1998 1,800 $2,700 4,500
1999 1,950 3,612 5,562
2000 4,000 4,963 8,963
2001 3,750 3,300 7,050
2002 2,050 3,800 5,850
2003 2,100 3,000 5,100
2004 2,100 2,775 4,875
2005 3,070 38,700 41,770
2006 - 44,725 44,725
Total $21,550 $107,575 $129,125
</TABLE>
In addition, PAMA estimated the cost to eventually close the
metallurgical complex of La Oroya at US$24 million. No provision has been
recorded for this amount, since there are no plans to close the complex.
The timing and amounts listed in the above table are estimates and
actual amounts and timing of payments could vary from the estimates.
Furthermore, in accordance with the Article 9 of the rules of the General Law on
Mining, annual expenditures for environmental remediation and control cannot be
less than 1 percent of total sales.
POTENTIAL TAX ASSESSMENTS
Centromin's income tax returns of 1993 through 1996, as well as the net
worth tax returns of 1992 and 1993, are pending review by the National
Superintendency of Tax Administration. No significant liabilities arose as a
result of the 1992 income tax return review. If tax assessments were made, any
tax, interest or surcharges would be charged to expense in the years in which
the assessment is known. In the opinion of Centromin's management there are no
matters that should result in significant additional tax assessments.
89
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
INVESTMENT PROGRAM
As discussed in Note 14, in May 1994 Centromin signed a Tax
Stabilization Agreement with the Peruvian Government for a ten-year period
beginning the year in which Centromin meets the Investment Program for La Oroya
metallurgical complex, which was then estimated at US$11.1 million. The
investment program was completed in December, 1996. In March 1997, the Mining
Bureau approved the completion of the Investment Program. Actual expenditures
amounted to approximately US$11.5 million.
CONTINGENCIES
At October 23, 1997, La Oroya metallurgical complex has legal suits
aggregating US$15.7 million related to labor matters. The financial statements
include a reserve of US$1.7 million (see note 12) estimated to cover the cost of
defending and settling such matters. In management and legal advisors' opinion,
the ultimate outcome of these suits will not result in a material adverse effect
on La Oroya's financial position and results of operations.
In addition, there is a contingency amounting to approximately US$12
million, related to demands filed by 19 local mining companies, which are
claiming the refund of value-added-tax withheld by La Oroya from 1975 to 1980.
In opinion of La Oroya's management and its legal advisors, the ultimate outcome
of these demands will be favorable to La Oroya.
SALES COMMITMENTS AND CONCENTRATION
La Oroya derives its revenue from the sale of its refined metals and
concentrates to several customers. La Oroya's three largest customers accounted
for: 11%, 6% and 6%, respectively, of net sales in the period from January 1 to
October 23, 1997. The percentages in 1995 were 15%, 14% and 12% and in 1996 were
11%, 7% and 6%. These customers have sales contracts, which guarantee their
supply at prices derived from international market quotations.
(18) RELATED PARTY TRANSACTIONS
Expenses allocated from Centromin to the operations of La Oroya related
primarily to accounting and administrative support services. These expenses
amounted to US$5,223 in the period from January 1 to October 23, 1997, US$5,660
in 1996 and US$4,479 in 1995.
Purchases of concentrates of polymetalic ores from the mining units of
Centromin were:
<TABLE>
<CAPTION>
PERCENTAGE OF
VALUE OF THE TOTAL VALUE
PERIOD PURCHASES OF PURCHASE
- ------ --------- ---------------
<S> <C> <C>
1995 $182,218 58%
1996 178,018 67
For the period from January 1 to October 31, 1997 135,644 59
</TABLE>
90
<PAGE>
EMPRESA MINERA DEL CENTRO DEL PERU S.A.-CENTROMIN PERU S.A.
LA OROYA DIVISION
NOTES TO THE FINANCIAL STATEMENTS
(19) GEOGRAPHIC DATA
The following is an analysis of net sales by geographic region:
<TABLE>
<CAPTION>
FOR THE
PERIOD
AS OF DECEMBER 31, JANUARY 1 TO
------------------- OCTOBER 23,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
USA $105,837 $184,546 $ 94,050
Latin America 201,631 162,620 165,866
Asia 112,401 84,964 65,975
Europe 31,060 24,667 26,914
-------- -------- --------
$450,929 $456,797 $352,805
-------- -------- --------
-------- -------- --------
</TABLE>
(20) SUBSEQUENT EVENT
In the Extraordinary Shareholders' Meetings of Doe Run Peru and
Metaloroya held on November 3, 1997, the merger of Metaloroya into Doe Run Peru
was approved, the surviving company being Doe Run Peru. The merger will be on
December 30, 1997.
