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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, 1999
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:
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Title of Each Class Name of Each Exchange on Which Registered
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None Not Applicable
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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.
[ ] YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to ITEM
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Number of shares outstanding of each of the issuer's classes of common stock,
as of January 26, 2000: 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 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matter 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
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 102
PART III
Item 10. Directors and Executive Officers of the Registrant 102
Item 11. Executive Compensation 103
Item 12. Security Ownership of Certain Beneficial Owners
and Management 106
Item 13. Certain Relationships and Related Transactions 106
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 108
SIGNATURES 111
EXHIBIT INDEX 112
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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 United States 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 silver, copper, zinc, lead and
gold.
All of the Company's issued and outstanding capital stock is
indirectly owned by The Renco Group, Inc. (Renco). Renco is 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 Islands
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 pursuant to a
Subscription Agreement on October 23, 1997 by Doe Run Peru. Doe Run Mining
and Doe Run Peru are Peruvian corporations.
The Company's business in the United States includes an integrated
primary lead operation, a secondary lead operation and lead fabrication
operations. In Peru, the Company produces various base metals and precious
metals and has a copper mining and milling operation. These operations will
be discussed in greater detail in the "overview" sections below. Reference is
hereby made to "Item 8. Financial Statements and Supplementary Data", Note 13
to the Company's Consolidated Financial Statements. The Company's business
does not involve: 1) seasonal fluctuations, 2) unusual working capital
requirements, 3) significant order backlog or 4) federal contracting.
OVERVIEW -- U.S. OPERATIONS
The Company's U.S. primary lead operation consists of two primary
smelters, which obtain concentrates from six mills. The mills are supplied
with ore mined from eight production shafts along approximately 40 miles of
the Viburnum Trend in southeastern Missouri, one of the world's most
productive lead deposits. As of October 31, 1999, the Company's U.S. ore
reserves consisted of approximately 65 million proven and probable tons,
containing grades of 5.62% lead, 1.13% zinc and .22% copper. The Company also
operates a secondary smelter in southeastern Missouri where it produces lead
metal from recycled lead-acid batteries and other lead bearing materials.
Through its subsidiary, Fabricated Products, Inc. (FPI), the Company produces
value-added lead products such as lead oxide, lead sheet and lead bricks at
facilities in Arizona, Washington and Texas. These operations permit the
Company 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 batteries and other materials containing lead.
In fiscal 1999, the Company shipped approximately 516,000 tons of
refined lead metal and lead alloy products, including recycled lead,
representing approximately 28% of North American consumption and 10% of
western world consumption. In fiscal 1999, the Company's U.S. operations
generated net sales of $342.8 million and a net loss of $31.2 million.
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, 1999, approximately 73% of the Company's net sales, inclusive of
La Oroya, were derived from tolling services, metals processing and other
sources less sensitive to lead metal price fluctuations.
The average market price, determined at the London Metal Exchange
(LME), for refined lead was $.23 per pound in fiscal 1999. As of December 31,
1999, the LME price for lead had declined to just under $.22 per pound. Over
the past two years the price has dropped as new sources of ore have been
developed in Australia and Ireland, and as
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China has increased its lead metal production and exports. Current prices are
near historical lows. Management believes that prices will recover from these
levels in the next several years, as several large lead producing mines will
be depleted of ore. This should bring about a balance or slight deficit in
supply versus demand. Over the past ten years, the average price of lead has
been approximately $.27 per pound. Management believes that lead prices over
the long term will reflect the historical industry average. In spite of low
lead prices, the Company's U.S. operations' income from operations was
marginally positive in fiscal 1999. While the Company expects to reduce
certain costs and achieve certain operating efficiencies during fiscal 2000
in an effort to mitigate the impact of low lead metal prices, these 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, acquired in October 1997, and the Cobriza mine and mill, acquired in
August 1998. 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, 1999, net
sales and net income were $461.7 million and $29.8 million, respectively.
Refined copper, silver, zinc, lead and gold accounted for 22%, 37%, 17%, 12%
and 4%, respectively, of fiscal 1999 net sales. Sales of various by-products
accounted for the balance of fiscal 1999 sales. For the year ended October
31, 1999, La Oroya was one of Peru's largest exporters, exporting
approximately 85% 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
contracts where the cost of concentrates 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
international market prices. Currently, La Oroya has secured approximately
90% of its concentrate requirements for fiscal 2000, through material
supplied by Cobriza and contracts with suppliers. For the year ended October
31, 1999, approximately 34% of the La Oroya smelter's copper concentrate
requirements were met by Cobriza, representing 100% of Cobriza's output.
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. Because 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, because 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 metal prices.
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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. The Company
also generates revenue from tolling fees received for recycling spent
lead-acid batteries and other lead-bearing materials for its customers. The
following table sets forth net sales for the Company's products and services:
<TABLE>
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Year Ended October 31,
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1999 1998 1997
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(dollars in thousands)
<S> <C> <C> <C>
Primary lead metal sales........................................ $217,062 $146,227 $156,077
Secondary lead:
Tolling.................................................... 23,441 21,892 22,369
Metal sales................................................ 31,754 31,110 29,039
Other...................................................... 5,620 6,547 6,063
Zinc concentrates............................................... 31,373 25,472 24,772
Copper concentrates............................................. 3,511 3,679 8,822
Fabricated Products............................................. 25,699 17,442 24,121
Other........................................................... 4,380 9,232 6,633
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Total..................................................... $342,840 $261,601 $277,896
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For the year ended October 31, 1999, 1998, and 1997 exports
represented approximately 2%, 2% and 7% of the U.S. operations' net sales,
respectively.
CUSTOMERS
The Company's U.S. operations had approximately 156 lead metal
customers in fiscal 1999 of which the five largest accounted for
approximately 35% 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
34% of U.S. net sales in fiscal 1999. The loss of any of the Company's 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. No single customer accounted for more than 10% of
the Company's consolidated fiscal 1999 net sales.
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. Because 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.
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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. The Viburnum-35 mine and Glover primary smelter obtain their
electric power from Black River Electric Cooperative, a public utility
located in Southeastern Missouri.
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 15 to the Company's
Consolidated Financial Statements.
EXPLORATION
The Company continues to explore actively within the Viburnum Trend,
which is one of the world's most productive lead ore deposits, located in
southeastern Missouri. 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 mining areas. 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 Missouri, 50 miles east
of the Viburnum trend, the Company is in the advanced stage of exploring a
lead-zinc-cobalt deposit. 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 1999, 1998 and 1997, the
Company spent $4.9 million, $5.3 million and $6.2 million, respectively, on
exploration activities, including $3.7 million, $4.1 million and $2.6
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 achieved the top award 14 times in the last
27 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.
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EMPLOYEES
As of October 31, 1999, the Company had 458 active salaried
employees and 1,375 active hourly employees in the United States. Management
believes that its labor relations are good. At October 31, 1999, 138 hourly
employees were represented by Local 7450 of the United Steelworkers of
America (USWA). Effective May 1999, the Company reached a three-year
agreement with the union, with a wage only reopener in May 2001.
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 1997 figures reflect activity preceding the Company's
acquisition of La Oroya.
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Twelve Months Ended October 31,
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1999 1998 1997
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(dollars in thousands)
<S> <C> <C> <C>
Copper................................... $103,392 $111,398 $148,898
Silver................................... 170,116 157,857 98,006
Zinc..................................... 76,305 76,370 83,521
Lead..................................... 56,560 60,782 65,385
Gold Bullion............................. 19,734 18,533 14,605
By-Products.............................. 35,627 30,040 21,469
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Total............................ $461,734 $454,980 $431,884
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CUSTOMERS
La Oroya had approximately 412 customers in 1999, including a wide
variety of industrial and international trading companies, of which the five
largest accounted for approximately 38% of its net sales. In 1999,
approximately 85% of net sales were exported, with sales to North American
countries representing approximately 35% of net sales, followed by Latin
America, Asia and Europe with 19%, 15% and 16% of net sales, respectively.
Substantially all of La Oroya's 1999 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 produce products that
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.
RAW MATERIALS
La Oroya's primary raw material is concentrate feedstock. In
addition, the Company utilizes various raw materials, principally water,
electricity, oxygen, coal and fluxes.
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COPPER. During 1999, approximately 62% of the copper concentrates
processed at La Oroya were obtained from the Peruvian domestic market,
approximately 53% of which was supplied by Cobriza. In fiscal 2000, La Oroya
expects to obtain approximately 69% of its copper concentrates from the
Peruvian domestic market, 50% of which will come 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
1999, were secured from the Peruvian domestic market. La Oroya requires
approximately 98,600 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 1999 lead concentrates were
obtained from the Peruvian domestic market, with the Paragsha and Mahr Tunnel
mines, owned by Volcan Compania Minera S.A., accounting for approximately 41%
of the total feedstock. Because La Oroya has no local Peruvian competitors in
lead smelting, it has a substantial freight advantage for all of the
concentrates produced in Peru, the total of which far exceeds La Oroya's
requirements.
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. In January 1999 the Company entered into a sale and
leaseback agreement for the La Oroya oxygen plant. See "Item 8 Financial
Statements and Supplementary Date", Note 8 to the Company's financial
statements for details of this transaction. 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 primarily 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 Empressa de
Electricidad de Los Andes S.A. (Electroandes), a local electric power company
owned by Centromin. The smelting complex consumes approximately 63 megawatts
of ongoing load which 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. The
contract expires in October 2007. Most of Cobriza's electrical power is also
provided by 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 wastewater 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.
Doe Run Peru has committed under its PAMA to implement the following projects
through December 31, 2006:
- - New sulfuric acid plants
- - Elimination of fugitive gases from the coke plant
- - Use of oxygenated gases in the anodic residue plant
- - Water treatment plant for the copper refinery
- - Recirculation system for cooling waters at the smelter
- - Management and disposal of acidic solutions at the silver refinery
- - Industrial waster water treatment plant for the smelter and refinery
- - Containment dam for the lead muds near the zileret plant
- - Granulation process water at the lead smelter
- - Anode washing system at the zinc refinery
- - Management and disposal of lead and copper slag wastes
- - Domestic waste water treatment and domestic waste disposal
La Oroya's operations historically and currently exceed some of the
applicable MEM maximum permissible limits pertaining to air emissions,
ambient air quality and wastewater 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 1) building sulfuric acid plants for the metal
circuits, 2) new converter and roaster technology for the copper circuit, 3)
replacement of the roaster equipment for the zinc circuit, 4) water and
sewage treatment facilities and 5) slag and slimes handling equipment and
disposal facilities. The Company estimates that expenditures related to
environmental matters will be approximately $189.9 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 $9.6 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.
7
<PAGE>
In conjunction with the MEM agreement, the Company has undertaken a
ten-year capital investment program, which runs through 2007, to enhance
various elements of its operations. The objective of the capital investment
program is to increase net sales by 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 1999. 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, 1999, the Company's Peruvian employees included
973 active salaried employees, 2,291 active hourly employees, and 1,573
people on a contract basis. There are three unions for hourly employees and
two unions for salaried employees. The principal union representing 78.1% 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 Sindacato de Trabajudones Ferroviarios Cobriza (Cobriza
Railway Workers Union) represent 1.7% of the hourly workers. The remaining
hourly workers (16.4%) are not affiliated with a union. On July 26, 1998, the
Company entered into a five-year labor agreement with the hourly unions at La
Oroya. The salaried employees are represented by the Sindicato de Empleados
Yauli-La Oroya (Yauli-La Oroya Employees Union), representing 41.2% of the
salaried employees and by the Sindicato de Empleados Ferroviarios La Oroya
(La Oroya Railway Employees Union), representing 3.5% of salaried employees.
The remaining salaried employees, 55.3%, are not affiliated with a union. The
current salaried employees' labor agreement continues until December 31,
2002. Management believes the Company's labor relations are good.
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 located near
its production shafts. 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 production capacities of the Company's mills are as
follows:
<TABLE>
<CAPTION>
Concentrator Capacity
Mill (Tons per Day)
------------ ---------------------
<S> <C>
Viburnum 12,000
Buick 7,200
Fletcher 5,000
Brushy Creek 5,000
West Fork 4,000
Sweetwater 6,800
</TABLE>
8
<PAGE>
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
approximately 136,000 tons per year. The Company owns the property.
The secondary lead recycling smelter is located in Boss, Missouri
approximately ten miles south of Viburnum. The Company owns the property. The
annual capacity of the facility is 120,000 tons. The facility operates under
a Resource Conservation and Recovery Act (RCRA) permit allowing it to handle
waste, primarily lead-bearing material.
The Company's fabricated products operations are located in Casa
Grande, Arizona, Vancouver, Washington, and Houston, Texas. All facilities
are 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 10 or 20 years and are renewable. The related mining
operations are conducted pursuant to four development contracts, which also
are for 10 or 20 years, as the case may be, subject to renewal.
The Company's development contracts consist of the following leases:
<TABLE>
<CAPTION>
Number of Expiration
Location Leases Date
------------ --------- -----------------
<S> <C> <C>
Viburnum 4 March 31, 2018
Fletcher 2 May 31, 2003
Buick 1 October 31, 2004
Brushy Creek 2 May 31, 2003
West Fork 1 January 31, 2003
Sweetwater 1 June 30, 2000
</TABLE>
The Company anticipates that the Sweetwater lease will be renewed by
the government for an additional 10 years. The government has not yet
assigned development contracts to these leases. The Company is required to
make royalty payments under the leases.
The Company's $50 million Senior Secured Notes are secured by a
first priority lien in the Sweetwater and West Fork mine and mill properties
and the Glover smelter property. These properties were acquired from Asarco
Incorporated's Missouri Lead Division (MLD) in September of 1998 (MLD
Acquisition).
9
<PAGE>
ORE RESERVES
The following table sets forth the mineable reserves, estimated by
the Company, as of October 31, 1999 for the Viburnum Trend mineral deposits
and the Higdon deposit, which is outside the Viburnum Trend.
RESERVE --MINEABLE RESERVES
AS OF OCTOBER 31, 1999
<TABLE>
<CAPTION>
Grade+
-------------------------
Tons Lead Zinc Copper
-------------- ---- ---- ------
(in thousands)
<S> <C> <C> <C> <C>
Proven................................. 13,636 7.46% 1.49% .31%
Probable............................... 51,656 5.14% 1.03% .19%
------
Total Proven and Probable........ 65,292 5.62% 1.13% .22%
======
</TABLE>
+ The estimated average extraction recovery after allowing for expected
dilution for lead, zinc and copper are approximately 89%. These losses
are included in the above reserve table. Estimated average
metallurgical recoveries for lead, zinc and copper are 96.5%, 83.0% and
50.0%, 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: 1) 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 2) 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 (short tons) 77,000
Lead (short tons) 121,000
Zinc (short tons) 83,000
Silver (thousands of troy ounces) 35,000
Gold Bullion (thousands of troy ounces) 76
</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 terrain. 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 10,000 tons per day and its current throughput is
approximately 8,300 tons per day.
Landholdings at Cobriza include approximately 2,600 acres of surface
ownership and approximately 128,000 acres of mining concessions. The current
mining operation is located on a portion of the area held. Economic
10
<PAGE>
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 four 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
Doe Run is a defendant in several lawsuits alleging certain damages
from lead emissions stemming from the operations at the Herculaneum smelter.
The cases brought in the Circuit Court 23rd Judicial Circuit at Hillsboro,
Jefferson County, Missouri are: KARLA RICHARDSON ET AL. V. THE DOE RUN
RESOURCES CORP., ET AL, filed September 12, 1995; SARA DIXON, ET AL. V. THE
DOE RUN RESOURCES CORP, filed August 25, 1995; RONALD HEATH, ET AL. V. THE
DOE RUN RESOURCES CORP. ET AL., filed November 20, 1995; ANDREA MASSA, ET AL.
V. THE DOE RUN RESOURCES CORP., ET AL., filed December 8, 1995; and GOVREAU,
II, ET AL. V. THE DOE RUN RESOURCES CORP., ET AL, filed May 21, 1999. The
DIXON and HEATH cases are class action lawsuits. In the DIXON case, the
plaintiffs are seeking 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 consist 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 HEATH case is seeking
certification of a class of property owners allegedly damaged by operations
from the smelter, but the potential size of the class is every homeowner in
Herculaneum, Missouri. The RICHARDSON, MASSA and GOVREAU cases are personal
injury actions by fifteen individuals collectively who allege damages from
the effects of lead poisoning they attribute to operations at the smelter.
Punitive damages also are being sought in each of the RICHARDSON, MASSA and
GOVERAU cases. The Company is vigorously defending all of these claims.
Preliminary investigation and research by Doe Run 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, Doe Run believes class certification is not appropriate.
On May 21, 1999, CHARLES MULLINS, II, ET AL. V. THE DOE RUN
RESOURCES CORPORATION, was filed in the Circuit Court 23rd Judicial Circuit
at Hillsboro, Jefferson County, Missouri. The case alleges certain damages
from discontinued mine facilities in St. Francois County. The plaintiffs seek
to have certified two separate classes. The first class would consist of
property owners, alleging that property values have been damaged due to the
tailings from the discontinued operations. The second class would be composed
of children, and the remedy sought is medical monitoring for the class.
The Company is one of several defendants in COFIELD ET AL. V LEAD
INDUSTRIES ASSOCIATION, INC., ET AL. filed on September 21, 1999 in the
Circuit Court for Baltimore City, Maryland. This is a class action seeking to
certify as a class the owners of all housing in the State of Maryland built
prior to 1978 that has lead paint on the premises. The complaint alleges that
all defendants were members of Lead Industries Association (LIA), a trade
association, who improperly promoted lead paint and seeks damages for paint
removal for all such housing in the state of Maryland. This suit also seeks
punitive damages.
The Company, with several other defendants, was named in SMITH ET
AL. V. LEAD INDUSTRIES ASSOCIATION, INC. ET al., filed on September 21, 1999
in the Circuit Court for Baltimore City, Maryland. Defendants are the same
defendants named in the COFIELD case except that this is a suit for personal
injuries by children alleging lead poisoning from lead paint in the family
residence. The suit requests damages, including punitive damages.
The Company is unable at this time to state with certainty the
expected outcome 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
on the results of operations, financial condition and liquidity of Doe Run.
All existing litigation involving 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.
11
<PAGE>
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, 1999. On January 5, 2000, the sole stockholder of
the Company, by written consent in lieu of meeting, re-elected Mr. Rennert as
Chairman and sole Director of the Company.
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.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth historical consolidated financial
data of The Doe Run Resources Corporation and subsidiaries for the five
fiscal years ended October 31, 1999, which have been derived from the
Company's audited consolidated financial statements. 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 audited financial statements and
the accompanying notes included elsewhere in this document.
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $225,143 $274,930 $280,467 $716,581 $804,574
Cost of sales................ 180,398 215,489 234,351 599,522 685,606
Depletion, depreciation and
amortization.............. 12,486 13,654 14,718 24,540 31,400
Selling, general and
administrative expenses... 8,405 10,079 10,959 34,816 35,323
Exploration expense.......... 1,926 2,912 2,705 4,312 3,919
-------- -------- -------- -------- --------
Operating income............. 21,928 32,796 17,734 53,391 48,326
Interest expense............. 14,361 14,348 13,740 40,659 59,417
Interest income.............. 140 113 21 9,586 14,755
Other income (expense)....... (132) 355 (37) 561 (1,586)
-------- -------- -------- -------- --------
Income before income tax
expense and extraordinary
item...................... 7,575 18,916 3,978 22,879 2,078
Income tax expense........... 3,252 6,451 4,331 11,398 3,488
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item........ 4,323 12,465 (353) 11,481 (1,410)
Extraordinary item net of
income tax benefit........ -- -- (1,062) (4,388) --
-------- -------- -------- -------- --------
Net income (loss)............ $ 4,323 $ 12,465 $ (1,415) $ 7,093 $ (1,410)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of October 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................ -- -- $ 8,943 $ 4,646 $ 9,886
Working capital..................... $ 32,571 $ 33,989 64,306 139,892 141,896
Property, plant and equipment, net.. 102,606 104,162 207,630 264,047 269,042
Total assets........................ 195,246 203,914 384,440 663,639 664,717
Total debt (including current
portion)......................... 90,645 82,791 234,740 478,302 485,868
Shareholder's equity................ 10,318 20,830 14,174 18,578 16,621
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis includes the both U.S.
operations and the Peruvian operations of the Company and should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto, and other financial information included herein.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
The Company reported a net loss of $1.4 million for the fiscal year
ended October 31, 1999 (1999) compared to net income of $7.1 million for the
fiscal year ended October 31, 1998 (1998). The Company's U.S. operations
reported a net loss of $31.2 million (excluding intercompany fee revenue of
$17.7 million) for 1999 compared to a net loss of $28.2 million (excluding
intercompany fee revenue of $16.1 million) for 1998. The U.S. operations' net
loss increased primarily as a result of increased depreciation expense,
increased interest expense and a write-off of deferred tax balances of $6.2
million associated with the change in the Company's tax status. See "Item 8.
Financial Statements and Supplementary Data" - Note 10 to the Company's
Consolidated Financial Statements for a discussion of the change in tax
status. These factors were partially offset by improved gross profits and
absence of the extraordinary loss related to early retirement of debt
recorded in 1998. Gross profits for U. S. operations improved $17.4 million
from 1998 to 1999, in spite of lower realized prices for lead metal and zinc
concentrates, due to increased production and sales volumes and lower unit
production costs.
