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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
(972) 401-7200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Exchange on Which Registered
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Common Stock, $0.10 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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___
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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 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. [_]
As of March 1, 1999, the aggregate market value of voting and non-voting common
equity held by nonaffiliates of the Registrant was $177,512,688.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 1999.
Common Stock, $0.10 par value, 16,519,991
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
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ITEM PAGE
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PART I
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Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 4A. Executive Officers of the Registrant 22
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 68
PART III
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Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial Owners and
Management 68
Item 13. Certain Relationships and Related Transactions 68
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 69
Signatures 73
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PART I
This Annual Report on Form 10-K contains forward-looking statements as defined
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements should be read in conjunction with the cautionary statements and
other important factors included in this Form 10-K. See Item 7. "MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS."
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. These
forward-looking statements may be identified by the use of the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties, but there can be no assurance that management's expectations,
beliefs or projections will result or be achieved or accomplished.
ITEM 1. BUSINESS
GENERAL
IMCO Recycling Inc. (the "Company") is the largest aluminum recycler in the
United States and believes that it is the largest aluminum recycler in the
world. The Company's principal business is the processing of aluminum, which
includes used aluminum beverage cans ("UBCs"), scrap, and dross (a by-product of
aluminum production). The Company converts UBCs, scrap and dross into molten
metal in furnaces at facilities owned and/or operated by the Company. While the
aluminum is in molten form, the Company may blend in other metals to prepare a
precise aluminum alloy mixture. The Company then delivers the processed aluminum
to customers in molten form or ingots. The Company recovers magnesium in a
similar process.
With the acquisition of U.S. Zinc Corporation ("U.S. Zinc") in July 1998 (see
"GROWTH OF BUSINESS" below), the Company believes that it is now the largest
recycler of zinc secondaries in the United States. U.S. Zinc uses company-owned
furnaces to convert zinc scrap and dross into various value-added zinc products
such as zinc oxides, dust, and metal.
Most of the Company's processing capacity is utilized to recycle customer-owned
materials, for which the Company charges a fee (a service called "tolling").
During 1998, approximately 68% of the Company's total pounds of metal melted
involved tolling. The balance of the Company's business involves the purchase of
scrap and dross for processing and recycling by the Company for subsequent
resale ("buy/sell" business). Except where the context otherwise requires, the
term "Company" as used herein refers to IMCO Recycling Inc. and its
subsidiaries.
The Company's business has benefited from the trend to include recycled
materials in finished products, the growth in the production and recycling of
UBCs and the increasing utilization of aluminum in automotive components.
According to industry statistics, over the past 25 years, U.S. production of
recycled aluminum has more than tripled to 3.7 million tonnes from 1.0 million
tonnes. In addition, recycled aluminum in the U.S. currently represents
approximately
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37% of the total domestic aluminum supply, compared to 19% in 1972. The U.S. is
the world's leading consumer of zinc, currently consuming about one-sixth of the
world's production, but is only the fifth largest producer. Consequently, the
U.S. is also the largest importer of refined zinc. During the period 1984-1996
world secondary zinc refining activity grew at three times the rate of primary
zinc metal production. Secondary zinc now provides approximately 36% of the
world's refined zinc output and in the U.S., secondary zinc refining is
equivalent to 38% of domestic consumption.
The Company's aluminum customers include some of the world's major aluminum
producers and aluminum fabricators, diecasters, extruders, automotive companies
and other processors. Most of the aluminum metal processed by the Company is
used to produce products for the transportation, packaging and construction
industries, which constitute the three largest aluminum markets. Much of the
Company's recent growth has been directed toward serving the transportation
sector, which has been the largest and fastest-growing aluminum market in recent
years due to the increasing use of aluminum in automotive components. The
Company's principal aluminum customers include Aluminum Company of America
("Alcoa"), Commonwealth Aluminum Corporation ("Commonwealth"), Kaiser Aluminum
Corporation ("Kaiser"), Ford Motor Company ("Ford"), Century Aluminum Company,
General Motors Corporation ("GM"), Toyota Tsusho America, Inc., Nelson Metals,
and Wise Metals Company ("Wise Metals").
The Company's zinc customers include some of the world's major tire and rubber
producers and galvanizers, steel companies and other processors, including
Goodyear Tire & Rubber Co., Michelin Tire, Bethlehem Steel and Dow
Agrosciences.
STRATEGY
The Company's strategy is to participate in sectors of the nonferrous metals
recycling industry in which it believes it can provide customers with a
technology-based, value-added service and in which it can develop significant
market share. The Company believes that it has been successful in
differentiating its aluminum recycling services from those of its competitors
through:
. operational and design technologies that are designed to produce
higher metal recovery yields
. the strategic location of facilities in close proximity to customers,
providing for both stronger ties to its customers and greater
convenience and accessibility for its customers
. the ability to deliver recycled aluminum in molten form for just-in-
time delivery, thereby saving customers the expense of remelting
aluminum ingots
. its environmental technologies and practices, including dedicated
disposal facilities and a proprietary process developed by the Company
used to recover aluminum from by-products of the recycling process
The Company believes that it has been successful in differentiating its zinc
value-added products from those of its competitors through:
. operational and design technologies that are designed to produce lower
cost, higher quality products to be sold at competitive prices
. the strategic location of facilities in close proximity to customers,
providing for both stronger ties to its customers and greater
convenience and accessibility for its customers
. customized packaging that meets customers' specifications, including
customer specific weights and labels
To achieve its objectives, the Company focuses on internal expansion as well as
growth through strategic acquisitions, vertical integration of its operations
and services, and operational efficiencies through technological innovation.
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Expansion. Since 1993, the Company has increased its number of facilities and
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capacity through acquisitions of existing facilities, construction of new
facilities and expansion of existing facilities. As of March 31, 1993, the
Company owned and operated five recycling plants, which had an aggregate annual
processing capacity of 735 million pounds of aluminum and 50 million pounds of
other metals. As of December 31, 1998, the Company owned and operated 22
recycling and processing plants, which have an aggregate annual melting
capacity of approximately 2.6 billion pounds of aluminum and 240 million pounds
of zinc, for a total annual processing capacity of 2.8 billion pounds. In
February 1999, the Company acquired substantially all the assets of an aluminum
alloying facility in Shelbyville, Tennessee, which has an annual capacity of 120
million pounds, and a zinc oxide facility in Clarksville, Tennessee, which has
an annual capacity of approximately 40 million pounds. Additionally, in March
1999, the Company announced plans to construct an aluminum alloying facility in
Saginaw, Michigan to supply molten aluminum to GM under a new long-term supply
agreement. The Company anticipates that its annual capacity for 1999 will be 3.0
billion pounds. In addition, the Company owns a 50% interest in an aluminum
recycling joint venture in Germany, which has an annual melting capacity of 340
million pounds, and has begun operations at its new aluminum recycling facility
in Swansea, Wales, which has an annual melting capacity of 100 million pounds.
The Company expects that currently planned expansions will add approximately 220
million pounds of annual processing capacity during 1999 and 2000. See "GROWTH
OF BUSINESS" below. Expansion of the Company's network of facilities in the U.S.
has enabled the Company to allocate processing work among its facilities,
thereby maximizing utilization of capacity and absorbing excess demand. The
Company intends to continue to expand its business by targeting growing markets,
such as the automotive market, constructing additional recycling facilities,
expanding and improving its existing facilities and acquiring or partnering with
similar recycling businesses or other metals processors. In addition, the
Company plans to continue seeking foreign sites for its recycling facilities
where market conditions warrant.
Vertical Integration. The Company also seeks business opportunities that combine
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its traditional recycling services with downstream processing operations that
more directly serve manufacturers and other end-users. With the Company's
acquisition of Alchem Aluminum, Inc. ("Alchem") in November 1997, the Company
began manufacturing and selling specification aluminum alloy products for
automotive equipment manufacturers. The Shelbyville, Tennessee acquisition in
early 1999 will expand the Company's capacity to serve this market. Further
expansion will occur with the announced plans to construct an aluminum alloying
facility in Saginaw, Michigan.
Technological Innovation. The Company's facilities and equipment have been
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continually improved and updated through plant modernization programs, including
technological advancements designed to improve operational efficiencies. Between
January 1, 1992 and December 31, 1998, the Company made capital expenditures and
joint venture investments totaling $138 million in new plant and equipment
(excluding acquisitions of existing companies or facilities). These investments
have increased the Company's productivity, market share and total processing
capacity.
Customer Service. The Company is dedicated to maintaining customer satisfaction
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and seeks to develop new methods and processes to better serve its customers.
The Company emphasizes a strong commitment to customer service by offering:
. higher metal recovery rates
. higher quality of metal recovered
. more precise specifications for alloyed metals
. advanced environmental technology and practices
. facilities conveniently located near its customers
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. customized packaging.
Through long-term relationships with primary producers and other customers, the
Company maximizes its production capabilities while providing customers with a
reliable source for their product requirements.
Environmental Efficiencies. The Company has committed resources towards
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developing a "closed loop" production system in which virtually all materials
used in the aluminum recycling process are reclaimed or consumed, thus greatly
reducing the need for and expense of landfilling. Management believes that
considerable progress has been made in this area through the operation of the
Company's Kentucky salt cake processing plant and its patented wet-milling
process employed to recycle salt cake at both its Arizona facility and its Solar
Aluminum Technology Services ("SALTS") joint venture in Utah. While no
assurances can be given that an economically efficient closed loop recycling
system will ever be developed for all of the Company's facilities and processes,
management believes that continued progress toward this goal is desirable for
the Company's customers due to the opportunities for cost savings and further
assurances of environmental safety. In addition, customers benefit from the
enhanced environmental facilities employed by the Company, such as the lined
landfill at its Morgantown, Kentucky aluminum facility, which was built to
hazardous waste standards. See "THE RECYCLING PROCESS."
In the zinc manufacturing process by-products which are generated are oxides
and zinc fines. These are either sold to third parties or melted in another
process in the zinc manufacturing cycle. Thus, there is no significant disposal
issue in the zinc process.
GROWTH OF BUSINESS
Since its inception, the Company has increased its number of facilities and
capacity through acquisitions, construction of new facilities and expansion of
existing facilities. See ITEM 2. "PROPERTIES." Beginning in 1995, this growth
strategy was accelerated.
In December 1995, the Company formed a joint venture, VAW-IMCO Gu(beta) und
Recycling GmbH ("VAW-IMCO"), with VAW aluminium AG, the largest aluminum company
in Germany. The Company has a 50% interest in this German venture, which owns
and operates two recycling and foundry alloy facilities. The plants principally
serve the European automotive markets.
In January 1996, the Company completed the construction of its salt cake
processing facility, located adjacent to the Company's Morgantown, Kentucky
plant. This facility processes salt cake, a by-product generated from the
Company's aluminum recycling plants, through use of materials separation
technology, and recovers additional amounts of aluminum for resale that would
otherwise be landfilled. See "ENVIRONMENTAL MATTERS."
In 1996, the Company began construction of an aluminum recycling facility in
Coldwater, Michigan for a joint venture with Alchem. The Coldwater plant reached
full capacity in the fourth quarter of 1997.
In 1997, the Company commenced construction of an aluminum recycling facility in
Swansea, Wales, U.K., through its IMCO Recycling (UK) Ltd. subsidiary, which
reached full capacity in mid-1998. The plant site is adjacent to a plant owned
by a subsidiary of Alcoa, which is the Swansea facility's principal customer
under a long-term tolling agreement.
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In January 1997, the Company acquired IMSAMET, Inc. ("IMSAMET") and Rock Creek
Aluminum, Inc. ("Rock Creek"). IMSAMET owns or has a majority interest in three
aluminum recycling plants located in the western U.S. (i.e., Idaho, Arizona and
Utah), and owns a 50% interest in SALTS, which is a Utah facility that uses a
proprietary process to reclaim materials from salt cake. Rock Creek operates two
facilities in Ohio that utilize milling, shredding, blending, testing and
packaging equipment to process various types of raw materials, including
aluminum dross and scrap, into aluminum products used as metallurgical additions
in the steel making process for steel producers.
In November 1997, the Company acquired Alchem, a producer of specification
aluminum alloys for automotive manufacturers and their suppliers. Through its
acquisition of Alchem, the Company increased its participation in the automotive
industry, broadened its customer base and expanded its product range to include
specification alloys.
In 1997 and 1998, the Company completed expansion programs at certain of its
U.S. facilities and at the VAW-IMCO facilities in Germany. The Sapulpa, Oklahoma
expansion increased the facility's processing capacity by 40 million pounds per
year. In 1997, VAW-IMCO signed a long-term agreement to process dross for a
major rolling mill in Germany and installed a new furnace. During 1998, the
Company constructed a 40-million pound facility at the Company's Loudon,
Tennessee site to supply molten metal to an automobile brake component
manufacturer under a long-term scrap management, tolling and supply agreement.
Additionally during 1998, the Company expanded its Morgantown, Kentucky facility
by adding a reverberatory furnace with an annual capacity of 100 million pounds.
In July 1998, the Company acquired U.S. Zinc which, along with its subsidiaries,
operate five production facilities located in Illinois, Texas and Tennessee.
With the acquisition of U.S. Zinc, the Company has expanded its zinc business,
broadened its customer base and expanded its product range to include various
value-added zinc products.
In February 1999, the Company acquired substantially all of the assets of an
aluminum alloying facility in Shelbyville, Tennessee from Alcan Aluminum
Corporation and acquired substantially all of the assets of a zinc oxide
production facility from North American Oxide, LLC in Clarksville, Tennessee.
In March 1999, the Company announced plans to construct a new aluminum alloying
plant in Saginaw, Michigan, which is expected to begin operations in 2000. This
facility's principal customer will be a GM metal casting plant in Saginaw,
Michigan. This facility will supply molten and ingot aluminum to GM under a new
supply agreement, which expires in 2011. See NOTE O--"SUBSEQUENT EVENTS" of
Notes to Consolidated Financial Statements.
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CERTAIN FACTORS
For descriptions of certain factors affecting the Company, including commitments
and contingencies, which subject the Company to certain continuing risks, see
(i) "ENVIRONMENTAL MATTERS" below, (ii) ITEM 3. "LEGAL PROCEEDINGS," (iii) ITEM
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7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS--CAUTIONARY STATEMENTS FOR PURPOSES OF FORWARD-LOOKING STATEMENTS"
and (iv) NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements,
respectively.
SEGMENT REPORTING
With the acquisition of U.S. Zinc in July 1998, the Company has two business
segments that meet the reporting requirements of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." See NOTE M--SEGMENT INFORMATION" of Notes to Consolidated
Financial Statements. The ALUMINUM segment represents all of the Company's
aluminum melting, processing, alloying, brokering and salt cake activities. In
addition, this segment includes the Company's magnesium melting activities,
which represent less than 1% of consolidated revenues and production. The
company's ZINC segment represents all of the Company's zinc melting, processing
and brokering activities.
PRODUCTS AND SERVICES
ALUMINUM. The Company recycles aluminum and delivers the recycled metal to
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customers as molten aluminum or ingots. The Company's customers include most of
the major United States aluminum producers and aluminum diecasters, extruders,
automotive companies and other processors of aluminum products. A principal
element of the Company's strategic plan calls for expanding the Company's
activities in the rapidly growing aluminum automotive components market.
The Company's metal alloying plant in Coldwater, Michigan manufactures
specification aluminum alloy products for automotive equipment manufacturers and
their suppliers. The recent acquisition of the Shelbyville, Tennessee facility
will strengthen the Company's ability to serve this market.
The Company's Rock Creek and Elyria, Ohio facilities manufacture a variety of
aluminum products that are ultimately used as metallurgical additions in the
steel making process, such as slag conditioners, deoxidizers, steel
desulfurizers and hot topping compounds. These facilities utilize milling,
shredding, blending, testing and packaging equipment to process various types of
raw materials, including aluminum dross and scrap, into aluminum products for
the steel industry. In addition, these facilities manufacture a wide range of
proprietary briquetted products and offers toll briquetting services.
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The Company's aluminum business has benefited from the trend to include recycled
materials in finished products, and in particular during its early years, from
the growth in the use and recycling of aluminum beverage conatiners. The
recycling of UBCs in the United States has increased because of numerous
economic, legislative and environmental factors. According to industry
estimates, the number of aluminum beverage cans produced has increased from 34.7
billion in 1979 to an annual average of approximately 100 billion for each of
1996, 1997 and 1998. The number of UBCs recycled increased from 8.5 billion in
1979 to approximately 66.8 billion in 1997.
The major force behind increased demand for recycled aluminum in recent years
has been its greater use in auto and truck components, including body
structures. This trend has made the transportation sector the largest and
fastest-growing aluminum market. The total aluminum shipped to the North
American auto market each year has more than doubled since 1988 to about 3.8
billion pounds.
The average amount of aluminum used per vehicle produced in North America, is
expected to increase to 248 pounds in 1999, some 36 percent above the 138 pound
average in 1991. Major auto makers estimate that this average will double by
2005. Some 65 percent of the aluminum contained in cars and trucks is recycled
metal, but this percentage is expected to move higher in future years as more
usable scrap becomes available.
The Company also recycles magnesium dross for primary magnesium producers. In
addition, it produces a line of magnesium anodes that are recycled from
post-consumer scrap and sold to end-users and independent distributors for
corrosion protection of steel structures.