91
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------
<S> <C> <C>
Ira Leon Rennert..................... 64 Chairman and Director of the Company, Doe Run Cayman and FPI
Jeffrey L. Zelms..................... 54 Vice Chairman, President and Chief Executive Officer of the Company
and President of Doe Run Cayman
Marvin K. Kaiser..................... 57 Vice President and Chief Financial Officer of the Company and FPI,
Vice President of Doe Run Cayman and Finance Manager of Doe Run
Mining and Doe Run Peru
Richard L. Amistadi.................. 54 Vice President Sales and Marketing of the Company
Gary E. Boyer........................ 57 Vice President Mining of the Company
Kenneth R. Buckley................... 60 Vice President Primary and Secondary Smelting of the Company and
General Manager of Doe Run Mining, Doe Run Peru and Cobriza
Juan Carlos Huyhua, Ph.D. ........... 46 Operations Manager of Doe Run Peru
Jerry L. Pyatt....................... 43 President of FPI
Anthony W. Worcester................. 56 Technical Manager of Doe Run Mining and Doe Run Peru
</TABLE>
Ira Leon Rennert has been Chairman, Chief Executive Officer and
principal shareholder of the Company's and the Guarantors' parent company, Renco
(including predecessors), since Renco's first acquisition in 1975, Chairman and
Director of the Company since April 1994, Chairman and Director of Doe Run
Cayman since October 1997 and Chairman and Director of FPI since August 1996.
Renco holds controlling interests in a number of manufacturing and distribution
concerns operating in businesses not competing with the Company including Renco
Steel Holdings, Inc., WCI Steel, Inc., Renco Metals, Inc., AM General
Corporation and Lodestar Holdings, Inc.
Jeffrey L. Zelms has served as Vice Chairman of the Company since
December 1998 and as President and Chief Executive Officer of the Company and
its predecessor since August 1984 and President of Doe Run Cayman since October
1997. Mr. Zelms has over 30 years of experience in the mining industry. Mr.
Zelms serves on the boards of directors of Homestake Mining Company and Phoenix
Textiles.
Marvin K. Kaiser has served as Vice President and Chief Financial
Officer of the Company and its predecessor since January 1994 and of FPI since
April 1998, Vice President of Doe Run Cayman since October 1997 and Finance
Manager of Doe Run Mining and Doe Run Peru since October 1997. From June 1989 to
December 1993, Mr. Kaiser was the Chief Financial Officer of AMAX Gold, Inc., a
gold producing company. Mr. Kaiser is a Certified Public Accountant.
Richard L. Amistadi has served as Vice President of Sales and Marketing
of the Company and its predecessor since November 1986. Mr. Amistadi has over 20
years of experience in sales, marketing and product development of lead metal,
lead alloys, zinc metal, lead, zinc and copper concentrates and associated
by-products.
Gary E. Boyer has been Vice President of Mining at the Company since
January 1993. He served as General Manager of mining and smelting operations of
the Company and its predecessor from January 1988 to April 1997. From January
1990 to January 1993, he served as Vice President of Smelting of the Company's
predecessor.
Kenneth R. Buckley has served as Vice President of Primary and
Secondary Smelting of the Company since September 1996, General Manager of Doe
Run Mining and Doe Run Peru since October 1997 and General Manager of Cobriza
since August 31, 1998. From January 1996 until September 1996, Mr. Buckley was
Vice President of Smelting for the Company. Mr. Buckley served as General
Manager of the Resource Recycling Division for the Company and its predecessor
from September 1988 until January 1996. Mr. Buckley has over 34 years of
experience in managing metal milling and smelting operations in five countries.
92
<PAGE>
Juan Carlos Huyhua, Ph. D., has been Operations Manager of Doe Run
Peru since October 1997. From January 1995 to June 1997, Dr. Huyhua was Chief
Operating Officer of Centromin. Dr. Huyhua has served in various capacities
for Centromin since 1978, including as Assistant General Manager--
Metallurgical Operations, General Superintendent--Smelting and Refining
Department and Manager--Metallurgical Operations. Dr. Huyhua received his
doctorate in Extractive Metallurgy from the New Mexico Institute of Mining and
Technology in 1989.
Jerry L. Pyatt has been President of FPI since October 1, 1998.
Mr. Pyatt has served, and will continue to serve, as General Manager of
the Company's Resource Recycling Division. Mr. Pyatt joined the Company
in 1991 as a Metallurgical Engineer.