Peruvian operations contributed $29.8 million to net income for 1999
(excluding intercompany fees and eliminations of $17.6 million) compared to
net income of $35.3 million (excluding intercompany fees and eliminations of
$16.2 million) for 1998. The decrease in Peruvian net earnings was due
primarily to lower margins on refined copper, which was primarily due to
higher feed costs for copper concentrates resulting from reduced treatment
charges. Increased currency exchange losses, and increased interest expense,
partially offset by lower income taxes and absence of the extraordinary loss
affecting 1998, also contributed to the reduction in net income.
The Company's results for the year ended October 31, 1999 reflect
declines in the market prices of copper, zinc, silver and lead from the prior
year. The following table sets forth average London Metal Exchange (LME)
prices for lead, copper and zinc and the average London Bullion Market
Association (LBMA) price for silver for the periods indicated:
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------
Average Prices 1999 1998 1997
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Lead ($/short ton) $ 458.40 $ 486.40 $ 589.40
Copper ($/short ton) 1,394.00 1,546.40 2,124.80
Zinc ($/short ton) 946.80 954.20 1,181.80
Silver ($/troy ounce) 5.18 5.63 4.80
</TABLE>
14
<PAGE>
The following table sets forth the Company's production statistics
for the periods indicated (INCLUDES LA OROYA'S PREDECESSOR FOR THE PERIOD
NOVEMBER 1,1996 TO OCTOBER 23, 1997):
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
U.S. OPERATIONS
Lead metal - primary (short tons) 384,441 266,739 241,143
Lead metal - secondary (short tons) 117,718 109,788 100,415
Lead concentrates (metal content, short tons) 381,769 262,684 247,187
Ore Grade 5.66% 5.52% 5.17%
PERUVIAN OPERATIONS
Refined copper (short tons) 74,314 70,042 70,928
Refined lead (short tons) 120,129 117,975 107,462
Refined zinc (short tons) 80,940 78,508 75,003
Refined silver (thousands of troy ounces) 32,639 27,712 21,590
Refined gold (thousands of troy ounces) 71 63 42
</TABLE>
In the United States, mine production of lead metal in concentrates
for 1999 increased by 45.3% compared to 1998. Of this increase, 82.8% was
attributable to the MLD Acquisition. Based on evaluations designed to
optimize mine production in light of low metal prices and the availability of
lead concentrates for purchase, operating plans were modified beginning in
the second quarter of 1999. As a result, mining of lower grade areas was
scaled back from planned levels. Production by existing properties was 8.3%
better than the prior year primarily due to an increase in ore grade
resulting from these production plan modifications.
Primary smelter production in 1999 increased 44.1% over 1998
primarily due to the MLD acquisition. The Company's Glover smelter, which was
acquired in the MLD Acquisition, set an all time annual production record of
136,464 tons in 1999. The Company's Herculaneum smelter produced
approximately the same tonnage in 1999 and 1998. This was accomplished in
spite of cooling system failures on its blast furnaces, which hampered
production during the first quarter of 1999 and a five-day, unscheduled
shutdown in the fourth quarter for maintenance of the stack.
Secondary smelter production exceeded the prior year by 7.2% in
1999. The secondary smelter set three consecutive monthly production records
in the fourth quarter and achieved a new annual production record for the
seventh consecutive year. These improvements were accomplished in spite of
the failure of the reverberatory furnace floor in July 1999, which resulted
in unplanned maintenance downtime and lost production. As part of the
rebuild, a new burner design was installed on the reverbatory furnace which
increased its capacity by approximately 25%. This change, along with other
improved operating efficiencies, enabled the smelter to increase production,
and reduce unit costs.
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. During the third quarter of 1999 the capacities
of the lead and zinc refineries were each increased by approximately five
percent. The benefits of these improvements, partially offset by problems
obtaining suitable feed material, are reflected in the production results for
1999. Production of copper, lead, zinc, silver and gold for 1999 all exceeded
1998. New annual production records were set for copper, silver, lead, and
zinc. These results were achieved in spite of the reduced availability of
suitable copper concentrate feed. The feed availability problems were the
result of tight market conditions and less than expected production from the
Company's Cobriza mine, which was due to lower than expected grade. Market
conditions are expected to improve slightly in fiscal 2000 and the Company
plans to improve production and grade at Cobriza through implementation of a
pillar recovery program in the second half of fiscal 2000.
15
<PAGE>
The following tables set forth the separate operating results, sales
volumes and realized prices for the Company's U. S. and Peruvian operations
(excluding intercompany transactions) for the periods indicated:
RESULTS OF U.S. OPERATIONS
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales (a) $ 342,840 $ 261,601 $ 277,896
Costs and expenses:
Cost of sales 295,005 231,166 232,324
Depletion, depreciation and amortization 23,557 17,726 14,567
Selling, general and administrative 17,450 17,171 10,925
Exploration 3,919 4,312 2,705
--------- --------- ---------
Total costs and expenses 339,931 270,375 260,521
--------- --------- ---------
Income (loss) from operations 2,909 (8,774) 17,375
Other income (expense):
Interest expense (40,786) (26,730) (13,483)
Interest income 14,119 8,977 21
Other, net (184) (939) (9)
--------- --------- ---------
(26,851) (18,692) (13,471)
--------- --------- ---------
Income (loss) before income tax expense
and extraordinary item (23,942) (27,466) 3,904
Income tax expense (benefit) 7,239 (1,272) 3,981
--------- --------- ---------
Loss before extraordinary item (31,181) (26,194) (77)
Extraordinary item - (2,019) (1,062)
--------- --------- ---------
Net loss $ (31,181) $ (28,213) $ (1,139)
========= ========= =========
</TABLE>
(a) Intercompany fees that are eliminated in the consolidated results of the
Company and have been excluded from the results presented above are as
follows:
<TABLE>
<S> <C> <C> <C>
Net Sales $ 17,690 $ 16,089 $ -
SALES VOLUMES (SHORT TONS)
Lead metal 450,782 312,448 284,711
Zinc concentrates 99,419 76,515 69,734
Copper concentrates 15,883 17,753 26,613
REALIZED PRICES ($/TON)
Lead metal $ 551.97 $ 567.57 $ 650.19
Zinc concentrates 315.56 332.90 355.24
Copper concentrates 221.05 207.23 331.49
</TABLE>
16
<PAGE>
RESULTS OF PERUVIAN OPERATIONS
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------
1999 1998 1997(a)
--------- --------- ---------
<S> <C> <C> <C>
Net sales (b) $ 461,734 $ 454,980 $ 431,884
Costs and expenses:
Cost of sales (b) 390,601 368,356 366,928
Depletion, depreciation and amortization 7,843 6,814 5,774
Selling, general and administrative (b) 17,873 17,645 18,558
--------- --------- ---------
Total costs and expenses 416,317 392,815 391,260
--------- --------- ---------
Income from operations 45,417 62,165 40,624
Other income (expense):
Interest expense (18,631) (13,929) (1,468)
Interest income 636 609 -
Other, net (1,402) 1,500 (891)
--------- --------- ---------
(19,397) (11,820) (2,359)
--------- --------- ---------
Income before income tax expense
and extraordinary item 26,020 50,345 38,265
Income tax expense (benefit) (3,751) 12,670 11,863
--------- --------- ---------
Income before extraordinary item 29,771 37,675 26,402
Extraordinary item - (2,369) -
--------- --------- ---------
Net income $ 29,771 $ 35,306 $ 26,402
========= ========= =========
</TABLE>
(a) Includes La Oroya's predesessor for the period November 1, 1996 to
October 23, 1997.
(b) Intercompany sales and fees that are eliminated in the consolidated
results of the Company and have been excluded from the results presented
above are as follows:
<TABLE>
<S> <C> <C> <C>
Net sales $ 2,898 $ 3,311 $ -
Cost of sales 3,013 3,196 -
Selling, general and administrative expense 17,690 16,089 -
SALES VOLUMES
Copper (short tons) 74,352 70,629 69,484
Lead (short tons) 120,737 119,022 106,690
Zinc (short tons) 79,121 79,291 71,024
Silver (thousands of troy ounces) 32,722 27,957 20,822
Gold (thousands of troy ounces) 71 63 42
REALIZED PRICES
Copper ($/ton) $1,390.57 $1,539.35 $2,127.51
Lead ($/ton) 490.65 518.44 612.97
Zinc ($/ton) 964.41 991.14 1,559.97
Silver ($/troy ounce) 5.20 5.64 4.80
Gold ($/troy ounce) 278.68 296.66 348.12
</TABLE>
Results of operations for the years ended October 31, 1999, 1998,
and 1997 include the results of the Company's U.S. and Peruvian 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."
NET SALES for 1999 were $804.6 million compared to $716.6 million
for 1998. Of this increase, $6.8 million is attributable to Peruvian
operations. U.S. net sales for 1999 were $81.2 million greater than 1998
primarily due to increased lead metal and zinc concentrate sales volume
partially offset by lower metal prices. Lead metal net sales
17
<PAGE>
increased 40.3% from $177.3 million in 1998 to $248.8 million in 1999. An
increase of $71.5 million in lead metal net sales is due to increased sales
volume, which resulted from the production increase discussed above and
continued strong demand in the U.S. market. The average LME price for lead
metal decreased 5.8% in 1999, compared to 1998. After improvements in
premiums and hedging, the Company's net realized price was 2.7% lower in
1999, resulting in a decline in net sales of $7.0 million. Net realized
prices for metals, concentrates, and by-products include the effects of
changes in: 1) premiums received, including charges for special alloys and
shapes, 2) adjustments for provisionally priced sales, 3) treatment and
refining charges and 4) net hedging activity. Zinc concentrate sales were
$5.9 million higher in 1999, compared to 1998, due to a 29.9% volume increase
partially offset by a 5.2% reduction in the net realized price. Other sales
were higher primarily due to an increase of approximately $8.3 million in
sales by FPI, which was partially offset by a reduction in sales of imported
zinc metal and by-products. FPI's sales improved primarily due to a return to
full production by its Seafab Metals division, after relocating its
fabricating plant during 1998. Increased sales of radiation shielding
products by its Lone Star Lead division also contributed to the increase.
COST OF SALES for 1999 was $685.6 million compared to $599.5 million
for 1998. Of this increase, $22.2 million is attributable to Peruvian
operations. U.S. cost of sales for 1999 increased by $63.8 million, or 27.6%
compared to 1998. Lead metal sales volume improved 44.3% or 138,334 tons over
the prior year, increasing cost of sales by $77.5 million. Other volume
changes added approximately $8.0 million to cost of sales. These volume
increases were partially offset by lower unit production costs which were
primarily the result of the Company's programs of cost reduction and the
productivity enhancements, and efficiencies realized as a result of the MLD
Acquisition.
DEPLETION, DEPRECIATION AND AMORTIZATION for 1999 increased by $6.9
million compared to 1998. Of this increase, $1.0 million is attributable to
Peruvian operations. The increase in depletion, depreciation, and
amortization for U.S. operations for 1999 is primarily attributable to the
MLD Acquisition partially offset by assets becoming fully depreciated during
the year.
INCOME FROM OPERATIONS for the 1999 was $48.3 million compared to
$53.4 million the 1998. A decrease of $16.7 million is attributable to
Peruvian operations. The remainder of the change is primarily due to the
increased sales and production volumes and lower production cost discussed
above.
INTEREST EXPENSE increased by $18.8 million in 1999, compared to
1998, due to an increase in the Company's average outstanding debt balance
and higher average interest rates. The increase in the Company's average
outstanding debt balance was approximately $154.5 million from 1998 to 1999.
This increase was primarily the result of the $125 million deposit made in a
foreign bank as collateral for a loan made to Doe Run Mining (Special Term
Deposit). Borrowing to finance the MLD Acquisition and increased working
capital required for operation of the MLD assets also contributed to the
increase.
INTEREST INCOME increased $5.2 from 1998 to 1999 primarily due to
interest income on the $125.0 million Special Term Deposit.
INCOME TAX EXPENSE for 1999 reflects the impact of the change in tax
status effective at the beginning of the fiscal year. Due to this change, the
elimination of federal and most state deferred tax assets and liabilities
resulted in a charge to income tax expense of $6.2 million, for U.S.
operations, in 1999. Peruvian taxes in 1999 reflect recognition of tax
benefits related to tax losses generated in 1999 and to an acquired tax loss
of Cobriza, recognized upon its merger with Doe Run Peru S.R.L., for which no
previous benefit had been recognized.
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, net of income tax benefit, were $4.4 million in
1998 and $1.1 million in 1997. The Company's U.S. operations reported a net
loss of $28.2 million (excluding intercompany fees of $16.1 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
18
<PAGE>
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.
Mine production of lead metal contained in concentrates for 1998
increased 6.3% over 1997 primarily due to the MLD Acquisition. Also
contributing to the production increase was an increase in the grade of ore
mined from existing properties from 5.17% in 1997 to 5.55% in 1998, which was
primarily due to the selective mining described above.
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 equipment and improved 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 improved smelter operating efficiencies as well as an increase in
cable strip, a feed material that requires less processing.
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 causing it to be inoperative
for approximately six weeks during 1998.
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.
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 1997
primarily due to lower lead, zinc and copper prices partially offset by
improved lead metal volume.
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. 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 volume decrease was mainly 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. Sales
by the Seafab Metals Company, 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,
increase smelter production, 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.
19
<PAGE>
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. Salaries, wages and benefits, net worth
appreciation, and other expenses 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.
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 1998,
which differed from the statutory federal rate of 35% primarily due to a
valuation allowance recorded against a deferred tax asset. This asset is for
the future federal tax benefit of deferred foreign tax liabilities that may
be taken as foreign tax credits when paid in the future.
RESULTS OF PERUVIAN OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES for 1999 were $461.7 million compared to $455.0 million in
1998. The increase is due to improved sales volumes partially offset by lower
metal prices. The production improvements discussed previously increased
refined silver sales volume by 4.8 million ounces or 17.0%, increasing net
sales by $26.9 million. Primarily due to an 8.0% decrease in the average LBMA
price for silver, the Company's net realized price for refined silver was
7.8% lower in 1999, reducing net sales by $14.6 million. Refined copper net
sales were lower by $5.3 million in 1999, compared to 1998, due to a 9.7%
decrease in the net realized price partially offset by a 5.3% increase in
sales volume.
COST OF SALES increased $22.2 million from 1998 to 1999. Increased
sales volumes of silver, lead, copper, blister copper and other by-products,
partially offset by lower refined zinc sales volume, account for a $34.5
million increase in cost of sales. The increase due to volume was partially
offset by lower unit production costs for lead, zinc and silver that were
primarily the result of lower cost of feed costs for these metals. The feed
costs were lower in 1999, compared to 1998 due to the decrease in average
market prices for metals, partially offset by lower treatment charges for
copper.
DEPRECIATION AND AMORTIZATION expense increased by $1.0 million
1999, compared to 1998, primarily due to recent capital additions.
INCOME FROM OPERATIONS decreased $16.7 million for 1999, compared to
1998, due primarily to the factors discussed above.
INTEREST EXPENSE increased $4.7 million for 1999 compared to the
prior year, due to an increase of approximately $40.2 million in the average
outstanding debt balance and higher average interest rates.
OTHER NET, expense was $1.4 million in 1999 compared to other net
income of $1.5 million in 1998. The change is primarily due to fluctuations
in exchange gains and losses partially offset by reductions of expenses
related to the El Nino flooding that occurred during 1998 and other
miscellaneous income.
20
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997 (INCLUDING LA OROYA'S PREDECESSOR
FOR THE PERIOD NOVEMBER 1,1996 TO OCTOBER 23, 1997)
NET SALES for 1998 were $455.0 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 $.84 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 0.4% 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 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 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 $21.5 million in 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 was $1.5 million in 1998 compared to other
expense of $0.9 million in 1997. The improvement is primarily due to
increases in various miscellaneous income items offset by: 1) reductions in
translation gains and losses; 2) reductions in costs associated with the
flooding caused by El Nino, primarily road and rail repairs; and 3) a
reduction of $3.2 million related to Centromin's privatization program which
was completed in 1997.
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, 1999,
$11.8 million was outstanding, exclusive of $6.4 million of letters of
credit, under the Doe Run Revolving Credit Facility.
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, 1999, $20.0 million, exclusive of $1.0 million of
letters of credit and customs bonds, was outstanding under the Doe Run Peru
Revolving Credit Facility. The Company also has available, in Peru, unsecured
and uncommitted credit arrangements, and additional availability related to
letters of credit and customs bonds, provided by local banks. At October 31,
1999, $3.6 million exclusive of $13.9 million of letters of credit and
customs bonds was outstanding under these arrangements. Borrowings under the
Peruvian working capital facilities, including the Doe Run Peru Revolving
Credit Facility, are limited to $60.0 million under the indentures governing
the Company's $200 million, 11.25% Senior Notes, $55 million Floating
Interest Rate Notes and $50 million 11.25% Senior Secured Notes (collectively
the Notes).
21
<PAGE>
Net unused availability at October 31, 1999 was $38.8 million under
the Doe Run Revolving Credit Facility and $19.0 million under the Doe Run
Peru Revolving Credit Facility. In addition to availability under the credit
facilities, the Company had $9.9 million of cash at October 31, 1999.
For 1999, cash provided by operating activities was $35.9 million,
cash used in investing activities was $36.3 million and cash provided by
financing activities was $5.6 million (this includes net proceeds of $17.9
million from sale and leaseback transactions, including the sale and
leaseback of La Oroya's oxygen plant discussed below).
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 $17.2 million were used
to reduce the outstanding balance on the Doe Run Peru Revolving Credit
Facility and to pay the outstanding balance of an obligation to the Company
of $3.8 million. The lease requires monthly payments of approximately $0.4
million and has a purchase option of $0.2 million at the end its five-year
term. On October 6, 1999 the Company borrowed $5.7 million, under a ten-year
9.9% secured note, to finance the purchase of capital assets. Payments are
due monthly under the note.
In the U.S., the Company had capital expenditures of $12.7 million
for 1999 and has projected total capital expenditures, in the U.S., for
fiscal 2000 of approximately $10.5 million, primarily to support ongoing
operations and for operational and environmental improvements. In addition to
these capital investments, the Company's U.S. operations expended an average
of approximately $64.8 million per year on repairs and maintenance from
fiscal 1996 through fiscal 1999. 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 acquisition of its Peruvian operations, 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. The
Company has spent approximately $77.0 million qualifying expenditures under
the investment commitment through October 31, 1999. These expenditures
included: capital expenditures of $9.6 million and $23.3 million, and
operating expenses of $8.5 million and $17.3 million for 1999 and 1998,
respectively, as well as a working capital increase of $18.3 million during
1998. Peruvian operations had capital expenditures of $23.3 million in the
1999 period and have projected total capital expenditures for fiscal 2000 of
approximately $26.0 million, primarily for environmental improvements and to
support ongoing operations.
The Company has substantial indebtedness and debt service
requirements. As of October 31, 1999, on a consolidated basis, the Company
had $485.9 million of indebtedness outstanding, or $360.9 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 the Company's liquidity needs for the foreseeable future.
The Doe Run Revolving Credit Facility, the Doe Run Peru
Revolving Credit Facility, and the indentures governing the 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 is dependent 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.
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 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). As a
result of such election, generally, no provision for federal income taxes
will be included in the Company's statements of income for periods beginning
after October 31, 1998. However, under the "built-in gain" provisions of the
tax law, federal and state taxes may become payable and will be charged to
the Company's statement of income. Such taxes are measured by the excess of
the fair market value of assets over their tax bases at 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
generate any taxes under the built-in gain provisions of the tax laws. See
"Item 8. Financial Statements--Note 10 to the Company's Consolidated
Financial Statements."
22
<PAGE>
YEAR 2000 MATTERS
As of January 20, 2000, the Company had experienced no significant
problems related to the Year 2000 conversion either domestically or foreign.
All computerized information and process control systems were operating
normally. The availability of utility and transportation services has
continued without significant incident. The performance of critical customers
and suppliers continues without notable changes. Production and business
activities were normal at all locations and the Company has no reason to
anticipate any Year 2000 related problems.
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; outcome of litigation; and major equipment failures.
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.
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, silver, and gold. Contract positions are
designed to ensure that 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. None of the aforementioned activities have been entered into for
speculative purposes.
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, 1999 and 1998, and the
related consolidated statements of operations, comprehensive income and
shareholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 1999. 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 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, 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended October 31, 1999, in conformity with generally accepted
accounting principles.
