<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7170
IMCO RECYCLING INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2008280
(I.R.S. Employer Identification No.)
5215 North O'Connor Blvd., Suite 940
Central Tower at Williams Square
Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(972) 401-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on October 31, 1998.
Common Stock, $0.10 par value, 16,645,346
-----------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,822 $ 405
Accounts receivable, net 74,517 52,163
Inventories 42,205 34,556
Deferred income taxes 4,291 2,782
Other current assets 4,482 1,746
---------------- ----------------
Total Current Assets 131,317 91,652
Property and equipment, net 166,718 142,100
Excess of acquisition cost over the fair value of net assets
acquired, net of accumulated amortization of $6,200 and
$4,053 at September 30, 1998 and December 31, 1997, respectively 113,337 74,658
Investments in joint ventures 15,322 14,271
Other assets, net 10,613 9,855
---------------- ----------------
$ 437,307 $ 332,536
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 37,041 $ 25,902
Accrued liabilities 14,530 7,254
Current maturities of long-term debt 1,624 648
---------------- ----------------
Total Current Liabilities 53,195 33,804
Long-term debt 172,071 109,194
Deferred income taxes 12,140 11,278
Other long-term liabilities 9,166 9,336
STOCKHOLDERS' EQUITY
Preferred stock; par value $.10; 8,000,000 shares authorized;
none issued - -
Common stock; par value $.10; 40,000,000 shares authorized;
17,046,835 issued at September 30, 1998; 16,515,750 issued at
December 31, 1997 1,705 1,652
Additional paid-in capital 107,380 96,519
Retained earnings 83,466 71,096
Treasury stock, at cost; 168,439 shares at September 30, 1998; 39,354
shares at December 31, 1997 (1,816) (343)
---------------- ----------------
Total Stockholders' Equity 190,735 168,924
---------------- ----------------
$ 437,307 $ 332,536
================ ================
</TABLE>
Page 2
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $153,651 $77,461 $405,372 $236,588
Cost of sales 136,959 64,618 360,880 201,468
------------- ------------- ------------- -------------
Gross profits 16,692 12,843 44,492 35,120
Selling, general and administrative expense 6,920 4,293 16,586 13,092
Interest expense 2,633 1,937 6,432 5,596
Interest and other income (381) (113) (580) (292)
Equity in earnings of affiliates (429) (272) (1,457) (362)
------------- ------------- ------------- -------------
Earnings before provision for income taxes, minority
interests and extraordinary item 7,949 6,998 23,511 17,086
Provision for income taxes 2,942 2,757 8,679 6,789
------------- ------------- ------------- -------------
Earnings before minority interests and extraordinary
item 5,007 4,241 14,832 10,297
Minority interests, net of provision for income taxes 39 110 242 319
------------- ------------- ------------- -------------
Earnings before extraordinary item 4,968 4,131 14,590 9,978
Extraordinary item, net - - - (1,318)
------------- ------------- ------------- -------------
Net earnings $ 4,968 $ 4,131 $ 14,590 $ 8,660
============= ============= ============= =============
Net earnings per common share:
Basic:
Earnings before extraordinary item $ 0.29 $ 0.33 $ 0.87 $ 0.80
Extraordinary item - - - (0.11)
------------- ------------- ------------- -------------
Net earnings $ 0.29 $ 0.33 $ 0.87 $ 0.69
============= ============= ============= =============
Diluted:
Earnings before extraordinary item $ 0.29 $ 0.32 $ 0.87 $ 0.78
Extraordinary item - - - (0.10)
------------- ------------- ------------- -------------
Net earnings $ 0.29 $ 0.32 $ 0.87 $ 0.68
============= ============= ============= =============
Weighted average shares outstanding:
Basic 16,904 12,540 16,685 12,487
Diluted 16,988 12,828 16,841 12,701
Dividends declared per common share $ 0.05 $ 0.05 $ 0.15 $ 0.15
</TABLE>
Page 3
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Earnings before extraordinary item $ 14,590 $ 9,978
Depreciation and amortization 16,524 11,673
Benefit of deferred income taxes (1,550) (315)
Equity in earnings of affiliates (1,456) (362)
Other noncash charges 1,400 1,284
Changes in operating assets and liabilities:
Accounts receivable 850 1,074
Inventories 2,234 1,959
Other current assets (1,102) (55)
Accounts payable and accrued liabilities 2,706 2,912
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES 34,196 28,148
INVESTING ACTIVITIES
Payments for property and equipment (25,338) (26,919)
Acquisition of U.S. Zinc Corporation, net of cash acquired (59,502) -
Acquisition of IMSAMET, Inc., net of cash acquired - (57,732)
Other 33 (1,149)
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (84,807) (85,800)
FINANCING ACTIVITIES
Net repayments of short-term borrowings - (8,351)
Net proceeds from long-term revolving credit facility 58,775 -
Proceeds from issuance of long-term debt 2,121 121,591
Principal payments of long-term debt (835) (55,460)
Debt issuance costs (153) (2,185)
Dividends paid (2,511) (1,881)
Common stock repurchased (1,438) -
Other 4 2,621
-------------- --------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 55,963 56,335
-------------- --------------
Effect of exchange rate differences on cash and cash equivalents 65 -
Net increase (decrease) in cash and cash equivalents 5,417 (1,317)
Cash and cash equivalents at January 1 405 5,070
-------------- --------------
Cash and cash equivalents at September 30 $ 5,822 $ 3,753
============== ==============
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 6,375 $ 6,971
Cash payments for income taxes $ 8,292 $ 2,576
Fair value of the shares and warrants issued in the acquisition of U.S.