Anthony W. Worcester has served as Technical Manager of Doe Run
Mining and Doe Run Peru since October 1997. From January 1991 to October
1997, Mr. Worcester was Technical Service Manager of lead smelting for the
Company and its predecessor. Mr. Worcester has held various other positions
with the Company's predecessor since 1960.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation of the named executive officers by the Company for services
rendered to it in all capacities:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LTIP
PAYOUTS(b)
--------------
ANNUAL PAYOUTS
COMPENSATION(a) -------------
FISCAL ------------------- LONG-TERM ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(c)
- ----------------- ------ ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ira Leon Rennert(d) 1998 -- -- -- $4,311,004
Chairman of the Board 1997 -- -- -- 1,200,000
1996 -- -- -- 1,200,000
- -------------------------------------------------------------------------------------------------------------------------
Jeffrey L. Zelms 1998 $251,952 $450,000 $125,000 33,042
Vice Chairman, President and Chief 1997 240,000 $100,000 $262,068 34,885
Executive Officer 1996 210,000 100,000 97,637 40,319
- -------------------------------------------------------------------------------------------------------------------------
Marvin K. Kaiser 1998 187,200 180,000 25,000 18,558
Vice President and Chief Financial Officer 1997 156,000 74,000 52,414 22,164
1996 150,000 70,000 19,527 28,279
- -------------------------------------------------------------------------------------------------------------------------
Richard L. Amistadi 1998 180,000 75,000 37,500 17,471
Vice President--Sales and Marketing 1997 163,248 60,000 78,620 23,197
1996 160,032 60,000 29,291 30,169
- -------------------------------------------------------------------------------------------------------------------------
Gary E. Boyer 1998 142,176 60,000 25,000 3,353
Vice President--Mining 1997 135,216 60,000 52,414 5,492
1996 132,540 75,000 19,527 10,633
- -------------------------------------------------------------------------------------------------------------------------
Kenneth R. Buckley 1998 186,398 225,000 12,500 120,356
Vice President--Primary and Secondary 1997 142,132 60,000 26,207 21,657
Smlting 1996 121,500 60,000 9,764 13,889
</TABLE>
- -----------
(a) Value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of total salary and bonus per named executive
officer.
(b) The amounts shown as "LTIP Payouts" in the table for each named
executive officer represent contractual payments under such
officer's net worth appreciation agreements. See "Net Worth
Appreciation Agreements."
93
<PAGE>
(c) The amounts shown as "All Other Compensation" in the table for fiscal
1998 for each named executive officer, except Mr. Rennert, represent
payments to Messrs. Zelms, Kaiser, Amistadi, Boyer and Buckley under
the gainsharing plan of $27,139, $18,558, $17,741, $3,353 and $8,415,
respectively, and $781 of life insurance premiums for Mr. Zelms and
$2,982 of medical expenses and $111,941 of expatriate compensation,
including relocation, for Mr. Buckley.
(d) Mr. Rennert receives no compensation directly from the Company. He is
Chairman of the Board and the principal stockholder of Renco which
receives a management fee from the Company pursuant to the Management
Consultant Agreement (as defined). The amount shown as all other
compensation to Mr. Rennert are the management fees paid by the Company
to Renco. In addition, for fiscal 1998, the Company paid to Renco a
transaction fee of approximately $2.3 million upon consummation of the
offering of the Secured Notes. See "Item 13. Certain Relationships and
Related Transactions."
NET WORTH APPRECIATION AGREEMENTS
The named executive officers (with the exception of Mr. Rennert) and
six other employees of the Company are each parties to net worth appreciation
agreements with the Company, pursuant to which, upon termination of each
person's employment with the Company, he is entitled to receive a fixed
percentage of the increase in the net worth of the Company, as defined, from a
base date until the end of the fiscal quarter preceding the date of his
termination. Such amount is payable without interest in 40 equal quarterly
installments, commencing three months after the termination of each person's
employment, and at three month intervals thereafter. It is anticipated that
certain key Peruvian employees will enter into comparable net worth appreciation
agreements with the Company.
The following table summarizes the net worth appreciation agreements
now held by the named executive officers and the amounts earned thereunder.
<TABLE>
<CAPTION>
ACCUMULATED
AS OF
NET WORTH OCTOBER 31,
PERCENTAGE(a) BASE DATE 1998(b)
------------- --------- -----------
<S> <C> <C> <C>
Jeffrey L. Zelms........................... 5.0% 4/7/94 $561,200
Marvin K. Kaiser........................... 1.0 4/7/94 112,240
Richard L. Amistadi........................ 1.5 4/7/94 168,360
Gary E. Boyer.............................. 1.0 4/7/94 112,240
Kenneth R. Buckley......................... 0.5 4/7/94 56,120
</TABLE>
- -----------
(a) Vested for each participant as to 80% as of March 31, 1998 and vesting
for an additional 20% on March 31, 1999, provided that the respective
participant remains in the employ of the Company until such date.
(b) Represents the gross aggregate amount that each participant is entitled
to receive as of October 31, 1998, subject to the vesting terms of the
applicable agreement.
The net worth appreciation agreements also provide that, in the event
of payment of a dividend or a sale of the Company, the active participants will
be entitled to receive a percentage of the dividend or the net proceeds of the
sale equal to their maximum percentages under the agreements. Upon consummation
of the Transactions, approximately $264,000 was paid to Messrs. Zelms, Kaiser,
Amistadi, Buckley, Boyer and other employees of the Company, pursuant to the net
worth appreciation agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee. The compensation for the
executive officers is fixed by negotiations between such executive officers and
Mr. Rennert on behalf of Renco.
94
<PAGE>
EMPLOYMENT AGREEMENTS
The named executive officers are parties to employment agreements with
the Company. Set forth below is a brief description of each such agreement.