ZINC. Zinc is used in diecastings, in brass-making as an alloying metal with
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copper and in chemical compounds to produce rubber, ceramics, paints and
fertilizer. However, its most unique quality is its natural ability to
metallurgically bond with iron and steel and protect these metals from
corrosion. With its recent acquisition of U.S. Zinc, the Company manufactures
three main value-added zinc products: oxides, dust and metal.
Zinc oxide is used predominantly in the tire and rubber industries and by the
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specialty chemical, motor oil and ceramics industries. The Company produces two
types of zinc dust: extra low lead dust, which is used in the industrial paint
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industry, and regular dust, which is used in paints, specialty chemical and
mining applications. Zinc metal recovered by the Company is used to galvanize
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steel, and by-products generated in the zinc metal recycling process, called
fines, serve the zinc sulfate industry as fertilizer additives.
The Company's zinc business has benefited from the growth of secondary zinc
refining, which has increased at three times the rate of primary zinc
production. According to published industry reports, it is estimated that
secondary zinc now accounts for more than 36% of the world's refined zinc
output, and it is estimated that the consumption of recycled zinc will account
for more than 40% of total worldwide zinc consumption by 2005.
FOREIGN OPPORTUNITIES. The Company continues to evaluate expansion opportunities
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in foreign sites, such as Europe and South America, where market conditions
warrant. General political and economic conditions in foreign countries could
affect the overall financial prospects of the Company. Foreign operations are
generally subject to several risks, including foreign currency exchange rate
fluctuations, distinct environmental regulations, changes in the methods and
amounts of taxation, foreign exchange controls and government restrictions on
the repatriation of hard currency.
SALES AND LONG-TERM CONTRACTS
ALUMINUM-GENERAL. The Company's principal aluminum customers (see "GENERAL"
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above) use recycled aluminum to produce can sheet, building, automotive and
other products. The Company provides products and services to a number of
primary and fabricating facilities of Alcoa. During 1998, 1997 and 1996, Alcoa
accounted for approximately 7%, 9% and 13%, respectively, of the Company's
consolidated revenues, and Ford and its affiliates accounted for approximately
10% and 2% of the Company's consolidated revenues in 1998 and 1997,
respectively. The loss of Alcoa or Ford as customers would have a material
adverse effect upon the business of the Company and its future operating
results.
Customarily, agreements with customers in the aluminum recycling industry have
been short-term. These usually result from a bidding process where aluminum
producers and metal traders
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offer to sell materials or to have materials tolled. Consequently, the Company
historically has maintained no significant backlog of orders.
ALUMINUM-LONG-TERM CONTRACTS. The Company has secured long term commitments for
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its recycling services with Alcoa, Commonwealth, Aluminium Norf GmbH
("AluNorf"), Kaiser, Wise Metals, PBR Automotive USA LLC, Century Aluminum and
GM. For the year ended December 31, 1998 the Company melted 1,077 million pounds
of aluminum pursuant to multi-year contracts with its customers, which
represented approximately 45% of the Company's total 1998 annual aluminum
melting volume.
In 1992, the Company entered into a 10-year supply contract with Commonwealth's
Uhrichsville plant to process all of that facility's scrap aluminum, UBCs and
dross at the Company's adjacent plant. See ITEM 2. "PROPERTIES--RECYCLING AND
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PROCESSING FACILITIES." In 1994, the Company entered into a three-year
processing agreement with Alcoa under which the Company's Rockwood plant
provides secondary metal for Alcoa's Alcoa, Tennessee facility. This agreement
was modified in 1995 and 1998 to include certain additional Company facilities
and to modify certain pricing and volume provisions. This agreement will extend
for additional one-year terms at the end of each contract year unless terminated
by either party. When so terminated, the agreement will continue in effect until
the second anniversary date of the last day of the contract year during which
the termination notice was given.
The Company has also entered into a similar supply agreement with an English
subsidiary of Alcoa pursuant to which the Company's Swansea, Wales facility will
provide Alcoa's adjacent facility with secondary tolled aluminum. The agreement
has a five-year primary term, expiring in 2002, with provisions for automatic
three-year extensions. In September 1997, the VAW-IMCO joint venture entered
into a five-year agreement with AluNorf to process 22,000 metric tons of dross
per year.
In 1997, the Company entered into a five and one-half year agreement with Wise
Metals to deliver ten million pounds of aluminum per month to supply a Kentucky
rolling mill.
The Company's Post Falls, Idaho facility has a processing contract to supply, on
a tolling basis, molten and ingot aluminum to Kaiser's nearby Trentwood,
Washington aluminum fabrication mill. The term of this agreement expires in
September 2000.
In February 1999, the Company entered into a supply agreement with GM to provide
alloyed molten and ingot aluminum to GM's metal casting facility in Saginaw,
Michigan. The agreement expires in 2011 and calls for escalating volumes
beginning in 1999. The Company's planned Saginaw facility, which is expected to
begin production in 2000, will supply GM's Saginaw plant.
Many of these agreements contain cross-indemnity provisions, including
provisions obligating the Company to indemnify the customer for certain
environmental liabilities that the customer may incur in connection with the
transactions contemplated by the agreements.
These agreements also typically contain escalation provisions that are intended
to cover changes in certain of the Company's processing costs. The Company may
seek similar dedicated long-term arrangements with customers in the future.
Increased emphasis on dedicated facilities and dedicated contracts with
customers carries the inherent risk of increased dependence on a single
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or few customers with respect to a particular Company facility. In such cases,
the loss of such a customer could have a material adverse effect on the
Company's financial condition and results of operation, and any timely
replacement of volumes attributable to such a customer could prove difficult.
ZINC. The Company's principal zinc customers use zinc to make tires and other
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rubber products, industrial paints, fertilizers, specialty chemicals, motor oil
and ceramics. Zinc products are also used in the mining and steel galvanizing
industries. Major zinc customers include Goodyear, Michelin, Bethlehem Steel and
Dow Agrosciences. Most of the Company's zinc products are sold directly to end
users. No single zinc customer accounted for more than 10% of the Company's
consolidated revenues in 1998.
Most of the Company's contracts with zinc customers are for a term of one year
or less. The Company historically has maintained no significant backlog of
orders for zinc products.
GENERAL. The primary metals industry and the metals recycling industry are
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subject to cyclical fluctuations, depending upon the availability and price of
unprocessed scrap metal and the level of demand in the metal consuming
industries. Temporary reductions in can stock production by one of the Company's
aluminum customers have previously affected the Company's results of operations,
and no assurances can be given that such conditions will not recur. See ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
The Company sells to both domestic and international customers. Sales to
customers in foreign locations accounted for approximately 13% of consolidated
revenues in 1998, and aluminum shipments to customers located in Canada
accounted for approximately 9% of consolidated revenues for 1998. Foreign sales
in 1997 and 1996 were immaterial (less than 3%). See "Note M-Segment
Information" of Notes to Consolidated Financial Statements.
THE RECYCLING/MANUFACTURING PROCESS
ALUMINUM. The Company uses two types of furnace technology, rotary and
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reverberatory. Rotary or barrel-like furnaces are able to pour a batch of melted
aluminum from dross and then immediately switch to other types of scrap; they
provide high recovery and excellent product quality. Reverberatory furnaces are
stationary and use both radiation and convection heating to melt the material
being processed. Reverberatory furnaces provide better recovery from shredded
material than a rotary furnace and can take advantage of the heat energy
contained in delacquered shreds.
After the aluminum is melted, the recovered metal is poured directly into an
ingot mold or hot metal crucible for delivery to customers. Magnesium is
recycled by the same method in a rotary furnace at the Sapulpa, Oklahoma plant.
Some of the Company's plants deliver molten aluminum in crucibles directly to
their customers' manufacturing facilities. As of December 1998, the Company had
the capacity to provide approximately 76% of its processed aluminum in molten
form. The molten aluminum is poured directly into the customer's furnace, saving
the customer the time and expense of remelting aluminum ingots. The Company
normally charges an additional fee for transportation and handling of molten
aluminum. The Oklahoma, Arizona, Utah, Illinois and Missouri facilities are
restricted, due to the geographical locations of their customers, to delivering
aluminum in ingot form. See ITEM 2. "PROPERTIES."
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At the Company's metal alloying facilities in Coldwater, Michigan, and
Shelbyville, Tennessee, additional materials are blended with molten aluminum to
produce a metal alloy. The alloyed aluminum is shipped in either molten or ingot
form to its customers. The Coldwater alloying facility generates dross, which is
recycled at the Company's adjacent aluminum recycling plant.
The aluminum recycling process from the Company's rotary furnaces produces a by-
product called "salt cake," which is formed from the contaminants and coatings
on aluminum scrap and dross and the salts added during the aluminum recycling
process. Salt cake is composed of salts, metallic aluminum, aluminum oxide and
small amounts of other materials. The by-product of processing materials through
the reverberatory furnaces is dross.
The Company disposes of its salt cake and certain airborne contaminants
("baghouse dust") in landfills that are used exclusively by the Company or that
are permitted specifically to handle the types of materials generated by the
Company. Salt cake is not currently listed as a "hazardous waste" under the
Resource Conservation and Recovery Act of 1976 ("RCRA") or as a "hazardous
substance" under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"). The Company has built and operates a lined
landfill at its Morgantown, Kentucky facility, the design of which exceeds
current requirements for disposal of salt cake and meets RCRA Subchapter "C"
hazardous waste standards.
In 1996, the Company completed the construction of a facility adjacent to its
Morgantown plant to further process the salt cake through the use of materials
separation technology and extract additional aluminum that is left after the
melting process. This salt cake processing facility is a critical step needed
for "closed loop recycling," which would involve no or minimal waste disposal.
The facility's process involves crushing the salt cake and separating the
aluminum out of the salt cake. The residual product is then landfilled in the
Company's Morgantown landfill. See "ENVIRONMENTAL MATTERS."
Certain of the Company's facilities also recycle salt cake and other by-products
from the aluminum recycling process. The Goodyear, Arizona facility processes
aluminum scrap and turnings and recycles concentrates from purchased dross and
salt cake. These concentrates are first treated in the facility's patented wet
milling process, which reduces the volume of material handled, thus allowing for
more efficient utilization of capacity. Aluminum oxide, a by-product of the wet
milling process, is further treated and sold for use in the production of
cement.
Located near the Bonneville Salt Flats, the Company's Wendover, Utah facility
processes aluminum concentrates from the adjacent 50%-owned SALTS joint venture
and produces aluminum ingots. The SALTS facility recycles salt cake from the
Company's Idaho and Utah plants into aluminum concentrates, aluminum oxide and
salt brine. The clear brine is delivered to the venture's partner, where its
chemical content is recycled for multiple uses, including reuse as a flux.
ZINC. Zinc oxide is produced by melting top dross, a low-iron content zinc by-
- ---- ----------
product of continuous galvanizing, and re-melt die cast, a high zinc-content
alloy, in a sweat or premelt furnace. The sweat furnace separates the zinc from
other metals contained in the raw material. The molten zinc is then transferred
to a muffle furnace which uses radiant heat to transform the molten zinc into a
vapor. The vaporized zinc is sent to a vapor chamber where, upon contact with
air, it condenses to zinc oxide. The final manufacturing step is to send the
completed
12
<PAGE>
product through a vertical cooler to a bag collector where the zinc oxide is
collected and custom packaged for shipment.
The Company manufactures two types of zinc dust: extra low lead and regular.
Zinc dust with extra low lead content, which is preferred by the domestic
industrial paint industry, is produced by converting primary zinc into a molten
form using an Electro Thermal Furnace. The Company manufactures regular zinc
dust by melting bottom dross, an iron-bearing zinc residue, created during the
galvanizing process, and re-melt die cast in a pot or ladle. Next, the molten
zinc is fed into a zinc dust retort furnace where the molten metal is vaporized
and condensed into raw zinc dust. Finally, the raw zinc dust is processed in a
dust mill, where it is screened, sent through a ball mill and then packaged into
custom-sized containers.
Zinc metal at the Houston facility is produced by placing pieces of oxidized
zinc-bearing metals (skimmings) into a ball mill, where the Company separates
the oxidic zinc (zinc fines), which are sold as fertilizer additives. After the
ball mill process, the metallic zinc-bearing material is melted in an electric
induction furnace, which is then transferred to a holding furnace for additional
refining. Finally, the molten zinc is poured into molds and shipped to
galvanizers.
In the Company's Coldwater, Michigan zinc recycling process, continuous
galvanizers' top dross is first melted in an electric induction furnace and then
transferred to a reactor which removes the impurities (iron and zinc oxide,
which are sold as by-products). The remaining molten zinc is poured into a
reverberatory holding furnace from which it is blended and cast into ingots,
which are returned to the customer.
OPERATIONS
ALUMINUM. In its aluminum tolling operations, the Company accepts UBCs, dross
and scrap owned by its customers and processes this material for a tolling
charge per pound of incoming weight. In order to retain control of their metal
supplies, customers have typically desired to toll, rather than sell, their
scrap materials. Tolling requires no metal inventory to be purchased or held by
the Company. In addition, tolling limits the Company's exposure to the risk of
fluctuating metal prices since the Company does not own the material being
processed. For the year ended December 31, 1998, approximately 71% of the
Company's total pounds of aluminum processed involved tolling. The acquisitions
of the Chicago Heights and Sikeston plants, the Coldwater metal alloying plant
and the operation of the Morgantown salt cake processing facility have changed
the Company's historical ratio of tolling to buy/sell business (formerly,
aluminum tolling represented more than 90% of the Company's total annual melting
volumes). See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------
CONDITION AND RESULTS OF OPERATIONS."
ZINC. The Company's zinc operations primarily consist of buy/sell transactions.
- ----
On an annualized basis, the Company's buy/sell zinc business represents
approximately 91% of its total zinc production. Unlike tolling transactions,
buy/sell transactions increase the Company's exposure to the risk of fluctuating
metal prices and increased working capital requirements. See ITEM 7.
------
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." and ITEM 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
-------
RISK."
13
<PAGE>
GENERAL. The Company's production network of plants have generally achieved high
- -------
overall operating rates due to strong demand for the Company's services and
products and due to the strategic location of many of the Company's plants near
major customers' production facilities. Expansion of the Company's network of
facilities in the U.S. has enabled the Company to allocate processing work among
its facilities, thereby maximizing utilization of available capacity and taking
advantage of excess demand.
The Company believes that its advanced scrap preparation equipment and recycling
technologies have also increased the demand for its services by producing higher
recovery rates and better quality recycled aluminum and zinc products than many
of its competitors.
The Company constantly seeks improvements in operational efficiencies at its
existing plants and at its acquired facilities through technological
advancements, automation of its operational procedures, and modifications in
processing and material throughput methods.
In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing number 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 processing it. Additionally, in order to facilitate the acquisition of
metal for its production process, the Company occasionally enters into metal
"swap" transactions whereby the Company agrees to exchange its recycled finished
goods for scrap raw materials.
When purchasing metals in the open market for its buy/sell business, the Company
attempts to reduce the risk of fluctuating metal prices by hedging anticipated
sales of aluminum and zinc and by avoiding large inventories, except to the
extent necessary to allow its plants to operate without interruption. See ITEM
----
7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
- --
COMPETITION
GENERAL. The aluminum and zinc recycling industries are fragmented and highly
- -------
competitive. The Company believes that its position as the largest U.S. recycler
of secondary aluminum and zinc is a positive competitive factor.
ALUMINUM. The principal factors of competition in the aluminum segment are
- --------
price, recovery rates, environmental and safety regulatory compliance, and
services (e.g., the ability to deliver molten aluminum). Freight costs also
limit the geographic areas in which the Company can compete effectively.
The major aluminum producers, some of which are the Company's largest customers,
have generally discontinued processing dross, instead focusing their resources
on other aspects of aluminum production. UBCs and other scrap are processed by
both the secondary recycling industry and the major producers. The Company
competes both with other secondary recyclers and their customers when purchasing
and processing scrap for the buy/sell business.
The amount of the Company's aluminum tolling business can vary depending upon
the extent that the major aluminum producers' used metal materials are
internally recycled. The aluminum producers generally vary their rate of
internal recycling depending upon furnace availability,
14
<PAGE>
inventory levels, the price of aluminum and their own internal demand for metal.
The major aluminum producers are larger and have greater financial resources
than the Company. A decision by these producers to expand their recycling
operations could reduce demand for certain of the Company's products and
services.
ZINC. The principal factors of competition in the zinc segment are price,
- ----
customer service, and delivery schedules. Competition is generally regionally
focused due to high freight costs.
For zinc oxide, the Company's major competitors are Zinc Corporation of America,
a subsidiary of Horsehead Industries, Inc. and Zochem, a subsidiary of Hudson
Bay Mining & Smelting, Ltd. The Company believes its strong customer
relationships, low cost production capabilities and geographic coverage allow it
to compete effectively in the zinc oxide market.
For zinc dust, the Company's major competitors are Purity Zinc Metals Company,
Ltd. and Meadowbrook Company, a subsidiary of T.L. Diamond Company, Inc. The
Company's Houston, Texas facility is believed to be the largest zinc dust
facility in the world, based on volume.