(signed) KPMG LLP
December 10, 1999
-24-
<PAGE>
THE DOE RUN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 9,886 $ 4,646
Trade accounts receivable, net of allowance for
doubtful accounts of $876 and $675, respectively 88,884 86,338
Inventories 120,261 126,803
Prepaid expenses and other current assets 33,861 30,306
Net deferred tax assets 2,115 --
--------- ---------
Total current assets 255,007 248,093
Property, plant and equipment, net 269,042 264,047
Special term deposit 125,000 125,000
Net deferred tax assets 1,606 8,015
Other noncurrent assets, net 14,062 18,484
--------- ---------
Total assets $ 664,717 $ 663,639
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt $ 8,582 $ 2,018
Accounts payable 54,736 53,698
Accrued liabilities 49,793 50,670
Net deferred tax liabilities -- 1,815
--------- ---------
Total current liabilities 113,111 108,201
Long-term debt, less current maturities 477,286 476,284
Net deferred tax liabilities -- 2,571
Other noncurrent liabilities 57,699 58,005
--------- ---------
Total liabilities 648,096 645,061
Shareholder's equity:
Common stock, $.10 par value, 1,000 shares authorized,
issued, and outstanding -- --
Additional paid-in capital 5,238 5,000
Retained earnings 12,168 13,578
Accumulated other comprehensive income (785) --
--------- ---------
Total shareholder's equity 16,621 18,578
--------- ---------
Total liabilities and shareholder's equity $ 664,717 $ 663,639
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
25
<PAGE>
THE DOE RUN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 804,574 $ 716,581 $ 280,467
Costs and expenses:
Cost of sales 685,606 599,522 234,351
Depletion, depreciation and amortization 31,400 24,540 14,718
Selling, general and administrative 35,323 34,816 10,959
Exploration 3,919 4,312 2,705
--------- --------- ---------
Total costs and expenses 756,248 663,190 262,733
--------- --------- ---------
Income from operations 48,326 53,391 17,734
Other income (expense):
Interest expense (59,417) (40,659) (13,740)
Interest income 14,755 9,586 21
Other, net (1,586) 561 (37)
--------- --------- ---------
(46,248) (30,512) (13,756)
--------- --------- ---------
Income before income tax expense and extraordinary item 2,078 22,879 3,978
Income tax expense 3,488 11,398 4,331
--------- --------- ---------
Income (loss) before extraordinary item (1,410) 11,481 (353)
Extraordinary item related to early retirement
of debt, net of income tax benefit -- (4,388) (1,062)
--------- --------- ---------
Net income (loss) $ (1,410) $ 7,093 $ (1,415)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
26
<PAGE>
THE DOE RUN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ (1,410) $ 7,093 $ (1,415)
Minimum pension liability (785) -- --
-------- -------- --------
Comprehensive income (loss) (2,195) 7,093 (1,415)
Shareholder's equity, beginning of year 18,578 14,174 20,830
Less dividends declared and paid:
Preferred stock - $0, $76 and $100 per share, respectively -- (189) (250)
Common stock - $4,991 per share -- -- (4,991)
Redemption of preferred stock -- (2,500) --
Additional paid in capital - expenses paid by parent 238 -- --
-------- -------- --------
Shareholder's equity, end of year $ 16,621 $ 18,578 $ 14,174
======== ======== ========
</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>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,410) $ 7,093 $ (1,415)
Extraordinary item related to retirement of debt -- 6,750 1,327
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 31,400 24,540 14,718
Imputed interest and amortization of deferred financing fees 3,979 2,288 5,892
Deferred income taxes (92) (3,560) --
Expenses paid by parent 238 -- --
Increase (decrease) resulting from changes in:
Trade accounts receivable (2,546) (30,967) 2,023
Inventories 6,542 (25,066) (3,062)
Prepaid expenses and other current assets (3,404) (24,044) (1,201)
Accounts payable 1,038 12,128 6,636
Accrued liabilities (899) 15,048 (1,939)
Other noncurrent assets and liabilities, net 1,319 1,218 (4,959)
--------- --------- ---------
Net cash provided by (used in) operating activities 36,165 (14,572) 18,020
Cash flows from investing activities:
Special term deposit -- (125,000) --
Purchases of property, plant and equipment (35,939) (27,689) (13,476)
Payments for acquisitions (375) (58,189) (128,242)
--------- --------- ---------
Net cash used in investing activities (36,314) (210,878) (141,718)
Cash flows from financing activities:
Proceeds from (payments on) revolving loans and
short term borrowings, net (13,417) 45,842 (6,399)
Proceeds from long-term debt 5,665 424,713 365,945
Payments on long-term debt (4,431) (230,845) (212,453)
Proceeds from sale/leaseback transactions 17,923 -- --
Payment of deferred financing costs (351) (15,868) (8,573)
Extraordinary item related to retirement of debt -- -- (638)
Payment of dividends -- (189) (5,241)
Redemption of preferred stock -- (2,500) --
--------- --------- ---------
Net cash provided by financing activities 5,389 221,153 132,641
--------- --------- ---------
Net increase (decrease) in cash 5,240 (4,297) 8,943
Cash at beginning of period 4,646 8,943 --
--------- --------- ---------
Cash at end of period $ 9,886 $ 4,646 $ 8,943
========= ========= =========
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest, net of capitalized interest $ 55,507 $ 32,653 $ 9,196
========= ========= =========
Income taxes $ 6,577 $ 19,524 $ 3,480
========= ========= =========
</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, 1999, 1998, AND 1997
(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.
RECLASSIFICATIONS
Certain balances have been reclassified from their previous presentation
in order to conform to their current presentation.
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, zinc and silver 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, foreign currency transaction 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 inventories. Supplies and repair parts are principally
stated at average cost, net of reserves for obsolescence.
Inventory costs include labor, material and other production costs.
29
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at the lower of cost or fair
value. Long-lived assets are 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.
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. 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.
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
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 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.
30
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
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
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 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.
Deferred tax assets and liabilities are recognized in foreign
jurisdictions 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.
31
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
(2) BUSINESS ACQUISITIONS
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 $ 54,285
Other current assets 1,382
Property, plant and equipment 99,043
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 in 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 (ASARCO) 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 $ 6,804
Property, plant and equipment 51,633
Accounts payable and other accrued liabilities (1,106)
Reserve for reclamation costs (2,690)
-----------
$ 54,641
===========
</TABLE>
32
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
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.
On August 31, 1998, Doe Run Mining acquired the stock of Empresa Minera
Cobriza S.A. (Cobriza) from Centromin. The assets purchased included a
copper mine, mill 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 $2,400, $2,000, and $1,200 for each of the years ended
October 31, 1999, 1998, and 1997, 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, 1999, 1998, and 1997, the Company reimbursed Renco for costs
of approximately $3,695, $4,352, and $2,473, respectively, under the
Renco insurance program.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Finished metals and concentrates $ 10,527 $ 10,954
Metals and concentrates in process 60,139 55,647
Materials, supplies and repair parts 49,595 60,202
---------- ----------
$ 120,261 $ 126,803
========== ==========
</TABLE>
Materials, supplies and repair parts are stated net of reserves for
obsolescence of $4,300 and $4,559 at October 31, 1999 and 1998,
respectively.
The FIFO cost of inventories valued under the LIFO cost method were
approximately $80,235 and $82,271 at October 31, 1999 and 1998,
respectively. If the FIFO cost method had been used to determine cost,
inventories would have been $1,729 and $1,578 higher at October 31, 1999
and 1998, respectively.
33
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
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 1999 and 1997. The Company calculates the effect of LIFO
liquidations on net income based on the current cost method. The effect
was an increase in net income of $400 and $899 and for the years ended
October 31, 1999 and 1997, respectively.
(5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Land $ 12,471 $ 12,075
Buildings and improvements 69,636 66,435
Machinery and equipment 235,490 217,668
Mineral interests 31,313 30,937
Construction in progress 21,653 7,441
------------- -------------
370,563 334,556
Less accumulated depreciation and depletion 101,521 70,509
------------- -------------
$ 269,042 $ 264,047
============= =============
</TABLE>
Rental expense applicable to minimum rentals under operating leases was
$7,567, $6,883, and $5,543 for the years ended October 31, 1999, 1998,
and 1997, respectively. Contingent rental payments, based primarily on
equipment usage, were $405, $532, and $674 for the years ended October
31, 1999, 1998, and 1997, 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>
<S> <C>
Fiscal year ending October 31:
2000 $ 6,516
2001 4,503
2002 2,842
2003 1,952
2004 899
Thereafter 3,337
------------
$ 20,049
============
</TABLE>
(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.
34
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest $ 6,467 $ 6,412
Reclamation and environmental 4,331 3,422
Property taxes 4,878 3,671
Payroll, related taxes and employee benefits 22,127 20,489
Other 11,990 16,676
------------ ------------
$ 49,793 $ 50,670
============ ============
</TABLE>
Reclamation and environmental costs represents the estimate of
reclamation and environmental spending for the following fiscal year. See
Note 15.
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revolving credit facilities $ 31,813 $ 48,842
11.25% unsecured senior notes due March 15, 2005 200,000 200,000
Floating interest rate unsecured senior notes due March 15,
2003, effective rate of 12.23% at October 31, 1999 55,000 55,000
11.25% secured senior notes due March 15, 2005, less unamortized
discount of $4,345 and $5,153 at October 31, 1999 and 1998,
respectively 45,655 44,847
Note payable to foreign bank 125,000 125,000
Pollution control financing, maturing December 15,1998,
annual principal payments due on December 15, interest
at 5.75%, payable semiannually - 895
Deferred purchase price obligation, no stated interest rate 2,638 3,718
Note payable, interest payable at 9.89%, maturing July 6, 2009 5,582 -
Sale and leaseback obligations 16,055 -
Capital leases 513 -
------------- -------------
482,256 478,302
Less current maturities 4,970 2,018
------------- -------------
Long-term debt, less current maturities $ 477,286 $ 476,284
============= =============
</TABLE>
35
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(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. Revolving loans outstanding
under this facility were $11,813 at October 31, 1999. Actual availability
was $38,836 at October 31, 1999. The facility bears interest at the prime
rate plus .75% per annum and the effective rate at October 31, 1999 was
9%. 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.
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 through June 1999, and 2.0% per annum since July 1999. The
effective rate was 7.70% and 9.23% at October 31, 1999 and 1998,
respectively. Individual loans must be greater than $1,000. Revolving
loans outstanding under this facility were $20,000 at October 31, 1999.
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 $19,005 at October 31, 1999. 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 16
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 of a 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: (1) repay principal and interest on a term loan of
$128,125 and $1,127, respectively, (2) repay balances under existing
revolving credit facilities of $14,444, (3) 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 (4) 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 16.
The deferred purchase price obligation is payable to Centromin for the
assets of the Cobriza mine purchased in 1998 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%.
The note payable financed the purchase of certain equipment, and is
secured by that equipment. The note is payable in monthly installments of
$75.
36
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
In January 1999, Doe Run Peru finalized an agreement for the sale and
leaseback of its oxygen plant at the La Oroya facility for $17,162. Doe
Run Peru has an option to repurchase the oxygen plant at the end of the
five-year lease term for $200. In April 1999, Doe Run Peru entered into a
sale and leaseback of computer equipment for $761. These transactions
have been accounted for as financing arrangements. The interest rates
applicable under the oxygen plant and computer equipment leases are
12.35% and 8.50%, respectively.
In conjunction with early extinguishment 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, 1999 are as follows:
<TABLE>
<S> <C>
Fiscal year ending October 31:
2000 $ 4,970
2001 17,298
2002 24,349
2003 59,594
2004 2,011
Thereafter 374,034
------------
$ 482,256
============
</TABLE>
Doe Run Peru has available two uncommitted lines of credit. Borrowings
are in the form of short-term notes, with interest rates determined at
the borrowing date. Borrowings under these lines of credit were $3,612 at
October 31, 1999.
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, 1999,
and accordingly, the related debt is classified as noncurrent.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1999 and 1998, the fair values of the Company's financial
instruments, except for long-term debt and the hedge positions described
in Note 14, 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. The fair value of the Company's long term
debt was approximately $433,000 and $430,000 at October 31, 1999 and
1998, respectively.
37
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
(10) INCOME TAXES
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 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 totaling $6,200 was recorded as
income tax.
For the previous fiscal years, the Company, pursuant to a tax sharing
agreement with Renco, provided for federal income taxes as if the Company
filed separate income tax returns except that, generally, no carryforward
of net operating losses was permitted. The Company remitted to Renco
annually the amount of federal income taxes provided. The Company's
current state income tax expense reflects payments to Renco for taxes
paid on its behalf.
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 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,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal $ 238 $ 3,446 $ 3,882
State - 529 99
Foreign 3,342 10,983 419
----------- ----------- ----------
3,580 14,958 4,400
----------- ----------- ----------
Deferred:
Federal 6,200 (6,200) -
Foreign (6,292) 2,640 (69)
----------- ----------- ----------
(92) (3,560) (69)
----------- ----------- ----------
$ 3,488 $ 11,398 $ 4,331
=========== =========== ==========
</TABLE>
38
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
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
---------- ---------
<S> <C> <C>
Income tax expense at statutory rate $ 8,008 $ 1,392
Increase (reduction) in income tax expense resulting
from:
Percentage depletion in excess of basis - (2,532)
Change in the balance of the valuation allowance
for deferred tax assets 1,786 4,487
Nondeductible expenses 894 477
State income taxes, net of federal benefit 344 64
Foreign income taxes at effective rates in excess of
the statutory rate - 324
Other, net 366 119
---------- ---------
$ 11,398 $ 4,331
========== =========
</TABLE>
The income tax expense recorded in the consolidated statement of
operations for the year ended October 31, 1999 reflects primarily: 1)
deferred federal income tax expense of $6,200 relating to the elimination
of net U.S. federal and state deferred tax assets, including related
valuation allowances, as a result of the change in tax status, 2) current
U.S. federal income tax expense resulting from the change in tax status,
which will be paid by Renco and 3) the income tax provision of the
Company's Peruvian subsidiaries. The net income tax benefit generated by
the Peruvian subsidiaries results primarily from the recognition of
benefits related to tax losses generated in 1999 and to an acquired tax
loss of Cobriza for which no previous benefit was recognized. As a result
of a merger of Cobriza with Doe Run Peru S.R.L., management believes that
it is more likely than not that the future benefits of this tax loss will
be realized.
39
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(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,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 1,343 $ -
Accounts receivable and other current assets - 318
Property, plant and equipment 33,083 43,609
Accrued liabilities 772 5,319
Postretirement benefits - 4,591
Reclamation and environmental costs - 11,793
Alternative minimum tax credits - 8,981
Tax loss carryforwards 4,996 1,593
Other noncurrent assets and liabilities 3,787 7,782
----------- -----------
43,981 83,986
Less valuation allowance (33,083) (60,316)
----------- -----------
Total deferred tax assets 10,898 23,670
----------- -----------
Deferred tax liabilities:
Inventories and other current assets - (7,921)
Property, plant and equipment (7,177) (5,394)
Mineral properties - (4,579)
Pension asset - (2,147)
----------- -----------
Total deferred tax liabilities (7,177) (20,041)
----------- -----------
Net deferred tax assets $ 3,721 $ 3,629
============ ===========
</TABLE>
The deferred tax assets as of October 31, 1999 relate solely to the
Company's Peruvian subsidiaries. The deferred tax assets and liabilities
related to 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 and accelerated depreciation methods used for tax purposes.
Net operating loss carryforwards in Peru are available for use for five
years beginning with the first year the Company has tax against which it
can take a credit.
Management believes that sufficient uncertainty exists regarding the
realization of certain deferred tax assets and that a valuation allowance
is required. The valuation allowance decreased $27,233 in 1999, $15,114
of which related to the U.S. federal net deferred tax assets eliminated
as a result of the change in tax status. The remainder of the change
results from a change in management's assessment regarding the future
realization of deferred tax assets as a result of the merger of Doe Run
Peru S.R.L and Cobriza and estimates of future earnings. In addition,
benefits were realized in 1999 relating to certain deferred tax assets
against which a valuation allowance had previously been provided.
40
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
(11) EMPLOYEE BENEFITS
DOMESTIC PLANS
DEFINED BENEFIT PLANS
The Company sponsors a noncontributory defined benefit plan for its U.S.
and expatriate employees. 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. 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. 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.
Net periodic pension expense is comprised of the following:
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $ 2,323 $ 1,754 $ 1,508
Interest cost on projected benefit obligation 4,435 4,040 3,762
Expected return on assets (4,622) (4,504) (4,161)
Net amortization and deferral of unrecognized net
losses 761 269 276
---------- ---------- ----------
Net periodic pension expense $ 2,897 $ 1,559 $ 1,385
========== ========== ==========
</TABLE>
The following assumptions were used in the determination of net periodic
pension expense:
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Discount rates 7.50% 6.75% 7.75%
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>
41
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
The following table sets forth the funded status of the Company's defined
benefit plan:
<TABLE>
<CAPTION>
October 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Change in benefit obligation:
Beginning of year $ 63,998 $ 53,296
Service cost 2,323 1,754
Interest cost 4,435 4,040
Actuarial (gains)/losses (3,372) 7,730
Benefits paid (3,024) (2,822)
---------- ----------
End of year $ 64,360 $ 63,998
========== ==========
Change in plan assets:
Beginning of year at fair value $ 52,722 $ 51,359
Actual return on plan assets 9,591 4,183
Employer contributions 10 2
Benefits paid (3,024) (2,822)
---------- ----------
End of year at fair value $ 59,299 $ 52,722
========== ==========
Reconciliation of funded status:
Projected benefit obligation in excess of plan assets $ (5,061) $ (11,276)
Unamortized net transition asset 626 666
Unrecognized actuarial losses 5,800 14,862
---------- ----------
Net amount recognized $ 1,365 $ 4,252
========== ==========
Amounts recognized in the balance sheet:
Prepaid benefit cost - noncurrent $ 2,284 $ 4,751
Intangible asset 1,054 843
Accrued benefit liability - current (20) (3)
Accrued benefit liability - noncurrent (2,738) (1,339)
Accumulated other comprehensive income 785 -
---------- ----------
Net asset at end of year $ 1,365 $ 4,252
========== ==========
</TABLE>
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.
42
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
October 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 85 $ 41 $ 34
Interest cost 709 754 789
Amortization of gains (57) (91) (104)
-------- -------- --------
Net periodic postretirement benefit cost $ 737 $ 704 $ 719
======== ======== ========
</TABLE>
The postretirement benefit plans are unfunded. The following illustrates
the Company's postretirement benefit obligation:
<TABLE>
<CAPTION>
October 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Change in benefit obligation:
Beginning of year $ 10,935 $ 10,552
Service cost 85 41
Interest cost 709 754
Actuarial (gains)/losses (484) 520
Benefits paid (912) (932)
---------- ----------
End of year $ 10,333 $ 10,935
========== ==========
Reconciliation of funded status:
Projected benefit obligation in excess of plan assets $ (10,333) $ (10,935)
Unrecognized actuarial gains (2,635) (2,207)
---------- ----------
Accrued postretirement benefit cost $ (12,968) $ (13,142)
========== ==========
Current portion $ (982) $ (915)
Noncurrent portion $ (11,986) $ (12,227)
</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 7% for fiscal 1999, and is assumed to decrease
gradually to 5% by the year 2001, and remain at that level thereafter. A
one percentage point increase/(decrease) in each year would
increase/(decrease) the accumulated postretirement benefit obligation and
the net periodic postretirement benefit cost by $621/$(558) and
$45/$(40), 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 $607, $495, and $499 for the
years ended October 31, 1999, 1998, and 1997, respectively. Plan assets
consist primarily of investments in common stock and debt securities.
43
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
The Company has 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, 1999,
1998, and 1997 was $0, $0, and $493, 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 $2,800 and $2,988 for the years ended October 31, 1999 and
1998, respectively.
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 payments was $0 and $2,908
for the years ended October 31, 1999 and 1998, respectively.
In addition, the Company recorded a deferred workers' profit sharing
asset (liability) of $1,084 and $(766) at October 31, 1999 and 1998,
respectively, which recognizes the effect of temporary differences
between financial reporting and tax bases of assets and liabilities
related to workers' profit sharing on a basis consistent with that used
for income taxes. The Company expects to recover the deferred workers'
profit sharing asset through future reductions of workers' profit
sharing payments.
(12) 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, 1999, 1998, and 1997,
approximately 61%, 67%, and 63%, respectively, of the Company's domestic
revenues from unaffiliated customers were from U.S. battery manufacturers
(primarily automotive) or their suppliers. At October 31, 1999 and 1998,
the accounts receivable balances related to these U.S. battery
manufacturers were $33,393 and $40,547, respectively.
For the year ended October 31, 1997, Johnson Controls, Inc., a battery
manufacturer, and Big River Zinc accounted for approximately 12% and 10%,
respectively, of the Company's revenues. No single customer accounted for
greater than 10% of revenues for the years ended October 31, 1999 and
1998.
(13) SEGMENT INFORMATION
In 1999, the Company applied SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement establishes standards
for reporting information about operating segments and related
disclosures about products and services, geographic areas and major
customers. The Company's operating segments are separately managed
business units that are distinguished by products, location and
production process. Prior year amounts have been restated to conform to
the current year presentation.
44
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
The primary lead segment includes integrated mining, milling and smelting
operations located in Missouri. The secondary lead segment, located in
Missouri, recycles lead-bearing feed materials, primarily spent
batteries. The fabricated products segment produces value-added lead
products. The Peruvian operations produces an extensive product mix of
non-ferrous and precious metals through the Company's subsidiary, Doe Run
Peru.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies, except that the
primary lead, secondary lead and fabricated products segments value
finished metals and concentrates, work in process and raw materials
inventories at FIFO cost. Certain functions, such as billing, are
performed at the Company's corporate office for the primary lead and
secondary lead segments, as well as general administration for the
Company. Related accounts receivable and corporate overhead expenses
are not allocated to operating segments.
<TABLE>
<CAPTION>
OPERATING SEGMENTS - REVENUES Year Ended October 31,
----------------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Revenues from external customers:
Peruvian operations $ 461,734 $ 454,980 $ 2,571
Primary lead 243,075 182,222 198,682
Secondary lead 60,016 58,872 57,137
Fabricated products 25,700 17,462 24,234
---------- ---------- -----------
Total 790,525 713,536 282,624
---------- ---------- -----------
Revenues from other operating segments: (1)
Peruvian operations 2,898 3,311 -
Primary lead 1,516 549 2,055
Secondary lead 745 677 629
Fabricated products - - -
---------- ---------- -----------
Total 5,159 4,537 2,684
---------- ---------- -----------
Total reportable segments 795,684 718,073 285,308
Other revenues (2) 14,049 3,045 (2,157)
Intersegment eliminations (5,159) (4,537) (2,684)
---------- ---------- -----------
Total revenues $ 804,574 $ 716,581 $ 280,467
========== ========== ===========
</TABLE>
(1) Transactions between segments consist of metal sales recorded based
on sales contracts that are negotiated between segments on an
arms-length basis.