Jeffrey L. Zelms entered into an Employment Agreement with the Company
effective as of April 7, 1994, with an initial term continuing until October 31,
1999 and automatically renewable thereafter for additional one-year terms.
Pursuant to the terms of his agreement, Mr. Zelms's compensation is composed of
(a) a base annual salary, (b) a year-end bonus of not less than $50,000 nor more
than $100,000 as may be determined by the Company in its sole discretion and (c)
such additional amounts, if any, as the Board of Directors may determine from
time to time in its discretion.
Marvin K. Kaiser entered into an Employment Agreement with the Company
effective as of April 7, 1994, with an initial term continuing until October 31,
1999 and automatically renewable thereafter for additional one-year terms.
Pursuant to the terms of his agreement, Mr. Kaiser's compensation is composed of
(a) a base annual salary, (b) a year-end bonus of not less than $30,000 nor more
than $60,000 as may be determined by the Company in its sole discretion and (c)
such additional amounts, if any, as the Board of Directors may determine from
time to time in its discretion.
Richard L. Amistadi entered into an Employment Agreement with the
Company effective as of April 7, 1994, with an initial term continuing until
October 31, 1999 and automatically renewable thereafter for additional one-year
terms. Pursuant to the terms of his agreement, Mr. Amistadi's compensation is
composed of (a) a base annual salary, (b) a year-end bonus of not less than
$30,000 nor more than $60,000 as may be determined by the Company in its sole
discretion and (c) such additional amounts, if any, as the Board of Directors
may determine from time to time in its discretion.
Gary E. Boyer entered into an Employment Agreement with the Company
effective as of April 7, 1994, with an initial term continuing until October 31,
1999 and automatically renewable thereafter for additional one-year terms.
Pursuant to the terms of his agreement, Mr. Boyer's compensation is composed of
(a) a base annual salary, (b) a year-end bonus of not less than $30,000 nor more
than $60,000 as may be determined by the Company in its sole discretion and (c)
such additional amounts, if any, as the Board of Directors may determine from
time to time in its discretion.
Kenneth R. Buckley entered into an Employment Agreement with the
Company effective as of January 1, 1996 (replacing a prior agreement), with an
initial term continuing until December 31, 2000, and automatically renewable
thereafter for additional one-year terms. Pursuant to the terms of his
agreement, Mr. Buckley's compensation is composed of (a) a base annual salary,
(b) a year-end bonus of not less than $30,000 nor more than $60,000 as may be
determined by the Company in its sole discretion and (c) such additional
amounts, if any, as the Board of Directors may determine from time to time in
its discretion.
Each of the above described employment agreements requires that, during
the term of their employment, each of the above executive officers not, directly
or indirectly, engage in any aspect of the business of lead mining, milling,
recycling or sale within the continental United States as an officer, director,
partner, proprietor, investor, associate, employee or consultant except with the
Company. In addition, each of the above executive officers has agreed to
maintain the confidentiality of information obtained during employment with the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date
hereof with respect to beneficial ownership of the Company's common stock by
each beneficial owner of 5% or more of the common stock, each director and each
named executive officer of the Company during the last fiscal year, and by all
directors and executive officers of the Company as a group. Except as otherwise
noted, the persons named in the table below have sole voting and investment
power with respect to all shares or interests, as applicable, shown as
beneficially owned by them.
95
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES PERCENT
- ---- --------- --------
<S> <C> <C>
The Renco Group, Inc.(a)(b)............................................................ 1,000 100.0%
DR Acquisition Corp.(a)................................................................ 1,000 100.0
Ira Leon Rennert(a)(c)................................................................. 1,000 100.0
Jeffrey L. Zelms....................................................................... -- --
Marvin K. Kaiser....................................................................... -- --
Richard L. Amistadi.................................................................... -- --
Gary E. Boyer.......................................................................... -- --
Kenneth R. Buckley..................................................................... -- --
All directors and executive officers of the Company as a group (7 persons)............. 1,000 100.0
</TABLE>
- -----------
(a) The address of this beneficial owner is c/o The Renco Group, Inc., 30
Rockefeller Plaza, Suite 4225, New York, New York 10112.
(b) Renco is deemed to beneficially own the shares owned by DRA due to
Renco's ownership of all of the outstanding capital stock of DR
Acquisition Corp.
(c) Mr. Rennert is deemed to beneficially own the interests and shares
owned by Renco due to the ownership by trusts established by him for
himself and members of his family of a total of 97.9% of the
outstanding common stock of Renco.