Zinc Corporation $ 8,500 $ -
Fair value of the shares issued in the acquisition of Rock Creek
Aluminum, Inc. $ - $ 7,125
</TABLE>
Page 4
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
(DOLLARS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The accompanying financial
statements include the accounts of IMCO Recycling Inc. and all of its
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE B - INVENTORIES
The components of inventories are:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
----------------- ------------------
<S> <C> <C>
Finished goods $ 24,782 $ 16,771
Raw materials 16,224 17,313
Supplies 1,199 472
----------------- ------------------
$ 42,205 $ 34,556
================= ==================
</TABLE>
NOTE C - LONG-TERM DEBT
In June 1998, the Company borrowed $4,100,000 from the issuance of Solid Waste
Disposal Facilities Revenue Bonds (Series 1998) by the City of Morgantown,
Kentucky. These bonds were issued in connection with the Company's expansion of
its landfill in Morgantown, Kentucky. The bonds bear a 6% per annum interest
rate and mature May 1, 2023. The net proceeds from the bonds were deposited
into an escrow fund, which will be disbursed to the Company as it incurs costs
to expand its landfill. As of September 30, 1998, the Company has drawn against
and received $2,121,000 in cash proceeds from the escrow fund.
In July 1998, the Company borrowed, under its long-term revolving credit
facility, approximately $62,000,000 to fund the cash portion of the acquisition
of U.S. Zinc Corporation
Page 5
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and its subsidiary corporations ("U.S. Zinc") and to repay a portion of U.S.
Zinc's outstanding long-term indebtedness under its working capital line of
credit facility (approximately $16,000,000).
NOTE D--NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerators for basic and diluted:
Net earnings before extraordinary item $ 4,968 $ 4,131 $14,590 $ 9,978
Extraordinary item - - - (1,318)
-------------- ------------- ------------- -------------
Net earnings $ 4,968 $ 4,131 $14,590 $ 8,660
============== ============= ============= =============
Denominator:
Denominator for basic--weighted-average
shares 16,904 12,540 16,685 12,487
Dilutive potential common shares--stock
options 84 288 156 214
-------------- ------------- ------------- -------------
Denominator for diluted--weighted-
average shares 16,988 12,828 16,841 12,701
============== ============= ============= =============
Basic net earnings per share:
Net earnings before extraordinary item $ 0.29 $ 0.33 $ 0.87 $ 0.80
Extraordinary item - - - (0.11)
-------------- ------------- ------------- -------------
Net earnings $ 0.29 $ 0.33 $ 0.87 $ 0.69
============== ============= ============= =============
Diluted net earnings per share:
Net earnings before extraordinary item $ 0.29 $ 0.32 $ 0.87 $ 0.78
Extraordinary item - - - (0.10)
-------------- ------------- ------------- -------------
Net earnings $ 0.29 $ 0.32 $ 0.87 $ 0.68
============== ============= ============= =============
</TABLE>
NOTE E - ACQUISITION
On July 21, 1998, the Company acquired all of the capital stock of U.S. Zinc for
a total purchase price of approximately $72,000,000, consisting of (i)
$46,500,000 in cash, (ii) the assumption of approximately $17,000,000 in long-
term debt, (iii) the issuance of 298,010 shares of the Company's common stock,
and (iv) the issuance of four-year warrants to purchase up to 1,500,000 shares
of the Company's common stock at an exercise price of $19.04 per share. In
addition, the transaction provides for future contingent payments to certain
former U.S. Zinc shareholders, dependent upon the future earnings performance of
U.S. Zinc and the Company's other zinc-related operations through June 30, 2002.
The acquisition was accounted for using the purchase method of accounting. The
estimated excess of the purchase price over the fair value of net assets
acquired is approximately $39,180,000 and is being amortized over thirty years
on a straight-line basis.
Page 6
<PAGE>
U.S. Zinc, headquartered in Houston, Texas, and its subsidiaries, operate five
production facilities located in Illinois, Texas and Tennessee and have an
annual processing capacity of 200,000,000 pounds of zinc.
The preliminary allocation of the purchase price of U.S. Zinc is as follows:
<TABLE>
<S> <C>
Working capital $ 20,105
Property and equipment 14,335
Goodwill 39,180
Other noncurrent assets 540
Noncurrent liabilities (19,291)
-------------
Total $ 54,869
=============
</TABLE>
The following table sets forth pro forma results of operations of the combined
entities of the Company and U.S. Zinc for the nine month period ended September
30, 1998 and 1997, assuming the acquisition had been consummated on January 1,
1997. The pro forma combined information is presented for comparative purposes
only and does not purport to represent the actual results which would have
occurred had the acquisition been consummated on such date or of future results
of the combined companies under the ownership and management of the Company:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Revenues $487,419 $467,919
Gross profit $ 50,548 $ 57,398
Earnings before extraordinary item $ 14,669 $ 14,388
Net earnings $ 14,669 $ 13,070
Earnings per common share before extraordinary item:
Basic $ 0.87 $ 1.04
Diluted $ 0.86 $ 1.02
Earnings per common share:
Basic $ 0.87 $ 0.94
Diluted $ 0.86 $ 0.93
</TABLE>
The table above reflects certain pro forma adjustments including additional
depreciation expense as a result of the increased basis of the fixed assets
acquired, additional amortization expense related to the goodwill recorded, a
reduction in general and administrative expenses for the elimination of
duplicate management costs, additional interest expense related to debt incurred
on the acquisition and adjustments for related income taxes.
NOTE F - OPERATIONS
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances that (1)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and
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<PAGE>
disposal practices for solid and hazardous wastes and (2) impose liability for
costs of cleaning up, and certain damages resulting from past spills, disposals,
or other releases of hazardous substances (together, "Environmental Laws"). It
is possible that more rigorous Environmental Laws will be enacted that could
require the Company to make substantial expenditures in addition to those
referred to in this Form 10-Q.