(2) Other revenues consist of metal sales not attributed to operating
segments and gains (losses) on hedging transactions.
<TABLE>
<CAPTION>
REVENUES BY COUNTRY (3) Year Ended October 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States $ 493,163 $ 401,053 $ 258,709
Peru 68,333 120,455 2,571
Brazil 50,184 40,086 -
England 37,379 8,984 3,787
Japan 29,183 25,001 -
India 28,890 10,435 -
Other 97,442 110,567 15,400
---------- ---------- ----------
Total revenues $ 804,574 $ 716,581 $ 280,467
========== ========== ==========
</TABLE>
(3) Revenues are attributed to countries based on location of
shipment.
45
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OPERATING SEGMENTS - EBITDA (EARNINGS BEFORE INTEREST, Year Ended October 31,
---------------------------------------
TAXES, AND DEPLETION, DEPRECIATION AND AMORTIZATION) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Peruvian operations $ 51,743 $ 70,594 $ 482
Primary lead 28,795 17,489 39,543
Secondary lead 10,917 9,594 10,884
Fabricated products 2,464 (458) 2,211
---------- ---------- ----------
Total reportable segments 93,919 97,219 53,120
Other revenues and expenses (4) 109 (2,761) (10,629)
Corporate selling, general and administrative expenses (16,045) (15,874) (10,005)
Intersegment eliminations 157 (92) (71)
---------- ---------- ----------
Consolidated EBITDA 78,140 78,492 32,415
Depreciation, depletion and amortization (31,400) (24,540) (14,718)
Interest Income 14,755 9,586 21
Interest expense (59,417) (40,659) (13,740)
---------- ---------- ----------
Income before taxes and extraordinary item $ 2,078 $ 22,879 $ 3,978
========== ========== ==========
</TABLE>
(4) Other revenues and expenses include primarily exploration expenses,
gains and losses recognized on hedge transactions, and adjustments
necessary to state inventories at LIFO cost.
<TABLE>
<CAPTION>
OPERATING SEGMENTS - TOTAL ASSETS Year Ended October 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Peruvian operations $ 266,784 $ 251,363
Primary lead 147,316 154,420
Secondary lead 30,347 30,612
Fabricated products 12,687 16,205
----------- -----------
Total reportable segments 457,134 452,600
Unallocated corporate assets (5) 252,862 255,620
Intersegment eliminations (45,279) (44,581)
----------- -----------
Total assets $ 664,717 $ 663,639
=========== ===========
</TABLE>
(5) Unallocated corporate assets consist primarily of the Special Term
Deposit, cash, primary lead and secondary lead segments' accounts
receivable, investments in subsidiaries, pension assets, and deferred
financing costs.
(14) 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 15. As of October 31, 1999, Doe
Run had invested approximately $76,975 under this commitment. 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.
46
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(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 December 2001, covers
approximately 12% of the Company's anticipated domestic lead metal
production.
SALES
The Company has commitments to sell approximately 70%, 90%, 85%, and 50%
of its anticipated 2000 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,
1999 and 1998 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, 1999 were:
FUTURES SALES (PURCHASE) CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
Fair
Metal Quantity Price Range Market Value Period
--------- ------------- ------------------------ ------------ ------------------
<S> <C> <C> <C> <C>
Lead (32,656) tons $.2184/lb. to $.2404/lb. $ (100,150) Nov. 99 to Dec. 01
Copper 771 tons $.7974/lb. to $.8042/lb. (6,143) Nov. 99 to Jan. 00
</TABLE>
47
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
SOLD CALL OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
Fair
Metal Quantity Price Range Market Value Period
--------- ------------- ------------------------ ------------ ------------------
<S> <C> <C> <C> <C>
Copper 9,400 tons $.7800/lb. to $.9200/lb. $ (1,213,975) Nov. 99 to Aug. 00
Lead 32,776 tons $.2404/lb. to $.2570/lb. (76,799) Nov. 99 to Dec. 99
Zinc 9,825 tons $.4944/lb. to $.5216/lb. (351,733) Nov. 99 to Mar. 00
Silver 370,000 oz. $5.51/oz. to $5.90/oz. (39,348) Nov. 99 to Dec. 99
</TABLE>
SOLD (PURCHASED) PUT OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
Fair
Metal Quantity Price Range Market Value Period
--------- ------------- ------------------------ ------------ ------------------
<S> <C> <C> <C> <C>
Copper 1,550 tons $.6600/lb. to $.7600/lb. $ 297,724 Nov. 99 to Aug. 00
Lead 3,250 tons $.2250/lb. to $.2404/lb. (37,417) Nov. 99 to Jan. 00
Zinc 1,125 tons $.4876/lb. to $.4899/lb. (10,734) Nov. 99 to Mar. 00
</TABLE>
The Company's open hedging positions at October 31, 1998 were:
FUTURES SALES (PURCHASE) CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
Fair
Metal Quantity Price Range Market 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
Metal Quantity Price Range Market 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>
48
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
SOLD (PURCHASED) PUT OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
<TABLE>
<CAPTION>
Fair
Metal Quantity Price Range Market 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 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, 1999, the Company had issued irrevocable standby letters
of credit totaling $6,437 in connection with the Company's insurance and
bonding activities. The Company also had outstanding standby letters of
credit and customs bonds of $2,200 and $9,726, respectively, relating to
concentrate and other purchases and a custom bond of $2,995 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, 2000.
(15) ENVIRONMENTAL AND LITIGATION MATTERS
ENVIRONMENTAL
The Company has recorded a liability of $33,573 as of October 31, 1999,
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 $1,000 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. Further, the Environmental Protection Agency (EPA) has
initiated an investigation of the smelter under the Comprehensive
Environmental Response, Compensation and Liability
49
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
Act of 1980, as amended (CERCLA), which could potentially require
remediaton similar to the corrective action mentioned above. The
Company expects to sign a voluntary Administrative Order of Consent
(AOC) to study and address issues related to the slag pile and the
community adjacent to the plant. At this time, it is not possible to
determine the outcome of the study or what potential remediation
actions, if any, may be required.
At its primary smelter in Glover, Missouri, the Company has opened a new
slag pile for disposal of its smelting residue. The new slag pile was
opened in January 2000 and the estimated cost of $400 will be
capitalized. ASARCO is required to close the existing pile with
proportionate contribution from the Company based on its use. The
Company's contribution is expected to be minimal, as the Company's
portion of the existing pile will be moved to the new pile. The Company
will accrue for closure of the new slag pile over the period of use.
The Company is working with regulators to develop a new three-year
compliance plan so that the Herculaneum smelter meets the ambient air
quality standard for lead promulgated under the federal Clean Air Act.
The plan must be completed by September 2000 and after that date the
Company will implement the control measures identified in the plan. The
Company expects to make capital expenditures for various control measures
totaling approximately $1,085 in fiscal 2000 and anticipates additional
future cash requirements of $8,000 during the three-year compliance
period. Regulators could require that additional measures be included in
the plan, which could increase the amount of anticipated capital
expenditures.
The Company has received notice that it is a potentially responsible
party (PRP) subject to liability under 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, 1999 of
approximately $13,500 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 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 an 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 (RI/FS) 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 with completion expected within two
years. The Company believes the current reserves assigned to these sites
are 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 in a joint venture with another company. The EPA has not
decided whether any action will be taken, but the Company has signed an
AOC to conduct an RI/FS 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
50
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
action will result in a material adverse impact to the results of
operations, financial condition or 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, 1999 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. Management does not expect an 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 $500 per
year. The Company's mine closure reserves were approximately $7,400 as of
October 31, 1999.
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 in effect at that
time.
Doe Run Peru has committed under its PAMA to implement the following
projects through December 31, 2006:
- New sulfuric acid plants
- Elimination of fugitive gases from the coke plant
- Use of oxygenated gases in the anodic residue plant
- Water treatment plant for the copper refinery
- Recirculation system for cooling waters at the smelter
- Management and disposal of acidic solutions at the silver refinery
- Industrial waste water treatment plant for the smelter and refinery
- Containment dam for the lead muds near the zileret plant
- Granulation process water at the lead smelter
- Anode washing system at the zinc refinery
- Management and disposal of lead and copper slag wastes
- Domestic waste water treatment and domestic waste disposal
51
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
Annual spending on a calendar year basis approved in the PAMA is as
follows:
<TABLE>
<CAPTION>
Estimated
Year Cost
---- ---------
<S> <C>
2000 $ 11,265
2001 13,800
2002 14,300
2003 13,180
2004 30,055
2005 34,790
2006 42,040
---------
$ 159,430
=========
</TABLE>
The current estimate for the total to be expended on environmental
projects under the PAMA and on additional related process changes for Doe
Run Peru is approximately $189,950 for this period.
Doe Run Peru's Cobriza mine has a separate PAMA to be completed by 2002.
The total cost of capital projects to manage tailings, sewage and garbage
is approximately $9,625, to be expended over the next three years, with
estimated spending of $6,985 in fiscal 2000.
Doe Run Peru's operations historically and currently exceed some of the
applicable Ministry of Energy and Mines (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 or
different environmental obligations that could adversely affect Doe Run
Peru's business, financial condition or results of operations. Under the
purchase agreement related to the acquisition of the La Oroya assets in
October 1997, Empresa Minera del Centro del Peru S.A. (Centromin), the
previous owner of the La Oroya assets, 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 purchase agreement, the Company has the option to
continue the use of the LaOroya smelter existing zinc ferrite disposal
site until October 2000, 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 ferrite
site is abandoned, the Company must pay this amount to Centromin.
52
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
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.
LITIGATION
The Company is a defendant in six 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 composed of children who lived in Herculaneum during a period of
time when they were nine 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 four cases are personal injury
actions by sixteen 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. 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.
On May 21, 1999, a lawsuit was filed against the Company alleging certain
damages from discontinued mine facilities in St. Francois County. The
plaintiffs seek to have certified two separate classes. The first class
would consist of property owners, alleging that property values have been
damaged due to the tailings from the discontinued operations. The second
class would be composed of children, and the remedy sought is medical
monitoring for the class. The Company intends to vigorously defend itself
against this claim. The Company is unable at this time to state with
certainty the expected outcome of and the final costs of this suit.
Therefore, there can be no assurance the suit will not have a material
adverse effect on the results of operations, financial condition and
liquidity of the Company.
The Company, with several other defendants, was named in two class action
cases seeking certification as a class owners of all housing in the State
of Maryland built prior to 1978 that have lead paint on the premises. The
complaint alleges that all defendants were members of Lead Industries
Association (LIA), a trade association, and that the defendants
improperly promoted lead paint. One suit seeks damages for paint removal
for all such housing in the State of Maryland. The other suit seeks
damages, alleging personal injuries to children as a result of lead
poisoning from lead paint in the family residence. Both suits seek
punative damages. Discovery has yet to be initiated, 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 on
the results of operations, financial condition and liquidity of the
Company.
53
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
(16) GUARANTOR SUBSIDIARIES
The Guarantor Subsidiaries (Fabricated Products, Inc. (FPI) and DR Land
Holdings, LLC (the Domestic Guarantors) Doe Run Cayman Ltd. (Doe Run
Cayman) and certain subsidiaries, Doe Run Mining S.R.L. and its
subsidiaries Doe Run Development S.A.C. and Doe Run Peru, and its
wholly-owned subsidiary, Doe Run Air S.A.C.) have jointly and severally,
fully, unconditionally and irrevocably guaranteed the Unsecured Notes and
Secured Notes of the Company. The Guarantor Subsidiaries' results of
operations were not material to the results of operations of the Company
for the year ended October 31, 1997. Separate financial statements and
other disclosures concerning certain Guarantor Subsidiaries and
disclosures concerning non-Guarantor Subsidiaries have not been presented
because management has determined that such information is not material
to investors.
54
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 31, 1999
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and
Subsidiaries Guarantors Subsidiaries Subsidiaries
------------ ---------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 7,197 $ (1,347) $ 39 $ 3,997
Trade accounts receivable, net of allowance for
doubtful accounts 46,162 4,292 67 38,864
Inventories 47,368 1,791 - 71,122
Prepaid expenses and other current assets 6,580 145 (77) 27,958
Net deferred tax assets - - (50) 2,165
Due from subsidiaries 11,321 - - 122
Due from parent - - - 23,622
--------- --------- --------- ---------
Total current assets 118,628 4,881 (21) 167,850
Property, plant and equipment, net 140,663 7,784 - 120,595
Special term deposit 125,000 - - -
Net deferred tax assets - - (40) 1,646
Other noncurrent assets, net 13,205 292 242 323
Investment in subsidiaries 33,029 - 188,227 -
--------- --------- --------- ---------
Total assets $ 430,525 $ 12,957 $ 188,408 $ 290,414
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 357 $ - $ 1,279 $ 6,946
Accounts payable 16,479 1,901 67 36,790
Accrued liabilities 30,967 478 2,546 16,547
Due to subsidiaries - - 23,744 -
Due to parent - 8,666 1,386 1,269
--------- --------- --------- ---------
Total current liabilities 47,803 11,045 29,022 61,552
Long-term debt, less current maturities 317,693 - 126,359 33,234
Other noncurrent liabilities 48,408 1,890 - 7,401
--------- --------- --------- ---------
Total liabilities 413,904 12,935 155,381 102,187
Shareholders' equity:
Common stock, $.10 par value, 1,000 shares authorized,
issued, and outstanding 0 - - -
Common stock, $1 par value, 1,000 shares authorized,
issued, and outstanding - 1 - -
Common stock, $1 par value, 2,005,000 shares authorized,
issued and outstanding - - 2,005 -
Common stock, one nuevo sole par value, 729,548,057
shares authorized, issued and outstanding - - - 271,435
Additional paid in capital 5,238 1,205 - (16,234)
Due from parent - - - (104,865)
Foreign currency translation adjustment - - - (20,135)
Retained earnings and accumulated other
comprehensive income 11,383 (1,184) 31,022 58,026
--------- --------- --------- ---------
Total shareholders' equity 16,621 22 33,027 188,227
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 430,525 $ 12,957 $ 188,408 $ 290,414
========= ========= ========= =========
<CAPTION>
The
Eliminations Company
----------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash $ - $ 9,886
Trade accounts receivable, net of allowance for
doubtful accounts (501) 88,884
Inventories (20) 120,261
Prepaid expenses and other current assets (745) 33,861
Net deferred tax assets - 2,115
Due from subsidiaries (11,443) -
Due from parent (23,622) -
--------- ---------
Total current assets
(36,331) 255,007
Property, plant and equipment, net - 269,042
Special term - 125,000
Net deferred tax assets - 1,606
Other noncurrent assets, net - 14,062
Investment in subsidiaries (221,256) -
--------- ---------
Total assets $(257,587) $ 664,717
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ - $ 8,582
Accounts payable (501) 54,736
Accrued liabilities (745) 49,793
Due to subsidiaries (23,744) -
Due to parent (11,321) -
--------- ---------
Total current liabilities (36,311) 113,111
Long-term debt, less current maturities - 477,286
Other noncurrent liabilities - 57,699
--------- ---------
Total liabilities (36,311) 648,096
Shareholders' equity:
Common stock, $.10 par value, 1,000 shares authorized,
issued, and outstanding - 0
Common stock, $1 par value, 1,000 shares authorized,
issued, and outstanding , (1) -
Common stock, $1 par value, 2,005,000 shares authorized
issued and outstanding (2,005) -
Common stock, one nuevo sole par value, 729,548,057
shares authorized, issued and outstanding (271,435) -
Additional paid in capital 15,029 5,238
Due from parent 104,865 -
Foreign currency translation adjustment 20,135 -
Retained earnings and accumulated other
comprehensive income (87,864) 11,383
--------- ---------
Total shareholders' equity (221,276) 16,621
--------- ---------
Total liabilities and shareholders' equity $(257,587) $ 664,717
========= =========
</TABLE>
55
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 31, 1998
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and
Subsidiaries Guarantors Subsidiaries Subsidiaries
------------ ---------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ - $ - $ 21 $ 4,625
Trade accounts receivable, net of allowance for
doubtful accounts 51,387 5,127 - 30,935
Inventories 40,196 1,735 - 85,049
Prepaid expenses and other current assets 6,966 134 2,217 23,072
Due from subsidiaries 20,434 - - 85
Due from parent - - - 7,083
--------- --------- --------- ---------
Total current assets 118,983 6,996 2,238 150,849
Property, plant and equipment, net 150,519 8,818 - 104,710
Special term deposit 125,000 - - -
Net deferred tax assets 8,015 - - -
Other noncurrent assets, net 17,359 391 286 448
Investment in subsidiaries 20,776 - 162,496 -
--------- --------- --------- ---------
Total assets $ 440,652 $ 16,205 $ 165,020 $ 256,007
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 895 $ - $ 1,123 $ -
Accounts payable 21,120 2,937 - 30,752
Accrued liabilities 28,692 366 2,973 20,722
Net deferred tax liabilities 1,815 - - -
Due to subsidiaries - - 7,168 -
Due to parent - 11,068 5,100 4,266
--------- --------- --------- ---------
Total current liabilities 52,522 14,371 16,364 55,740
Long-term debt, less current maturities 320,689 - 127,595 28,000
Net deferred tax liabilities - - - 2,571
Other noncurrent liabilities 48,863 1,942 - 7,200
--------- --------- --------- ---------
Total liabilities 422,074 16,313 143,959 93,511
Shareholders' equity:
Common stock, $.10 par value, 1,000 shares authorized,
issued, and outstanding 0 - - -
Common stock, $1 par value, 1,000 shares authorized,
issued, and outstanding - 1 - -
Common stock, $1 par value, 2,005,000 shares authorized,
issued and outstanding - - 2,005 -
Common stock, one nuevo sole par value, 729,548,057
shares authorized, issued and outstanding - - - 255,201
Additional paid in capital 5,000 935 - -
Due from parent - - - (125,000)
Retained earnings and accumulated other
comprehensive income 13,578 (1,044) 19,056 32,295
--------- --------- --------- ---------
Total shareholders' equity 18,578 (108) 21,061 162,496
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 440,652 $ 16,205 $ 165,020 $ 256,007
========= ========= ========= =========
<CAPTION>
The
Eliminations Company
----------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash $ - $ 4,646
Trade accounts receivable, net of allowance for
doubtful accounts (1,111) 86,338
Inventories (177) 126,803
Prepaid expenses and other current assets (2,083) 30,306
Due from subsidiaries (20,519) -
Due from parent (7,083) -
--------- ---------
Total current assets (30,973) 248,093
Property, plant and equipment, net - 264,047
Special term deposit - 125,000
Net deferred tax assets - 8,015
Other noncurrent assets, net - 18,484
Investment in subsidiaries (183,272) -
--------- ---------
Total assets $(214,245) $ 663,639
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 2,018
Accounts payable (1,111) 53,698
Accrued liabilities (2,083) 50,670
Net deferred tax liabilities - 1,815
Due to subsidiaries (7,168) -
Due to parent (20,434) -
--------- ---------
Total current liabilities (30,796) 108,201
Long-term debt, less current maturities - 476,284
Net deferred tax liabilities - 2,571
Other noncurrent liabilities - 58,005
--------- ---------
Total liabilities (30,796) 645,061
Shareholders' equity:
Common stock, $.10 par value, 1,000 shares authorized,
issued, and outstanding - 0
Common stock, $1 par value, 1,000 shares authorized,
issued, and outstanding (1) -
Common stock, $1 par value, 2,005,000 shares authorized,
issued and outstanding (2,005) -
Common stock, one nuevo sole par value, 729,548,057
shares authorized, issued and outstanding (255,201) -
Additional paid in capital (935) 5,000
Due from parent 125,000 -
Retained earnings and accumulated other
comprehensive income (50,307) 13,578
--------- ---------
Total shareholders' equity (183,449) 18,578
--------- ---------
Total liabilities and shareholders' equity $(214,245) $ 663,639
========= =========
</TABLE>
56
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and The
Subsidiaries Guarantors Subsidiaries Subsidiaries Eliminations Company
------------ ---------- -------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 337,091 $ 25,700 $ 12,163 $ 464,632 $ (35,012) $ 804,574
Costs and expenses:
Cost of sales 275,621 21,687 1 393,613 (5,316) 685,606
Depletion, depreciation and amortization 22,054 1,503 - 7,843 - 31,400
Selling, general and administrative 16,045 1,405 9,434 38,292 (29,853) 35,323
Exploration 3,919 - - - - 3,919
--------- --------- --------- --------- --------- ---------
Total costs and expenses 317,639 24,595 9,435 439,748 (35,169) 756,248
--------- --------- --------- --------- --------- ---------
Income from operations 19,452 1,105 2,728 24,884 157 48,326
Other income (expense):
Interest expense (40,586) (1,101) (14,835) (3,796) 901 (59,417)
Interest income 15,020 - - 636 (901) 14,755
Other, net (40) (144) 973 (2,375) - (1,586)
Equity in earnings of subsidiaries 11,983 - 25,731 - (37,714) -
--------- --------- --------- --------- --------- ---------
(13,623) (1,245) 11,869 (5,535) (37,714) (46,248)
--------- --------- --------- --------- --------- ---------
Income (loss) before income tax expense 5,829 (140) 14,597 19,349 (37,557) 2,078
Income tax expense (benefit) 7,239 - 2,631 (6,382) - 3,488
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (1,410) $ (140) $ 11,966 $ 25,731 $ (37,557) $ (1,410)
========= ========= ========= ========= ========= =========
</TABLE>
57
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and The
Subsidiaries Guarantors Subsidiaries Subsidiaries Eliminations Company
------------ ---------- -------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 261,454 $ 17,462 $ 8,032 $ 458,291 $ (28,658) $ 716,581
Costs and expenses:
Cost of sales 215,885 16,530 22 371,530 (4,445) 599,522
Depletion, depreciation and amortization 16,621 1,105 - 6,814 - 24,540
Selling, general and administrative 15,874 1,297 5,715 36,051 (24,121) 34,816
Exploration 4,312 - - - - 4,312
--------- --------- --------- --------- --------- ---------
Total costs and expenses 252,692 18,932 5,737 414,395 (28,566) 663,190
--------- --------- --------- --------- --------- ---------
Income (loss) from operations 8,762 (1,470) 2,295 43,896 (92) 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) 97 1,403 - 561
Equity in earnings of subsidiaries 16,861 - 32,404 - (49,265) -
--------- --------- --------- --------- --------- ---------
(940) (891) 19,477 1,107 (49,265) (30,512)
--------- --------- --------- --------- --------- ---------
Income (loss) before income tax expense 7,822 (2,361) 21,772 45,003 (49,357) 22,879
Income tax expense (benefit) (1,290) 18 71 12,599 - 11,398
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item 9,112 (2,379) 21,701 32,404 (49,357) 11,481
Extraordinary item (2,019) - (2,369) - - (4,388)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 7,093 $ (2,379) $ 19,332 $ 32,404 $ (49,357) $ 7,093
========= ========= ========= ========= ========= =========
</TABLE>
58
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and The
Subsidiaries Guarantors Subsidiaries Subsidiaries Eliminations Company
------------ ---------- -------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 27,678 $ 1,175 $ 14,382 $ 30,644 $(37,714) $ 36,165
Cash flows from investing activities:
Purchases of property, plant and equipment (12,543) (120) - (23,276) - (35,939)
Payments for acquisitions (375) - - - - (375)
Investment in subsidiaries (11,983) - (25,731) - 37,714 -
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities (24,901) (120) (25,731) (23,276) 37,714 (36,314)
Cash flows from financing activities:
Proceeds from (payments on) revolving loans
and short-term borrowings, net (9,029) - - (4,388) - (13,417)
Proceeds from long-term debt 5,665 - - - - 5,665
Payments on long-term debt (978) - (1,495) (1,958) - (4,431)
Proceeds from sale/leaseback transactions - - - 17,923 - 17,923
Payment of deferred financing costs (351) - - - - (351)
Loans from parent/subsidiaries 9,113 (2,402) 12,862 (19,573) - -
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 4,420 (2,402) 11,367 (7,996) - 5,389
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash 7,197 (1,347) 18 (628) - 5,240
Cash at beginning of period - - 21 4,625 - 4,646
-------- -------- -------- -------- -------- --------
Cash at end of period $ 7,197 $ (1,347) $ 39 $ 3,997 $ - $ 9,886
======== ======== ======== ======== ======== ========
</TABLE>
59
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and The
Subsidiaries Guarantors Subsidiaries Subsidiaries Eliminations Company
------------ ---------- -------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 24,261 $ 132 $ 26,055 $ (15,755) $ (49,265) $ (14,572)
Cash flows from investing activities:
Special term deposit (125,000) - - - - (125,000)
Purchases of property, plant and equipment (10,748) (6,065) - (10,876) - (27,689)
Payment for acquisitions (54,640) - (3,507) (42) - (58,189)
Investment in subsidiaries (16,861) - (32,404) - 49,265 -
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities (207,249) (6,065) (35,911) (10,918) 49,265 (210,878)
Cash flows from financing activities:
Proceeds from (payments on )revolving loans
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 (14,162) (1,215) - -
Payment of dividends (189) - - - - (189)
Redemption of preferred stock (2,500) - - - - (2,500)
--------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 181,409 5,933 7,526 26,285 - 221,153
--------- --------- --------- --------- --------- ---------
Net decrease in cash (1,579) - (2,330) (388) - (4,297)
Cash at beginning of period 1,579 - 2,351 5,013 - 8,943
--------- --------- --------- --------- --------- ---------
Cash at end of period $ - $ - $ 21 $ 4,625 $ - $ 4,646
========= ========= ========= ========= ========= =========
</TABLE>
60
<PAGE>
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
The Company
Excluding Doe Run Cayman Doe Run
Guarantor Domestic and Certain Peru and The
Subsidiaries Guarantors Subsidiaries Subsidiaries Eliminations Company
------------ ---------- -------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 12,040 $ 1,585 $ 376 $ 4,019 $ - $ 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
loans 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) 148,529 (123,786) - -
Capital contributions - - (247,924) 247,924 - -
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) 1,975 124,138 (2,005) 132,641
--------- --------- --------- --------- --------- ---------
Net increase in cash 1,579 - 2,351 5,013 - 8,943
Cash at beginning of period - - - - - -
--------- --------- --------- --------- --------- ---------
Cash at end of period $ 1,579 $ - $ 2,351 $ 5,013 $ - $ 8,943
========= ========= ========= ========= ========= =========
</TABLE>
61
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Doe Run Peru S.R.L.:
We have audited the accompanying combined balance sheet of Doe Run Peru S.R.L.