For zinc metal, the Company considers both primary and secondary zinc producers
to be competitors. However, the Company believes that only a minimal threat
exists from galvanizers recycling their own by-products, since relatively large
capital expenditures, technology costs and internally generated raw material
volume represent real barriers to entry into this market.
SOURCE AND AVAILABILITY OF RAW MATERIALS AND ENERGY
ALUMINUM. The Company has historically not had, and does not anticipate having,
- --------
difficulties in obtaining raw materials for its aluminum operations. In the case
of buy/sell business, the primary sources of aluminum and magnesium for
recycling and alloying are dross and scrap, which are purchased from both the
major aluminum producers and metal traders. Many of the Company's aluminum
suppliers are also customers of the Company.
ZINC. As the largest worldwide purchaser of zinc-bearing secondaries, the
- ----
Company provides its customers an outlet to sell the by-products of their
manufacturing processes. A significant portion of the Company's zinc products
are produced from secondary materials provided by the galvanizing and scrap
metals industries. Secondary zinc-bearing materials consist of top dross
generated by continuous galvanizers, bottom dross and skimmings generated by
"hot dip" galvanizers, and die cast scrap generated by scrap dealers or
remelters. The Company purchases approximately 100,000 tons of these materials
each year. The Company also purchases primary zinc to produce high-grade zinc
oxide in its Hillsboro, Illinois facility and for metals brokerage purposes.
The Company purchases zinc raw materials from numerous suppliers. Many of the
"hot dip" galvanizers, which supply approximately 40% of the aggregate zinc raw
materials, are also customers of the Company. This supplier-customer
relationship is beneficial since the Company competes with other zinc recyclers
for raw materials. The Company believes that its long-term supply contract with
one secondary zinc supplier for re-melt die cast provides the Company with a
stable and cost-efficient supply of raw materials for its Millington, Tennessee
zinc oxide facility. The Company's zinc brokerage unit also procures raw
materials for use in its zinc manufacturing operations. The availability of zinc
dross is dependent upon the demand for galvanized steel,
15
<PAGE>
which has historically paralleled fluctuations in customer demand in the
automotive, appliance and construction industries.
GENERAL. The Company's operations are fueled by natural gas, which represents
- -------
the second largest component of operating costs. In an effort to acquire the
most favorable natural gas costs, the Company has secured at fixed prices
commitments for its natural gas requirements. Occasionally, when deemed
necessary, the Company purchases its natural gas on a spot-market basis. Most of
the Company's long-term supply contracts with its customers contain provisions
to reflect fluctuations in natural gas prices. See ITEM 7A. "QUANTITATIVE AND
-------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK." The Company understands that most of
its competitors' operations are also fueled by natural gas; therefore, it
believes that increases in the prices for natural gas do not adversely affect
the Company's competitive position. The Company believes it will continue to
have access to adequate energy supplies to meet its needs for the foreseeable
future.
SEASONALITY
ALUMINUM. UBC collections have historically been highest in the summer months
- --------
and lowest in the winter months. Therefore, the Company has, at times,
experienced lower volumes at certain facilities during the winter. In recent
years, however, the Company's total processing volumes have fluctuated mostly
due to the startup of additional capacity rather than the seasonality of UBC
collections.
A portion of the Company's business that serves the automotive industry has
historically experienced a decline in molten metal deliveries during periods
when its automotive customers stop production to perform new model changeovers
and during the holidays in December.
ZINC. Historically, demand for the Company's zinc products used in the painting
- ----
industry is somewhat lower in the winter months, while demand for zinc products
used in fertilizers is lower in the summer months.
TRANSPORTATION
ALUMINUM AND ZINC. The Company receives incoming metal by both rail and truck.
- -----------------
Most of the Company's plants own their own rail siding or have access to rail
lines nearby. The Company owns and leases various trucks and trailers to support
its business. Customarily, the transportation costs of scrap materials to be
tolled are paid by the Company's customers, while the transportation costs of
metal purchased and sold by the Company may be paid by either customers or the
Company. The Company contracts with third-party transportation firms for hauling
some of its solid waste for disposal.
16
<PAGE>
EMPLOYEES
As of January 31, 1999, the Company had 1867 employees, consisting of 428
employees engaged in administrative and supervisory activities and 1439
employees engaged in production and maintenance. Labor relations with employees
have been satisfactory. The production and maintenance employees at the
following Company facilities are represented by the collective bargaining groups
set forth below:
<TABLE>
<CAPTION>
CONTRACT
FACILITY REPRESENTATIVE EXPIRES
- --------------------- ----------------------------------------------------- ------------------
<S> <C> <C>
Uhrichsville, OH United Mine Workers of America November 1998*
Chicago, IL United Auto Workers June 1999
Bedford, IN International Brotherhood of Electrical Workers April 2000
Rockwood, TN United Steelworkers of America August 2000
Hillsboro, TN Laborer's International Union of North America August 2000
Sikeston, MO United Steelworkers of America March 2001
</TABLE>
* This facility is currently operating without a union agreement, and the
Company is currently negotiating a new collective bargaining agreement.
ENVIRONMENTAL MATTERS
GENERAL. 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. It can be anticipated that more rigorous
environmental laws will be enacted that could require the Company to make
substantial expenditures in addition to those referred to herein, including
future regulations, which are expected to impose stricter emission requirements
on the aluminum industry. While the Company believes that current pollution
control measures at most of the emission sources at its facilities will meet
these anticipated future requirements, additional measures at some of the
Company's facilities may be required.
The Company's operations may generate certain discharges and emissions,
including in some cases off-site dust and odors, which are subject to the
Federal Clean Air Act and other environmental laws. From time to time,
operations of the Company have resulted or may result in certain noncompliance
with applicable requirements under environmental laws. The Company may also
incur liabilities for off-site disposals of salt cake and other materials. In
addition, historical or current operations at, or in the vicinity of, the
Company's facilities, may have resulted in soil or groundwater contamination.
However, based on environmental investigations conducted by the Company and its
consultants and certain indemnities associated with the Company's acquisitions,
the Company believes that any such noncompliance or liability under current
environmental laws would not have a material adverse effect on the Company's
financial position. See ITEM 3. "LEGAL PROCEEDINGS."
------
Due to relatively high costs and limited coverage, the Company does not carry
environmental impairment liability insurance. The Company made capital
expenditures for environmental
17
<PAGE>
control facilities of approximately $8,600,000 in 1998, most of which was for
air pollution control equipment and landfill capacity additions. Environmental
expenditures for 1999 and 2000, which primarily relate to the Company's
landfills and air pollution control equipment, are currently estimated to be
approximately $7,200,000 and $5,000,000, respectively.
ALUMINUM. The processing of UBCs, dross and scrap generates solid waste in the
- --------
form of salt cake and baghouse dust. Currently, such material is either disposed
of at off-site landfills or at the Company's permitted Sapulpa and Morgantown
disposal sites. For example, the Rockwood, Loudon, Bedford and Sikeston plants
currently dispose of the majority of their solid waste by transporting it to the
Morgantown plant, where the Company operates a salt cake processing facility
which prepares salt cake for landfilling. See ITEM 2. "PROPERTIES--SOLID WASTE
------
DISPOSAL." At the Uhrichsville plant, under the Company's supply agreement with
Commonwealth, the disposal of all salt cake generated by the Company as a result
of its processing for Commonwealth is the responsibility of Commonwealth. Salt
cake from all other material processed at the Uhrichsville plant is either
shipped to the Morgantown plant for disposal or landfilled with a local solid
waste management firm. The IMSAMET Goodyear facility recycles its own salt cake
and sells the by-products to third parties, and the Sapulpa, Wendover and Post
Falls facilities ship most of their salt cake to the 50%-owned SALTS joint
venture for further processing. See "THE RECYCLING/MANUFACTURING PROCESS."
If salt cake were ever classified as a hazardous waste or substance under RCRA
or CERCLA, the Company's handling and disposal of salt cake would be required to
be modified. To dispose of its salt cake, the Company may then be required to
take other actions including obtaining a RCRA Subchapter "C" permit for its
Morgantown landfill, obtaining other permits (including transportation permits),
and landfilling additional amounts of salt cake with third parties not under the
Company's direct control. Based on current annual processing volumes and
remaining landfill capacity, the estimated remaining life of the landfill at the
Sapulpa plant is two years. The Company has constructed a second landfill cell
at its Morgantown plant, which was expanded in 1998, and estimates its remaining
useful life, based on current utilization, to be approximately nine years. A
planned second expansion is expected to provide an additional seven years of
useful life. Landfill closure costs for the Company-owned landfills are
currently estimated to be approximately $8,000,000. The Company is currently
providing for this expenditure by accruing, on a current basis, these estimated
costs as the landfills are used. See ITEM 2. "PROPERTIES."
------
ZINC. Several of the zinc manufacturing processes create various by-products
- ----
which are either sold to downstream processors or re-used internally. Because
there are virtually no remaining by-products requiring disposal, the zinc
manufacturing process is essentially a "closed loop' process.
18
<PAGE>
ITEM 2. PROPERTIES
RECYCLING AND PROCESSING FACILITIES
During 1998, the Company owned and/or operated the following facilities as
detailed below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
NUMBER MELTING PROCESSING MOLTEN
OWNED OF CAPACITY CAPACITY YEAR YEAR MATERIALS DELIVERY
PLANT ACREAGE FURNACES ( MILLION LBS) (MILLION LBS) BUILT ACQUIRED PROCESSED CAPABILITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ALUMINUM SEGMENT:
- --------------------------------------------------------------------------------------------------------------------------------
Sapulpa, OK 64 7 210 -- 1962 -- Alum/Mag No
- --------------------------------------------------------------------------------------------------------------------------------
Rockwood, TN 238 6 220 -- 1985 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Morgantown, KY 552(a) 7 320 -- 1989 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Uhrichsville, OH 42 10 360 -- 1992 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Loudon, TN 173 4 220 -- -- 1994 Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Bedford,IN 19 4 210 -- -- 1995 Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Chicago HTS., IL 9 2 100 -- -- 1995 Alum No
- --------------------------------------------------------------------------------------------------------------------------------
Sikeston, MO 31 2 60 -- -- 1995 Alum No
- --------------------------------------------------------------------------------------------------------------------------------
Morgantown, KY (a) (b) (b) 400 1996 -- Salt Cake (b)
- --------------------------------------------------------------------------------------------------------------------------------
Post Falls, ID 49 4 280 -- -- 1997 Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Goodyear, AZ (c) 40(c) 4 70(d) 168 -- 1997 Al/Salt Cake No
- --------------------------------------------------------------------------------------------------------------------------------
Wendover, UT 160(c) 2 70 -- -- 1997 Alum No
- --------------------------------------------------------------------------------------------------------------------------------
Elyria, OH 12 (e) (e) 50 -- 1997 Alum (e)
- --------------------------------------------------------------------------------------------------------------------------------
Rock Creek, OH 11 (e) (e) 100 -- 1997 Alum (e)
- --------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI 75 3 150 -- 1997 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Swansea, Wales 5(c) 2 100 -- 1997 -- Alum Yes
- -------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI (alloys) 47 3 200 -- -- 1997 Alum Yes
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ALUM. 2,570 718
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
ZINC SEGMENT:
- -------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI 27 2 40 -- -- 1992 Zinc Metal No
- -------------------------------------------------------------------------------------------------------------------------------
Houston, TX 4 22 50 -- -- 1998 Zinc Dust No
- -------------------------------------------------------------------------------------------------------------------------------
Houston, TX 7 1 20 -- -- 1998 Zinc Metal No
- -------------------------------------------------------------------------------------------------------------------------------
Chicago, IL 2 6 40 -- -- 1998 Zinc Oxide No
- -------------------------------------------------------------------------------------------------------------------------------
Hillsboro, IL 5 3 50 -- -- 1998 Zinc Oxide No
- -------------------------------------------------------------------------------------------------------------------------------
Millington, TN 17 3 40 -- -- 1998 Zinc Oxide No
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ZINC 240 --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPACITY 2,810 718
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
50% OWNED FACILITIES (ALUMINUM):
- -------------------------------------------------------------------------------------------------------------------------------
VAW-IMCO, Germany 29 13 340(f) -- -- 1996 Alum Yes
- -------------------------------------------------------------------------------------------------------------------------------
SALTS, Wendover, UT 40 (b) (b) 168 -- 1997 Salt Cake (b)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPACITY 3,150 886
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
NOTES:
- -----
(a) The acreage in Morgantown, Kentucky includes both the aluminum and salt
cake processing facilities as well as landfill cells.
(b) These facilities process salt cake only.
(c) This acreage is leased.
(d) Represents 100% of the capacity of this facility--the facility is 70% owned
by the Company.
(e) These facilities process aluminum products for use in the steel industry.
(f) Represents 100% of the capacity of the two VAW-IMCO facilities located in
Grevenbroich and Toging, Germany.
The average operating rates for all of the Company's facilities for 1998, 1997
and 1996 were 97%, 95% and 92%, respectively, of stated capacity. The operating
rate for 1996 was negatively impacted due to the effect of the closure of the
Company's Corona, California facility during the third quarter of 1996. See ITEM
----
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -
OPERATIONS."
Commonwealth has a currently exercisable option to acquire up to a 49% equity
interest in the Uhrichsville plant at a price equal to the equity percentage
amount to be specified by Commonwealth, multiplied by the depreciated book value
of the plant, or the subsidiary owning the plant, plus a premium to compensate
the Company for its recycling technology. The option price may be above or below
the fair value of the Uhrichsville plant. Should Commonwealth exercise its
option, there can be no assurance that the production or earnings attributable
to the purchased interest could be replaced, and the Company's net earnings and
cash flow could be adversely affected. See NOTE D--PROPERTY AND EQUIPMENT of
Notes to Consolidated Financial Statements.
In 1996, the Company began its 50% participation in its VAW-IMCO joint venture
in Germany. The joint venture owns and operates two recycling and foundry alloy
facilities located at Grevenbroich and Toging, Germany. Aggregate annual melting
capacity for these two plants is approximately 340 million pounds.
The Company also has four zinc brokerage offices located in California,
Pennsylvania, Canada and Germany.
SOLID WASTE DISPOSAL
The Company completed a new landfill cell adjacent to its plant in Morgantown,
Kentucky in 1996. All of the waste generated from the salt cake processing
facility at the Morgantown site is deposited in this landfill. Management
anticipates that this new landfill cell, which was expanded during 1998 and is
designed to be expanded again, will serve the Company's landfilling needs for
the majority of the salt cake generated by facilities currently owned by the
Company in the Eastern United States for the next 16 years, based on current
utilization. The Company also owns a landfill at its Sapulpa, Oklahoma plant
which is estimated to have two years' useful life remaining. The Goodyear
facility recycles its
20
<PAGE>
own salt cake and sells the by-products to third parties, and the Sapulpa,
Wendover and Post Falls facilities ship their salt cake to the 50%-owned SALTS
joint venture for further processing. See ITEM 1. "BUSINESS--ENVIRONMENTAL
------
MATTERS."
ADMINISTRATIVE
In Irving, Texas, the Company leases approximately 28,200 square feet of office
space for certain of its executive, financial and management functions. This
lease expires in January 2000. In Houston, Texas, the Company owns approximately
30,000 square feet of office space for certain of its financial and management
functions for its zinc operations.
The Company believes that its plants and equipment are maintained in good
operating condition. Properties and improvements at the Company's Sapulpa,
Rockwood, Morgantown, Loudon, Bedford, Chicago Heights and Post Falls plants are
mortgaged to secure senior indebtedness. See ITEM 7. "MANAGEMENT'S DISCUSSION
------
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
CAPITAL RESOURCES" and NOTE H--"LONG TERM DEBT AND EXTRAORDINARY LOSS ON EARLY
DEBT RETIREMENT" of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
- ------
In 1996, the Company entered into a settlement agreement with the Missouri
Department of Natural Resources ("MDNR") pertaining to certain air violations at
its Sikeston facility. Since entering into the settlement agreement, the Company
received additional notices of violation from the MDNR, which related to
fugitive dust emissions from its truck loading and unloading operations and
certain other air compliance matters. In addition, the Company responded to a
request for information from the United States Environmental Protection Agency
regarding air issues at the Sikeston facility. Since purchasing the Sikeston
facility in 1995, the Company has made significant upgrades to the air pollution
control equipment and has constructed a new truck loading facility which is
intended to capture fugitive emissions located at the facility. The Company
currently believes that it has fulfilled all of its obligations related to the
settlement agreement and that the Sikeston facility is now operating in full
compliance with MDNR standards. There can be no assurance, however, that future
violations will not occur or that the violations identified by the MDNR will not
result in penalties against the Company.
In 1997, the Illinois Environmental Protection Agency ("IEPA") notified IZI that
it 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, although there
can be no assurance, that its liability at this site will have a material
adverse effect on its financial position or its results of operations. A
subsidiary of U.S. Zinc, which the Company acquired in July 1998, was also
named as a PRP at this site.
The Company is also a party from time to time to what it believes are routine
litigation and proceedings considered part of the ordinary course of its
business; however, the Company believes that the outcome of such proceedings
would not have a material adverse effect on the Company's financial position or
results of operations.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------
No matters were submitted to a vote of security holders of the Company during
the quarter ended December 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
- -------
The executive officers of the Company are listed below, together with brief
accounts of their experience and certain other information. Executive officers
are appointed by the Board of Directors.