From time to time, operations of the Company have resulted or may result in
certain noncompliance with applicable requirements under Environmental Laws.
However, the Company believes that any such non-compliance under such
Environmental Laws would not have a material adverse effect on the Company's
financial position or results of operations.
The Illinois Environmental Protection Agency ("IEPA") recently notified the
Company that a subsidiary, Interamerican Zinc, Inc., ("IZI") is a potentially
responsible party ("PRP") pursuant to the Illinois Environmental Protection Act
for the cleanup of contamination at a site in Marion County, Illinois to which
IZI, among others, in the past sent zinc oxide for processing and resale. IZI
has joined a group of PRPs that is planning to negotiate with the IEPA regarding
the cleanup of the site. Although the site has not been fully investigated and
final cleanup costs not yet determined, based on current cost estimates and
information regarding the amount and type of materials sent to the site by IZI,
the Company does not believe, while there can be no assurance, that its
liability at this site will have a material adverse effect on its financial
position or results of operations.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Most of the Company's processing consists of aluminum and magnesium tolled for
its customers. To a lesser (but increasing) extent, the Company's processing
also consists of buy/sell business, which involves purchasing scrap metal and
dross for further processing and resale. The Company's zinc processing and
aluminum alloying operations consist primarily of buy/sell transactions. The
Company's buy/sell business revenues include the cost of the metal, the
processing cost and the Company's profit margin. Tolling revenues reflect only
the processing cost and the Company's profit margin. Accordingly, tolling
business produces lower revenues and costs of sales than does the buy/sell
business. Variations in the mix of these two businesses can cause revenues to
change significantly from period to period while not significantly affecting
gross profit, since both types of business generally produce approximately the
same gross profit per pound of metal processed. As a result, the Company
considers processing volume to be a more important determinant of performance
than revenues.
The Company's Coldwater, Michigan aluminum alloying facility (acquired in
November 1997) is primarily engaged in buy/sell business, as opposed to tolling,
and with the recent acquisition of U.S. Zinc (see "ACQUISITION" below), the
level of overall buy/sell business, relative to tolling, for the Company has
increased during 1998. The higher levels of buy/sell business increase the
Company's working capital requirements and subject the Company to greater risks
associated with price fluctuations in the metals markets.
The following table shows the total pounds of metal melted, the percentage of
total pounds melted represented by tolled metal, total revenues and total gross
profits (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Pounds Melted:
Aluminum 604,908 500,890 1,751,800 1,400,889
Zinc and other non-ferrous 61,347 7,527 85,047 29,838
-------------- ------------- -------------- ---------------
Total Pounds Melted 666,255 508,417 1,836,847 1,430,727
-------------- ------------- -------------- ---------------
Percentage of pounds tolled 66% 84% 70% 84%
Revenues:
Aluminum $109,448 $ 72,746 $ 352,137 $ 222,886
Zinc and other non-ferrous 44,203 4,715 53,235 13,702
-------------- ------------- -------------- ---------------
Total Revenues $153,651 $ 77,461 $ 405,372 $ 236,588
-------------- ------------- -------------- ---------------
Gross profits $ 16,692 $ 12,843 $ 44,492 $ 35,120
</TABLE>
In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing amount of metal brokerage transactions pursuant
to which the Company buys metal from primary and other producers, and then sells
the metal to end users. These transactions involve buying and selling metal
without ever processing it. Additionally, in order the facilitate acquiring
metal for its production process, the Company occasionally enters into
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metal "swap" transactions whereby the Company agrees to exchange its recycled
finished goods for scrap raw materials. As with the buy/sell business, the
brokerage business also increases the Company's working capital requirements and
subjects the company to greater price risk associated with fluctuations in the
metal commodity markets (see ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK).
ACQUISITION
On July 21, 1998, the Company acquired all of the capital stock of U.S. Zinc for
a total purchase price of approximately $72,000,000, consisting of (i)
$46,500,000 in cash, (ii) the assumption of approximately $17,000,000 in long-
term debt, (iii) the issuance of 298,010 shares of the Company's common stock,
and (iv) the issuance of four-year warrants to purchase up to 1,500,000 shares
of the Company's common stock at an exercise price of $19.04 per share. In
addition, the transaction provides for future contingent payments to certain
former U.S. Zinc shareholders, dependent upon the future earnings performance of
U.S. Zinc and the Company's other zinc-related operations through June 30, 2002.
On July 21, 1998, the closing price per share of the Company's common stock, as
reported on the New York Stock Exchange composite transactions, was $17.3125.
The acquisition was accounted for using the purchase method of accounting. The
estimated excess of the purchase price over the fair value of net assets
acquired is approximately $39,180,000 and is being amortized over thirty years
on a straight-line basis.
U.S. Zinc, headquartered in Houston, Texas, and its subsidiaries, operate five
production facilities located in Illinois, Texas and Tennessee and have an
annual processing capacity of 200,000,000 pounds of zinc. The acquisition of
U.S. Zinc is expected to increase the Company's total annual processing capacity
in 1998 to approximately 2.7 billion pounds.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
PRODUCTION: For the three and nine month periods ended September 30, 1998, the
Company melted 31% and 28%, respectively, more metal than it did during the same
periods in 1997. Aluminum processing at the Company's newest plants in
Coldwater, Michigan (which began production in the first quarter of 1997) and
Swansea, Wales (which began production in the fourth quarter of 1997) and the
acquisitions of the Alchem Aluminum, Inc. ("Alchem") aluminum alloying facility
(which was acquired in November 1997) and U.S. Zinc facilities (which were
acquired in July 1998) accounted for 79% and 74% of the increase in production
for the three and nine month periods ended September 30, 1998, respectively.