By virtue of Renco's indirect ownership of 100.0% of the outstanding
common stock of the Company, and Mr. Rennert's ownership of a majority of the
stock of Renco, Mr. Rennert is in position to control actions that require the
consent of a majority of the holders of equity interests in the Company and its
subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under a management consultant agreement, dated as of April 7, 1994, as
amended (Management Consultant Agreement), between Renco and the Company, the
Company pays an annual fee of $2.4 million to Renco. The Management Consultant
Agreement provides that the Company shall not make any payment thereunder which
would violate any of its agreements with respect to any of its outstanding
indebtedness. The Management Consultant Agreement extends to October 31, 2000
and thereafter shall continue for additional terms of three years each unless
sooner terminated by either party by giving six months prior written notice. In
the year ended October 31, 1998, the Company paid management fees to Renco in
the amount of $2.0 million. The Company believes that the cost of obtaining the
type and quality of services rendered by Renco under the Management Consultant
Agreement was, and continues to be, no less favorable than that at which the
Company could obtain such services from unaffiliated entities.
To obtain the advantages of volume, Renco purchases certain insurance
coverages for its subsidiaries, including the Company, and the cost of such
insurance, without markup, is reimbursed by the covered subsidiaries. Currently,
the major areas of insurance coverage obtained under the Renco programs for the
Company's U.S. operations are property, business interruption and fidelity and
for its Peruvian operations foreign general liability and fidelity. The premiums
for property, business interruption, fidelity and foreign general liability (as
applicable) are allocated by Renco to its covered subsidiaries, substantially as
indicated in the underlying policies. Renco also purchases and administers
certain insurance policies exclusively for the Company's U.S. operations,
including fiduciary, general and product liability, workers' compensation,
political risk, automobile liability, and casualty umbrella, and for its
Peruvian operations, including property, business interruption, general and
product liability, workers' compensation, automobile liability and casualty
umbrella. The cost of such insurance, without markup, is reimbursed by the
Company as incurred. The total insurance cost under the Renco insurance programs
in fiscal 1998 was approximately $2.8 million for the Company's U.S. operations
and approximately $1.6 million for its Peruvian operations. The Company believe
that its insurance costs were less than would have been incurred had the
respective insurances been obtained directly.
Pursuant to a tax sharing agreement between the Company and Renco, the
Company pays to Renco an amount equal to the amount the Company would have been
required to pay for taxes on a stand-alone basis to the Internal Revenue Service
and the applicable state taxing authority, as the case may be, except that the
Company will not have the benefit of
96
<PAGE>
any of its tax loss carryforwards unless such tax losses were a result of
timing differences between the Company's accounting for tax and financial
reporting purposes. This agreement also provides that transactions between
the Company and Renco and its other subsidiaries are accounted for on a cash
basis and not on an accrual basis.
Effective November 1, 1998, Renco converted from a C corporation to an
S corporation due to a change in the tax laws allowing entities with
subsidiaries to elect S corporation status. In connection with that conversion,
Renco is permitted to designate its subsidiaries as qualified S corporation
subsidiaries, and the Company has been so designated. As a result, the Company's
taxable income will be included in Renco's shareholders' income tax returns.
Generally, no provision for federal income taxes will be included in the
Company's statements of income for periods beginning after October 31, 1998. The
Company will continue to provide for foreign, state and local income taxes for
those taxing jurisdictions that do not recognize qualified S corporation
subsidiary status. However, under the "build-in gains " provisions of the tax
law, federal and state taxes may become payable and will be charged to our
statement of income. Such taxes are measured by the excess of the fair market
value of assets over their tax bases on the effective date of the S corporation
election if the appreciated assets are disposed of within the ten-year
post-conversion period. It is not management's present intent to trigger any
taxes under the built-in gains provisions of the tax laws. Deferred tax assets
of $8.0 million and deferred tax liabilities of $1.8 million will be reflected
as a charge and credit to income, respectively, in the first quarter of our
consolidated statement of income in fiscal 1999.
Beginning in fiscal 1998, the Company sold, and may from time to time
in the future sell, zinc and other alloys to WCI Steel, Inc., an indirect
subsidiary of Renco. The Company believes that such sales were on an arm's
length basis at a price no less favorable than that at which the Company could
have sold to unaffiliated entities. These sales totaled $.8 million in fiscal
1998.
Upon consummation of the Existing Notes Offering, the Company paid a
transaction fee of $2.3 million to Renco.
97
<PAGE>
PART IV
<TABLE>
<CAPTION>
Page #
------
<S> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Documents filed as part of this Form 10-K:
1. FINANCIAL STATEMENTS (included in Part II, ITEM 8):
a) The Doe Run Resources Corporation
Independent Auditors' Report 24
Report of Independent Public Accountants 25
Consolidated Balance Sheets - October 31, 1998 and 1997 26
Consolidated Statements of Income and Shareholders' Equity - Years
ended October 31, 1998, 1997, and 1996 27
Consolidated Statements of Cash Flows - Years ended October 31, 1998, 1997,
and 1996 28
Notes to Consolidated Financial Statements 29-55
b) Doe Run Peru S.R.L
Report of Independent Accountants 56
Consolidated Balance Sheets - October 31, 1998 and 1997 57
Consolidated Statements of Operations - Years ended October 31, 1998, and
for the period from October 23, 1997 to October 31, 1997 58
Consolidated Statements of Shareholders' Equity - Years ended October 31,
1998, and for the period from October 23, 1997 to October 31, 1997 59
Consolidated Statements of Cash Flows - Years ended October 31, 1998, and
for the period from October 23, 1997 to October 31, 1997 60
Notes to Consolidated Financial Statements 61-73
c) Empresa Minera del Centro del Peru S.A. - Centromin Peru S.A.