(a Peruvian Company) and its subsidiary as of October 31, 1999, and the related
combined statements of operations, changes in shareholders' equity and cash
flows for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards 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
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Doe Run
Peru S.R.L. and its subsidiary as of October 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States of America.
Lima, Peru
December 3, 1999
Countersigned by:
- ------------------------
Juan Jose Cordova (Partner)
Peruvian Public Accountant
Registration N(0) 18869
62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Doe Run Peru S.R.L.:
We have audited the accompanying combined balance sheet of Doe Run Peru
S.R.L. (a Peruvian company), its consolidated subsidiary and Empresa Minera
Cobriza S.R.L. as of October 31, 1998, the consolidated balance sheet of Doe
Run Peru S.R.L. and its subsidiary as of October 31, 1997, and the related
combined statements of operations, changes in shareholders' equity and cash
flows for the year ended October 31, 1998 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the period from October 23, 1997 to October 31, 1997. These financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the combined financial position of Doe Run Peru
S.R.L., its subsidiary and Empresa Minera Cobriza S.R.L. as of October 31,
1998 and the consolidated financial position of Doe Run Peru S.R.L. and its
subsidiary as of October 31, 1997, and the combined results of their
operations and their cash flows for the year ended October 31, 1998 and the
consolidated results of operations and cash flows 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
December 3, 1999
63
<PAGE>
DOE RUN PERU S.R.L.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
October 31,
----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
A S S E T S
Current assets:
Cash $ 3,997 $ 4,625
Trade accounts receivable 38,864 30,935
Due from related parties 23,744 7,168
Inventories 71,122 85,049
Prepaid expenses and other current assets 27,958 23,072
Net deferred tax assets 2,165 -
------------ ------------
Total current assets 167,850 150,849
Property, plant and equipment, net 120,595 104,710
Deferred financing fees, net 323 448
Net deferred tax assets 1,646 -
------------ ------------
Total assets $ 290,414 $256,007
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt $ 6,946 $ -
Accounts payable 36,790 30,752
Due to related parties 1,269 4,266
Accrued liabilities 16,547 20,722
------------ ------------
Total current liabilities 61,552 55,740
Long-term debt, less current maturities 33,234 28,000
Net deferred tax liabilities - 2,571
Other noncurrent liabilities 7,401 7,200
------------ ------------
Total liabilities 102,187 93,511
------------ ------------
Shareholders' equity:
Capital stock, S/1 par value, 729,548,057 and 648,678,241 shares 271,435 247,926
authorized, issued and outstanding, respectively
Capital stock, S/1 par value, 80,869,816 shares - 7,275
authorized, issued and outstanding
Additional paid-in capital (16,234) -
Due from shareholder (104,865) (125,000)
Retained earnings 58,026 32,295
Accumulated other comprehensive income (20,135) -
------------ ------------
Total shareholders' equity 188,227 162,496
------------ ------------
Total liabilities and shareholders' equity $ 290,414 $ 256,007
============ ============
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
64
<PAGE>
DOE RUN PERU S.R.L.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998 AND FOR THE PERIOD
FROM OCTOBER 23, 1997 TO OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $464,632 $458,291 $2,571
Costs and expenses:
Costs of sales 393,613 371,530 2,048
Depreciation 7,843 6,814 151
Fees and commissions to related parties 23,983 20,333 -
Selling, general and administrative expenses 14,309 15,718 32
------------ ------------ ------------
Total costs and expenses 439,748 414,395 2,231
------------ ------------ ------------
Income from operations 24,884 43,896 340
------------ ------------ ------------
Other income (expense):
Interest expense (3,796) (754) -
Interest income 636 458 -
Exchange difference (3,492) 105 (28)
Other, net 1,117 1,298 -
------------ ------------ ------------
(5,535) 1,107 (28)
------------ ------------ ------------
Income before income tax expense (benefit) 19,349 45,003 312
Income tax expense (benefit) (6,382) 12,599 421
------------ ------------ ----------
Net income (loss) $ 25,731 $ 32,404 $ (109)
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
65
<PAGE>
DOE RUN PERU S.R.L.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998 AND FOR THE PERIOD
FROM OCTOBER 23, 1997 TO OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Cobriza Additional Retained Accumulated
Capital Net Paid-in Due from Earnings Comprehensive
Stock Assets Capital Shareholder (Deficit) Income Total
----- ------ ------- ----------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions $ 247,926 $ - $ - $ - $ - $ - $ 247,926
Due from shareholder - - - (125,000) - - (125,000)
Net loss - - - - (109) (109) (109)
--------- --------- --------- --------- --------- --------- ---------
Balance as of October 31, 1997 247,926 - - (125,000) (109) (109) 122,817
Acquisition of Cobriza - 7,275 - - - - 7,275
Net income - - - - 32,404 32,404 32,404
--------- --------- --------- --------- --------- --------- ---------
Balance as of October 31, 1998 247,926 7,275 - (125,000) 32,295 32,295 162,496
Foreign currency
translation adjustment - - - 20,135 - (20,135) -
Merger of Doe Run Peru S.R.L
and Cobriza 23,509 (7,275) (16,234) - - - -
Net income - - - - 25,731 25,731 25,731
--------- --------- --------- --------- --------- --------- ---------
Balance as of October 31, 1999 $ 271,435 $ - $ (16,234) $(104,865) $ 58,026 $ 37,891 $ 188,227
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
66
<PAGE>
DOE RUN PERU S.R.L.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998 AND FOR THE PERIOD
FROM OCTOBER 23, 1997 TO OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 25,731 $ 32,404 $ (109)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes (6,382) 2,569 2
Depreciation 7,843 6,814 151
Amortization of deferred financing fees 125 52 -
Increase (decrease) resulting from changes in:
Trade accounts receivable (7,929) (30,545) (390)
Inventories 13,927 (19,636) (3,465)
Prepaid expenses and other current assets (4,735) (19,334) (1,347)
Trade accounts payable 6,038 7,117 5,025
Accrued liabilities (4,175) 4,804 3,006
Other noncurrent liabilities 201 - 1,146
------------- ------------- ------------
Net cash provided by (used in) operating activities 30,644 (15,755) 4,019
------------- ------------- ------------
Cash flows from investing activities:
Additions of fixed assets (23,276) (10,918) (129)
Acquisition of net assets of Metaloroya - - (123,015)
------------- ------------- ------------
Net cash used in investing activities (23,276) (10,918) (123,144)
------------- ------------- ------------
Cash flows from financing activities:
Net proceeds from revolving loans (8,000) 28,000 -
Cash provided by sales and leaseback transactions 17,923 - -
Cash provided by short-term borrowings, net 3,612 - -
Payments on sale and leaseback (1,958) - -
Increase in due from related parties (19,573) (1,215) (123,786)
Payment of deferred financing fees - (500) -
Capital contributions - - 247,924
------------- ------------- ------------
Net cash provided by (used in) financing activities (7,996) 26,285 124,138
------------- ------------- ------------
Net increase (decrease) in cash (628) (388) 5,013
Cash at beginning of period 4,625 5,013 -
------------- -------------- ------------
Cash at end of period $ 3,997 $ 4,625 $ 5,013
======== ======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 3,671 $ 754 $ -
======== ======== =======
Peruvian income tax $ 5,400 $ 16,951 $ -
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
67
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
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 $126,500 in exchange for
51% of the shares and a payment of $121,400 for the transfer of the
remaining 49%. The acquisition has been accounted for as a purchase and
the effective purchase price of $123,015, including transaction costs
of approximately $2,500, 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
$157,000 has been mainly used to reduce the value of the fixed assets
acquired.
In the November 3, 1997 Extraordinary Shareholders' Meeting of Doe Run
Peru and Metaloroya the merger of Metaloroya into Doe Run Peru, the
surviving company, was approved. The merger was effective on December
30, 1997.
Effective March 1, 1999, Doe Run Mining merged Doe Run Peru and Empresa
Minera Cobriza S.A. (Cobriza), an entity previously controlled by Doe
Run Mining since the acquisition of substantially all of Cobriza's
outstanding shares on August 31, 1998. The financial statements of the
Company reflect the historical cost basis of assets and liabilities and
the results of operations of Cobriza for the periods before the merger,
during which Doe Run Peru and Cobriza were under common control. The
financial statements as of and for the year ended October 31, 1998 have
been restated accordingly.
3. BASIS OF PRESENTATION
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the combined financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The combined financial statements of the Company have been prepared in
accordance with the accounting principles generally accepted in the
United States of America (U.S. GAAP). Unless otherwise indicated, all
amounts in the financial statements and in these notes are presented in
thousands of U.S. dollars ($).
68
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The combined 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market. 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). Materials, supplies and spare parts are principally
stated at average cost.
Inventory costs include concentrates purchased, labor, depreciation and
other production costs.
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.
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 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.
69
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Adjustments to provisional billings are made in the period during
which additional information becomes available.
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.
DEFERRED 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.
DEFERRED WORKERS' PROFIT SHARING
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. 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.
Because workers' participation is calculated on taxable income, the
Company recognizes the effect of temporary differences between
financial reporting and tax bases of assets and liabilities related to
workers' profit sharing on a basis consistent with that used for income
taxes.
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,
1999, which are S/3.489 per each $1 for assets and S/3.493 per
each $1 for liabilities as per Superintendency of Banks and
Insurances. The exchange rates in effect at October 31, 1998
were S/3.060 for assets and S/3.072 for liabilities.
70
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(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 differences has been reflected in the accompanying
combined statements of operations.
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.
Assets and liabilities denominated in Peruvian nuevos soles are as
follows (in thousands):
<TABLE>
<CAPTION>
October 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash S/ 675 S/ 578
Due from related parties 407,513 -
Prepaid expenses and other current assets 78,147 61,707
------- -------
486,335 62,285
------- -------
Liabilities:
Accrued liabilities 47,582 61,191
------- -------
47,582 61,191
------- -------
Net position S/438,753 S/1,094
======= =======
</TABLE>
The net effects of exchange differences applicable to the net asset
positions denominated in Peruvian nuevos soles were a loss of $3,492, a
gain of $105 and a loss of $28 for the years ended October 31, 1999 and
1998, and for the period from October 23, 1997 to October 31, 1997,
respectively, which have been reflected in the accompanying combined
statements of operations.
7. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Refined metals and concentrates for sale $ 1,414 $ 3,925
Metals and concentrates in process 47,970 55,262
Materials, supplies and spare parts 21,738 25,862
--------- ---------
$71,122 $85,049
========= =========
</TABLE>
The FIFO cost of inventories valued under the LIFO cost method were
approximately $50,965 and $57,027 at October 31, 1999 and 1998,
respectively. If the FIFO cost method had been used to determine cost,
inventories would have been $1,785 higher at October 31, 1999 and
$2,160 lower at October 31, 1998.
71
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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 1999. The Company calculates the effect of LIFO
liquidations on net income based on the current cost method. The effect
was an increase in net income of $400 for 1999. There was no LIFO
liquidation in fiscal 1998.
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
October 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Credit on Peruvian value added tax $11,861 $7,124
Prepaid Peruvian income tax 9,574 11,144
Other 6,523 4,804
------- ------
$27,958 $23,072
======= ======
</TABLE>
The value added tax (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.
9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
Average Annual October 31,
Depreciation --------------------------
Rate 1999 1998
------------------- -------- -------
<S> <C> <C> <C>
Cost:
Land - $ 5,989 $ 5,989
Buildings and improvements 5% and 10% 19,595 18,569
Machinery and equipment 6.67% 78,523 74,607
Transportation units 33.33% 3,116 2,062
Other equipment 10% and 20% 7,948 6,506
Construction in progress - 20,232 3,942
-------- --------
135,403 111,675
Less accumulated depreciation 14,808 6,965
-------- --------
$120,595 $104,710
======== ========
</TABLE>
72
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
October 31,
----------------------------
1999 1998
------ ------
<S> <C> <C>
Salaries, wages and employee benefits $ 7,451 $6,437
Workers' profit sharing - 2,763
Due to power company 2,523 2,215
Accounts payable to contractors 1,156 2,715
Taxes payable 1,507 1,589
Other accrued liabilities 3,910 5,003
---------- ---------
$16,547 $20,722
========== =========
</TABLE>
11. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Revolving credit facility $ 20,000 $ 28,000
Sale and leaseback obligations 16,055 -
Capital leases 513 -
------------ ------------
36,568 28,000
Less current maturities 3,334 -
------------ ------------
Long-term debt, less current maturities $ 33,234 $ 28,000
============ ============
</TABLE>
The revolving credit facility with a Peruvian bank 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 through June 1999, plus 2.0% per
annum since July 1999. The effective rate was 7.70% and 9.23% at
October 31, 1999 and 1998, respectively. Individual loans must be
greater than $1,000. Revolving loans outstanding under this facility
were $20,000 at October 31, 1999. An unused line fee of .375% per annum
on the average unused portion of the line is payable quarterly, in
arrears. In the event of non-payment of any part of the principal or
interest owed, Doe Run Peru would pay an additional 3% per annum.
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 $19,005 at October
31, 1999. The facility is secured by Doe Run Peru's accounts receivable
and work-in-progress and finished goods inventories.
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
73
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Revolving Credit Facility and/or the acceleration of all amounts due
thereunder. The Company was in compliance with the covenants as of
October 31, 1999.
Doe Run Peru has available two uncommitted lines of credit. Borrowings
are in the form of short-term notes, with interest rates determined at
the borrowing date. Borrowings under these lines of credit were $3,612
at October 31, 1999.
In January 1999, Doe Run Peru finalized an agreement for the sale and
leaseback of its oxygen plant at the La Oroya facility for $17,162. Doe
Run Peru has an option to repurchase the oxygen plant at the end of the
five-year lease term for $200. In April 1999, Doe Run Peru entered into
a three-year sale and leaseback of computer equipment for $761. These
transactions have been accounted for as financing arrangements. The
interest rates applicable under the oxygen plant and computer equipment
leases are 12.35% and 8.50%, respectively.
The aggregate estimated amounts of long-term debt maturing after
October 31, 1999 are as follows:
<TABLE>
<S> <C>
Fiscal year ending October 31:
2000 $ 3,334
2001 3,730
2002 23,912
2003 4,112
2004 1,480
----------
$ 36,568
==========
</TABLE>
12. OTHER LONG-TERM LIABILITIES
Other long-term liabilities is principally comprised of estimated
closure cost of a zinc ferrite site of $7,200, 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%.
- 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.
74
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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 years ended October 31, 1999 and 1998 and the period from October
23, 1997 to October 31, 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current provision $ - $10,030 $ 419
Deferred provision (6,382) 2,569 2
------- ------- -----
Total $(6,382) $12,599 $ 421
======= ======= =====
</TABLE>
Peruvian income tax expense (benefit) expense differed from the amount
computed by applying the statutory income tax rate of 30% to income
before income tax expense (benefit) as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax expense at statutory rate $ 5,805 $13,501 $ 93
Increase (reduction) in income tax expense
resulting from:
Change in valuation allowance (12,413) (5,211) -
Effect of converting Peruvian nuevos soles
into U.S. dollars (169) 1,891 180
Other, net 395 2,418 148
-------- -------- ------
$ (6,382) $12,599 $ 421
======== ======== ======
</TABLE>
The net income tax benefit in fiscal 1999 results primarily from the
recognition of benefits related to tax losses generated in 1999 and to
an acquired tax loss of Cobriza for which no previous benefit was
recognized. As a result of the merger of Doe Run Peru and Cobriza,
management believes that it is more likely than not that the future
benefits of this tax loss will be realized.
75
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset (liability), included in the
deferred income tax caption of the consolidated balance sheet, are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories $ 1,343 $ -
Other current assets and liabilities 822 229
Property, plant and equipment 33,083 43,903
Tax loss carryforward 4,996 1,593
Other noncurrent assets and liabilities 3,827 -
-------- --------
44,071 45,725
Less valuation allowance (33,083) (45,496)
-------- --------
10,988 229
-------- --------
Deferred tax liability:
Inventories - (371)
Property, plant and equipment (7,177) (2,429)
-------- --------
(7,177) (2,800)
-------- --------
Net deferred tax asset (liability) $ 3,811 $ (2,571)
======== ========
</TABLE>
Tax loss carryforwards in Peru are available for use for five years
beginning with the first year the Company has tax against which it can
take a credit.