The large increase in production for the third quarter was partially offset by
lower production at the Bedford facility due to a reconfiguration of the
furnaces and a work force reorganization at that facility. In addition, the
Company's June and July 1998 production was impacted by a strike at several of
the facilities of General Motors Corporation, a customer of the Company.
REVENUES: For the three months ended September 30, 1998, revenues increased 98%
to $153,651,000 compared to $77,461,000 for the same period in 1997. In the
first nine months of 1998, the Company's revenues totaled $405,372,000, which
was 71% higher than revenues of
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<PAGE>
$236,588,000 for the same period in 1997. The acquisitions of Alchem and U.S.
Zinc and operations at the new Coldwater, Michigan and Swansea, Wales plants
accounted for most of the increase for both the three and nine month periods
ended September 30, 1998; however, this increase was partially offset, in the
third quarter of 1998, by lower aluminum selling prices. Tolling activity
represented 66% and 70% of the Company's pounds melted for the three and nine
months ended September 30, 1998, respectively, compared to 84% for the
respective periods of 1997. As discussed above, a reduction in the tolling
percentage has generally had the effect of increasing revenues. Prior to
November 1997, materials processed for Alchem at the Company's Coldwater,
Michigan facility were classified as tolling business, but because the Company
acquired Alchem in November 1997, these pounds are now classified as buy/sell
business.
GROSS PROFIT: Gross profits for the three month period ended September 30, 1998
were $16,692,000, an increase of $3,849,000, or 30% over gross profits for the
third quarter of 1997. Gross profits were $44,492,000 for the nine months ended
September 30, 1998, an increase of $9,372,000 or 27% over the same period of
1997. The acquisitions of Alchem and U.S. Zinc and operations at the new
Coldwater and Swansea plants accounted for most of the increase for the three
and nine month periods ending September 30, 1998.
SG&A EXPENSES: Selling, general and administrative expenses were $6,920,000 for
the three month period and $16,586,000 for the nine month period ended September
30, 1998, compared to $4,293,000 and $13,092,000, respectively, for the same
periods in 1997. The increase for both the three and nine month periods ended
September 30, 1998, was primarily due to higher selling and goodwill
amortization expenses resulting from the acquisitions of Alchem and U.S. Zinc.
INTEREST: Interest expense for the three month period ended September 30, 1998
and 1997 was $2,633,000 and $1,937,000, respectively, an increase of 36%.
Interest expense was $6,432,000 for the first nine months of 1998, or 15% higher
than $5,596,000 for the first nine months of 1997. For the three and nine month
periods ended September 30, 1998, the increase in interest expense was primarily
related to higher levels of borrowings outstanding to fund the cash portion of
the U.S. Zinc acquisition ($46,500,000) and to repay $16,000,000 of U.S. Zinc's
outstanding indebtedness. This increase in interest expense was partially
offset by higher levels of capitalized interest during the first quarter of
1997, in connection with the construction of the Company's new plant in
Coldwater, Michigan.
EXTRAORDINARY ITEM: In connection with the Company's western plant acquisitions
in January 1997, the Company borrowed funds under a new long-term credit
facility. A portion of the funds borrowed under this credit facility was used
to retire substantially all of the Company's outstanding indebtedness prior to
its stated maturity. This early debt retirement generated an extraordinary loss
of $1,318,000 (net of income tax benefit of $878,000) for the first quarter of
1997. There has been no extraordinary item in 1998.
NET EARNINGS: Earnings before the provision for income taxes, minority
interests and extraordinary item increased 14% to $7,949,000 for the three month
period ended September 30, 1998 compared to $6,998,000 for the same period in
1997 and increased 38% to $23,511,000 for the first nine months of 1998 compared
to $17,086,000 for the same period in 1997. The increase was primarily the
result of higher gross profits as a result of increases in revenue due mainly to
the Alchem and U.S. Zinc acquisitions. The Company's effective income tax rate
was
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37% for the three and nine months ended September 30, 1998, compared to 39% and
40% for the three and nine months ended September 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations. Operations provided $34,196,000 and $28,148,000 of
cash during the first nine months of 1998 and 1997, respectively. Higher net
earnings before extraordinary item in 1998 of $14,590,000 compared to $9,978,000
for 1997 accounted for the majority of the increase in cash provided from
operations. In addition, higher depreciation and amortization expense of
$16,524,000 in 1998 compared to $11,673,000 in 1997 accounted for a significant
portion of the increase in cash provided from operations. Changes in operating
assets and liabilities generated $4,688,000 and $5,890,000 of cash for the first
nine months of 1998 and 1997, respectively. At September 30, 1998, the
relationship of current assets to current liabilities, or current ratio, was
2.47 to 1, compared to 2.71 to 1 at December 31, 1997.
For the reasons discussed above, working capital fluctuates as the mix of
buy/sell business, tolling business and brokerage business changes. The Company
anticipates its working capital requirements to increase in 1998 as a result of
higher levels of buy/sell and brokerage business and increased processing
volumes primarily due to the acquisitions of Alchem and U.S. Zinc. The
acquisition of U.S. Zinc has increased the level of overall Company buy/sell and
brokerage business, and thereby further increased its working capital
requirements. Nonetheless, the Company believes that its cash on hand, the
availability of funds under its amended and restated credit facilities and its
anticipated internally generated funds will be sufficient to fund its current
needs and meet its obligations for the foreseeable future (see "Cash Flows from
Financing Activities" below).