Report of Independent Accountants 74
Statements of Assets and Liabilities - October 23, 1997 and December 31, 75
1996
Statement of Revenues and Expenses - Period from January 1 to October 23,
1997 and years ended December 31, 1996, and 1995 76
Statement of Changes in Net Assets - Period from January 1 to October 23,
1997 and years ended December 31, 1996, and 1995 77
Statements of Cash Flows - Period from January 1 to October 23, 1997 and
years ended December 31, 1996, and 1995 78
Notes to Consolidated Financial Statements 79-91
2. FINANCIAL STATEMENT SCHEDULES (included in Part IV):
Independent Auditor's Report 99
Schedule II Valuation and Qualifying Accounts 100
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included
in the consolidated financial statements or notes thereto.
3. EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K.
The information called for by this paragraph is contained in the
Exhibit Index of this report which is incorporated herein by
reference.
</TABLE>
98
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Doe Run Resources Corporation and subsidiaries:
Under date of December 18, 1998, we reported on the consolidated balance sheets
of The Doe Run Resources Corporation and subsidiaries as of October 31, 1998 and
1997, and the related consolidated statements of income and shareholders' equity
and cash flows for each of the years in the three-year period ended October 31,
1998, which are included in the report on Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule in the Form 10-K. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therin.
(signed) KPMG LLP
December 18, 1998
99
<PAGE>
<TABLE>
<CAPTION> SCHEDULE II
THE DOE RUN RESOURCES CORPORATION
Valuation and Qualifying Accounts
Years ended October 31, 1998, 1997, and 1996
(dollars in thousands)
Additions Deductions -
Balance at charged to write-offs
beginning costs and against Balance at
of year expenses allowance end of year
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Year ended October 31, 1998:
Applied against asset accounts:
Allowance for doubtful accounts $ 729 147 - 876
Allowance for inventory obsolescence $ 4,977 124 542 4,559
Year ended October 31, 1997:
Applied against asset accounts:
Allowance for doubtful accounts $ 947 59 277 729
Allowance for inventory obsolescence $ 4,866 386 275 4,977
Year ended October 31, 1996:
Applied against asset accounts:
Allowance for doubtful accounts $ 947 - - 947
Allowance for inventory obsolescence $ 4,564 603 300 4,866
</TABLE>
100
<PAGE>
(b) REPORTS ON FORM 8-K.
On September 16, 1998, the Company filed a Form 8-K to report, among
other things, the acquisition of the MLD, the issuance of the Secured Notes and
the acquisition of Cobriza.
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE DOE RUN RESOURCES CORPORATION
(Registrant)
/s/ Jeffrey L. Zelms
By: ----------------------------------
Jeffrey L. Zelms
Vice Chairman, President and
Chief Executive Officer
January 29, 1999
-----------------------------------
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Ira Leon Rennert
Chairman of the Board and Director /s/ Ira Leon Rennert January 29, 1999
-------------------------------------- ----------------
Signature Date
Jeffrey L. Zelms
Vice Chairman, President and Chief Executive Officer
(principal executive officer) /s/ Jeffrey L. Zelms January 29, 1999
-------------------------------------- ----------------
Signature Date
Marvin K. Kaiser
Vice President and Chief Financial Officer
(principal financial and accounting officer) /s/ Marvin K. Kaiser January 29, 1999
-------------------------------------- ----------------
Signature Date
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report to security holders covering the registrant's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has
been or will be sent to security holders.