Name Age Position
- ---- --- --------
Don V. Ingram 63 Chairman of the Board and Chief
Executive Officer
Richard L. Kerr 56 President and Chief Operating Officer
Paul V. Dufour 59 Executive Vice President--Finance and
Administration, Chief Financial Officer
and Secretary
Thomas W. Rogers 52 Senior Vice President, Marketing and
Sales
Denis W. Ray 50 Senior Vice President, Operations
C. Lee Newton 55 Senior Vice President, Engineering,
Technology and Environmental
Robert R. Holian 46 Vice President and Controller
James B. Walburg 45 Vice President and Treasurer
Don V. Ingram has served as a director of the Company since 1988 and as Chairman
of the Board since 1994. He was elected Chief Executive Officer of the Company
in February 1997. Mr. Ingram played the major role in the formation of the
Company in 1986.
Richard L. Kerr was elected President of the Company in February 1997.
Previously, he served as Executive Vice President and has been Chief Operating
Officer since 1991. In 1994, he became President of the Company's Metals
Division. Mr. Kerr joined International Metal Co., a predecessor of the Company,
in April 1984, and became Executive Vice President of International Metal Co. in
April 1987.
Paul V. Dufour has served as Vice President, Chief Financial Officer and
Secretary of the Company since March 1987. He was promoted to Senior Vice
President in May 1988 and to Executive Vice President in October 1994.
Thomas W. Rogers has served as Senior Vice President of Marketing and Sales of
the Company since July 1988. Mr. Rogers was employed as Plant Manager of the
Sapulpa, Oklahoma plant in October 1986.
Denis W. Ray has served as Senior Vice President of the Company since March
1998. Previously, Mr. Ray served as President of Reynolds Architectural Products
at Reynolds Metals Company from 1997 to 1998, President of Reynolds (Europe)
Ltd. in Switzerland from 1995 to 1997 and Vice President, Operations of Reynolds
(Europe) Ltd. from 1994 to 1995. Prior to his employment with Reynolds Metals
Company and its affiliates, Mr. Ray was employed by Alcoa in various capacities
for 25 years.
C. Lee Newton became Senior Vice President of the Company in 1993. Mr. Newton
was named Vice President in 1990 and was the General Manager of the Morgantown,
Kentucky plant from 1989 to 1993. He was originally employed by the Company as
Plant Manager of its Rockwood, Tennessee plant in 1987.
Robert R. Holian has served as Vice President and Controller since 1994. He
joined the Company in 1990 and was named Controller in 1992.
James B. Walburg has served as Vice President and Treasurer of the Company since
September 1994. Prior to this, Mr. Walburg was employed by NTS, Inc., a
transportation service company, as Vice President, Client Services and
Operations.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------
The Company's Common Stock trades on The New York Stock Exchange (trading
symbol: IMR). The following table sets forth, for the fiscal quarters indicated,
the high and low sales prices for the Company's Common Stock, as reported on The
New York Stock Exchange composite tape from January 1, 1997 through December 31,
1998, and the dividends declared per share during the periods indicated.
CALENDAR PRICE RANGE DIVIDENDS
------------------------
YEAR HIGH LOW DECLARED
- ------------------------- -------- ------- ----------
1997
- ----
FIRST QUARTER $ 17 $ 13 5/8 $ 0.05
SECOND QUARTER 18 7/8 13 3/4 0.05
THIRD QUARTER 20 1/16 17 3/8 0.05
FOURTH QUARTER 21 15 1/4 0.05
1998
- ----
FIRST QUARTER 18 1/2 14 1/4 $ 0.05
SECOND QUARTER 20 15 1/2 0.05
THIRD QUARTER 18 5/8 10 1/4 0.05
FOURTH QUARTER 15 13/16 12 3/16 0.06
Dividends as may be determined by the Board of Directors may be declared and
paid on the Common Stock from time to time out of any funds legally available
therefor. The Company's Amended and Restated Credit Agreement contains
limitations on the Company's ability to declare and pay dividends in cash or
property; however, if there is no default under the agreement, then the Company
is permitted to make cash dividend payments in an aggregate amount of up to
$6,000,000 in 1999, $6,000,000 in 2000, and $8,000,000 in each year thereafter.
See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------
RESULTS OF OPERATIONS."
No assurances can be given as to future levels of dividends, if any, which may
be declared and paid. The Company intends to continue paying dividends on its
Common Stock, although future dividend declarations are at the discretion of the
Company's Board of Directors and will be based upon the Company's level of
earnings, cash flow, financial requirements, and economic and business
conditions then prevailing, as well as other relevant factors, including the
restrictions contained in the Company's long-term debt instruments.
On March 1, 1999, the outstanding shares of Common Stock were held of record by
473 stockholders.
23
<PAGE>
During the fourth quarter of 1998, the Company made no unregistered sales of its
equity securities.
ITEM 6. SELECTED FINANCIAL DATA
- ------
(In thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $568,514 $339,381 $210,871 $141,167 $101,116
Earnings before extraordinary item 19,590 14,127 6,720 12,470 8,471
Earnings per common share before
extraordinary item:
Basic (a) 1.18 1.08 0.57 1.08 0.75
Diluted (a) 1.17 1.06 0.55 1.05 0.74
Total assets 456,558 332,536 164,707 139,877 96,791
Long-term debt (excluding current maturities 168,700 109,194 48,202 29,754 11,860
Dividends declared per common share $ 0.210 $ 0.200 $ 0.200 $ 0.105 $ 0.100
</TABLE>
- -------------------------------------------------------------------------------
NOTE:
- -----
(a) The earnings per share amounts prior to 1997 have been restated, as
required, to comply with Statement of Financial Accounting Standards No.
128, Earnings per Share.
The Company's results of operations and financial position have been affected by
acquisitions of existing facilities and companies during the periods presented.
See NOTE B--" ACQUISITIONS AND INVESTMENTS" of Notes to Consolidated Financial
Statements. See also ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------
CONDITION AND RESULTS OF OPERATIONS."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------
RESULTS OF OPERATIONS
GENERAL
Most of the Company's processing consists of aluminum tolled for its customers.
To a lesser (but increasing) extent, the Company's processing also consists of
zinc and aluminum 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.
24
<PAGE>
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
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.
During the 1990's, aluminum inventories on the worldwide commodity exchanges
fluctuated from severe excesses to relatively balanced positions. In times of
excess, aluminum prices declined, negatively impacting the profitability of the
major aluminum producers who are some of the Company's largest customers.
Environments of low profitability for the Company's customers have inhibited,
during those times, the Company's ability to pass cost increases through to its
customers. During 1997, the U.S. domestic aluminum industry benefited from
increases in aluminum prices and an increase in demand. However, during the
fourth quarter of 1997 and throughout 1998, aluminum prices declined, which
negatively impacted the Company's selling prices of aluminum, especially at its
salt cake processing facility in Kentucky. Also during 1998, zinc prices
declined sharply from their relatively high levels in the third quarter of 1997.
It is not possible to predict the future price of aluminum or zinc, or the level
of worldwide inventories of these metals and whether, or to what extent, such
factors will affect the Company's future business.
The following table sets forth, for the periods indicated, the total pounds of
material processed (aluminum and zinc); the percentage of total pounds processed
represented by pounds tolled and purchased; total revenues; total gross profits
and gross profits as a percentage of revenues (in thousands, except
percentages):
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------------------------------------
Total Pounds Processed 2,516,752 1,988,796 1,451,408
Percent of Total Pounds Processed:
Tolled 68% 82% 83%
Purchased 32% 18% 17%
------------------------------------------
100% 100% 100%
==========================================
Revenues $ 568,514 $ 339,381 $ 210,871
Gross Profits $ 61,520 $ 47,854 $ 25,538
Gross Profit % * 10.8% 14.1% 12.1%
* See NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements
and RESULTS OF OPERATIONS--Fiscal Year 1998 vs. Fiscal Year 1997 below.
-------------------------------------
In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing number of metal brokerage transactions each year
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 processing it. Additionally, in order
25
<PAGE>
to facilitate acquiring metal for its production process, the Company
occasionally enters into 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 7A. "QUANTITATIVE AND
-------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
The following table sets forth, for the periods indicated, aluminum and zinc
segment information for percentage of total pounds processed, revenues, income
and assets.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
PERCENT OF TOTAL POUNDS PROCESSED:
Tolled Aluminum 67% 81% 82%
Purchased Aluminum 27% 17% 15%
--------------- -------------- --------------
Total Aluminum 94% 98% 97%
--------------- -------------- --------------
Tolled Zinc 1% 1% 1%
Purchased Zinc 5% 1% 2%
--------------- -------------- --------------
Total Zinc 6% 2% 3%
--------------- -------------- --------------
100% 100% 100%
=============== ============== ==============
REVENUES:
Aluminum revenues from external customers $ 465,122 $ 326,522 $ 198,769
Zinc revenues from external customers 103,392 12,859 12,102
--------------- -------------- --------------
Consolidated revenues $ 568,514 $ 339,381 $ 210,871
=============== ============== ==============
INCOME:
Aluminum income $ 54,704 $ 45,728 $ 23,830
Zinc income 6,429 1,127 1,278
Unallocated general and administrative expenses 21,568 16,431 11,458
Unallocated interest expense 9,197 7,331 3,421
Unallocated interest and other income 775 413 623
Net earnings before provision for income taxes,
--------------- -------------- --------------
minority interests and extraordinary item $ 31,143 $ 23,506 $ 10,852
=============== ============== ==============
ASSETS:
Aluminum $ 328,891 $ 314,377 $ 149,822
Zinc 109,398 9,235 5,135
Other unallocated assets 18,269 8,924 9,750
--------------- -------------- --------------
Consolidated assets $ 456,558 $ 332,536 $ 164,707
=============== ============== ==============
</TABLE>
26
<PAGE>
The accounting policies of the reportable segments are the same as those
described in NOTE A--"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" of Notes to
Consolidated Financial Statements. The Company evaluates performance based on
gross profit or loss from operations, net of selling expenses. Provision for
income taxes, interest, corporate general and administrative costs, including
depreciation of corporate assets and amortization of capitalized debt costs, are
not allocated to the reportable segments. Intersegment sales and transfers are
recorded at market value; net profits on intersegment sales and transfers were
immaterial for the periods presented. Consolidated cash, net capitalized debt
costs, net current deferred tax assets and assets located at the Company's
headquarters office in Irving, Texas are not allocated to the reportable
segments. Also, see NOTE M--"SEGMENT INFORMATION" of Notes to Consolidated
Financial Statements for additional segment disclosures.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 VS. FISCAL YEAR 1997
- -------------------------------------
Production. During 1998, the pounds of metal processed by the Company increased
- ----------
27% to 2,517 million pounds, compared to 1,989 million pounds processed 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 74% of the increase in production for 1998. The increase in
production 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
negatively impacted by a strike at several of the facilities of GM, a customer
of the Company.
Production by segment is as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- ------- ---------
Pounds Processed (in millions):
Aluminum 2,375 1,952 1,411
Zinc 142 37 40
--------- -------- -----------
2,517 1,989 1,451
========= ======== ===========
Aluminum processing at the Company's newest plants in Coldwater, Michigan;
Swansea, Wales; and the Alchem facility accounted for 68% of the increase in
production for the aluminum segment. Zinc processing at the Company's recently
acquired U.S. Zinc facilities accounted for 96% of the increase in production
for the zinc segment.
Revenues. During 1998, revenues increased 68% to $568,514,000, compared to
- --------
revenues of $339,381,000 in 1997. The acquisitions of Alchem and U.S. Zinc and
operations at the new Coldwater, Michigan and Swansea, Wales plants principally
accounted for this increase; however, this increase was partially offset by
lower aluminum selling prices prevailing during 1998. The percentage increase in
revenues was greater than the relative increase in volumes processed due to
higher levels of buy/sell business during 1998 as compared to 1997. The
27
<PAGE>
buy/sell business increased to 32% of total processing for 1998 compared to 18%
for 1997. As discussed above, an increase in buy/sell business generally results
in a much higher increase in revenue than would be generated by a similar
increase in tolling business. The increased levels of buy/sell business were
principally attributable to the acquisitions of Alchem and U.S. Zinc. 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. The increase in buy/sell activity in 1998 also resulted in higher
inventory, accounts receivable and accounts payable levels.
Sales at the Company's newest plants in Coldwater, Michigan; Swansea, Wales; and
the Alchem facility accounted for 114% of the increase in revenues for the
aluminum segment, which was partially offset by a decrease in aluminum selling
prices. Sales from the Company's recently acquired U.S. Zinc facilities
accounted for virtually all of the increase in revenues for the zinc segment.
Gross Profits. During 1998, gross profits increased 29% to $61,520,000, compared
- -------------
to gross profits of $47,854,000 in 1997. The acquisitions of Alchem and U.S.
Zinc and operations at the new Coldwater plant accounted for virtually all of
the increase in total gross profits and virtually all the increase in profits by
each segment. However, falling aluminum and zinc selling prices reduced the
gross margin per pound of metal sold.
SG&A Expenses. During 1998, selling, general and administrative costs increased
- -------------
35% to $23,705,000, compared to $17,612,000 in 1997. This increase was due
principally to higher employee, selling and goodwill amortization expenses,
principally associated with the acquisitions of Alchem and U.S. Zinc.
Interest. During 1998, interest expense increased 25% to $9,197,000, compared to
- --------
interest expense of $7,331,000 in 1997. 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 (see "LIQUIDITY AND CAPITAL RESOURCES"
below).
Extraordinary Item: In connection with the Company's acquisition 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 then-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 was no extraordinary item in 1998.
Net Earnings. During 1998, the Company's earnings before provision for income
- ------------
taxes, minority interests and extraordinary item increased 32% to $31,143,000,
compared to $23,506,000 in 1997. The increase was primarily the result of higher
gross profits, due mainly to the Alchem and U.S. Zinc acquisitions, which were
in turn partially offset by the increases in selling, general and administrative
expenses and interest expense (also attributable to these and other recent
acquisitions). The Company's higher earnings before income taxes caused the tax
provision to increase to $11,275,000 in 1998, compared to $9,086,000 in 1997.
The effective tax rate was approximately 36% in 1998 compared to 39% in 1997
primarily due to lower state taxes provided during 1998. During 1998, net
earnings increased 53% to $19,590,000, compared to $12,809,000 in 1997.
28
<PAGE>
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
- -------------------------------------
Production. During 1997, the pounds of metal processed by the Company increased
- ----------
37% to 1,989 million pounds, compared to 1,451 million pounds processed in 1996.
Increases in aluminum processing from the Idaho, Utah and Arizona facilities
(which were acquired in January 1997), the Coldwater, Michigan aluminum facility
(which began production during the first quarter of 1997) and the Coldwater
alloying facility (which was acquired in November 1997) were the primary reasons
for the increased production.
Revenues. During 1997, revenues increased 61% to $339,381,000, compared to
- --------
revenues of $210,871,000 in 1996. The acquisitions of the Idaho, Utah and
Arizona plants, the Rock Creek and Elyria, Ohio plants and the Coldwater,
Michigan alloying facility, and the operations at the new Coldwater aluminum
plant, accounted for virtually all of the increase in revenues. During 1997,
higher revenues from the combination of higher aluminum selling prices (relative
to 1996 prices), higher levels of buy/sell business at the Company's remaining
aluminum plants and additional metal for sale from its Kentucky salt cake
processing facility were partially offset by the elimination of revenues at the
Company's Corona, California plant (which was closed in the third quarter of
1996). The percentage increase in revenues was greater than the relative
increase in volumes processed due to higher levels of buy/sell business during
1997 as compared to 1996. The increased level of buy/sell business was
principally attributable to the Coldwater alloying facility acquired in 1997.
Tolling activity for aluminum represented 81% of the Company's total pounds
melted during 1997, as compared to 82% in 1996. The increase in buy/sell
activity in 1997 also resulted in higher inventory levels. Additionally,
revenues increased due to the January 1997 acquisitions of the Rock Creek and
Elyria, Ohio plants.
Gross Profits. During 1997, gross profits increased 87% to $47,854,000, compared
- -------------
to gross profits of $25,538,000 in 1996. Approximately 60% of the increase in
gross profits was due to (1) the January 1997 acquisitions of the Idaho, Utah
and Arizona plants, and the Rock Creek and Elyria, Ohio facilities, (2) the
operations at the new Coldwater, Michigan plant and (3) the November 1997
acquisition of the Coldwater, Michigan alloying facility. In addition, 1997's
gross profits were higher due to (a) the elimination of the losses at the
Company's Corona, California plant (which was closed in the third quarter of
1996), (b) higher aluminum prices, which increased margins from the Company's
buy/sell business and (c) strengthened plant operating efficiencies.
SG&A Expenses. During 1997, selling, general and administrative costs increased
- -------------
50% to $17,612,000, compared to $11,774,000 in 1996. This increase was due
principally to higher employee, professional, consulting and goodwill
amortization expenses associated with the January and November 1997 plant
acquisitions.
Interest. During 1997, interest expense increased 114% to $7,331,000, compared
- --------
to interest expense of $3,421,000 in 1996. The increase in interest expense was
primarily attributable to the additional debt outstanding during 1997 to fund
the January and November 1997 plant acquisitions. See "LIQUIDITY AND CAPITAL
RESOURCES" below.