Cash Flows from Investing Activities. During the nine months ended September 30,
1998, net cash used by investing activities decreased slightly to $84,807,000
compared to $85,800,000 for the same period in 1997. In July 1998, the Company
spent $59,502,000 (net of cash acquired) to purchase U.S. Zinc, and in January
1997, the Company spent $57,732,000 (net of cash acquired) to purchase IMSAMET,
Inc. In addition, the Company's total payments for property, plant and
equipment in the first nine months of 1998 decreased to $25,338,000, compared to
$26,919,000 spent in the first nine months of 1997. Capital expenditures for
property, plant and equipment in 1998 are expected to be approximately
$37,500,000. Major 1998 projects have included the installation of a
reverberatory furnace and delacquering equipment at the Morgantown, Kentucky
facility, the purchase of environmental equipment, the expansion of an existing
Company-owned landfill and upgrades to various furnaces.
Cash Flows from Financing Activities. During the nine months ended September 30,
1998, net cash provided by financing activities decreased slightly to
$55,963,000 compared to $56,335,000 for the same period in 1997. In July 1998,
the Company borrowed approximately $62,000,000, under its long-term revolving
credit facility, to fund the cash portion of the acquisition of U.S. Zinc and to
repay a portion of U.S. Zinc's outstanding long-term indebtedness under its
working capital line of credit facility (approximately $16,000,000). In
connection with its January 1997 acquisitions, the Company entered into a new
long-term credit agreement with certain lenders, borrowing $110,000,000 at the
closing and using approximately $61,000,000 for the IMSAMET, Inc. acquisition
and $49,000,000 to retire substantially all of the Company's then-outstanding
Page 12
<PAGE>
debt. Financing activities also included cash payments of $2,511,000 in
dividends for the first nine months of 1998.
In June 1998, the Company borrowed $4,100,000 in connection with the issuance of
Solid Waste Disposal Facilities Revenue Bonds (Series 1998) by the City of
Morgantown, Kentucky. These bonds were issued in connection with the Company's
expansion of its landfill in Morgantown, Kentucky. The bonds bear a 6% per
annum interest rate and mature May 1, 2023. The net proceeds from the bonds
were deposited into an escrow fund, which will be disbursed to the Company as it
incurs costs to expand its landfill. As of September 30, 1998, the Company has
drawn against and received $2,121,000 in cash proceeds from the escrow fund.
In September 1998, the Company's Board of Directors authorized and the Company
announced the repurchase in open market or privately-negotiated transactions of
up to 1,000,000 shares of its common stock. As of September 30, 1998, the
Company had spent $1,438,000 to repurchase 126,800 shares. The shares
repurchased are being held as treasury shares to be used to satisfy obligations
of the Company under its stock option and other equity plans, and for general
corporate purposes.
As of October 31, 1998, the Company had $155,000,000 outstanding under its long-
term reducing revolving credit facility, leaving approximately $43,500,000
available for borrowings under the facility. As of September 30, 1998, the
floating interest rate was capped at 8% per annum for 24% of the total
outstanding borrowings under the long-term reducing revolving credit facility.
At September 30, 1998, the Company had standby letters of credit outstanding in
the amounts of $1,471,000 with Chase Bank of Texas, N.A., $769,000 with American
National Bank and Trust Company, $1,180,000 with the Economic Development
Corporation of the City of Coldwater, Michigan and $179,000 with Bank of America
of Texas, N.A.
Contingencies. On May 8, 1997, Harvard Industries, Inc. ("Harvard") announced
that it and its wholly-owned subsidiary, Doehler-Jarvis, Inc. ("Doehler-Jarvis")
had filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The
Company had previously sold aluminum to Doehler-Jarvis. At September 30, 1998,
the Company had $3,492,000 of outstanding unsecured receivables from Doehler-
Jarvis, net of related reserves. The Company's revenues from Doehler-Jarvis
totaled $12,350,000 and $17,490,000 for the years ended December 31, 1997 and
1996, respectively. The loss of this customer has not had a material adverse
effect on the Company's financial position or results of operations.
On October 15, 1998, the United States Bankruptcy Court for the District of
Delaware confirmed Harvard's First Amended and Modified Consolidated Plan under
Chapter 11 of the Bankruptcy Code (the "Plan"). According to the terms of the
Plan, holders of general unsecured claims (including the Company) will receive
(a) to the extent their general unsecured claims are allowed, their pro rata
share of 100% of the new common stock of reorganized Harvard (subject to
dilution pursuant to provisions of the Plan, including an emergence bonus plan,
incentive plan and new warrants) and (b) if a rights plan is implemented, to the
extent their general unsecured claims were not disallowed as of the confirmation
date, the right to subscribe to rights and oversubscription options to purchase
$44 million in new junior secured debentures. At the present time, Harvard does
not anticipate that the rights plan will be implemented. The Plan will not be
consummated immediately upon confirmation, but only upon the effective date.
The effective date will not occur unless various conditions to confirmation and
consummation are satisfied (or waived pursuant to, and in accordance with, the
terms of the Plan). The Company
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<PAGE>
understands that Harvard believes that all conditions to the effective date of
the Plan will likely be satisfied within sixty (60) days of the confirmation
date. While the Company currently believes that Harvard's bankruptcy will not
have a material adverse effect on the Company's financial position or results of
operations, no assurance can be given as to the amount and timing of the
Company's ultimate recovery, if any, of its claims.
ENVIRONMENTAL
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances that (1)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes and (2) impose liability for costs of cleaning
up, and certain damages resulting from past spills, disposals, or other releases
of hazardous substances (together, "Environmental Laws"). It is possible that
more rigorous Environmental Laws will be enacted that could require the Company
to make substantial expenditures in addition to those referred to in this Form
10-Q and in other filings made by the Company.
From time to time, operations of the Company have resulted or may result in
certain noncompliance with applicable requirements under Environmental Laws.
However, the Company believes that any such non-compliance under such
Environmental Laws would not have a material adverse effect on the Company's
financial position or results of operations.