Management believes that sufficient uncertainty exists regarding the
realization of certain deferred tax assets and that a valuation
allowance is required. The change in valuation allowance reflects a
change in management's assessment regarding the future realization of
deferred tax assets as a result of the merger of Doe Run Peru S.R.L and
Cobriza and estimates of future earnings. In addition, benefits were
realized in 1999 relating to certain deferred tax assets against which
a valuation allowance had previously been provided.
14. EMPLOYEE BENEFITS
SEVERANCE INDEMNITIES
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 $2,786 and $2,573 for the years
ended October 31, 1999 and 1998, respectively.
76
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
WORKERS' PROFIT SHARING
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. 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. The Company's expense relating to workers'
profit sharing payments was $0 and $2,908 for the years ended October
31, 1999 and 1998, respectively.
In addition, the Company recorded a deferred workers' profit sharing
asset (liability) of $1,105 and $(745) at October 31, 1999 and 1998,
respectively. The Company expects to recover the deferred workers'
profit sharing asset through future reductions of workers' profit
sharing payments.
15. COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENTS
(a) According to the Contract described in Note 2, Doe Run Peru is
obligated to expend $120,000 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 a
penalty to Centromin equal to 30% of any shortfall. As of
October 31, 1999, Doe Run Peru had expended approximately
$76,975.
(b) According to the Contract of Guarantees and Measures to
Promote Investments mentioned in Note 13(b), (as modified on
December 21, 1999) Doe Run Peru is obligated to expend $93,761
through December 31, 2006 to expand and modernize its
facilities, including environmental expenditures. The related
investments can be considered as part of the $120,000
investment discussed in the above paragraph if expended before
October 23, 2002. Through October 31, 1999, Doe Run Peru has
invested approximately $17,974.
ENVIRONMENTAL MATTERS
Doe Run Peru submitted to and received approval from the Peruvian
government for an Environmental Adjustment 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
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. Future changes in legal rules and maximum permissible
levels would not be applicable to Doe Run Peru for the remaining period
of the PAMA.
77
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Doe Run Peru has committed under its PAMA to implement the following
projects through December 31, 2006:
- New sulfuric acid plants
- Elimination of fugitive gases from the coke plant
- Use of oxygenated gases in the anodic residue plant
- Water treatment plant for the copper refinery
- Recirculation system for cooling waters at the smelter
- Management and disposal of acidic solutions at the silver
refinery
- Industrial waste water treatment plant for the smelter and
refinery
- Containment dam for the lead muds near the zileret plant
- Granulation process water at the lead smelter
- Anode washing system at the zinc refinery
- Management and disposal of lead and copper slag wastes
- 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 COST
--------------
<S> <C>
2000 $ 11,265
2001 13,800
2002 14,300
2003 13,180
2004 30,055
2005 34,790
2006 42,040
--------------
$ $159,430
==============
</TABLE>
The current estimate for the total to be expended on environmental
projects under the PAMA and on additional related process changes for
Doe Run Peru is approximately $189,950 for this period.
Doe Run Peru's operations historically and currently exceed some of the
applicable Ministry of Energy and Mines (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 or different environmental obligations that could
adversely affect Doe Run Peru's business, financial condition or
results of operations. Under the purchase agreement related to the
acquisition of the La Oroya assets in October 1997, Empresa Minera del
Centro del Peru S.A. (Centromin), the previous owner of the La Oroya
assets, 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
78
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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 purchase agreement, the Company has the option to
continue the use of the La Oroya smelter existing zinc ferrite disposal
site until October 2000, 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 ferrite site is abandoned, the Company must pay this amount to
Centromin.
Doe Run Peru's Cobriza mine has a separate PAMA to be completed by
2000. The total cost of capital projects to manage tailings, sewage and
garbage is approximately $9,625, to be expended over the next three
years, with estimated spending of $6,985 in fiscal 2000.
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 operations 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: 8%, 8%, and 6%, respectively, of net sales in
the year ended October 31, 1999 and 9%, 6%, and 5% for the year ended
October 31, 1998. The percentages in the period from October 23, 1997
to October 31, 1997 were 20%, 19%, and 17%, respectively. The customers
have sales contracts, under which the Company will supply products at
prices based on international market quotations.
HEDGING
The Company utilizes derivative financial instruments to reduce certain
market risks and to protect its Peruvian source income. These market
risks 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, 1999 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.
79
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The Company's open hedging positions as of October 31, 1999 were:
(numbers not in thousands)
SOLD CALL OPTION CONTRACTS
<TABLE>
<CAPTION>
Fair market
Metal Quantity Price range value Period
----- -------- ----------- ----- ------
<S> <C> <C> <C> <C>
Copper 9,400 tons $0.7800/lb. to $0.9200/lb. ($1,213,975) Nov 99/Aug 00
Lead 551 tons $0.2495/lb. to $0.2495/lb. $ - Nov 99
Silver 370,000 oz. $5.51/oz. to $5.90/oz. ($39,348) Nov 99/Dec 99
</TABLE>
PURCHASED PUT OPTIONS CONTRACTS
<TABLE>
<CAPTION>
Fair market
Metal Quantity Price range value Period
----- -------- ----------- ----- ------
<S> <C> <C> <C> <C>
Copper 1,550 tons $0.6600/lb. to $0.7600/lb. $297,724 Nov 99/Aug 00
</TABLE>
The Company's open hedging positions as of October 31, 1998 were:
(numbers not in thousands)
SOLD CALL OPTION 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. $300.00/oz. to $300.00/oz. $ - Dec 98
</TABLE>
SOLD PUT OPTIONS CONTRACTS
<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/Jun 99
Zinc 2,480 tons $0.4400/lb. to $0.4536/lb. ($117,274) Nov 98/Dec 98
</TABLE>
FUTURES SALES CONTRACTS
<TABLE>
<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
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 $7,200 and recorded as a reserve in the caption other
long-term liabilities in the accompanying combined balance sheets. If
the Company decides to develop a new site, it is required to pay to
Centromin the $7,200 estimated closure costs.
80
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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, 1999 and 1998, 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 $3,800.
(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 related
expense was $10,145 for the year ended October 31, 1999 and
$5,800 for the period from March 9, 1998 to October 31, 1998.
The term of this agreement is for two years after which it is
automatically renewed on an annual basis unless notice of
non-renewal is given by either party.
(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 $1,600.
On March 9, 1998, Doe Run Peru entered into an agreement with
conditions similar to the above-described agreement. The
amount expensed was $11,821 for the year ended October 31,
1999 and $6,800 for the period from March 9, 1998 to October
31, 1998. The term of this agreement is for two years after
which it is automatically renewed on an annual basis unless
notice of non-renewal is given by either party.
(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 was $2,018 for the year ended October 31, 1999 and
$2,300 for the period from March 9, 1998 to October 31, 1998.
The term of this agreement is for two years after which it is
automatically renewed on an annual basis unless notice of
non-renewal is given by either party.
81
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
In addition to the above described, the following intercompany
transactions occurred during the periods ended October 31, 1999, 1998
and 1997:
(a) On October 23, 1997, Doe Run Peru granted to its shareholder,
Doe Run Mining, a $125,000 loan which does not accrue interest
and matures in October 23, 2002. This receivable is
denominated in nuevos soles. The balance of $104,865 and
$125,000 at October 31, 1999 and 1998, respectively were shown
net of the shareholders' equity. This loan is long term in
nature and management anticipates that it will not be settled
in the forseeable future. Accordingly, gains and losses on the
loan are reported in the same manner as currency translation
adjustments, as a component of shareholders' equity.
(b) As of October 31, 1999 and 1998, the Company had a receivable
from Doe Run Mining of $43,519 and $17,471, respectively,
related to payments made on behalf of this entity (primarily,
interest on loans and repayments of a revolving loan). The
Company also had receivables from Doe Run Development S.A.C.
of $122 and $85 at October 31, 1999 and 1998, respectively,
related to payments made on behalf of this company in
connection with its current operations.
At October 31, 1999 and 1998 the Company had payables to Doe
Run Mining S.R.L. of $19,897 and $10,388, respectively,
primarily for the fees described above.
(c) Doe Run Peru had payables to Doe Run Resources of $1,269 and
$4,266 at October 31, 1999 and 1998, respectively, related to
the fees described above, hedging activity and to payments
made by Doe Run Resources on behalf of Doe Run Peru. These
payables did not accrue interest.
Included in Trade Accounts Receivable, the Company had
balances due from Doe Run Resources for sales of refined
metals of $67 and $883 at October 31, 1999 and 1998,
repsectively. Sales related to these accounts were $2,898
in fiscal 1999 and $2,632 in fiscal 1998.
As a result of these transactions, the Company had a due from and due
to related parties of $23,744 and $1,269 at October 31, 1999 and $7,168
and $4,266 at October 31, 1998, respectively. These balances, except
for trade receivables, are shown separately in the combined balance
sheets.
Doe Run Cayman and its wholly-owned subsidiary, Doe Run Mining, and Doe
Run Peru have jointly and severally, fully, unconditionally guaranteed
$200,000 11.25% senior notes due 2005 and $55,000 floating interest
rate senior notes due 2003, issued by Doe Run Resources (collectively,
the Unsecured Notes). Additionally, the above-referred companies and
their subsidiaries have jointly and severally, fully, unconditionally
guaranteed $50,000 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 11.
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. The Company is in
compliance with these covenants as of October 31, 1999.
82
<PAGE>
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
18. GEOGRAPHIC DATA
The following is an analysis of net sales by country of destination:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
USA $159,506 $148,870 $ -
Peru 68,333 120,455 2,571
Brazil 50,184 40,086 -
England 37,379 9,165 -
Japan 29,183 24,955 -
India 28,864 10,426 -
Other 91,183 104,334 -
-------- -------- --------
Total $464,632 $458,291 $ 2,571
======== ======== ========
</TABLE>
83
<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
84
<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.
85
<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.
86
<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.
87
<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.
88
<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.
89
<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.
90
<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.
91
<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.
92
<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)
93
<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>
94
<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.
95
<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.
96
<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
------- ------- -------
------- ------- -------
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>
97
<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).
98
<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.
99
<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>
100
<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.
101
<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 .................... 65 Chairman and sole Director of the Company, Doe Run Cayman and FPI
Jeffrey L. Zelms .................... 55 Vice Chairman, President and Chief Executive Officer of the Company
and President of Doe Run Cayman
Marvin K. Kaiser .................... 58 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 ................. 55 Vice President Sales and Marketing of the Company
Kenneth R. Buckley .................. 61 Vice President of the Company and General Manager of Doe Run
Mining, Doe Run Peru and Cobriza
John E. FitzSimmons ................. 54 Vice President Primary Smelting
Jerry L. Pyatt ...................... 44 Vice President Secondary Smelting of the Company, President FPI
Juan Carlos Huyhua, Ph.D ............ 47 Operations Manager of Doe Run Peru
</TABLE>
Ira Leon Rennert has been Chairman, Chief Executive Officer and
deemed beneficial shareholder of the 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 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 30 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.
Kenneth R. Buckley has served as Vice President 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 35 years of experience in managing
metal milling and smelting operations in five countries.
John E. FitzSimmons has served as Vice President of Primary Smelting
of the Company since 1989. Prior to his present assignment, Mr. FitzSimmons
served as General Manager of Doe Run's Smelting Division from August 1986
until December 1989 and from January 1993 to September 1998. From January
1990 until January 1993, he served as Vice President of Mining and General
Manager. Mr. FitzSimmons joined St. Joe Minerals Corporation, the Company's
predecessor, more than 33 years ago, supervising every aspect of lead and
zinc smelting operations.
102
<PAGE>
Jerry L. Pyatt was named Vice President Secondary Smelting of the
Company January 1, 2000. Prior to that time, Mr. Pyatt served as General
Manager of the Company's Resource recycling Division and has been President
of FPI since October 1, 1998. Mr. Pyatt joined the Company in 1991 as a
Metallurgical Engineer.
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.
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
Annual Payouts(b)
Compensation(a) Payouts
Fiscal ------------------------ Long-term All Other
Name and Position Year Salary Bonus Compensation Compensation(c)
----------------- ------ ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ira Leon Rennert(d) 1999 - - - $2,400,000
Chairman of the Board and sole Director 1998 - - - 4,311,004
1997 - - - 1,200,000
Jeffrey L. Zelms 1999 $ 253,821 $ 450,000 - 68,401
Vice Chairman, President and Chief 1998 251,952 450,000 $ 125,000 33,042
Executive Officer 1997 240,000 100,000 262,068 34,885
Marvin K. Kaiser 1999 195,000 80,000 - 38,851
Vice President and Chief Financial Officer 1998 187,200 180,000 25,000 18,558
1997 156,000 74,000 52,414 22,164
Richard L. Amistadi 1999 187,500 75,000 - 37,517
Vice President Sales and Marketing 1998 180,000 75,000 37,500 17,471
1997 163,248 60,000 78,620 23,197
Kenneth R. Buckley 1999 185,400 155,900 124,219
Vice President 1998 186,398 225,000 12,500 120,356
1997 142,132 60,000 26,207 21,657
John E. FitzSimmons 1999 149,435 80,000 - 27,402
Vice President Primary Smelting 1998 142,248 80,000 - 22,600
1997 135,312 70,000 52,414 20,540
</TABLE>
- --------------------
(a) Value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of total salary and bonus for any 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."
(c) The amounts shown as "All Other Compensation" in the table for fiscal
1999 for each named executive officer, except Mr. Rennert, represent
payments to Messrs. Zelms, Kaiser, Amistadi, Boyer, Buckley and
FitzSimmons under the gainsharing and profit sharing plans of $44,645,
$34,051, $32,717, $3,097, $25,554 and $22,601, respectively, and
$23,756 of life insurance premiums and medical expenses for Mr. Zelms
and $2,982 of medical expenses and $98,665 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 deemed beneficial shareholder of Renco
which receives a management fee from the Company pursuant to the
103
<PAGE>
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 current and former 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. In
addition, Mr. Buckley's agreement provides for a "Peru Credit" under which he
is entitled to receive a fixed percentage of the cumulative net income of Doe
Run Mining S.R.L. with provisions similar to those described above. Two other
employees are parties to net worth appreciation agreements providing for a
Peru Credit.
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 Base Date 1999 (a)
---------- --------- ------------
<S> <C> <C> <C>
Jeffrey L. Zelms .............................. 5.0% 4/7/94 $1,095,400
Marvin K. Kaiser .............................. 1.0 4/7/94 219,080
Richard L. Amistadi ........................... 1.5 4/7/94 328,620
Kenneth R. Buckley ............................ 0.5 4/7/94 109,540
Kenneth R. Buckley - Peru Credit .............. 1.0(b) 10/23/97 310,230
John E. FitzSimmons ........................... 1.0 4/7/94 219,080
</TABLE>
- -----------
(a) Represents the gross aggregate amount that each participant is entitled
to receive as of October 31, 1999, subject to the vesting terms of the
applicable agreement.
(b) Peru credit for Mr. Buckley vests 100% on October 23, 2000.
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.
104
<PAGE>
RETIREMENT PLANS
The following table shows the estimated amount of annual retirement
income (calculated as a straight life annuity benefit) payable to employees
under The Doe Run Resources Corporation Retirement Plan for Salaried
Employees( the Plan), supplemented by the Doe Run Resources Corporation
Supplemental Employee Retirement Plan (SERP). The SERP is a non-qualified
plan under which any benefits not payable from Plan assets by reason of the
limitations imposed by the Internal Revenue Code of 1986, as amended (the
Code) are paid by the Company. The benefits paid are not subject to any
deduction for Social Security or other offset amount.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Approximate Annual Retirement Benefits
Final Average 15 Years of 20 Years of 25 Years of 30 Years of 35 Years of
Compensation Service Service Service Service Service
- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 28,125 $ 37,500 $ 46,875 $ 56,250 $ 65,625
150,000 33,750 45,000 56,250 67,500 78,750
175,000 39,375 52,500 65,625 78,750 91,875
200,000 45,000 60,000 75,000 90,000 105,000
225,000 50,625 67,500 84,375 101,250 118,125
250,000 56,250 75,000 93,750 112,500 131,250
300,000 67,500 90,000 112,500 135,000 157,500
400,000 90,000 120,000 150,000 180,000 210,000
450,000 101,250 135,000 168,750 202,500 236,250
500,000 112,500 150,000 187,500 225,000 262,500
600,000 135,000 180,000 225,000 270,000 315,000
700,000 157,500 210,000 262,500 315,000 367,500
800,000 180,000 240,000 300,000 360,000 420,000
900,000 202,500 270,000 337,500 405,000 472,500
1,000,000 225,000 300,000 375,000 450,000 525,000
</TABLE>
Retirement benefits are based on a Member's monthly "Compensation"
for the highest 36 consecutive months out of the final 120 months.
"Compensation" covered by the Plan includes basic salary, overtime pay, cash
bonuses, amounts contributed through a salary reduction arrangement to a
qualified plan which meets the requirements of Section 401(k) of the Internal
Revenue Code or to a cafeteria plan which meets the requirements of Section
125 of the Internal Revenue Code. "Compensation" covered by the plan does not
include commissions, income from the exercise of stock options or income from
shadow stock, other special pay or allowances, severance pay, payments in the
nature of royalties, and the cost to the Company of any public or private
employee benefit plan.
As of December 31, 1999, the following officers had completed the
number of years of service indicated opposite their names: Jeffrey L. Zelms,
31 years; Marvin K. Kaiser, 6 years; Richard L. Amistadi, 31 years; Kenneth
R. Buckley, 22 years; John E. FitzSimmons, 33 years. Covered compensation
under the Plan for the year ended October 31, 1999 did not differ by more
than 10% from the compensation disclosed in the Summary Compensation Table.
EMPLOYMENT AGREEMENTS
The named executive officers are parties to employment agreements
with the Company which expire October 31, 2000, except for Mr. Buckley's,
which expires December 31, 2000. The agreements are automatically renewable
there after for additional one-year terms. Pursuant to the terms of these
agreements compensation is composed of: 1) a base annual salary, 2) a
year-end bonus of not less than $50,000 nor more than $100,000 for Mr. Zelms,
not less than $30,000 nor more than $60,000 for each of the other named
executive officers, as may be determined by the Company in its sole
discretion and 3) such additional amounts, if any, as the sole Director may
determine from time to time in his discretion.
The agreements require that, during the term of their employment,
the officers shall 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.
105
<PAGE>
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.
<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.................................................................... - -
Kenneth R. Buckley..................................................................... - -
John E. Fitzsimmons.................................................................... - -
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 all of the outstanding common
stock of Renco.
By virtue of Renco's indirect ownership of all of the outstanding
common stock of the Company, and Mr. Rennert's ownership 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. Management believes that the agreement will continue
beyond October 31, 2000. In the year ended October 31, 1999, the Company paid
management fees to Renco in the amount of $2.4 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
106
<PAGE>
reimbursed under the Renco insurance programs in fiscal 1999 was
approximately $5.2 million, of which Doe Run financed $1.5 million directly
with insurance premium finance companies. The Company believes that its
insurance costs were less than would have been incurred had the respective
insurance 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 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 with the beginning of fiscal 1999, Renco, formerly a C
corporation, elected to be treated as an S corporation pursuant to a change
in the Federal tax laws allowing corporations with subsidiaries to elect such
Subchapter S status. In connection with that election, 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 the
Company's 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 were reflected as a charge and credit to income, respectively, in the
first quarter of the Company's consolidated statement of income in fiscal
1999.
The Company 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 are on an arm's length basis at a price no less
favorable than that at which the Company could sell to unaffiliated entities.
107
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
A. Documents filed as part of this Form 10-K:
1. FINANCIAL STATEMENTS (included in Part II, Item 8): Page #
------
a) The Doe Run Resources Corporation
Independent Auditors' Report 24
Consolidated Balance Sheets - October 31, 1999 and 1998 25
Consolidated Statements of Operations - Years ended October 31, 1999, 1998,
and 1997 26
Consolidated Statements of Comprehensive Income and Shareholders' Equity -
Years ended October 31, 1999, 1998 and 1997 27
Consolidated Statements of Cash Flows - Years ended October 31, 1999, 1998,
and 1997 28
Notes to Consolidated Financial Statements 29-61
b) Doe Run Peru S.R.L
Independent Auditors' Report 62
Report of Independent Accountants 63
Combined Balance Sheets - October 31, 1999 and 1998 64
Combined Statements of Operations - Years ended October 31, 1999 and 1998,
and for the period from October 23, 1997 to October 31, 1997 65
Combined Statements of Shareholders' Equity - Years ended October 31, 1999
and 1998, and for the period from October 23, 1997 to October 31, 1997 66
Combined Statements of Cash Flows - Years ended October 31, 1999 and 1998,
and for the period from October 23, 1997 to October 31, 1997 67
Notes to Combined Financial Statements 68-83
c) Empresa Minera del Centro del Peru S.A. - Centromin Peru S.A.