Extraordinary Item. In connection with the plant acquisitions in January 1997,
- ------------------
the Company borrowed funds under a new Credit Agreement. See "LIQUIDITY AND
CAPITAL RESOURCES" below. A portion of the sums borrowed under the Credit
Agreement was used to
29
<PAGE>
retire substantially all of the Company's then-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 was no extraordinary item in 1996.
Net Earnings. During 1997, the Company's earnings before provision for income
- ------------
taxes, minority interests and extraordinary item increased 117% to $23,506,000,
compared to $10,852,000 in 1996. This increase in earnings was primarily the
result of higher gross profits, which were in turn partially offset by the
increases in selling, general and administrative expenses and interest expense.
The Company's higher earnings before income taxes caused the tax provision to
increase to $9,086,000 in 1997, compared to $4,132,000 in 1996. The effective
tax rate was approximately 39% in 1997 compared to 38% in 1996. During 1997, net
earnings increased 91% to $12,809,000, compared to $6,720,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital expenditures
from internally generated cash and its working capital credit facilities and has
financed its acquisitions and capacity expansions from a combination of funds
from long-term borrowings and public stock offerings.
Cash Flows from Operations. During 1998, operations provided cash of
- --------------------------
$53,198,000, compared to $30,368,000 in 1997. Changes in the components of
operating assets and liabilities accounted for 62% of the increase in cash
provided from operations; in 1998, changes in the components of operating assets
and liabilities provided $11,386,000 in cash, compared to using $2,832,000 in
cash during 1997'. In addition, net earnings before extraordinary item increased
39% or $5,463,000, and depreciation and amortization increased 38% or
$6,317,000, compared to 1997's corresponding amounts. The increase in these
items was primarily due to the Company's plant acquisitions during 1998. As of
December 31, 1998, the relationship of current assets to current liabilities, or
current ratio, decreased to 1.93, compared to 2.71 as of December 31, 1997.
For the reasons discussed above, working capital fluctuates as the mix of
buy/sell business, tolling business and metals brokerage activities changes. The
Company anticipates its working capital requirements to further increase in 1999
as a result of higher levels of buy/sell business and metals brokerage
activities and increased processing volumes primarily due to its recent
acquisitions.
Cash Flows from Investing Activities. During 1998, net cash used by investing
- ------------------------------------
activities decreased 25% to $93,873,000, compared to $124,461,000 in 1997. In
July 1998, the Company spent $59,497,000 (net of cash acquired) to purchase U.S.
Zinc. In 1997, the Company spent $59,882,000 (net of cash acquired) to purchase
IMSAMET, Inc. and $25,430,000 (net of cash acquired) to purchase Alchem. In
addition, the Company's total payments for property, plant and equipment
(excluding acquisitions) in 1998 decreased to $35,199,000, compared to
$37,159,000 spent in 1997. During 1998, major projects included the completion
of construction of the Company's new aluminum recycling facility in Swansea,
Wales, 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.
30
<PAGE>
Capital expenditures for property, plant and equipment in 1999 are expected to
total approximately $35,000,000. Major projects include the installation of an
Enterprise Resource Planning (ERP) software system, construction of a new
aluminum alloying plant in Saginaw, Michigan and the installation of a new
furnace at the Millington, Tennessee facility.
Cash Flows from Financing Activities. During 1998, net cash provided from
- ------------------------------------
financing activities decreased 48% to $46,326,000, compared to $89,434,000 in
1997. In July 1998, the Company borrowed approximately $62,000,000 under its
senior 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 (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 debt.
Financing activities also included cash payments of $3,503,000 in dividends
during 1998 compared to $2,702,000 in 1997.
Equity Purchases and Sales. In September 1998, the Company's Board of Directors
- --------------------------
authorized the repurchase in open market or privately-negotiated transactions of
up to 1,000,000 shares of its common stock. As of December 31, 1998, the Company
had spent $6,377,000 to repurchase 488,900 shares. As of February 28, 1999, the
Company had purchased a total of 543,900 shares for an aggregate cumulative
purchase price of $7,026,000. 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.
In November 1997, the Company issued and sold 2,645,000 (inclusive of 345,000
shares from the exercise of the underwriters' over-allotment option) shares of
its Common Stock through an underwritten public offering at a price to public of
$18.00 per share. The Company received net proceeds of approximately
$44,734,000, after deducting underwriting discounts and commissions and offering
expenses. The Company used the net proceeds to reduce outstanding indebtedness
under its credit agreement. See NOTE H--"LONG-TERM DEBT AND EXTRAORDINARY LOSS
ON EARLY DEBT RETIREMENT" of Notes to Consolidated Financial Statements.
Credit Facilities. The Company's Amended and Restated Credit Agreement provides
- -----------------
for a reducing revolving credit facility of up to $200,000,000, and provides
that the maximum amount of commitments under the facility will be reduced on an
annual basis beginning in December 1999 (e.g. to $180,000,000 on December 31,
1999), so that by December 31, 2002, the maximum amount of aggregate commitments
may not exceed $100,000,000. As of December 31, 1998, the Company had
$152,000,000 in indebtedness outstanding under the Amended and Restated Credit
Agreement and had $46,479,000 available for borrowings. The Amended and Restated
Credit Agreement bears interest, at the Company's option, at fluctuating
interest rates based upon an alternate base rate (which may be the prime rate),
or a rate based upon the applicable LIBOR rate plus a credit margin (6.2% at
December 31, 1998) which is based upon the Company's ratio of total debt to
total capitalization (47% at December 31, 1998). In addition, the Company pays a
commitment fee for unborrowed amounts available under the reducing revolving
facility based upon the Company's ratio of debt to total capitalization.
At December 31, 1998, the Company had standby letters of credit outstanding in
the aggregate amount of $3,442,000. The Company has also entered into an
interest rate cap transaction
31
<PAGE>
agreement with Chase Bank of Texas, N.A.. See ITEM 7A. "QUANTITATIVE AND
-------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
The Amended and Restated Credit Agreement is secured by a first lien mortgage
and security interest on seven plant facilities owned by the Company, as well as
security interests in equipment, accounts receivable, inventories and certain
intellectual property and general intangibles. The facilities are additionally
secured by a pledge of the capital stock and equity interests of substantially
all of the Company's wholly-owned subsidiaries and certain joint ventures in
which the Company is directly or indirectly a joint venturer. Additionally,
substantially all of the Company's wholly-owned subsidiaries have guaranteed the
Company's obligations under the credit facilities. The Amended and Restated
Credit Agreement provides that if (i) the Company's senior unsecured long-term
indebtedness for borrowed money is rated at least BBB- or Baaa3 by Standard &
Poor's and Moody's, or (ii) during four consecutive fiscal quarters the
Company's leverage ratio and debt to capitalization ratio meet certain
requirements, then the lenders' liens in the collateral may be released upon the
request and at the expense of the Company. See NOTE H--"LONG-TERM DEBT AND
EXTRAORDINARY LOSS ON EARLY DEBT RETIREMENT" of Notes to Consolidated Financial
Statements.
The Amended and Restated Credit Agreement contains certain covenants,
representations and warranties by the Company and its subsidiary guarantors,
including (i) limitations on the ability to dispose of assets of the Company and
its subsidiaries or equity interests of subsidiaries, (ii) limitations on
acquisitions of unaffiliated businesses other than certain scheduled specified
transactions, and additional unscheduled acquisitions and investments not to
exceed $125,000,000 in the aggregate, (iii) restrictions on liens and
indebtedness permitted to be incurred or assumed by the Company and its
subsidiaries, other than as otherwise scheduled or permitted under the Amended
and Restated Credit Agreement, and (iv) restrictions on investments by the
Company and its subsidiaries.
The Amended and Restated Credit Agreement also contains limitations on the
Company's ability to declare and pay dividends in cash or property; however, if
there is no default under the agreement, then the Company is permitted to make
cash dividend payments in an aggregate amount of up to $6,000,000 in 1999,
$6,000,000 in 2000, and $8,000,000 in each year thereafter (see ITEM 5. "MARKET
------
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS"). The Amended
and Restated Credit Agreement further contains provisions restricting the amount
of capital expenditures that the Company and its subsidiaries may make in any
fiscal year ($35,000,000 for fiscal 1999 and for each fiscal year thereafter,
plus certain allowed carryovers, not including capital expenditures for certain
permitted acquisitions). Finally, the agreement requires the Company to maintain
and comply with certain financial covenants and ratios, including a maximum debt
to capitalization ratio, a minimum interest coverage ratio and a covenant
requiring that certain minimum net worth amounts be maintained.
In May 1996, the Company borrowed $5,740,000 from the issuance of Solid Waste
Disposal Facilities Revenue Bonds (Series 1996) by the City of Morgantown,
Kentucky. These bonds were issued in connection with the Company's construction
of its salt cake processing plant in Morgantown, which was completed in January
1996. The 1996 bonds bear interest at the rate of 7.65% per annum and mature on
May 1, 2016. In April 1997, the Company borrowed an additional $4,600,000 from
the issuance of Solid Waste Disposal Facilities Revenue Bonds (Series 1997) by
the City of Morgantown, Kentucky. These bonds were also issued in connection
with the Company's expansion of its second landfill cell and to fund additional
32
<PAGE>
construction costs of its salt cake processing facility in Morgantown. The 1997
bonds bear interest at the rate of 7.45% per annum and mature on May 1, 2022. In
June 1998, the Company borrowed an additional $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 second landfill cell at Morgantown. The 1998 bonds bear
interest at the rate of 6% per annum and mature May 1, 2023. The net proceeds
from the 1998 bonds were deposited into an escrow fund, which will be borrowed
by the Company as it incurs costs to expand its landfill. As of December 31,
1998, the Company has drawn against and received $3,421,000 in cash proceeds
from the escrow fund.
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.
Doehler-Jarvis had been an aluminum customer of the company. At December 31,
1998, the Company had $2,292,000 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.
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, it is currently expected that holders of general unsecured claims
(including the Company) will receive, 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). Harvard, as
reorganized, has commenced execution of the Plan. The Company anticipates that
upon allowance of its claims, it will receive its pro rata share of common stock
of reorganized Harvard as provided in the Plan. 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 in which the Company's claims will be allowed and/or the
timing and value of the Company's ultimate recovery, if any, on its claims.
The Company believes that its cash on hand, the resources available under the
terms of its Amended and Restated Credit Agreement and anticipated 1999 cash
provided by operations should provide the financial resources necessary to fund
its capital requirements and to meet its obligations for 1999 and the
foreseeable future.
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. It is possible that more rigorous environmental laws
and regulations will be adopted that could require the Company to make
substantial expenditures in addition to those referred to in this Form 10-K and
in other filings made by the Company.
33
<PAGE>
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.
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's embedded systems (or non-information technology systems)
include office equipment such as phone and voicemail systems, fax machines,
copiers, and postage machines, as well as environmental and manufacturing
control systems at its plants. These environmental and manufacturing systems at
the Company's plant locations consist of items such as scales, process
controllers, programmable logic controllers, adjustable frequency drives, and
radiation detection systems.
The Company has completed a physical inventory of its information technology
computer hardware and software, and its embedded systems at each facility. The
Company's assessment phase, currently in progress, 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 April 1999.
All personal computer hardware compliance testing and remediation is also
anticipated to be completed by April 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 information technology operations and
accounting software are Year 2000 compliant. Because of the Company's recent
rapid growth and the need to integrate its financial and operating systems, the
Company is in the process of implementing an enterprise-wide information
technology system, which has been tested to be Year 2000 compliant. When
complete, this will enable the Company to gather more uniform operating and
financial information, and do so in less time than is currently required.
The Company has identified potential Year 2000 compliance issues with certain
subsidiaries 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.
34
<PAGE>
The Company cannot presently determine the impact on its customers and suppliers
in the event that any of them 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. The Company has contacted its
customers and suppliers (via 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 the third quarter of 1999.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency (the euro). The Company conducts business through a joint
venture in one member country. The transition period for the introduction of the
euro is between January 1, 1999 and June 30, 2002. The Company is addressing the
issues involved with the introduction of the euro. The more important issues
facing the Company include: converting information technology systems;
reassessing currency risk; and processing tax and accounting records.
Based on progress to date, the Company believes that use of the euro will not
have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the euro is not expected to have a material effect on the
Company's financial condition or results of operations.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this ITEM 7. "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 (including that of its recently-announced
Saginaw, Michigan plant), 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
35
<PAGE>
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; effects of the euro
conversion on the Company's operations and results of operations; 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 Annual Report on Form 10-K,
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 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 technology and embedded systems' 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.
36
<PAGE>
* 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. Weather delays and
labor and materials shortages can adversely affect the construction
schedules of the Company's new facilities.
* 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.
* 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
In the ordinary course of business, the Company is exposed to potential losses
arising from changes in the price of aluminum, zinc and natural gas, and the
level of interest rates. The Company uses derivative instruments, such as
futures, options, swaps and interest rate caps to manage the effect of such
changes. See NOTE A--"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" of Notes to
Consolidated Financial Statements.
RISK MANAGEMENT. All derivative contracts are held for purposes other than
- ---------------
trading, and are used primarily to mitigate uncertainty and volatility, and
cover underlying exposures. The Company's commodity and derivative activities
are subject to the management, direction and control of the Company's Risk
Management Committee, which is composed of the chief executive officer, the
chief financial officer, the treasurer and other officers and employees that the
chief executive officer designates. The Risk Management Committee reports to the
Company's Board of Directors, which has supervisory authority over all of its
activities.
37
<PAGE>
COUNTER-PARTIES. The Company is exposed to losses in the event of
- ---------------
non-performance by the counter-parties to the derivative contracts discussed
below; however, while no assurances can be made, the Company currently does not
anticipate any non-performance by the counter-parties. Counter-parties are
evaluated for creditworthiness and risk assessment prior to the Company
initiating trading activities. The counter-parties' creditworthiness is
monitored on an ongoing basis, and credit levels are reviewed to ensure that
there is not an inappropriate concentration of credit outstanding to any
particular counter-party.
METAL COMMODITY PRICE RISK. Aluminum and zinc ingots are internationally
- --------------------------
produced, priced, and traded commodities, with their principal trading market
being the London Metal Exchange ("LME"). In order to preserve margins, the
Company enters into futures and options contracts.
ALUMINUM. The Company enters into futures sale contracts with metal brokers
- --------
to fix the margin on a portion of the aluminum generated by the Company's salt
cake processing facility in Kentucky and aluminum generated from the processing
of other scrap items having minimal or no cost associated in obtaining them.
These futures sale contracts are settled in the month of shipment. Estimated
1999 total production covered under these futures sale contracts as of December
31, 1998 was 16,100 metric tonnes (mt). The impact of a 10% change in the
December 31, 1998 price of aluminum ingot per the LME would be immaterial on the
Company's gross profit for the year ended December 31, 1999.
ZINC. In the normal course of business, the Company enters into fixed-price
- ----
forward sales contracts with a number of its zinc customers. At December 31,
1998 such contracts had metal deliveries committed during 1999 of 5,674 mt. The
Company may enter into similar arrangements in the future. In order to hedge the
risk of higher metal prices the Company enters into long positions, principally
using future purchase contracts. These contracts are settled in the month of the
corresponding shipment. At December 31, 1998 the contracts hedging 1999
deliveries totaled 5,674 mt. The impact of a 10% change in the December 31, 1998
price of zinc ingot per the LME would be immaterial on the Company's gross
profit for the year ended December 31, 1999.
NATURAL GAS. The Company's earnings are affected by changes in the price and
- -----------
availability of natural gas, which is the Company's second largest cost
component. In an attempt to acquire the most favorable natural gas costs, the
Company is utilizing natural gas swap contracts. Under the terms of the swap
contracts, the Company has fixed the price for approximately 55% of its expected
1999 natural gas requirements. The Company makes or receives payments based on
the difference between the month-end closing price on the New York Mercantile
Exchange ("NYMEX") and the fixed price agreed to in the swap contracts. The
impact of a hypothetical 10% change in the December 31, 1998 NYMEX closing price
would result in no material impact to the Company's gross profits for the year
ended December 31, 1999.
INTEREST. Approximately 90% of the Company's outstanding long-term debt as of
- --------
December 31, 1998 is at floating rates related to LIBOR plus a margin. In order
to limit the risk associated with a potentially significant increase in the
LIBOR rates, the Company entered into an interest rate cap transaction which
expires on March 30, 2001. Under the terms of this cap transaction, the
Company's interest rate will not exceed 8% per annum for $35,600,000 (the
notional amount as of December 31, 1998) of the Company's outstanding floating-
rate debt. Beginning in 1999 the notional amount covered under the cap
transaction reduces quarterly until the amount of the cap reaches $22,800,000
upon its expiration. The counter-party to the cap transaction is a major
commercial bank, and management believes that potential losses related to the
credit risk are remote.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its interest expense from variable-rate debt
instruments. If interest rates increased 10% from the floating rates as of
December 31, 1998, interest expense for the year ended December 31, 1999 would
increase by approximately $1,030,000. These amounts are determined by
considering the impact of hypothetical interest rates on the Company's
variable-rate long-term debt, as of December 31, 1998, adjusted for known cash
commitments during 1999.