The Illinois Environmental Protection Agency ("IEPA") recently notified the
Company that a subsidiary, Interamerican Zinc, Inc., ("IZI") is a potentially
responsible party ("PRP") pursuant to the Illinois Environmental Protection Act
for the cleanup of contamination at a site in Marion County, Illinois to which
IZI, among others, in the past sent zinc oxide for processing and resale. IZI
has joined a group of PRPs that is planning to negotiate with the IEPA regarding
the cleanup of the site. Although the site has not been fully investigated and
final cleanup costs not yet determined, based on current cost estimates and
information regarding the amount and type of materials sent to the site by IZI,
the Company does not believe, while there can be no assurance, that its
liability at this site will have a material adverse effect on its financial
position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," which is effective for periods beginning after
December 31, 1997. Statement 130 establishes standards for reporting and display
of comprehensive income and its components. During the nine months of 1998, the
impact of Statement 130 was not material.
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which is
effective for periods beginning after December 15, 1997. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Based on management's review of the impact
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<PAGE>
of Statement 131, the Company's recent acquisition of U.S. Zinc has increased
the number of operating segments the Company will be required to report.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal quarters beginning after June 15, 1999. Statement No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently assessing the impact
of Statement 133 on its financial position and results of operations.
YEAR 2000 COMPLIANCE
The Company relies on software and hardware technology for its information and
data processing and to deliver its services, and has established a comprehensive
plan to address potential Year 2000 compliance problems resulting from the
computer programs written utilizing two digits, instead of four, to represent
the year. The Company is in the process of taking a physical inventory of
computer hardware and software, and embedded systems at each facility. This
inventory phase is expected to be completed by December 1998. The embedded
system inventory includes office equipment such as phone and voicemail systems,
fax machines, copiers, and postage machines, as well as environmental and
manufacturing control systems. These environmental and manufacturing systems at
Company plant locations consist of items such as scales, process controllers,
programmable logic controllers, adjustable frequency drives, and radiation
detection systems.
The Company's assessment phase entails obtaining manufacturer and developer Year
2000 compliance information about embedded systems and software. This process
is ongoing and is currently expected to be completed in March 1999.
All personal computer hardware compliance testing and remediation is also
anticipated to be completed by March 1999. Testing of embedded systems and
desktop application software is ongoing and expected to be completed by July
1999.
The Company believes that its primary operations and accounting software are
Year 2000 compliant. However, the Company has identified potential Year 2000
compliance issues with certain subsidiaries (including its recently acquired
U.S. Zinc subsidiary) and a joint venture partner, and is currently converting
and modifying those systems in order to achieve Year 2000 compliance.
The cumulative Year 2000 project expenditures have been immaterial to date, and
based upon results of current testing, the estimated remaining Year 2000 costs
are not expected to be material to the Company's results of operations and
financial position. The Company currently believes that it will be able to
manage its total Year 2000 transition without any material adverse effect on its
business, financial position or results of operations.
The Company cannot presently determine the impact on its customers and suppliers
in the event that they may be Year 2000 non-compliant, and in such event,
whether such non-compliance may have a material adverse effect on the Company's
results of operations or financial position.
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<PAGE>
The Company has contacted its customers and suppliers (through written
questionnaires and verbal inquiries) to determine the status of their respective
Year 2000 compliance programs and is currently reviewing the responses and
taking additional actions, such as further inquiries and personal follow up
interviews, on an as needed basis.
An unexpected or widespread Year 2000 problem involving the Company and/or its
suppliers and customers could result in a significant interruption to the
Company's normal business operations or activities, which could have a material
adverse effect on the Company's results of operations and financial position.
The Company is preparing for this uncertainty through its remediation efforts
and its ongoing investigation of its suppliers and customers referred to above.
The Company has not yet developed a contingency plan, but based upon completion
of its assessments and investigations discussed above, plans to develop such a
plan. Currently, the development of such a contingency plan is anticipated to
be completed in mid-1999.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this ITEM 2. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" (as well as certain
oral statements made by or on behalf of the Company) may be deemed to be
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provisions in
that enacted legislation. This information includes, without limitation,
statements concerning future capacity, volumes, revenues, earnings, costs,
margins and expenses; the expected effects of strikes or work stoppages at
Company customer facilities; future acquisitions or corporate combinations;
expected effects of the recent U.S. Zinc acquisition; future prices for metals;
plans for domestic or international expansion, facility construction schedules
and projected completion dates, and anticipated technological advances; future
capabilities of the Company to achieve "closed loop recycling" on a commercially
efficient basis; prospects for the Company's joint venture partners to purchase
a portion of the Company's interests; future (or extensions of existing) long-
term supply contracts with its customers; the outcome of and any liabilities
resulting from any claims, investigations or proceedings against the Company or
its subsidiaries; future levels of dividends (if any); the future mix of
business; future asset recoveries; future operations, future demand, future
industry conditions, future capital expenditures and future financial condition;
and the extent of the Company's "Year 2000" compliance, its timetable for
becoming "Year 2000" compliant, and impact of the "Year 2000" transition on the
operations, results of operations and financial condition of the Company, its
customers and suppliers. These statements are based on current expectations and
involve a number of risks and uncertainties. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in or incorporated by reference into this Quarterly Report on Form 10-
Q, the words "anticipate," "estimate," "expect," "may," "project" and similar
expressions are intended to be among the statements that identify forward-
looking statements. Important factors that could affect the Company's actual
results and cause actual results to differ materially from those results that
might be projected, forecasted, estimated or budgeted by the Company in these
forward-looking statements include, but are not limited to, the following:
fluctuations in operating levels at the Company's facilities, the mix of
buy/sell business as opposed to tolling
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<PAGE>
business, retention and financial condition of major customers, effects of
future costs, collectibility of receivables, the inherent unpredictability of
adversarial or administrative proceedings, effects of environmental and other
governmental regulations, currency exchange rate fluctuations, trends in the
Company's key markets, the price of and supply and demand for aluminum and zinc
(and their derivatives) on world markets, business conditions and growth in the
aluminum and zinc industries and aluminum and zinc recycling industries, the
extent of "Year 2000" compliance by the Company's suppliers and customers and
the Company's information and embedded technology, and future levels and timing
of capital expenditures.