101
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of Doe Run.(1)
3.2 Amended and Restated By-laws of Doe Run.(1)
3.3 Certificate of Incorporation of FPI.(1)
3.4 Bylaws of FPI.(1)
3.5 Certificate of Incorporation of Doe Run Cayman.(1)
3.6 Memorandum and Articles of Association of Doe Run Cayman.(1)
3.7 Constitucion de Sociedad Comercial de Responsibilidad Limitada de
Doe Run Mining (with English translation).(1)
3.8 Constitucion de Sociedad Comercial de Responsibilidad Limitada de
Doe Run Peru (with English translation).(1)
3.9.1 Constitucion Simultanea de Sociedad Anonima Cerrada de Doe Run
Air (with English translation).(3)
3.9.2 Constitucion Simultanea de Sociedad Anonima Cerrada de Doe Run
Development (with English translation).(3)
3.9.3 Modificacion Total de Estatuto Social, Designacion de membros de
Directorio, Nombramiento de Gerente General, Nombriento de
Apoderados Especiales y Otorgamiento de Poderes Especiales de
Cobriza (with English translation).(3)
3.10 Certificate of Formation of DRLH. (3)
3.11 Limited Liability Company Agreement of DRLH. (3)
4.1.1 Indenture, dated as of March 12, 1998, by and among Doe Run, as
issuer, FPI, Doe Run Cayman, Doe Run Mining and Doe Run Peru, as
guarantors, and State Street Bank and Trust Company, as trustee,
relating to the 111'4% Senior Notes due 2005, Series A, Floating
Interest Rate Senior Notes due 2003, Series A, 111'4% Senior
Notes due 2005, Series B and Floating Interest Rate Senior Notes
due 2003, Series B and the Guarantees thereof (containing, as
exhibits, specimens of the Notes and the Guarantees).(1)
4.1.2 First Supplemental Indenture, dated as of September 1, 1998, by
and among Doe Run, as issuer, FPI, Doe Run Cayman, Doe Run
Mining, Doe Run Peru, Doe Run Air and Doe Run Development, as
guarantors, and State Street Bank and Trust Company, as trustee,
supplementing the Indenture, dated as of March 12, 1998.(2)
4.1.3 Second Supplemental Indenture, dated as of September 16, 1998, by
and among Doe Run, as issuer, FPI, Doe Run Cayman, Doe Run
Mining, Doe Run Peru, Doe Run Air, Doe Run Development and
Cobriza, as guarantors, and State Street Bank and Trust Company,
as trustee, supplementing the Indenture, dated as of March 12,
1998.(3)
4.1.4 Third Supplemental Indenture, dated as of January 13, 1999, by
and among Doe Run, as issuer, FPI, Doe Run Cayman, Doe Run
Mining, Doe Run Peru, Doe Run Air, Doe Run Development, Cobriza
and DR Land Holdings, LLC ("DRLH"), as guarantors, and State
Street Bank and Trust Company, as trustee, supplementing the
Indenture, dated as of March 12, 1998. (3)
4.2.1 Indenture, dated as of September 1, 1998, by and among Doe Run,
as issuer, FPI, Doe Run Cayman, Doe Run Mining, Doe Run Peru, Doe
Run Air and Doe Run Development, as guarantors, and State Street
Bank and Trust Company, as trustee, relating to the 111'4% Senior
Secured Notes due 2005, Series A and 111'4% Senior Secured Notes
due 2005, Series B and the Guarantees thereof (containing, as
exhibits, specimens of the Notes and the Guarantees).(2)
4.2.2 First Supplemental Indenture, dated as of September 16, 1998, by
and among Doe Run, as issuer, FPI, Doe Run Cayman, Doe Run
Mining, Doe Run Peru, Doe Run Air, Doe Run Development and
Cobriza, as guarantors, and State Street Bank and Trust Company,
as trustee, supplementing the Indenture, dated as of September 1,
1998.(3)
4.2.3 Second Supplemental Indenture, dated as of January 13, 1999, by
and among Doe Run, as issuer, FPI, Doe Run Cayman, Doe Run
Mining, Doe Run Peru, Doe Run Air, Doe Run Development, Cobriza
and DRLH, as guarantors, and State Street Bank and Trust Company,
as trustee, supplementing the Indenture, dated as of September 1,
1998.(3)
4.2.4 Pledge Agreement, dated as of January 15, 1999, by Doe Run to
State Street Bank and Trust Company. (3)
4.4 Registration Rights Agreement, dated as of September 1, 1998, by
and among Doe Run, FPI, Doe Run Cayman, Doe Run Mining, Doe Run
Peru, Doe Run Air, Doe Run Development and Jefferies & Company,
Inc., relating to the 111'4% Senior Secured Notes due 2005.(2)
10.1.1 Employment Agreement, dated as of April 7, 1994, between The Doe
Run Resources Corporation and Jeffrey L. Zelms.(1)
102
<PAGE>
10.1.2 Employment Agreement, dated as of April 7, 1994, between The Doe
Run Resources Corporation and Marvin K. Kaiser.(1)
10.1.3 Employment Agreement, dated as of April 7, 1994, between The Doe
Run Resources Corporation and Richard L. Amistadi.(1)
10.1.4 Employment Agreement, dated as of April 7, 1994, between The Doe
Run Resources Corporation and Gary E. Boyer.(1)
10.1.5 Employment Agreement, dated as of April 7, 1994, between The Doe
Run Resources Corporation and Kenneth R. Buckley.(1)
10.2.1 Net Worth Appreciation Agreement, dated as of April 7, 1994, as
amended, between The Doe Run Resources Corporation and Jeffrey L.
Zelms.(1)
10.2.2 Net Worth Appreciation Agreement, dated as of April 7, 1994, as
amended, between The Doe Run Resources Corporation and Marvin K.
Kaiser.(1)
10.2.3 Net Worth Appreciation Agreement, dated as of April 7, 1994, as
amended, between The Doe Run Resources Corporation and Richard L.
Amistadi.(1)
10.2.4 Net Worth Appreciation Agreement, dated as of April 7, 1994, as
amended, between The Doe Run Resources Corporation and Gary E.