Report of Independent Accountants 84
Statements of Assets and Liabilities - October 23, 1997 and December 31, 1996 85
Statement of Revenues and Expenses - Period from January 1 to October 23,
1997 and years ended December 31, 1996, and 1995 86
Statement of Changes in Net Assets - Period from January 1 to October 23,
1997 and years ended December 31, 1996, and 1995 87
Statements of Cash Flows - Period from January 1 to October 23, 1997 and
years ended December 31, 1996, and 1995 88
Notes to Consolidated Financial Statements 89-101
2. FINANCIAL STATEMENT SCHEDULES (included in Part IV):
Independent Auditor's Report 109
Schedule II Valuation and Qualifying Accounts 110
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>
108
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Doe Run Resources Corporation and subsidiaries:
Under date of December 10, 1999, we reported on the consolidated balance
sheets of The Doe Run Resources Corporation and subsidiaries as of October
31, 1999 and 1998, and the related consolidated statements of operations,
comprehensive income and shareholders' equity and cash flows for each of the
years in the three-year period ended October 31, 1999, 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 therein.
(signed) KPMG LLP
December 10, 1999
109
<PAGE>
SCHEDULE II
THE DOE RUN RESOURCES CORPORATION
Valuation and Qualifying Accounts
Years ended October 31, 1999, 1998, and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
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, 1999:
Applied against asset accounts:
Allowance for doubtful accounts $ 876 103 304 675
Allowance for inventory obsolescence $ 4,559 66 325 4,300
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
</TABLE>
110
<PAGE>
(b) REPORTS ON FORM 8-K.
None
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)
By: /s/ Jeffrey L. Zelms
----------------------------------
Jeffrey L. Zelms
Vice Chairman, President and Chief
Executive Officer
1/26/2000
----------------------------------
(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> <C>
Ira Leon Rennert
Chairman of the Board and Director /s/ Ira Leon Rennert 1/26/2000
---------------------- -----------
Signature Date
Jeffrey L. Zelms
Vice Chairman, President and Chief Executive Officer
(principal executive officer) /s/ Jeffrey L. Zelms 1/26/2000
---------------------- -----------
Signature Date
Marvin K. Kaiser
Vice President and Chief Financial Officer
(principal financial and accounting officer) /s/ Marvin K. Kaiser 1/26/2000
---------------------- -----------
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.
111
<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
</TABLE>
112
<PAGE>
<TABLE>
<S> <C>
L. Zelms.(1)
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 John E. FitzSimmons.(6)
10.1.5 Employment Agreement, dated as of April 7, 1994, as amended,
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 John
E. FitzSimmons.(6)
10.2.5 Net Worth Appreciation Agreement, dated as of January 15,
1999, as amended, between The Doe Run Resources Corporation
and Kenneth R. Buckley.(6)
10.2.6 Form of second amendment to net worth appreciation agreements
dated January 15, 1999 (Amendments to Exhibits 10.1.1-10.1.4).
(6)
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)
10.5.5 Amendment No. 3 to Loan and Security Agreement dated February
1, 1999 by and among the Doe Run Resources Corporation,
Fabricated Products, Inc. and Congress Financial Corporation
(4) Ex. 10.1
10.5.6 Amendment No. 4 to Loan and Security Agreement dated June 11,
1999 by and among the Doe Run Resources Corporation,
Fabricated Products, Inc. and Congress Financial Corporation
(5) Ex 10.3
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
</TABLE>
113
<PAGE>
<TABLE>
<S> <C>
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 Cobranza (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)
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)
10.15 Financial leasing dated January 20, 1999 entered into by and
between Credito Leasing S.A. and Banco de Credito del Peru as
party of the first part and Doe Run Peru S.R.L. as party of
the second part (English) (5) Ex. 10.1
10.16 Unconditional Guarantee dated June 11,1999 by and among the
Doe Run Resources Corporation, Boeing Capital Corporation and
First Security Bank, N.A. (5) Ex 10.2.1
10.17 Promissory Note dated July 6, 1999 by and among Boeing Capital
Corporation and First Security Bank, N.A. (5) Ex 10.2.2
10.18 Loan and Security Agreement dated June 11, 1999 by and among
Boeing Capital Corporation and First Security Bank, N.A. (5)
Ex 10.2.3
21 List of Subsidiaries of Registrant. (3)
27.1 Financial Data Schedule
27.2 Restated 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.
(4) Incorporated by reference to the exhibit number in Form 10Q filed June
11, 1999.
(5) Incorporated by reference to the exhibit number in Form 10Q filed
September 13, 1999.
(6) Filed with this Form 10K.
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EXHIBIT 10.1.4
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 7th day of April, 1994, between THE DOE RUN
RESOURCES CORPORATION, a New York corporation, doing business in Missouri under
the trade name "The Doe Run Company" (herein called the "Company"), with its
principal office at 1801 Park 270 Drive, St. Louis, Missouri 63146 and John E.
FitzSimmons ("Employee").
WITNESSETH:
WHEREAS, Employee has for some years been employed by the Company or a
predeessor, and Company desires to continue to employ the Employee and Employee
desires to continue to be employed by the Company, all on the terms hereof;
In consideration of the mutual covenants herein contained, it is hereby
agreed as follows:
1. TERM AND DUTIES.
Commencing on the date of this Agreement and continuing until October
31, 1999, unless sooner terminated or extended as herein provided (the
"Employment Term"), the Company shall continue to employ the Employee as its
Vice President and General Manager-Smelting. During the Employment Term the
Employee shall continue to devote all of his business time and his best efforts
to the business of the Company, and its subsidiaries, as may be necessary to
perform his duties hereunder, in accordance with the policies, procedures,
business plans and budgets from time to time established by the Board of
Directors, and the Chairman of the Board and the President and shall not have
any other business affiliations. Employee hereby accepts continued employment
hereunder.
2. COMPENSATION.
In full compensation for the services to be rendered by the Employee to
the Company and its subsidiaries hereunder, during the Employment Term, the
Company will pay to the Employee, and the Employee shall accept:
(a) A basic annual salary of $132,600 for each employment year
of the Employment Term payable in installments not less frequently than
monthly, and increased as the Board of Directors may, from time to
time, determine in its discretion; plus
(b) For each fiscal year (November 1 to October 31) of the
Company ending during the employment of the Employee, 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, PROVIDED THAT the Employee is in
the employ of the Company at the close of such year and the Company
shall not have incurred a net loss before taxes for such fiscal year
determined in accordance with generally accepted
1
<PAGE>
accounting principles followed by the Company in preparing its audited
balance sheet as of the date of this Agreement but before giving
effect to this clause (b), and to like provisions in any other
employment agreement to which the Company is a party. The bonus for
each fiscal year shall, if due, be paid as promptly as practicable
after the independent accountants for the Company shall have
determined, and reported in writing, as to whether the Company had a
net loss within the meaning of this clause (b) for such year; plus
(c) such additional amounts, if any, as the Board of Directors
of the Company may determine from time to time in its discretion.
3. PLACE OF EMPLOYMENT.
The Employee's regular place of employment during the Employment Term
shall be at the Herculaneum Smelting Division of the Company in Herculaneum,
Missouri. The Employee may not be required to relocate without his consent.
4. TRAVEL; EXPENSES.
The Employee shall engage in such travel as may reasonably be required
in connection with the performance of his duties, in accordance with prior
practice.
All reasonable travel and other expenses incurred by the Employee (in
accordance with the policies of the Company established from time to time) in
carrying out his duties hereunder will be reimbursed by the Company on
presentation to it of expense accounts and appropriate documentation in
accordance with the customary procedures of the Company for reimbursement of
executive expenses. The Employee shall be entitled to a travel expense advance
in the discretion of the Company when anticipated travel warrants such advance.
5. Early Termination of Employment Term ON DISABILITY OR DEATH.
(a) If during the Employment Term, the Employee fails because
of illness or other incapacity (including incapacity because of
substance abuse) to render to the Company the services required of him
hereunder for a period of two months (during which the Company shall
continue the Employee's compensation at the rates herein provided), the
Company may, in its discretion, give one month notice of termination of
the Employment Term (during which the Employee's compensation shall
likewise be continued), and if the Employee shall not resume full
performance of his duties within such one month period, the Employment
Term shall terminate at the expiration thereof, provided that any such
termination shall not affect the right of the Employee (or his estate)
to continue to receive benefits under any disability insurance plan or
program covering the Employee which is in effect at the date of
termination, and further provided that if any such termination shall be
during a fiscal year and the Company shall not have a net loss before
income taxes determined as provided in paragraph 2(b) for such fiscal
year, the Employee shall be entitled to a pro-rata portion of the
minimum bonus for such year based on the number of full months worked
by him in such year.
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(b) The Employment Term shall end upon the death of the
Employee, provided that (i) if the Employee shall die during a fiscal
year, and the Company shall not have a net loss, determined as provided
in paragraph 2(b), for such fiscal year, the Employee shall be entitled
to a pro-rata portion of the minimum bonus for such year, based on the
number of full months worked by him during such year.
6. VACATION.
During the Employment Term, the Employee shall be entitled to vacation
periods in accordance with previously agreed-to vacation entitlement or with the
*Vacation Policy for St. Louis Office Employees on April 7, 1994, to be taken at
such time or times as shall be mutually convenient to the Company and the
Employee (but not more than two weeks consecutively except as may be
specifically approved by the President). Unused vacation shall not accumulate
from year to year.
* 1-4 years service = 2 weeks vacation
5-11 years service = 3 weeks vacation
12-19 years service = 4 weeks vacation
20-29 years service = 5 weeks vacation
30 or more years service = 6 weeks vacation
7. CONFIDENTIALITY; COMPETITION.
(a) For the purposes hereof, all confidential information
about the business and affairs of the Company (including, without
limitation, business plans, financial and marketing information and
information about its secrets and machinery, designs, plans patterns
and specifications, formulae, processes, inventions and discoveries,
and name of suppliers and customers and nature of dealings with them)
constitute "Company Confidential Information. " For some years, the
Employee has been a senior officer of the Company or a predecessor. He
acknowledges that he has in the past had, and will continue to have,
access to and knowledge of Company Confidential Information, and that
improper use or revelation of same by the Employee during or after the
termination of his employment by the Company could cause serious injury
to the business of the Company. Accordingly, the Employee agrees that
he will forever keep secret and inviolate all Company Confidential
Information which shall have come or shall hereafter come into his
possession, and that he will not use the same for his own private
benefit, or directly or indirectly for the benefit of others, and that
he will not disclose such Company Confidential Information to any other
person.
(b) During the Employment Term, the Employee will not (whether
as an officer, director, partner, proprietor, investor, associate,
employee, consultant, adviser, public relations or advertising
representative or otherwise), directly or indirectly, be engaged in any
aspect of the business of lead mining, milling, recycling or sale
within the continental United States (which the parties acknowledge is
the Company's trading area). For purposes of the preceding sentence,
the Employee shall be deemed to be engaged in any business which any
person for whom he shall perform services is engaged. Nothing herein
contained shall be deemed to prohibit the Employee from owning, as a
passive investment, a security of any issuer which is not a supplier,
vendor, customer or competitor of the Company.
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(c) Within the terms of this Agreement, it is intended to
limit disclosure and competition by the Employee to the maximum extent
permitted by law. If it shall be finally determined by any court of
competent jurisdiction ruling on this Agreement that the scope or
duration of any limitation contained in this paragraph 7 is too
extensive to be legally enforceable, then the parties hereby agree that
the scope and duration (not greater than that provided for herein) of
such limitation shall be the maximum scope and duration which shall be
legally enforceable and the Employee hereby consents to the enforcement
of such limitation as so modified.
(d) The Employee acknowledges that any violation by him of the
provisions of this paragraph 7 could cause serious and irreparable
damages to the Company. He further acknowledges that it might not be
possible to measure such damages in money. Accordingly, the Employee
further acknowledges that, in the event of a breach or threatened
breach by him of the provisions of this paragraph 7, the Company may
seek in addition to any other rights or remedies, including money
damages, an injunction or restraining order, restraining the Employee
from doing or continuing to do or perform any acts constituting such
breach or threatened breach.
8. EMPLOYEE'S INVENTIONS.
The Employee agrees to assign and transfer to the Company, its
successors and assigns, his entire right, title and interest in and to any or
all inventions, designs, discoveries and improvements which he may make, either
solely or jointly with others, during the Employment Term hereunder and for a
period of one (1) year thereafter, which relate in any way to the business or
products of the Company, together with all rights to letters patent which may be
granted thereon. Immediately upon making any inventions, designs, discoveries or
improvements, the Employee shall notify the Company and, without further
compensation, shall execute and deliver to the Company such documents as may be
necessary to prepare or prosecute applications for patents upon such inventions,
designs, discoveries and improvements, and shall assign and transfer to the
Company his entire right, title and interest therein. the Company shall pay all
expenses involved in carrying out the provisions of this paragraph 8.
9. BENEFITS.
The company agrees to provide to the Employee during the Employment
Term the retirement plan, 401-(k) Savings Plan, medical, hospitalization,
dental, life and AD&D, disability, travel accident insurance, as well as the
executive auto allowance program and other benefits as provided to the Employee
on March 31, 1994.
10. EMPLOYEE'S REPRESENTATION.
Employee hereby represents to the Company that he has full right and
power to enter into his Agreement and carry out his duties hereunder, and that
same will not constitute a breach of or default under any employment,
confidentiality, non-competition or other agreement by which he may be bound.
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11. DEFAULT BY EMPLOYEE.
If the Employee shall:
(i) commit an act of dishonesty against the Company or fraud
upon the Company; or
(ii) breach his obligations under-this Agreement and fail to cure
such breach within five (5) days after written notice
thereof; or
(iii) be convicted of a crime involving moral turpitude; or
(iv) fail or neglect diligently to perform his duties hereunder
and continue in his failure after written notice;
then, and in any such case, the Company may terminate the employment of the
Employee hereunder and, in the event of any such termination, the Employee shall
no longer have any right to any and all benefits (including future salary
payments) which would otherwise have accrued after such termination.
12. AUTOMATIC RENEWAL.
This Agreement shall automatically renew and be extended from year to
year upon the expiration of the Employment Term (as extended if extended) unless
terminated by either party by written notice given to the other at least three
months prior to its termination date. If any such notice shall be given, this
Agreement shall terminate on the next succeeding October 31.
13. SUCCESSORS.
The rights, benefits, duties and obligations under this Agreement shall
inure to and be binding upon the Company, its successors and assigns and upon
the Employee and his legal representatives, legatees and heirs. It is
specifically understood, however, that this Agreement may not be transferred or
assigned by the Employee. The Company may assign any of its rights and
obligations hereunder to any subsidiary or affiliate of the Company, or, by
written instruction to a successor or surviving corporation resulting from a
merger, consolidation, sale of assets or stock, or other corporate
reorganization, on condition that the assignee shall assume all of the Company's
obligations hereunder (but nevertheless the Company shall remain liable
hereunder) and it is agreed that such successor or surviving corporation shall
continue to be obligated to perform the provisions of this Agreement.
14. NOTICES.
Notices hereunder shall be in writing and shall be sent by telegraph or
by certified or registered mail, telecopy, or recognized overnight delivery
service (such as Federal Express) prepaid as follows:
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TO EMPLOYEE: TO COMPANY:
John E. FitzSimmons The Doe Run Company
P. O. Box 476 c/o The Renco Group, Inc.
Viburnum, MO 65566 45 Rockefeller Center
New York, New York 10111
Attention: Ira Leon Rennert
Chairman
After October 1, 1994:
30 Rockefeller Plaza
42nd floor
New York, NY
with copies to:
The Doe Run Resources
Corporation
1801 Park 270 Drive
St. Louis, Missouri 63146
Attention: President
and
Baer Marks & Upham
805 Third Avenue
New York, New York 10022
Attention: Justin W. D"Atri, esq.
and shall be deemed to have been given when telecopied to the addressee or three
days after placed in the mail or the second business day following delivery to a
recognized overnight delivery service (such as Federal Express) or a telegraph
company, prepaid and properly addressed. Notices to the Employee may also be
delivered to him personally. Notices of change of address shall be given as
provided above, but shall be effective only when actually received.
15. WAIVERS.
The failure of either party to insist upon the strict performance of
any of the terms, conditions, and provisions of this Agreement shall not be
construed as a waiver or relinquishment of future compliance therewith, and said
terms, conditions, and provisions shall remain in full force and effect. No
waiver of any term or condition of this Agreement on the part of the Company,
shall be effective for any purposes whatsoever unless such waiver is in writing
and signed by the Company.
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16. ENTIRE AGREEMENT; GOVERNING LAW.
There are no oral or written understandings concerning the Employee's
employment outside of this Agreement and the separate Net Worth Appreciation
Agreement between the Company and the Employee. This Agreement may not be
modified except by a writing signed by the parties hereto. This Agreement
supersedes any and all prior employment agreements or understandings. This
Agreement is made under, and shall be construed in accordance with, the laws of
the State of Missouri, applicable to agreements to be performed wholly within
that state.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
THE DOE RUN RESOURCES CORPORATION
Attest: doing business as THE DOE RUN COMPANY
/s/ NICOLE FEERICK By: /s/ IRA LEON RENNERT 10/21/94
- ------------------ ---------------------------------
Witness:
/s/ LIL RAPERT /s/ JOHN E. FITZSIMMONS 8/11/94
- -------------- ---------------------------------
John E. FitzSimmons, Employee
<PAGE>
EXHIBIT 10.2.4
DR ACQUISITION CORP.
c/o THE DOE RUN RESOURCES CORPORATION
1801 PARK 270 DRIVE
ST. LOUIS, MISSOURI 63146
As of April 7, 1994
Mr. J. E. FitzSimmons
c/o The Doe Run Resources Corporation 1801 Park 270 Drive
St. Louis, Missouri 63146
Re: NET WORTH APPRECIATION AGREEMENT
Dear Mr. FitzSimmons:
This will confirm the understanding of this corporation, (the
"Company") with you, effective upon acquisition by this corporation of the
capital stock of The Doe Run Resources Corporation ("Doe Run"), with respect to
your Net Worth compensation to you as an employee of Doe Run.
1. VESTING.
On March 31, 1997, provided that you have been continuously in the
employ of Doe Run from the date hereof through that date, you shall receive a
net worth appreciation credit of 3/5ths of 1% and on March 31 in each of the
years 1998 and 1999 you shall receive an additional net worth appreciation
credit of 1/5th of 1%, provided that you have been continuously in the employ of
Doe Run from the date hereof to the applicable March 31, for a maximum credit,
if you remain in the employ of Doe Run continuously through March 31, 1999, of
1%. You shall not receive any credit unless you remain in the employ of Doe Run
from the date hereof continually until March 31, 1997, and thereafter you shall
not receive credit for any partial year, provided that (a) if your employment
terminates due to death or permanent disability preventing you from performing
your usual employment functions and duties ("disability") on or after March 31,
1995 and prior to March 31, 1997, you shall receive a credit of 1/5th of 1% if
such termination is prior to March 31, 1996 and 2/5ths of 1% if such termination
is on or after March 31, and prior to March 31 1997, and (b) if your employment
terminates after March 31, 1997 and before March 31, 1999, due to death or
disability, you shall receive a credit of 1/5th of 1% for the partial year in
which the termination takes place (in addition to all credits previously
accrued)
2. NET WORTH APPRECIATION BENEFIT.
Upon the termination of your employment by Doe Run, other than for
legal cause, you shall be entitled to a net worth appreciation payment
("Payment") equal to the product of (a) the total percentage credited to you
under paragraph 1 (a maximum of 1%) multiplied by (b) the "net worth increment."
The "net worth increment" is the amount, if any, by which the consolidated net
worth of this Company and its subsidiaries, as at the end of its fiscal quarter
immediately preceding the date of your termination, exceeds its consolidated net
worth as of the date hereof, provided, however, that any increase in net worth
resulting from a capital contribution to the Company or Doe Run or the sale of
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stock of the Company or Doe Run shall be disregarded in calculating "net worth
increment". The determination of the independent public accountants for the
Company as to the net worth increment, made in accordance with generally
accepted accounting principles, consistently applied, shall be conclusive on
each of us. If there is no "net worth increment", no amount shall be payable. If
your employment is terminated for legal cause, you shall not be entitled to
receive any payment.
3. PAYMENT.
The Payment shall be payable to you (or your designee or estate) in 40
equal quarterly installments, without interest, commencing three (3) months
after the termination of your employment, and at 3 month intervals thereafter.
4. DIVIDENDS; SALE OF SUBSTANTIALLY ALL OF THE COMPANY'S STOCK OR
ASSETS.
(a) If and in the event either Doe Run or the Company shall pay either
a dividend or management fee or any other form of distribution in excess of
$1,200,000 annually to The Renco Group, Inc. ("Renco") or any affiliate, other
than a subsidiary of the Company, (this distribution shall include any transfer
of assets from the Company or Doe Run to Renco or any other subsidiary company
of Renco in any form whether as cash or other form of value which shall have the
effect of reducing the net worth of the Company) while you shall be employed by
Doe Run, then you shall be entitled to receive, as additional compensation, an
amount equal to 1% of such cash dividend or distribution. This provision shall
not apply to intercompany payments among the Company and its own wholly-owned
subsidiaries or among two wholly-owned subsidiaries of the Company, or to
reimbursement to Renco a proportionate part of costs, such as audit charges and
insurance premiums, paid by Renco on behalf of itself and of its subsidiaries
including the Company and Doe Run;
(b) If, while you shall be employed by Doe Run (and whether before or
after March 31, 1997), all or substantially all the stock or assets of the
Company or of Doe Run shall be sold to a person who is not an affiliate of Ira
Leon Rennert, or if The Renco Group, Inc. sells a controlling interest in the
Company, then, upon the closing of such sale, your full 1% net worth
appreciation credit shall be deemed to be vested, and you shall be entitled to
receive as payment in full of your participation, your pro rata share (1%) of
the "net proceeds" of the sale, in kind, on the same terms and conditions as the
Company or its shareholder is being paid. "Net proceeds", for purposes hereof,
shall mean the amount if any, by which the proceeds of the sale after deducting
all expenses of the sale, all applicable federal, state and local taxes, and all
liabilities retained by the seller exceeds the consolidated net worth of the
Company on the date hereof. Except for such payment, neither you nor this
Company nor Doe Run have any further rights or liabilities hereunder.