These statements are further qualified by the following:
* Estimates of future operating rates at the Company's plants are based on
current expectations by management of the Company of future levels of volumes
and prices for the Company's services or metal, and are subject to
fluctuations in customer demand for the Company's services and prevailing
conditions in the metal markets, as well as certain components of the
Company's cost of operations, including energy and labor costs. Many of the
factors affecting revenues and costs are outside of the control of the
Company, including weather conditions, general economic and financial market
conditions, and governmental regulation and factors involved in
administrative and other proceedings. The future mix of buy/sell vs. tolling
business is dependent on customers' needs and overall demand, world and U.S.
market conditions then prevailing in the respective metal markets, and the
operating levels at the Company's various facilities at the relevant time.
* The price of primary aluminum, zinc and other metals is subject to worldwide
market forces of supply and demand and other influences. Prices can be
volatile, which could affect the Company's buy/sell metals business. The
Company's use of contractual arrangements including long-term agreements and
forward contracts, may reduce the Company's exposure to this volatility but
does not eliminate it.
* The markets for most aluminum and zinc products are highly competitive. The
major primary aluminum producers are larger than the Company in terms of
total assets and operations and have greater financial resources. In
addition, aluminum competes with other materials such as steel, vinyl,
plastics and glass, among others, for various applications in the Company's
key markets. Unanticipated actions or developments by or affecting the
Company's competitors and/or willingness of customers to accept substitutions
for aluminum products could affect the Company's financial position and
results of operations.
* Fluctuations in the costs of fuels, raw materials and labor can affect the
Company's financial position and results of operations.
* The Company's key transportation market is cyclical, and sales within that
market in particular can be influenced by economic conditions. Strikes and
work stoppages by automotive customers of the Company may have a material
adverse effect on the Company's financial condition and results of
operations.
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<PAGE>
* A strike at a customer facility or a significant downturn in the business of
a key customer supplied by the Company could affect the Company's financial
position and results of operations.
* The Company spends substantial capital and operating amounts relating to
ongoing compliance with environmental laws. In addition, the Company is
involved in certain investigations and actions in connection with
environmental compliance and past disposals of solid waste. Estimating future
environmental compliance and remediation costs is imprecise due to the
continuing evolution of environmental laws and regulatory requirements and
uncertainties about their application to the Company's operations, the
availability and applicability of technology and the allocation of costs
among principally responsible parties. Unanticipated material legal
proceedings or investigations could affect the Company's financial position
and results of operations.
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Ernst & Young LLP, have reviewed the
Company's consolidated financial statements at September 30, 1998, and for the
three and nine month periods then ended prior to filing, and their report is
included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks include (1) floating interest rate risk on its long-
term debt, (2) foreign currency risk from its operations outside the United
States, (3) price risk for natural gas used in its production process, (4) price
risk for aluminum and zinc in its buy/sell and by-product processing businesses
and (5) credit risk from customers. The Company uses derivative financial
instruments to manage some of these risks; these financial instruments are not
used for speculative purposes.
In order to reduce the fluctuating interest rate exposure on the term loan under
the January 1997 Credit Agreement (See ITEM 2. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL
RESOURCES"), the Company entered into an interest rate cap transaction ("Rate
Cap Transaction") agreement with Chase Bank of Texas, N.A. on April 7, 1997.
The cost associated with this Rate Cap Transaction is being amortized as
interest expense over the four year term of the agreement. As of September 30,
1998, the floating interest rate was capped at 8% per annum for 24% of the total
outstanding borrowings under the Amended and Restated Credit Agreement.
During the first nine months of 1998, the financial impact of gains and losses
from foreign currency exchange rate fluctuations associated with the
construction and operation of the Company's Wales facility and German joint
venture was immaterial.
Natural gas is the Company's second largest cost component. In order to manage
its price exposure for natural gas purchases, the Company has, at times, fixed
the future price of a portion of its natural gas requirements by entering into
firm-priced physical commitments and/or by entering into financial hedge
agreements. Beginning in the second quarter of 1998, the Company
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<PAGE>
began utilizing financial hedge agreements to hedge its anticipated natural gas
purchases. Under these agreements, payments are made or received based on the
differential between the monthly closing price on the New York Mercantile
Exchange, ("NYMEX") and the actual price of the natural gas. These contracts are
accounted for as hedges, with all gains and losses recognized in cost of sales
when the gas is consumed. In addition, the Company has cost escalators included
in some of its long-term supply contracts with its customers, which limit the
Company's exposure to natural gas price risk. In addition, as of September 30,
1998, the Company has outstanding swap agreements to hedge its anticipated
domestic natural gas requirements in the following approximate amounts: 29% for
the remainder of 1998, 26% for 1999 and 8% for 2000. In addition, as of
September 30, 1998, the Company's projected domestic natural gas requirements
were locked-in at fixed delivery prices in the following approximate amounts:
32% for the remainder of 1998, 12% for 1999 and 6% for 2000.