Boyer.(1)
10.2.5 Net Worth Appreciation Agreement, dated as of April 7, 1994, as
amended, between The Doe Run Resources Corporation and Kenneth R.
Buckley.(1)
10.3 The Doe Run Resources Corporation Supplemental Employee Retirement
Plan.(1)
10.4 The Doe Run Company Executive Tax Services Plan.(1)
10.5.1 Loan and Security Agreement, dated March 12, 1998, by and among
Doe Run, FPI and Congress Financial Corporation.(1)
10.5.2 Amendment No. 1 to Loan and Security Agreement, dated
September 1, 1998, among Doe Run, FPI and Congress Financial
Corporation. (2)
10.5.3 Amendment No. 2 to Loan and Security Agreement, dated January 13,
1999, by and among Doe Run, FPI and Congress Financial
Corporation. (3)
10.5.4 Guarantee, dated January 13, 1999, between DRLH and Congress Financial
Corporation. (3)
10.6 Contrato de Transferencia de Acciones, Aumento del Capital Social y
Suscripcion de Acciones de La Empresa Metalurgica La Oroya S.A.
(Contract of Stock Transfer, Capital Increase and Stock Subscription) (with
English translation).(1)
10.7 Programa de Adecuacion y Manejo Ambiental (Environmental Remedy and
Management Program) (with English translation).(1)
10.8.1 Convenio de Estabilidad Juridica Entre el Estado y La Empresa
Metalurgica La Oroya S.A. (Legal Stability Agreement between the
State and Empresa Metalurgica La Oroya S.A.) (with English
translation).(1)
10.8.2 Convenio de Estabilidad Juridica con Doe Run Mining S.R. Ltda. (Legal
Stability Agreement with Doe Run MiningCommission for Foreign
Investments and Technologies) (with English translation).(1)
10.8.3 Convenio de Estabilidad Juridica con Doe Run Mining S.R. Ltda.
(Legal Stability Agreement with Doe Run MiningMinistry of Energy
and Mines) (with English translation).(1)
10.8.4 Convenio de Estabilidad Juridica con Doe Run Peru S.R. Ltda. (Legal
Stability Agreement with Doe Run PeruMinister of Energy and Mines)
(with English translation).(1)
10.8.5 Convenio de Estabilidad Juridica con Doe Run Peru S.R. Ltda. (Legal
Stability Agreement with Doe Run PeruVice Minister of Mines)
(with English translation).(1)
10.8.6 Convenio de Estabilidad Juridica con Doe Run Cayman Ltd. (Legal
Stability Agreement with Doe Run CaymanCommission for Foreign
Investments and Technologies) (with English translation).(1)
10.8.7 Remite Contrato de Estabilidad Administrativa Ambiental
(Environmental Stability Agreement) (with English translation).(1)
10.9.1 Contrato de Linea de Credito en Moneda Extranjero (Contract for a
Line of Credit in Foreign Currency), dated June 11, 1998, between
Banco de Credito del Peru and Doe Run Peru (with English
translation).(1)
10.9.2 Modificacion al Contrato de Linea de Credito en Moneda Extranjera
y al Contrato de Afectacion en Garantia de Pagos y/o Cobranzas y
de Cuentas Cobranza (amendment to the Contract for Line of Credit in
Foreign Currency and Collection Account Agreement, dated as of
October 6, 1998, between Banco de Credito del Peru and Doe Run Peru
S.R.L. (English translation to be filed by amendment).(3)
10.10 Contrato de Afectacion en Garantia de Pagos y/o Cobranzas y de
Cuentas Cobran za (Collection Account
Agreement), dated June 11, 1998, between Banco de Credito del
Peru and Doe Run Peru (with English translation).(1)
10.11 Contrato de Prenda de Minerales (Ore Collateral Agreement), dated
June 11, 1998, between Banco de Credito del Peru and Doe Run Peru
(with English translation).(1)
103
<PAGE>
10.12 Security Agreement, dated as of September 1, 1998, by Doe Run in
favor of State Street Bank and Trust Company, as trustee and
collateral agent.(2)
10.13 Intercreditor Agreement, dated as of September 1, 1998, between
State Street Bank and Trust Company, as note trustee, and
Congress Financial Corporation, as lender.(2)
10.14 Management Consulting Agreement, dated as of April 17, 1994,
as amended, between The Renco Group, Inc. and
The Doe Run Resources Corporation.(3)
21 List of Subsidiaries of Registrant. (3)
27 Financial Data Schedule
</TABLE>
- -----------
(1) Incorporated by reference to the same numbered exhibit filed with the
Registration Statement on Form S-4, as amended, (File No. 333-52285)
originally filed May 11, 1998
(2) Incorporated by reference to Form 8-K (File No. 333-52285) filed
September 16, 1998.
(3) Incorporated by reference to the same numbered exhibit filed with the
Registration Statement on Form S-4, as amended, (File No. 333-66291),
originally filed October 29, 1998.
104
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