38
<PAGE>
Market risk for fixed-rate long-term debt is estimated as the potential increase
in fair value resulting from a hypothetical decrease in market interest rates.
With respect to the Company's fixed-rate long-term debt outstanding at December
31, 1998, a 10% decline in market interest rates would result in an increase to
the fair value of the Company's fixed-rate long-term debt of approximately
$1,160,000. The fair values of the Company's long-term debt were estimated using
discounted future cash flows based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------
INDEX OF FINANCIAL STATEMENTS OF IMCO RECYCLING INC. AND SUBSIDIARIES
PAGE
----
Report of Ernst & Young LLP, Independent Auditors 41
Consolidated Balance Sheets at December 31, 1998 and 1997 42
Consolidated Statements of Earnings for the three years ended
December 31, 1998 43
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998 44
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 1998 45
Notes to Consolidated Financial Statements 46
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
40
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and
Board of Directors
IMCO Recycling Inc.
We have audited the accompanying consolidated balance sheets of IMCO Recycling
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 consolidated financial position of IMCO
Recycling Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 1, 1999
41
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 6,075 $ 405
Accounts receivable (net of allowance of $1,616 and $1,345
at December 31, 1998 and 1997, respectively) 84,446 52,163
Inventories 50,921 34,556
Deferred income taxes 4,093 2,782
Other current assets 6,302 1,746
----------------- -----------------
Total Current Assets 151,837 91,652
Property and equipment, net 168,505 142,100
Excess of acquisition cost over the fair value of net assets
acquired, net of accumulated amortization of $7,156 and
$4,053 at December 31, 1998 and 1997, respectively 112,559 74,658
Investments in joint ventures 14,502 14,271
Other assets, net 9,155 9,855
----------------- -----------------
$ 456,558 $ 332,536
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 67,089 $ 25,902
Accrued liabilities 10,365 7,254
Current maturities of long-term debt 1,415 648
----------------- -----------------
Total Current Liabilities 78,869 33,804
Long-term debt 168,700 109,194
Deferred income taxes 12,820 11,278
Other long-term liabilities 8,861 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
at December 31, 1998; 20,000,000 authorized at December
31,1997; 17,048,585 issued at December 31, 1998; 16,515,750
issued at December 31, 1997 1,705 1,652
Additional paid-in capital 106,046 96,519
Retained earnings 87,214 71,128
Accumulated other comprehensive loss from foreign currency
translation adjustments (902) (32)
Treasury stock, at cost; 530,539 shares at December 31, 1998;
39,354 shares at December 31, 1997 (6,755) (343)
----------------- -----------------
Total Stockholders' Equity 187,308 168,924
----------------- -----------------
$ 456,558 $ 332,536
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 568,514 $ 339,381 $ 210,871
Cost of sales 506,994 291,527 185,333
------------ ------------ ------------
Gross profits 61,520 47,854 25,538
Selling, general and administrative expense 23,705 17,612 11,774
Interest expense 9,197 7,331 3,421
Interest and other income (775) (413) (623)
Equity in (earnings) loss of affiliates (1,750) (182) 114
------------- -------------- ------------
Earnings before provision for income taxes, minority
interests and extraordinary item 31,143 23,506 10,852
Provision for income taxes 11,275 9,086 4,132
------------ ------------ ------------
Earnings before minority interests and extraordinary item 19,868 14,420 6,720
Minority interests, net of provision for income taxes 278 293 -
------------ ------------ ------------
Earnings before extraordinary item 19,590 14,127 6,720
Extraordinary item, net - (1,318) -
------------ -------------- ------------
Net earnings $ 19,590 $ 12,809 $ 6,720
============ ============ ============
Net earnings per common share:
Basic:
-----
Earnings before extraordinary item $ 1.18 $ 1.08 $ 0.57
Extraordinary item - (0.10) -
============ ============ ============
Net earnings $ 1.18 $ 0.98 $ 0.57
============ ============ ============
Diluted:
-------
Earnings before extraordinary item $ 1.17 $ 1.06 $ 0.55
Extraordinary item - (0.10) -
============ ============ ============
Net earnings $ 1.17 $ 0.96 $ 0.55
============ ============ ============
Weighted average shares outstanding:
Basic 16,670 13,066 11,852
Diluted 16,802 13,293 12,130
Dividends declared per common share $ 0.21 $ 0.20 $ 0.20
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Earnings before extraordinary item $ 19,590 $ 14,127 $ 6,720
Depreciation and amortization 22,828 16,511 11,316
Provision for (benefit of) deferred income taxes (674) 1,516 176
Equity in (earnings) loss of affiliates (1,750) (182) 114
Other noncash charges 1,818 1,228 132
Provision for plant closure - - 3,577
Changes in operating assets and liabilities:
Accounts receivable (9,504) 12,256 (6,282)
Inventories (6,505) 2,594 (3,728)
Other current assets (531) 379 72
Accounts payable and accrued liabilities 27,926 (18,061) (5,353)
----------- ----------- -----------
NET CASH FROM OPERATING ACTIVITIES 53,198 30,368 6,744
INVESTING ACTIVITIES
Payments for property and equipment (35,199) (37,159) (16,711)
Acquisition of U.S. Zinc Corporation, net of cash acquired (59,497) - -
Acquisition of IMSAMET, Inc., net of cash acquired - (59,882) -
Acquisition of Alchem Aluminum, Inc., net of cash acquired - (25,430) -
Acquisitions of other businesses and investments in joint ventures (700) 163 (13,681)
Other 1,523 (2,153) 47
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (93,873) (124,461) (30,345)
FINANCING ACTIVITIES
Net proceeds from long-term revolving credit facility 55,775 96,225 -
Net proceeds from (repayments of) short-term borrowings - (8,351) 2,000
Net proceeds from issuance (repayments) of long-term debt 705 (41,072) 18,355
Net proceeds (costs) from public stock offering (65) 44,799 -
Debt issuance costs (158) (3,180) -
Dividends paid (3,503) (2,702) (2,371)
Purchases of treasury stock (6,377) - -
Other (51) 3,715 2,009
----------- ----------- -----------
Net cash from financing activities 46,326 89,434 19,993
Effect of exchange rate differences on cash and cash equivalents 19 (6) -
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,670 (4,665) (3,608)
Cash and cash equivalents at January 1 405 5,070 8,678
----------- ----------- -----------
Cash and cash equivalents at December 31 $ 6,075 $ 405 $ 5,070
=========== =========== ===========
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 9,098 $ 9,087 $ 3,083
Cash payments for income taxes $ 10,152 $ 5,940 $ 7,440
Fair value of the shares and warrants issued in the acquisition
of U.S. Zinc Corporation $ 8,470 - -
Fair value of the shares issued in the acquisition of Alchem
Aluminum, Inc. - $ 17,250 -
Fair value of the shares issued in the acquisition of Rock
Creek Aluminum, Inc. - $ 7,125 -
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
-----------------------------
SHARES AMOUNT CAPITAL EARNINGS
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 11,964,911 $ 1,196 $ 27,282 $ 56,672
Net earnings and comprehensive income - - - 6,720
Cash dividend - - - (2,371)
Issuance of common stock for services 3,003 1 51 -
Exercise of stock options - - (586) -
Tax benefit from the exercise of non-
qualified stock options - - 806 -
Exercise of warrants 50,000 5 - -
------------ ------------- --------------- -----------
BALANCE AT DECEMBER 31, 1996 12,017,914 1,202 27,553 61,021
Comprehensive income:
Net earnings - - - 12,809
Other comprehensive loss, net of tax:
Foreign currency translation adjustments - - - (32)
Net comprehensive income
Cash dividend - - - (2,702)
Net proceeds from public stock offering 2,645,000 264 44,535 -
Purchase of Rock Creek Aluminum 618,137 62 7,063 -
Purchase of Alchem Aluminum 1,208,339 121 17,129 -
Issuance of common stock for services 7,493 1 127 -
Exercise of stock options 18,867 2 (212) -
Tax benefit from the exercise of non-
qualified stock options - - 324 -
------------ ------------- --------------- -----------
BALANCE AT DECEMBER 31, 1997 16,515,750 1,652 96,519 71,096
Comprehensive income:
Net earnings - - - 19,590
Other comprehensive loss, net of tax:
Foreign currency translation adjustments - - - (871)
Net comprehensive income
Cash dividend - - - (3,503)
Public stock offering costs - - (65) -
Purchase of U.S. Zinc Corporation 298,010 30 8,470 -
Issuance of common stock for services 7,625 1 123 -
Exercise of stock options 227,200 22 1,554 -
Executive option exercise loan program - - (1,360) -
Tax benefit from the exercise of non-
qualified stock options - - 994 -
Common stock repurchased - - - -
Other - - (189) -
============ ============= ============== ==========
BALANCE AT DECEMBER 31, 1998 17,048,585 $ 1,705 $ 106,046 $ 86,312
============ ============= ============== ==========
<CAPTION>
TREASURY STOCK TOTAL
------------------------------
SHARES AMOUNT DOLLARS
------------- ------------ -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 (207,972) $ (1,874) $ 83,276
Net earnings and comprehensive income - - 6,720
Cash dividend - - (2,371)
Issuance of common stock for services - - 52
Exercise of stock options 89,421 433 (153)
Tax benefit from the exercise of non-
qualified stock options - - 806
Exercise of warrants - - 5
------------- ------------ -------------
BALANCE AT DECEMBER 31, 1996 (118,551) (1,441) 88,335
Comprehensive income:
Net earnings - - 12,809
Other comprehensive loss, net of tax:
Foreign currency translation adjustments - - (32)
-------------
Net comprehensive income 12,777
-------------
Cash dividend - - (2,702)
Net proceeds from public stock offering - - 44,799
Purchase of Rock Creek Aluminum - - 7,125
Purchase of Alchem Aluminum - - 17,250
Issuance of common stock for services - - 128
Exercise of stock options 79,197 1,098 888
Tax benefit from the exercise of non-
qualified stock options - - 324
------------- ------------ -------------
BALANCE AT DECEMBER 31, 1997 (39,354) (343) 168,924
Comprehensive income:
Net earnings - - 19,590
Other comprehensive loss, net of tax:
Foreign currency translation adjustments - - (871)
-------------
Net comprehensive income 18,719
-------------
Cash dividend - - (3,503)
Public stock offering costs - - (65)
Purchase of U.S. Zinc Corporation - - 8,500
Issuance of common stock for services - - 124
Exercise of stock options (2,285) (35) 1,541
Executive option exercise loan program - - (1,360)
Tax benefit from the exercise of non-
qualified stock options - - 994
Common stock repurchased (488,900) (6,377) (6,377)
Other - - (189)
============= ============ =============
BALANCE AT DECEMBER 31, 1998 (530,539) $ (6,755) $ 187,308
============= ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLARS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
- ----------------------
The accompanying consolidated financial statements include the accounts of IMCO
Recycling Inc. and all of its majority owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated upon
consolidation. Investments in affiliated companies, owned 50% or less, are
accounted for using the equity method.
The Company's principal business involves the ownership and operation of
aluminum recycling and alloying facilities and zinc manufacturing facilities.
Aluminum scrap material is recycled for a fee and then the material is returned
to its customers, some of whom are the world's largest aluminum and automotive
companies. Aluminum and zinc scrap is also purchased on the open market,
recycled and sold.
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.
CASH EQUIVALENTS:
- ----------------
All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents. The carrying amount approximates fair
value because of the short maturity of those instruments.
INVENTORIES:
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the specific identification method and includes an allocation of average
manufacturing labor and overhead costs to finished goods.
CREDIT RISK:
- -----------
The majority of the Company's accounts receivable are due from companies in the
aluminum, zinc and automotive industries. Credit is extended based on evaluation
of the customers' financial condition and, generally, collateral is not
required. Accounts receivable are net of a valuation reserve that represents an
estimate of amounts considered uncollectible. Expense for such uncollectible
amounts was $1,325,000, $670,000 and $35,000 in 1998, 1997 and 1996,
respectively.
46
<PAGE>
PROPERTY AND EQUIPMENT:
- ----------------------
Property and equipment are stated at cost. Major renewals and improvements are
capitalized, while maintenance and repairs are expensed when incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets.
Landfill closure costs are currently estimated to be approximately $8,000,000
and are being accrued as space in the landfills are used. Landfill costs are
depreciated as space in the landfill is used.
The Company reviews its property and equipment for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is measured as the amount by which the carrying amount
of the asset exceeds the estimated fair value of the asset less disposal costs.
Interest is capitalized in connection with the construction of major facilities.
Capitalized interest costs for 1998, 1997 and 1996 were $339,000, $1,386,000 and
$237,000, respectively.
AMORTIZATION OF INTANGIBLES:
- ---------------------------
The excess of original acquisition cost over the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis over the expected
life, currently from 15-40 years. Management regularly reviews the remaining
goodwill with consideration toward recovery through future operating results.
Goodwill is evaluated for recovery on an undiscounted basis. Deferred debt
issuance costs, included in other assets, are being amortized over the term of
the long-term debt. Organizational costs are being amortized on a straight-line
basis from 5-15 years. Patents are amortized over their remaining legal lives.
REVENUE RECOGNITION:
- -------------------
Revenues are recognized when products are shipped or when services are performed
for customers.
STOCK-BASED COMPENSATION:
- ------------------------
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related interpretations in accounting
for its employee stock options. Under APB 25, if the exercise price of employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recorded.
MARKET RISK MANAGEMENT USING FINANCIAL INSTRUMENTS:
- --------------------------------------------------
In order to reduce the floating interest rate risk on its long-term debt, the
Company entered into an interest rate cap transaction in 1997 (see NOTE H). The
cost of the rate cap is included in other long-term assets and is being
amortized as interest expense over the life of the Credit Agreement.
In order to manage its price exposure for natural gas purchases, the Company
has fixed the future price of a portion of its natural gas requirements by
entering into
47
<PAGE>
financial hedge agreements. 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 hedge price. 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. At December 31, 1998,
the Company had outstanding swap agreements to hedge its anticipated domestic
natural gas requirements on approximately 3,350,000 mmbtu's of natural gas,
which represents approximately 55% of its expected 1999 fuel needs and
approximately 8% of its expected 2000 fuel needs. The fair value of the
Company's financial hedging agreements at December 31, 1998, representing the
amount the Company would pay to terminate the agreements, totaled $817,000.
The Company has entered into futures 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 futures contracts with
metal brokers to cover the future selling prices of zinc recycled for certain
zinc customers under fixed-price contracts. These contracts are settled in the
month of the corresponding production and/or shipment, with all gains or losses
recognized in revenues.
The Company is exposed to losses in the event of non-performance by the counter-
parties to the financial hedge agreements and futures contracts discussed above;
however, the Company does not anticipate non-performance by the counter-parties.
The counter-parties are evaluated for creditworthiness and risk assessment prior
to initiating trading activities with the brokers. However, the Company does
not require collateral to support broker transactions.
FOREIGN CURRENCY TRANSLATION:
- ----------------------------
The Company's foreign subsidiaries in the U.K., Germany, Canada, Netherlands,
and its equity investee in Germany use the local currency as their functional
currency. Adjustments resulting from the translation into U.S. dollars are
reflected as a separate component of stockholders' equity, and foreign currency
transaction gains and losses are reflected in the Statement of Earnings. The
gains and losses on foreign currency exchange rate fluctuations and the
translation adjustments for 1998 were immaterial. As of December 31, 1998, the
Company's accumulated foreign currency translation adjustment totaled $902,000
and is included in other comprehensive income in the Statement of Changes in
Stockholders' Equity.
NEW ACCOUNTING STANDARDS:
- ------------------------
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.
PRIOR YEAR RECLASSIFICATIONS:
- ----------------------------
Certain reclassifications have been made to prior year statements to conform to
the current year presentation.
48
<PAGE>
NOTE B--ACQUISITIONS AND INVESTMENTS
On July 21, 1998, the Company acquired all of the capital stock of U.S. Zinc
Corporation ("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. The former U.S. Zinc shareholders have
certain registration rights with respect to the shares of common stock, and the
warrants that were issued to the former U.S. Zinc shareholders are contractually
restricted from exercise for periods of up to four years. In addition, the
transaction provides for future contingent payments (which will be expensed as
earned) 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 preliminary 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 which convert
zinc scrap into various value-added zinc products such as zinc dust, oxides,
ingots and other zinc by-products. These facilities have an aggregate annual
processing capacity of approximately 200 million pounds of zinc bearing
materials.
The preliminary allocation of the purchase price of U.S. Zinc is as follows:
Working capital $ 20,105
Property and equipment 14,335
Goodwill 39,180
Other noncurrent assets 540
Noncurrent liabilities (19,291)
-----------
Total $ 54,869
===========
In November 1997, the Company acquired all of the capital stock of Alchem
Aluminum, Inc. ("Alchem") in exchange for approximately $26,000,000 cash and the
assumption of debt and 1,208,339 shares of the Company's common stock. The
shares of common stock that were issued to the former Alchem shareholders are
contractually restricted from resale for periods of up to three years, and the
former Alchem shareholders have certain registration rights with respect to such
shares of common stock. The acquisition was accounted for using the purchase
method of accounting. The excess of the purchase price over the fair value of
net assets acquired of approximately $17,000,000 is being amortized over forty
years on a straight-line basis. Alchem is a producer of specification aluminum
alloys for automotive manufacturers and their suppliers and has been operating
its facility located in Coldwater, Michigan since 1972. Alchem and the Company
had been operating under a joint venture agreement entered into in October 1995
to construct and operate an aluminum recycling plant adjacent to Alchem's
processing facility in Coldwater.