Aluminum and zinc ingots are internationally priced, sourced and traded
commodities, with their principal trading market being the London Metal
Exchange. From time to time, the Company has entered into forward sale
contracts and a series of put and call option contracts with metal brokers to
cover the future selling prices on a portion of the aluminum generated by the
Company's salt cake processing facility in Kentucky. In addition, the Company
has entered into forward sale contracts with metal brokers to cover the future
selling prices of zinc recycled for certain zinc customers. These contracts are
settled in the month of the corresponding production and/or shipment. The
contracts did not have a significant effect on the Company's financial position
or results of operations for the first nine months of 1998. Based upon the
Company's increased amount of buy/sell business in recent years and the recent
U.S. Zinc acquisition (See "NOTE D ACQUISITION" and ITEM 2. "ACQUISITION"), it
is likely that the degree of the Company's metals hedging activities will
increase during the remainder of 1998 and for the foreseeable future.
In May 1997, one of the Company's customers filed for protection under Chapter
11 of the U.S. Bankruptcy Code--see "LIQUIDITY AND CAPITAL RESOURCES" above.
Because the Company is not yet required to provide the disclosures otherwise
mandated under Item 305 of Regulation S-K promulgated by the Securities and
Exchange Commission (pursuant to General Instruction 1. of General Instructions
to Paragraphs 305(a), 305(b), 305(c), 305(d) and 305(e)), the foregoing
disclosures under this ITEM 3. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK" do not and are not intended to comply with Item 305.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company paid $850,000 in cash dividends during the third quarter of 1998.
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<PAGE>
On July 21, 1998, in connection with the acquisition of all of the issued and
outstanding capital stock of U.S. Zinc, the Company issued to the former
stockholders of U.S. Zinc (the "U.S. Zinc Stockholders") (i) 298,010 shares of
the common stock, par value $0.10 per share, of the Company ("Common Stock"),
and (ii) four-year Warrants to purchase an aggregate of 1,500,000 shares of
Common Stock. The shares of Common Stock and Warrants issued to the U.S. Zinc
stockholders were issued in a private placement transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, based upon
the limited number of U.S. Zinc Stockholders and their representations as
contained in the purchase documents. See Part I, Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Acquisition."
The Warrants issued to the U.S. Zinc Stockholders are exercisable for an
exercise price of $19.04 per share of Common Stock, subject to adjustment for
stock dividends, distributions, recapitalizations and other extraordinary
corporate transactions. On July 21, 1998 and October 31, 1998, the closing
price per share of Common Stock, as reported on the New York Stock Exchange
composite transactions, was $17.3125 and $13.8125, respectively. The
exercisability of the Warrants vests in four equal annual installments over the
term of the Warrants, beginning January 1, 1999, and vesting accelerates upon a
"Change in Control" of the Company (as defined in the Warrants). The Warrants
also provide that the U.S. Zinc Stockholders may effect a cashless exercise of
the Warrants and thereby receive a number of shares of Common Stock equal to the
quotient of (i) the excess of the market value of the Common Stock at the time
of exercise over the exercise price thereof with respect to the vested shares
being exercised, divided by (ii) the market value per share of the Common Stock
at the time of exercise. The Warrants are also subject to certain restrictions
on transfer. Upon any attempted sale of such Warrants (other than as permitted
under their terms), the Company shall have a right of first refusal to purchase,
at its option, all or any portion of the offered Warrants at the purchase price
per Warrant offered to be paid by the proposed transferee.
As of September 30, 1998, the Company had repurchased 126,800 shares of its
Common Stock in open market and privately negotiated transactions. See PART I,
ITEM 2. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-LIQUIDITY AND CAPITAL RESOURCES."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
15.1 Acknowledgment letter regarding unaudited financial information from
Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K:
(1) The Company filed a Current Report on Form 8-K dated as of July 21,
1998 under "Item 2--Acquisition or Disposition of Assets" reporting the
purchase of the capital stock of U.S. Zinc Corporation. Such Current
Report on Form 8-K was amended by the filing of the Company's Form 8-
K/A-1 dated October 5, 1998, under "Item 7-Financial Statements and
Exhibits."
SIGNATURES
Pursuant to the requirements 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.
IMCO Recycling Inc.
(Registrant)
Date: November 9, 1998 By: /s/ Robert R. Holian
-------------------------------------
Robert R. Holian
Vice President and Controller
(Principal Accounting Officer)
Page 21
<PAGE>
Independent Accountants' Review Report
Stockholders and
Board of Directors
IMCO Recycling, Inc.
We have reviewed the accompanying consolidated balance sheet of IMCO Recycling
Inc. as of September 30, 1998, and the related consolidated statements of
earnings for the three-month and nine-month periods ended September 30, 1998 and
1997 and the consolidated statements of cash flows for the nine-month periods
ended September 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of IMCO Recycling Inc. as of December
31, 1997, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for the year then ended, [not presented herein], and in
our report dated February 2, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Dallas, Texas
October 26, 1998
22
<PAGE>
Exhibit 15.1
Stockholders and
Board of Directors
IMCO Recycling Inc.
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-26641, Form S-8 No. 33-34745, Form S-8 No. 33-76780, Form S-8
No. 333-00075, and Form S-8 No. 333-07091) pertaining to the Nonqualified Stock
Option Plan of IMCO Recycling Inc., the IMCO Recycling Inc. Amended and Restated
Stock Option Plan, the IMCO Recycling Inc. 1992 Stock Option Plan, the IMCO
Recycling Inc. Amended and Restated 1992 Stock Option Plan, and the IMCO
Recycling Inc. Annual Incentive Program of our report dated October 26, 1998
relating to the unaudited condensed consolidated interim financial statements of
IMCO Recycling Inc. which are included in its Form 10-Q for the quarter ended
September 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not part of
the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities act of 1933.
/s/ ERNST & YOUNG LLP
Dallas, Texas
November 10, 1998
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