5. CONDITION PRECEDENT.
The Company's obligation to make the Payment to you shall be
conditioned on your faithful adherence to your employment arrangements with Doe
Run and on your refraining from engaging, during the period over which such
payments are to be made to you, directly or indirectly in any activity which is
competitive with the business engaged in by Company or Doe Run at the date of
termination of your employment. If you do engage in any such competitive
activities, then we shall no longer be obligated to make any payments to you
hereunder.
6. NOTICE.
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Any notices to be sent pursuant hereto shall be sent by hand, certified
or registered mail or overnight service to you, at the address indicated above
and to the Company, c/o The Renco Group, Inc. at 45 Rockefeller Plaza (36th
Floor), New York, New York 10111 (after October 1, 1994: 30 Rockefeller Plaza,
New York, New York - 42nd floor), to the attention of Ira Leon Rennert, or to
any other address which any of us may designate by notice in writing.
Please confirm that the foregoing correctly sets forth our full
agreement with respect to your net worth appreciation benefit by signing and
returning the enclosed copy of this letter.
Very truly yours,
DR ACQUISITION CORP
/s/ Ira Leon Rennert 10/21/94
------------------------------
Ira Leon Rennert
Chairman of the Board
Accepted and Agreed to:
/s/ J. E. FitzSimmons 8/11/94
------------------------------
J. E. FitzSimmons
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<PAGE>
FIRST AMENDMENT TO THE NET WORTH APPRECIATION AGREEMENT
MARCH 12, 1998
This will confirm our agreement with you to amend your Net Worth
Appreciation Agreement as follows:
1) DR Acquisition Corp. hereby assigns the Net Worth Appreciation
Agreement to The Doe Run Resources Corporation ("Doe Run") and Doe Run accepts
such assignment.
2) The definition of net worth increment will be changed to a)
substitute Doe Run for the Company and b) exclude from consolidated net worth
all preferred stock.
The economic effect of such changes is that the redemption of the
preferred stock of Doe Run will not reduce net worth increment.
3) Paragraph 4(a) of the Agreement is amended by substituting
$2,400,000 for $1,200,000.
Please acknowledge the foregoing by signing below.
Very truly yours,
DR Acquisition Corp.
The Doe Run Resources Corporation
/s/Ira Leon Rennert
Chairman of the Board
Accepted and agreed to:
/s/John E. FitzSimmons
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EXHIBIT 10.2.5
THE DOE RUN RESOURCES CORPORATION
1801 PARK 270 DRIVE
SUITE 300
ST. LOUIS, MO 63146
October 31, 1998
Mr. Kenneth Buckley
15993 Chamfers Farm
Chesterfield, MO 63005
RE: NET WORTH APPRECIATION PARTICIPATION AGREEMENT
Dear Ken:
This will confirm the understanding of The Doe Run Resources
Corporation (the "Company"), with you with respect to your Net Worth
Appreciation Participation, intended to constitute additional incentive
compensation to you.
1a) VESTING - Under your Net Worth Appreciation Agreement dated April
7, 1994, you have received a credit of 4/10 of 1% and provided you are
continually employed by the Company until March 31, 1999, or your employment
with the Company terminates between today and March 31, 1999 due to death or
permanent disability, you shall receive on March 31, 1999 an additional credit
of 1/10 of 1% for a total credit of 1/2 of 1% ("Maximum Credit").
1b) In addition, on October 23, 2000 provided you are continually
employed by the Company and serving in Peru on expatriate assignment to Doe Run
Mining, or one of its affiliates, you shall receive a credit of one percent (1%)
("Peru Credit").
2) CUMULATIVE NET INCOME PARTICIPATION BENEFIT - Upon the termination
of your employment by the Company (other than for cause), or your death or
permanent disability while in our employment, you (or your designee or estate)
shall be entitled to a payment ("Payment") equal to the sum of:
A) the product, if positive, of (i) the total percentage
credited to you under paragraph 1(a)
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(a maximum of one half of one percent (1/2%)) multiplied by (ii) the "Retained
Cumulative Net Income". The "Retained Cumulative Net Income" is the amount, if
any, of the cumulative consolidated net income of the Company available to its
Common Stock, less the amount of any dividends paid to the holders of the common
stock from April 7, 1994, through the end of either (at the Company's option)
(x) its fiscal quarter immediately preceding the date of your termination or (y)
the fiscal quarter in which your date of termination occurs; and
B) the product, if positive, of (i) the Peru Credit of one percent (1%)
multiplied by (ii) the "Retained Peruvian Cumulative Net Income". The Retained
Peruvian Cumulative Net Income is the amount, if any, of the cumulative net
income of Doe Run Mining S.R. Ltda available to the holders of its common stock
from October 23, 1997, the date of your assignment to Doe Run Peru S.R. Ltda, an
affiliate of Doe Run Mining S.R. Ltda, until the date when such assignment is
effectively completed, less the amount of any dividends paid by Doe Run Mining
S.R. Ltda to the holders of its common stock during such period, but only if you
received actual cash payments based on such dividends as outlined in the second
sentence of section 3 below.
If there is no positive "Retained Cumulative Net Income" there shall be
no payment under paragraph 2A. If there is no positive "Retained Peruvian
Cumulative Net Income" there shall be no payment under Paragraph 2B. The
determination of the Retained Cumulative Net Income and Retained Peruvian
Cumulative Net Income shall be made by the Company in accordance with generally
accepted accounting principles of the United States, consistently applied. If
your employment shall be terminated for cause at any time, you shall forfeit all
rights to receive any Payment.
3) DIVIDEND PARTICIPATION - If while you are employed by the Company,
the Company shall pay any cash dividend on its Common Stock, or the Company pays
management fees to The Renco Group, Inc. in excess of $ 2,400,000 per fiscal
year, then the Company shall make a cash payment to you equal to the total
amount of the cash dividend and management fees in excess of $2,400,000 per
fiscal year multiplied by your Maximum Credit. In addition, if while you are
serving in Peru at Doe Run Mining S.R. Ltda, or one of its affiliates, Doe Run
Mining S.R. Ltda pays cash dividends to its common stockholders and subsequent
to such payment while you are serving in Peru at Doe Run Mining S.R. Ltda, or
one of its
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affiliates, the Company pays dividends to its common stockholders, then the
Company shall make a cash payment to you equal to the lesser amount of the
product of cash dividends paid by a) Doe Run Mining S.R. Ltda (minus any cash
dividends paid by the Company as to which a payment was previously made under
this section 3), or b) the Company, multiplied by your Peru Credit, in addition
to the payment to you under the first sentence of this paragraph.
4) PAYMENT - The Payment shall be payable to you (or your designee or
estate) in 40 equal quarterly installments, without interest, commencing three
(3) months after the later of (x) the termination of your employment by the
Company or (y) your attaining 62 years of age, and at 3-month intervals
thereafter, PROVIDED, HOWEVER, that in the event of your death or permanent
disability, rendering you unable to engage in your customary employment, the
Payment, if it has not already commenced, will commence. The period during which
the payments will be made is herein called the "Payment Period". You have
advised us that your date of birth is January 22, 1939.
5) PAYMENT EFFECT ON OTHER BENEFITS - Any payments made to you pursuant
to this agreement, whether as a result of dividend participation or otherwise,
will not be counted as wages for the purpose of computing other benefits.
6) SALE OF SUBSTANTIALLY ALL OF COMPANY STOCK OR ASSETS - If, while you
shall be employed by the Company all or substantially all the stock or assets of
the Company shall be sold to a person who is not an affiliate of Ira Leon
Rennert, then, upon the closing of such sale, the Maximum Credit shall be deemed
to be vested, and you shall be entitled to receive, as payment in full of your
participation, your pro rata share one half of one percent (1/2%) of the "net
proceeds" of the sale available for the Company's Common Stock, in kind, on the
same terms and conditions as the Company or its shareholder is being paid. "Net
proceeds", for purposes hereof, shall mean the amount, if any, by which the
proceeds of the sale after deducting all expenses of the sale, all applicable
taxes, all net liabilities retained by the seller and all amounts to which
holders of preferred stock are entitled exceeds the consolidated net worth
applicable to the Common Stock of the Company on April 7, 1994. In addition, you
shall receive the remaining payments due you for your Peru Credit paid in
accordance with section 4
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above. Except for such payment, neither you nor this Company shall have any
further rights or liabilities hereunder.
7) CONDITION PRECEDENT - NON COMPETE AND CONFIDENTIALITY - You shall
comply with the following provisions as a condition precedent to your right to
receive Payments:
(a) You acknowledge that, by reason of your employment by the Company,
you will have continuing access to and knowledge of company confidential
information and that improper use or revelation of same by you during or after
the termination of your employment by the Company could cause serious injury to
the business of the Company. Accordingly, you agree that you will forever keep
secret and inviolate all company confidential information which shall have come
or shall hereafter come into your possession, and that you will not use the same
for your own private benefit, or directly or indirectly for the benefit of
others, and that you will not disclose such company confidential information to
any other person.
(b) You agree you will not (whether as an officer, director, partner,
proprietor, investor, associate, employee, consultant, adviser, public relations
or advertising representative or otherwise), directly or indirectly, be engaged
in the mining and/or refining of metals, or in any other business in which the
Company is engaged, or proposed to engage, at the time of the termination of
your employment.
8) TERMINATION - This agreement may be terminated or amended at any
time at the sole discretion of The Doe Run Resources Corporation, provided,
however, that any amendment or termination shall not affect the rights you have
accrued under the agreement at the time of amendment or termination.
9) NOTICES - Any notice to be sent pursuant hereto shall be sent by
hand, certified or registered mail or overnight service to you, at the address
indicated above and to the Company, _ The Doe Run Resources Corporation, 1801
Park 270 Drive, Suite 300, St. Louis, MO 63146, to the attention of Barbara
Shepard, or to any other address which any of us may designate by notice in
writing, with a copy to The Renco Group, Inc., 30 Rockefeller Plaza, Suite 4225,
New York, New York 10112, to the attention of Ira Leon Rennert.
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10) OTHER - The agreement amends and restates in its entirety the Net
Worth Appreciation Agreement dated April 7, 1994 as amended on March 12, 1998
between the Company and yourself.
Please confirm that the foregoing correctly sets forth our full agreement with
respect to the subject matter contained herein by signing and returning the
enclosed copy of this letter.
Very truly yours,
The Doe Run Resources Corporation
By:
-------------------------------
CONFIRMED AND AGREED TO:
/s/ Kenneth Buckley
- ---------------------------
Kenneth Buckley
15993 Chamfers Farm
Chesterfield, MO 63005
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<PAGE>
THE DOE RUN RESOURCES CORPORATION
1801 PARK 270 DRIVE
ST. LOUIS, MO 63146
As of January 15, 1999
Mr. Kenneth Buckley
15993 Chamfers Farm
Chesterfield, MO 63005
RE: AMENDMENT TO NET WORTH APPRECIATION PARTICIPATION AGREEMENT
Dear Mr. Buckley:
This will confirm the understanding of this Corporation (the "Company")
with you with respect to our agreed amendments to your Net Worth Appreciation
Participation Agreement dated October 31, 1998 (which, among other things,
amended and restated in their entirety our prior agreements with you, (the
"Agreement")).
As you know, our parent company, The Renco Group, Inc. ("Renco"), has
elected to become, for Federal Internal Revenue Code purposes, a subchapter S
corporation (instead of a subchapter C corporation), effective with its fiscal
year beginning November 1, 1998, and has designated this Company and its United
States subsidiaries as qualified subchapter S subsidiaries (the "S election").
This designation is also applicable for those states which recognize such
election. This letter is intended to set forth our understanding as to the
changes in the Agreement intended to accommodate such election. Our subsidiaries
organized outside of the United States continue to be subchapter C corporations.
It is the intent of the parties to the Agreement that the S election
not alter the benefits payable under the Agreement; therefore we agree as
follows:
A. For purposes of calculating the benefits payable under the
Agreement, the Company will continue to calculate Federal corporate income taxes
and the corporate income taxes for those jurisdictions in which the Company and
its subsidiaries do business, for fiscal
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periods beginning on or after November 1, 1998, as if this Company and its
subsidiaries had continued to have C corporation status, under the Federal
Internal Revenue Code and under state and local tax laws, in accordance with the
provisions of generally accepted accounting principles and the Internal Revenue
Code and regulations thereunder and under state and local tax laws thereunder
applicable to C corporations as from time to time in effect ("C Status"). Such
tax calculations will include calculations of current and deferred tax expense
or benefit and current and non-current tax assets and liabilities ("C Taxes")
and the differences ("Tax Differences") between the C Taxes and the taxes as
recorded by the Company and those of its subsidiaries which are qualified
subchapter S subsidiaries ("S Taxes").
Cumulative Income Statement Tax Difference shall be the cumulative
difference in income tax expense or benefit between the calculation of the C
Taxes and S Taxes, in each case calculated for the tax periods beginning on or
after November 1, 1998 and through the end of the calculation period. Cumulative
Cash Flow Tax Difference shall be the cumulative difference in income tax
payments, net of refunds, between the calculation of the C Taxes and S Taxes in
each case made after November 1, 1998 or, which would be in the case of C Taxes,
or are in the case of S Taxes, immediately due and payable contemporaneously
with the payment of any Distributions, as defined below. A dividend or
management fee or any other form of distribution in excess of $2,400,000
annually to The Renco Group, Inc. ("Renco") or an affiliate, other than a
subsidiary of the Company, shall be called a "Distribution".
B. Any payment due to you under Paragraph 2A of the Agreement (the
"Termination Benefit") shall be (A) 1/2 of 1% the Retained Cumulative Net
Income, as defined, less (B) 1/2 of 1% of the Cumulative Income Statement Tax
Difference (in each case
-7-
<PAGE>
through the end of the calculation period as determined pursuant to said
paragraph 2A) and excluding such Cumulative Income Statement Tax Difference to
the extent equal to Cumulative Cash Flow Tax Difference utilized in calculating
an Additional Compensation Benefit under the first sentence of Paragraph 3 of
the Agreement.
C. Any payment due to you under Paragraph 2B of the Agreement shall be
calculated as provided in said paragraph 2B.
D. The first sentence of paragraph 3 of the Agreement is hereby amended
to read as follows:
"While you are employed by the Company, there shall be paid to you (a)
one-half of 1% of the cumulative Distributions paid by the Company since
November 1, 1998 in excess of one-half of 1% of any positive Cumulative Cash
Flow Tax Difference, less (b) all amounts previously paid to you pursuant to
this provision since November 1, 1998."
E. The second sentence of paragraph 3 of the Agreement is hereby
amended to read as follows:
"In addition, if while you are serving in Peru at Doe Run Mining S.R.
Ltda. or one of its affiliates, Doe Run Mining S.R. Ltda. pays cash dividends to
its common stockholders and subsequent to such payment while you are serving in
Peru at Doe Run Mining S.R. Ltda. or one of its affiliates, the Company pays
dividends to its common stockholders, then, in addition to the payment to you
under the first sentence of this paragraph, the Company shall make a cash
payment to you equal to the lesser of (a) one percent of the cash dividend paid
by Doe Run Mining S.R. Ltda or (b) the excess of one percent of the cumulative
Distributions paid by the Company subsequent to November 1, 1998 over one
percent of any positive Cumulative Cash Flow Tax Difference, less, in either
case, all amounts previously
-8-
<PAGE>
paid to you pursuant to this provision since November 1, 1998.
F. Any payment due to you under the first sentence of paragraph 6 of
the Agreement shall be (A) one-half of one percent of the "net proceeds" as
defined, plus (B) one-half of one percent of the cumulative Distributions paid
by the Company subsequent to November 1, 1998, less (C) one-half of one percent
of the Cumulative Income Statement Tax Difference through the date of sale, and
less (D) the amount of any payments previously paid to you under the first
sentence of paragraph 3 of the Agreement subsequent to November 1, 1998.
G. As amended hereby, the Agreement shall continue in full force and
effect.
Please confirm that the foregoing correctly sets forth our
understanding by signing and returning the enclosed duplicate of this letter.
Very truly yours,
THE DOE RUN RESOURCES CORPORATION
/s/ Ira Leon Rennert
-----------------------------------
Ira Leon Rennert
Chairman of the Board
Accepted and Agreed to:
/s/ Kenneth Buckley
- ---------------------
Kenneth Buckley
-9-
<PAGE>
EXHIBIT 10.2.6
THE DOE RUN RESOURCES CORPORATION
1801 PARK 270 DRIVE
ST. LOUIS, MO 63146
As of January 15, 1999
Participant
_ Doe Run Resources Corporation
1801 Park 270 Drive, Suite 300
St. Louis, MO 63146
RE: SECOND AMENDMENT TO NET WORTH APPRECIATION AGREEMENT
Dear Participant:
This will confirm the understanding of this Corporation (the "Company")
with you with respect to our agreed amendments to your Net Worth Appreciation
Agreement dated April 7, 1994 as amended March 12, 1998 (which, among other
things, transferred that Agreement from DR Acquisition Corp. to this Company
(collectively, the "Agreement")).
As you know, our parent company, The Renco Group, Inc. ("Renco"), has
elected to become, for Federal Internal Revenue Code purposes, a subchapter S
corporation (instead of a subchapter C corporation), effective with its fiscal
year beginning November 1, 1998, and has designated this Company and its
subsidiaries as qualified subchapter S subsidiaries (the "S election"). This
designation is also applicable for those states which recognize such election.
This letter is intended to set forth our understanding as to the changes in the
Agreement intended to accommodate such election.
It is the intent of the parties to the Agreement that the S election
not alter the benefits payable under the Agreement; therefore we agree as
follows:
A. For purposes of calculating the benefits payable under the
Agreement, the Company will continue to calculate Federal corporate income taxes
and the corporate income taxes for those jurisdictions in which the Company and
its subsidiaries do business, for fiscal periods beginning on or after November
1, 1998, as if this Company and its subsidiaries had continued to have C
corporation status, under the Federal Internal Revenue Code and under state and
local tax laws, in accordance
1
<PAGE>
with the provisions of generally accepted accounting principles and the Internal
Revenue Code and regulations thereunder and under state and local tax laws
applicable to C corporations as from time to time in effect ("C Status"). Such
tax calculations will include calculations of current and deferred tax expense
or benefit and current and non-current tax assets and liabilities ("C Taxes")
and the differences ("Tax Differences") between the C Taxes and the taxes as
recorded by the Company and its subsidiaries while being designated a qualified
subchapter S subsidiary ("S Taxes").
Cumulative Income Statement Tax Difference shall be the cumulative
difference in income tax expense or benefit between the calculation of the C
Taxes and S Taxes, in each case calculated for the tax periods beginning on or
after November 1, 1998 and through the end of the calculation period. Cumulative
Cash Flow Tax Difference shall be the cumulative difference in income tax
payments, net of refunds, between the calculation of the C Taxes and S Taxes in
each case made after November 1, 1998 or, which would be in the case of C Taxes,
or are in the case of S Taxes, immediately due and payable contemporaneously
with the payment of any Distributions, as defined below. A dividend or
management fee or any other form of distribution in excess of $2,400,000
annually to The Renco Group, Inc. ("Renco") or an affiliate, other than a
subsidiary of the Company, shall be called a "Distribution".
In connection with the annual audit of the financial statements of the
Company, the Company's Board of Directors will require that the independent
public accountants issue a special report indicating their agreement with the
Tax Differences.
B. Any payment due to you under Paragraph 2 of the Agreement (the
"Termination Benefit") shall be (A) __% of the net worth increment, as
defined, less (B) __% of the Cumulative Income Statement Tax Difference (the
calculation period shall end at the end of the Company's fiscal quarter
immediately preceding your date of termination) and excluding such Cumulative
Income Statement Tax Difference to the extent equal to Cumulative Cash Flow
Tax Difference utilized in calculating an Additional Compensation Benefit
under Paragraph 4(a).
2
<PAGE>
C. Any payment due to you under Paragraph 4(a) of the Agreement in
regard to Distributions paid by the Company (the "Additional Compensation
Benefit"), shall be (A) the excess of __% of the cumulative Distributions paid
by the Company subsequent to November 1, 1998 over __% of any positive
Cumulative Cash Flow Tax Difference less (B) the amount of Additional
Compensation Benefit previously paid to you under Paragraph 4(a) subsequent to
November 1, 1998.
D. Any payment due to you under Paragraph 4(b) of the Agreement (the
"Sale Proceeds Benefit"), shall be (A) __% of any net proceeds, as defined,
plus (B) __% of the cumulative Distributions paid by the Company subsequent
to November 1, 1998, less (C) __% of the Cumulative Income Statement Tax
Difference through the date of sale, and less (D) the amount of any
Additional Compensation Benefits previously paid to you under Paragraph 4(a)
subsequent to November 1, 1998.
E. As amended hereby, the Agreement shall continue in full force and
effect. Please confirm that the foregoing correctly sets forth our understanding
by signing and returning the enclosed duplicate of this letter.
Very truly yours,
THE DOE RUN RESOURCES CORPORATION
---------------------------------
Ira Leon Rennert
Chairman of the Board
Accepted and Agreed to:
- ------------------------------
Participant
3
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<TOTAL-COSTS> 663,190
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