49
<PAGE>
The allocation of the purchase price of Alchem is as follows:
Working capital $ 14,938
Property and equipment 10,959
Goodwill 16,852
Other noncurrent assets 4,228
Noncurrent liabilities (18,819)
--------
Total $ 28,158
========
During 1997, the Company and Alchem completed the construction of a $17,000,000
aluminum recycling facility in Coldwater, Michigan. This facility, which
delivers molten metal to the Company's Alchem subsidiary, commenced operations
in the first quarter of 1997 and reached full capacity in the fourth quarter of
1997.
In January 1997, the Company acquired all of the capital stock of IMSAMET, Inc.
("IMSAMET"), a wholly owned subsidiary of EnviroSource, Inc., for approximately
$58,000,000 in cash, not including acquisition costs. IMSAMET operates and owns
or has a majority interest in three aluminum recycling plants located in Post
Falls, Idaho; Wendover, Utah and Goodyear, Arizona. In addition, IMSAMET owns a
50% interest in a joint venture facility adjacent to the Utah plant, which uses
a proprietary process to reclaim materials from salt cake. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the net assets acquired based on their fair values. The
excess of the purchase price over the fair value of net assets acquired of
approximately $42,000,000 is being amortized over forty years on a straight-line
basis.
The allocation of the purchase price of IMSAMET is as follows:
Working capital $ 4,674
Property and equipment 19,852
Goodwill 41,976
Other noncurrent assets 914
Noncurrent liabilities (7,176)
-----------
Total $ 60,240
===========
Also in January 1997, the Company acquired, in a privately-negotiated
transaction, all of the capital stock of Rock Creek Aluminum, Inc. ("Rock
Creek") in exchange for 618,137 shares of the Company's Common Stock. The
acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of net assets acquired of
$6,000,000 is being amortized over forty years on a straight-line basis. Rock
Creek owns and operates two Ohio facilities located in Elyria and Rock Creek.
These facilities utilize milling, blending, testing and packaging equipment to
process various types of raw materials, including aluminum dross and scrap,
various minerals and slags.
The Company's results of operations include the results of IMSAMET and Rock
Creek from January 1, 1997, the results of Alchem from November 1, 1997 and the
results of U.S. Zinc from July 1, 1998.
50
<PAGE>
The following table sets forth unaudited pro forma results of operations of the
Company and U.S. Zinc for the year ended December 31, 1998 and the Company,
Alchem and U.S. Zinc for the year ended December 31, 1997, assuming the
acquisitions had been consummated on January 1 of each respective year. 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
acquisitions been consummated on such dates or of future results of the combined
companies under the ownership and management of the Company:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues $ 650,561 $ 626,079
Gross profit 67,576 72,071
Earnings before extraordinary item 20,248 17,804
Net earnings 20,248 16,486
Earnings per common share before extraordinary item:
Basic $ 1.20 $ 1.23
Diluted $ 1.19 $ 1.21
Net earnings per common share:
Basic $ 1.20 $ 1.14
Diluted $ 1.19 $ 1.12
</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 acquisitions (see NOTE H) and adjustments for related income taxes and
minority interests.
NOTE C--INVENTORIES
The components of inventories are:
DECEMBER 31,
---------------------------------
1998 1997
-------------- ---------------
Finished goods $ 26,668 $ 16,771
Raw materials 23,012 17,313
Supplies 1,241 472
-------------- ---------------
$ 50,921 $ 34,556
============== ===============
51
<PAGE>
NOTE D--PROPERTY AND EQUIPMENT
The components of property and equipment are:
DECEMBER 31,
---------------------------------
1998 1997
--------------- --------------
Land, buildings and improvements $ 113,709 $ 100,587
Production equipment and machinery 117,861 89,804
Office furniture, equipment and other 8,876 6,704
--------------- --------------
240,446 197,095
Accumulated depreciation (71,941) (54,995)
--------------- --------------
$ 168,505 $ 142,100
=============== ==============
Depreciation expense for 1998, 1997 and 1996 was $19,074,000, $14,007,000 and
$10,249,000, respectively.
Estimated useful lives for buildings and improvements range from 15 to 39 years,
machinery and equipment range from 3 to 20 years and office furniture and
equipment range from 3 to 10 years.
In March 1992, the Company entered into an agreement with Commonwealth
Industries, Inc. ("Commonwealth"), formerly Barmet Aluminum Corporation, to
construct, own and operate the Uhrichsville plant adjacent to Commonwealth's
rolling mill in Uhrichsville, Ohio and to supply Commonwealth with all of its
recycled aluminum needs. The Uhrichsville plant, including costs for capitalized
interest and for the 1994 expansion, cost approximately $20,750,000.
Commonwealth has an option to acquire up to a 49% equity interest in the
Company's subsidiary that owns the Uhrichsville plant at a price based on a
predetermined formula; such formula should result in a gain if Commonwealth
exercised its option.
NOTE E--LONG-TERM RECEIVABLE
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 December 31, 1998, the Company
had $2,292,000 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.
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,
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). Reorganized Harvard has commenced execution of the Plan.
The Company
52
<PAGE>
anticipates that upon allowance of its claims, it will receive its pro rata
share of common stock of reorganized Harvard as provided in the Plan. 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 in which the Company's claims will be
allowed and/or the timing and value of the Company's ultimate recovery, if any,
on its claims.
NOTE F - COMMON STOCK
OFFERING:
- --------
In November 1997, the Company issued and sold 2,645,000 (inclusive of 345,000
shares from the exercise of the underwriters' over-allotment option) shares of
its Common Stock through an underwritten public offering at a price to public of
$18.00 per share. The Company received net proceeds of approximately
$44,734,000, after deducting underwriting discounts and commissions and offering
expenses. The Company used the net proceeds to reduce outstanding indebtedness
originally incurred under its credit agreement in January 1997 (see NOTE H).
CHANGE IN AUTHORIZED SHARES:
- ---------------------------
In May 1998, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 20,000,000 shares to 40,000,000 shares.
REPURCHASE:
- -----------
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 December 31, 1998, the Company
had spent $6,377,000 to repurchase 488,900 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.
53
<PAGE>
NOTE G--INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
CURRENT:
Federal $ 11,498 $ 6,035 $ 3,587
State 451 1,535 369
------------ ------------- ------------
11,949 7,570 3,956
DEFERRED:
Federal (45) 2,028 7
State (211) (512) 169
Foreign (418) - -
------------ ------------- ------------
(674) 1,516 176
------------ ------------- ------------
$ 11,275 $ 9,086 $ 4,132
============ ============= ============
</TABLE>
The income tax expense, computed by applying the federal statutory tax rate to
earnings before income taxes, differed from the provision for income taxes as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes at the federal statutory rate $ 11,854 $ 8,227 $ 3,690
Foreign taxes at the statutory rate (845) - -
Goodwill amortization, nondeductible 453 196 168
State income taxes, net 150 651 355
Foreign loss (593) - -
Other, net 256 12 (81)
--------- -------- ---------
Provision for income taxes $ 11,275 $ 9,086 $ 4,132
========= ======== =========
</TABLE>
54
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
- ------------------------
Accelerated depreciation and amortization $15,250 $13,635
Federal effect of state income taxes 969 804
Other 1,016 171
------- -------
Total Deferred Tax Liabilities 17,235 14,610
Deferred tax assets:
- --------------------
Net operating loss carryforwards 1,591 859
Tax credit carryforwards 2,074 1,900
Expenses not currently deductible 5,288 3,434
Federal effect of state income taxes 896 805
Other - 44
------- -------
Total deferred tax assets 9,849 7,042
Valuation allowance (1,341) (928)
------- -------
Net deferred tax assets 8,508 6,114
------- -------
Net deferred tax liability
$ 8,727 $ 8,496
======= =======
</TABLE>
At December 31, 1998, the Company had a $1,341,000 valuation allowance to reduce
certain deferred tax assets to amounts that are more than likely to be realized.
The majority of the valuation allowance relates to the Company's potential
inability to utilize, foreign tax loss carryforwards available in the United
Kingdom and state recycling credits available in Kentucky.
At December 31, 1998, the Company had approximately $2,546,000 of unused net
operating loss carryforwards for foreign tax purposes, which do not expire, and
had approximately $13,009,000 for state purposes which expire in 2008 to 2012.
The majority of the net operating loss carryforwards were generated by the
Loudon, Bedford and Houston facilities.
At December 31, 1998, the Company had $2,074,000 of unused federal and state tax
credit carryforwards, $147,000 of which expire in 2007 to 2012, and $1,927,000
of which do not expire.
Undistributed earnings of the Company's non-United States investment in a joint
venture amounted to approximately $720,000 at December 31, 1998. These earnings
are considered permanently reinvested and, accordingly, no additional United
States income taxes or non-U.S. withholding taxes have been provided.
Determination of the amount of additional taxes that would be payable if such
earnings were not considered indefinitely reinvested is not practical.
55
<PAGE>
NOTE H--LONG-TERM DEBT AND EXTRAORDINARY LOSS ON EARLY DEBT RETIREMENT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Revolving Credit Loans $ 152,000 $ 96,225
7.65% Morgantown, Kentucky Solid Waste
Disposal Facilities Revenue Bonds-1996 Series 5,690 5,688
7.45% Morgantown, Kentucky Solid Waste
Disposal Facilities Revenue Bonds-1997 Series 4,600 4,600
6.00% Morgantown, Kentucky Solid Waste
Disposal Facilities Revenue Bonds-1998 Series 3,421 -
Other 4,404 3,329
--------- --------
Subtotal 170,115 109,842
Less current maturities 1,415 648
--------- --------
Total $ 168,700 $109,194
========= ========
</TABLE>
In connection with the January 1997 acquisitions (see NOTE B), the Company
entered into a $125,000,000 syndicated credit agreement (the "Credit Agreement")
with certain lenders, including Merrill Lynch & Co. as syndication agent and
Chase Bank of Texas, N.A. as administrative agent ("Chase"). The Company
received $110,000,000 at the closing and used approximately $61,000,000 for the
IMSAMET acquisition. The remaining $49,000,000 of the proceeds was used to
retire substantially all of the Company's outstanding debt as of December 31,
1996. The early debt retirement generated an extraordinary loss of $1,318,000 in
the first quarter of 1997, which consisted of early payment penalties of
$1,953,000, write-off of old debt costs of $243,000 and an income tax benefit of
$878,000.
The Credit Agreement provided for $125,000,000 of senior secured credit
facilities consisting of a $105,000,000 term loan, with a final maturity of
seven years, and a $20,000,000 revolving credit facility, with a final maturity
of five years. Of the $20,000,000 revolving credit facility, $4,000,000 was to
be used, as needed, by the Company for standby letters of credit.
In November 1997, the Company amended and restated the terms of the Credit
Agreement with its lenders (the "Amended and Restated Credit Agreement"). The
Amended and Restated Credit Agreement provides for a reducing revolving credit
facility of up to $200,000,000, which allowed the Company to consolidate the
unpaid amount of its then-outstanding indebtedness of $96,755,000 and
$15,100,000 under the original Credit Agreement's term loan and revolving credit
facilities, respectively, and permitted the company to acquire Alchem (see NOTE
B). The Company funded the cash portion of the Alchem acquisition and repaid a
portion of Alchem's outstanding indebtedness from borrowings under the Amended
and Restated Credit Agreement. In addition, up to $12,000,000 available under
the Amended and Restated Credit Agreement may be used, as needed, by the Company
for letters of credit. Indebtedness under the Amended and Restated Credit
Agreement will mature in December 2003. The Amended and Restated Credit
Agreement provides that the maximum amount of commitments under the facility
will be
56
<PAGE>
reduced on an annual basis beginning in December 1999, so that by December 31,
2002, the maximum amount of aggregate commitments may not exceed $100,000,000.
Indebtedness under the Amended and Restated Credit Agreement bears interest, at
the Company's option, at fluctuating interest rates based upon an alternate base
rate (which may be the prime rate), or a rate based upon the applicable LIBOR
rate plus a credit margin which is based upon the Company's ratio of total debt
to total capitalization. At December 31, 1998, the interest rate under the
Company's Amended and Restated Credit Agreement was approximately 6.2%. In
addition, the Company pays a commitment fee for unborrowed amounts available
under the reducing revolving facility at a rate based upon the Company's ratio
of debt to total capitalization.
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 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 order to reduce the fluctuating interest rate exposure on the term loan, the
Company entered into an interest rate cap transaction ("Rate Cap Transaction")
agreement with Chase in April 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 December 31, 1998, the floating interest rate was capped at
8% per annum for 23% of the total borrowings under the Amended and Restated
Credit Agreement.
The Amended and Restated Credit Agreement imposes certain restrictions,
including: (i) a prohibition of certain additional indebtedness (ii) maintenance
of certain financial ratios, and (iii) limitations on investments, dividends,
capital expenditures, acquisitions of businesses (limitation increased to
$125,000,000 in 1998) and dispositions of assets. The annual limitations on cash
dividends are as follows: $4,000,000 for 1997, $5,000,000 for 1998, $6,000,000
per year for 1999 and 2000, and $8,000,000 for each year after 2000. The
indebtedness under the Amended and Restated Credit Agreement is secured by
assets at seven of the Company's plants, as well as a pledge of the capital
stock of certain of the Company's subsidiaries.
At December 31, 1998, the Company had standby letters of credit outstanding in
the aggregate amount of $3,442,000.
The 6% Morgantown, Kentucky Solid Waste Disposal Facilities Revenue Bonds
(Series 1998) are due on May 1, 2023. The bonds were issued in 1998 in
conjunction with the Company's expansion of its landfill in Morgantown,
Kentucky. 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 December 31, 1998, the Company has drawn against and received
$3,421,000 in cash proceeds from the escrow fund.
The 7.45% Morgantown, Kentucky Solid Waste Disposal Facilities Revenue Bonds
(Series 1997) are due on May 1, 2022. The bonds were issued in 1997 in
conjunction with the Company's expansion of its landfill in Morgantown, Kentucky
and additional construction costs of its salt cake processing plant in
Morgantown.
The 7.65% Morgantown, Kentucky Solid Waste Disposal Facilities Revenue Bonds
(Series 1996) are due on May 1, 2016. The bonds were issued in 1996 in
conjunction with the
57
<PAGE>
Company's construction of its salt cake processing plant in Morgantown,
Kentucky. The bonds were issued at a 1% discount which is being amortized over
the life of the bonds.
The fair value of the Company's Amended and Restated Credit Agreement
approximates its carrying value due to its recent issuance, floating rate and
relatively short maturity. The fair value of the Company's fixed rate Revenue
Bonds based on discounted cash flows and incremental borrowing rates totals
approximately $15.6 million.
Scheduled maturities of long-term debt subsequent to December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 1,415
2000 1,020
2001 18,020
2002 35,569
2003 100,380
After 2003 13,711
----------
Total $ 170,115
==========
</TABLE>
NOTE I--NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------ -----------
<S> <C> <C> <C>
Numerators for basic and diluted earnings per share:
Net earnings before extraordinary item $ 19,590 $ 14,127 $ 6,720
Extraordinary item - (1,318) -
------------- ------------ -----------
Net earnings $ 19,590 $ 12,809 $ 6,720
============= ============ ============
Denominator:
Denominator for basic earnings per share--
weighted-average shares outstanding 16,669,768 13,066,006 11,852,066
Dilutive potential common shares--stock options 132,300 226,698 277,773
------------- ------------ -----------
Denominator for diluted earnings per share 16,802,068 13,292,704 12,129,839
============= ============ ===========
Basic net earnings per share:
Earnings before extraordinary item $ 1.18 1.08 0.57
Extraordinary item - (0.10) -
------------- ------------ -----------
Net earnings $ 1.18 $ 0.98 $ 0.57
============= ============ ============
Diluted net earnings per share:
Earnings before extraordinary item $ 1.17 $ 1.06 $ 0.55
Extraordinary item - (0.10) -
------------- ------------ -----------
Net earnings $ 1.17 $ 0.96 $ 0.55
============= ============= ===========
</TABLE>
58
<PAGE>
The following stock options were excluded from the computation of diluted
earnings per share because the effect would have been anti-dilutive, as the
options' exercise price was greater than the average market price of the common
stock:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Anti-dilutive stock options as of December 31 1,098,856 225,829 612,353
</TABLE>
NOTE J--EMPLOYEE BENEFIT PLANS
With the exception of the employees at the Company's recently acquired U.S. Zinc
facilities, the Company's profit-sharing retirement plan covers most of its
employees who meet defined service requirements. Contributions are determined
annually by the Board of Directors and may be as much as 15% of covered
salaries. Contributions for 1998, 1997 and 1996 were $1,994,000, $1,524,000 and
$1,366,000, respectively. The Company paid the 1998 and 1997 contributions in
January 1999 and 1998, respectively.
In July 1996, the Company amended and restated the profit-sharing retirement
plan to allow elective contributions as described in Internal Revenue Code
Section 401(k). Subject to certain dollar limits, employees may contribute a
percentage of their salaries to this plan, and the Company matches a portion of
the employees' contributions. The Company's match of employee contributions
totaled $707,000, $582,000 and $189,000 for 1998, 1997 and 1996, respectively.
NOTE K--STOCK OPTION PLANS
In 1990, the Company adopted an Amended and Restated Stock Option Plan. This
plan expired in 1997, and no further grants of options may be made under the
plan. This plan provided for the granting of nonqualified and incentive stock
options. The number of shares of common stock authorized for issuance under the
plan was 1,200,000 shares. Options granted under the plan had various vesting
periods and are exercisable for a period of 10 years from the date of grant,
although options may expire earlier because of termination of employment.
In 1992, the Company adopted the 1992 Stock Option Plan, which provides for the
granting of nonqualified and incentive stock options to employees, officers,
consultants and nonemployee members of the Board of Directors. Options granted
to employees under this plan have various vesting periods. Annually, nonemployee
directors will be granted nonqualified stock options exercisable after six
months from the date of grant, equal to the number of shares determined by
dividing the annual director fee amount by the fair market value of a share of
common stock as of the date of grant. All options granted under this plan, once
vested, are exercisable for a period of up to 10 years from the date of grant,
although options may expire earlier because of termination of employment or
service.
In 1996, the Company adopted the Annual Incentive Program, which provides
certain of the Company's key employees with annual incentive compensation tied
to the achievement of pre-established and objective performance goals. This plan
provides for the granting of stock options to key management employees, both on
a discretionary basis and based upon a plan formula, in the event that the
Company's return on total assets (as defined in the plan) for any bonus year
exceeds 15%. Nonqualified and incentive stock options may be granted, and the
59
<PAGE>
terms of the plan concerning the stock options are substantially the same as the
corresponding terms of the 1992 Stock Option Plan.
The 1992 Stock Option Plan and the 1996 Annual Incentive Program allow for the
payment of all or a portion of the exercise price and tax withholding
obligations in shares of the Company's common stock delivered and/or withheld.
Such payment or withholding will be valued at fair market value as of the date
of exercise. Participants making use of this feature will automatically be
granted a reload stock option to purchase a number of shares equal to the number
of shares delivered and/or withheld. When a reload stock option is granted, a
portion of the shares issued to the participant will be designated as restricted
stock for a period of five years, although the restriction may be removed
earlier under certain circumstances. Reload stock options have an exercise price
equal to the fair market value as of the date of exercise of the original
options and will expire on the same date as the original options.
In March 1998, the Company adopted the Executive Option Exercise Loan Program in
order to encourage option exercises and share retention by management employees
holding certain options under the Company's Amended and Restated Option Plan and
to provide such management employees with a long-term capital accumulation
opportunity. This program provides loans to permit the exercise of certain
Company stock options under the Amended and Restated Option Plan and to pay
federal and state taxes realized upon such exercises. During 1998, options to
purchase 196,800 shares were exercised under this loan program, and as of
December 31, 1998, the Company had extended $2,074,000 in executive loans to
these individuals ($1,360,000 of which represented a reduction to additional
paid in capital and $714,000 of which was included in other long-term assets)
and recorded $28,000 in interest income.
In 1998, 1997 and 1996 the Company acquired from employees and placed in the
treasury, 2,285, 19,703 and 48,806 shares, respectively, pursuant to provisions
of the Company's stock option plan. Such shares were tendered or withheld in
satisfaction of those employees' federal and state withholding taxes on
compensation resulting from the exercise of nonqualified stock options and for
the aggregate exercise cost of certain of the options.
Transactions under the option plans are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding Jan. 1 1,868,433 $ 14.25 1,541,959 $ 13.65 1,291,364 $ 12.05
Options granted 627,696 $ 13.36 584,714 $ 15.84 395,422 $ 16.25
Options exercised (227,200) $ 6.94 (117,767) $ 10.63 (138,227) $ 6.00
Options forfeited (28,566) $ 16.79 (140,473) $ 17.30 (6,600) $ 17.64
------------- ----------- -----------
Options outstanding Dec. 31 2,240,363 $ 14.71 1,868,433 $ 14.25 1,541,959 $ 13.65
============= =========== ===========
Options exercisable Dec. 31 1,131,961 $ 15.11 958,285 $ 12.62 776,732 $ 11.17
============= =========== ===========
Options available for grant Dec. 31 273,328 80,331 499,821
============= =========== ===========
</TABLE>
60
<PAGE>
Information related to options outstanding at December 31, 1998, is summarized
below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 4.890 - $ 7.550 110,200 2.0 Years $ 7.16 110,200 $ 7.16
$12.325 - $13.750 1,031,307 7.7 Years $ 13.18 441,911 $ 13.37
$15.000 - $19.000 939,441 6.7 Years $ 15.91 420,435 $ 16.12
$22.750 - $23.375 159,415 6.7 Years $ 22.75 159,415 $ 22.75
------------- ----------
2,240,363 1,131,961
============= ==========
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" requires disclosure of pro forma net earnings and net
earnings per common share information computed as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1995 under the
fair value method set forth in SFAS No. 123. The fair value of the Company's
outstanding stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected option life in years 4.0 3.4 3.9
Risk-free interest rate 4.58% 6.13% 6.11%
Volatility factor 0.312 0.293 0.305
Dividend yield 1.80% 1.28% 1.22%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the option's vesting period. In addition, because SFAS No. 123 is
applicable only to options granted subsequent to December 31, 1994, the pro
forma information does not reflect the pro forma effect of all previous stock
option grants of the Company. Therefore, the pro forma information is not
necessarily indicative of future amounts unless SFAS No. 123 is applied to all
outstanding stock options.
61
<PAGE>
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997 1996
------------ ----------- -------------
<S> <C> <C> <C>
Net earnings before extraordinary item:
As reported $ 19,590 $ 14,127 $ 6,720
Pro forma $ 18,528 $ 13,446 $ 6,406
Net earnings per common share before extraordinary item:
As reported--basic $ 1.18 $ 1.08 $ 0.57
As reported--diluted $ 1.17 $ 1.06 $ 0.55
Pro forma--basic $ 1.11 $ 1.03 $ 0.54
Pro forma--diluted $ 1.10 $ 1.01 $ 0.53
Weighted-average fair value of options granted during the year $ 3.56 $ 4.15 $ 4.83
</TABLE>
NOTE L--OPERATIONS
During the third quarter of 1996, the Company recorded a charge to cost of sales
of $3,577,000 resulting from management's decision to close the Company's
Corona, California aluminum recycling plant.
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 herein.
From time to time, operations of the Company have resulted or may result in
certain non-compliance 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, although there can be no
62
<PAGE>
assurance, that its liability at this site will have a material adverse effect
on its financial position or results of operations. A subsidiary of U.S. Zinc,
which the Company acquired in July 1998, was also named as a PRP at this site.
The Company is also a party from time to time, to what it believes are routine
litigation and proceedings considered part of the ordinary course of its
business.
NOTE M--SEGMENT INFORMATION
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. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company adopted Statement 131 in 1998, and its recent acquisition of U.S.
Zinc increased the number of operating segments the Company is required to
report.
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
- ----------------------------------------------------------------------------
SEGMENT DERIVES ITS REVENUES:
- ----------------------------
The Company has two reportable segments: aluminum and zinc. The ALUMINUM segment
represents all of the Company's aluminum melting, processing, alloying,
brokering and salt cake activities including investments in joint ventures. The
Company delivers aluminum in molten and ingot form to aluminum producers,
diecasters, extruders, steel and automotive companies and other aluminum
customers in the packaging, construction and transportation industries. In
addition, this segment includes magnesium melting activities, which represent
less than 1% of consolidated revenues and production. The company's ZINC segment
represents all of the Company's zinc melting, processing and brokering
activities. The Company sells zinc dust, oxides and metal to customers in the
tire and rubber, industrial paint, specialty chemical, mining and steel
galvanizing industries.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS:
- --------------------------------------------------------
The accounting policies of the reportable segments are the same as those
described in NOTE A. The Company evaluates performance based on gross profit or
loss from operations, net of selling expenses. Provision for income taxes,
interest, corporate general and administrative costs, including depreciation of
corporate assets and amortization of capitalized debt costs, are not allocated
to the reportable segments. Intersegment sales and transfers are recorded at
market value; net profits on intersegment sales and transfers were immaterial
for the periods presented. Consolidated cash, net capitalized debt costs, net
current deferred tax assets and assets located at the Company's headquarters
office in Irving, Texas are not allocated to the reportable segments.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS:
- ---------------------------------------------------------------------
The Company's reportable segments are business units that offer different types
of metal products and services. The reportable segments are each managed
separately, because they sell distinct products and services and sell to
different types of customers.
63
<PAGE>
REPORTABLE SEGMENT INFORMATION:
- ------------------------------
Selected reportable segment disclosures for the three years ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
ALUMINUM ZINC TOTALS
--------------- -------------- ---------------
<S> <C> <C> <C>
1998
- ----
Revenues from external customers $ 465,122 $ 103,392 $ 568,514
Intrasegment revenues 27,332 9,791 37,123
Intersegment revenues 89 10 99
Segment income 54,704 6,429 61,133
Depreciation and amortization expense 19,155 2,402 21,557
Equity in earnings of affiliates 1,750 - 1,750
Segment assets 328,891 109,398 438,289
Equity investments in joint ventures 14,502 - 14,502
Payments for plant and equipment 30,507 1,518 32,025
1997
- ----
Revenues from external customers $ 326,522 $ 12,859 $ 339,381
Intrasegment revenues 11,782 - 11,782
Segment income 45,728 1,127 46,855
Depreciation and amortization expense 15,162 304 15,466
Equity in earnings of affiliates 182 - 182
Segment assets 314,377 9,235 323,612
Equity investments in joint ventures 14,271 - 14,271
Payments for plant and equipment 32,623 3,532 36,155
1996
- ----
Revenues from external customers $ 198,769 $ 12,102 $ 210,871
Intrasegment revenues 11,571 - 11,571
Segment income 23,830 1,278 25,108
Depreciation and amortization expense 10,376 275 10,651
Equity in loss of affiliates (114) - (114)
Segment assets 149,822 5,135 154,957
Equity investments in joint ventures 14,187 - 14,187
Payments for plant and equipment 15,500 267 15,767
</TABLE>
64
<PAGE>
Reconciliations of total reportable segment disclosures to the Company's
consolidated financial statements are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------ ------------
<S> <C> <C> <C>
REVENUES
- --------
Total revenues from external customers for reportable segments $ 568,514 $ 339,381 $ 210,871
Intrasegment revenues for reportable segments 37,123 11,782 11,571
Intersegment revenues for reportable segments 99 - -
Elimination of intrasegment and intersegment revenues (37,222) (11,782) (11,571)
================ ============ ============
Total consolidated revenues $ 568,514 $ 339,381 $ 210,871
================ ============ ============
PROFITS
- -------
Total profits for reportable segments $ 61,133 $ 46,855 $ 25,108
Unallocated amounts:
General and administrative expense 21,568 16,431 11,458
Interest expense 9,197 7,331 3,421
Interest and other income 775 413 623
Income before provision for income taxes, minority interests
================ ============ ============
and extraordinary item $ 31,143 $ 23,506 $ 10,852
================ ============ ============
DEPRECIATION AND AMORTIZATION EXPENSE
- -------------------------------------
Total depreciation and amortization expense for reportable
segments $ 21,557 $ 15,466 $ 10,651
Other depreciation and amortization expense 1,271 1,045 665
================ ============ ============
Total consolidated depreciation and amortization expense $ 22,828 $ 16,511 $ 11,316
================ ============ ============
ASSETS
- ------
Total assets for reportable segments $ 438,289 $ 323,612 $ 154,957
Other assets 18,269 8,924 9,750
================ ============ ============
Total consolidated assets $ 456,558 $ 332,536 $ 164,707
================ ============ ============
PAYMENTS FOR PLANT AND EQUIPMENT
- --------------------------------
Total payments for plant and equipment for reportable segments $ 32,025 $ 36,155 $ 15,767
Other payments for plant and equipment 3,174 1,004 944
================ ============ ============
Total consolidated payments for plant and equipment $ 35,199 $ 37,159 $ 16,711
================ ============ ============
</TABLE>
65
<PAGE>
GEOGRAPHIC INFORMATION:
- ----------------------
The following table sets forth the geographic breakout of revenues (based on
customer location) and property and equipment (net of accumulated depreciation):
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
- --------
Domestic $ 494,674 $ 329,937 $ 210,871
Foreign 73,840 9,444 -
------------- -------------- --------------
Consolidated Total $ 568,514 $ 339,381 $ 210,871
============= ============== ==============
PROPERTY AND EQUIPMENT
- ----------------------
Domestic $ 157,844 $ 135,716 $ 86,308
Foreign 10,661 6,384 -
------------- -------------- --------------
Consolidated Total $ 168,505 $ 142,100 $ 86,308
============= ============== ==============
</TABLE>
Aluminum shipments to customers located in Canada accounted for approximately 9%
of consolidated revenues for 1998. Substantially all the Company's foreign
property and equipment are located at the Company's aluminum facility in
Swansea, Wales.
MAJOR CUSTOMERS:
- ---------------
During 1998, aluminum sales to Ford Motor Company ("Ford") accounted for 10% of
consolidated revenues. During 1997, no single customer accounted for more than
10% of consolidated revenues. During 1996, aluminum sales to Aluminum Company of
America ("Alcoa") accounted for 13% of consolidated revenues. The loss of Alcoa
and Ford would have a material adverse effect upon the business of the Company
and its future operating results. However, a significant portion of the
processing for Alcoa is performed pursuant to long-term supply agreements.
66
<PAGE>
NOTE N--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1998:
- ----
Revenues $ 127,232 $ 124,489 $ 153,651 $ 163,142 $ 568,514
Gross profits 13,626 14,174 16,692 17,028 61,520
Net earnings 4,611 5,011 4,968 5,000 19,590
Net earnings per common share:
Basic 0.28 0.30 0.29 0.30 1.18
Diluted 0.28 0.30 0.29 0.30 1.17
1997:
- ----
Revenues 82,528 76,600 77,461 102,792 339,381
Gross profits 10,152 12,140 12,843 12,719 47,854
Earnings before extraordinary item 2,280 3,567 4,131 4,149 14,127
Extraordinary item (1,318) - - - (1,318)
Net earnings 962 3,567 4,131 4,149 12,809
Basic net earnings per common share: *
Earnings before extraordinary item 0.18 0.28 0.33 0.28 1.08
Extraordinary item (0.10) - - - (0.10)
============ ============ ============ ============ ============
Net earnings 0.08 0.28 0.33 0.28 0.98
============ ============ ============ ============ ============
Diluted net earnings per common share: *
Earnings before extraordinary item 0.18 0.28 0.32 0.28 1.06
Extraordinary item (0.10) - - - (0.10)
============ ============ ============ ============ ============
Net earnings $ 0.08 $ 0.28 $ 0.32 $ 0.28 $ 0.96
============ ============ ============ ============ ============
</TABLE>
* The earnings per share amounts have been restated, as required, to comply
with the Statement of Financial Accounting Standards No. 128, Earnings per
Share.
NOTE O--SUBSEQUENT EVENTS (UNAUDITED)
In February 1999, the Company acquired substantially all of the assets of an
aluminum alloying facility located in Shelbyville, Tennessee from Alcan Aluminum
Corporation for approximately $11,000,000 in cash, not including acquisition
costs. Also in February 1999, the Company acquired substantially all of the
assets of a zinc oxide production facility located in Clarksville, Tennessee
from North American Oxide, LLC for approximately $11,000,000 in cash, not
including acquisition costs. Both acquisitions will be accounted for using the
purchase method of accounting.
In February 1999, the Company entered into a supply agreement with General
Motors Corporation ("GM") to provide alloyed molten and ingot aluminum to GM's
metal casting facility in Saginaw, Michigan. The agreement expires in 2011 and
calls for escalating volumes beginning in 1999. The Company plans to construct a
new aluminum alloying plant in Saginaw, which is expected to begin production in
2000 to supply GM's Saginaw facility.
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------
The information required by this item with respect to directors and nominees for
director of the Company appears under the captions "Election of Directors" and
"Remuneration of Directors and Officers - Compliance with Section 16(a)" in the
definitive Proxy Statement (herein so called) of the Company relating to the
Company's 1999 Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission (the "Commission") pursuant to Regulation 14A of the
Securities Exchange Act of 1934, which information is incorporated herein by
reference. It is currently anticipated that the Proxy Statement will be publicly
available and mailed to stockholders in mid-April 1999. Certain information as
to executive officers is included herein under PART I, ITEM 4A. "EXECUTIVE
--
OFFICERS OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
- -------
The information required by this item appears under the caption "Remuneration of
Directors and Officers" in the definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------
The information required by this item appears under the caption "Voting and
Principal Stockholders" in the definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------
The information required by this item appears under the captions "Remuneration
of Directors and Officer--Directors' Compensation" and "Compensation Committee
Report to Stockholders-Compensation Committee Interlocks and Insider
Participation" in the definitive Proxy Statement, which information is
incorporated herein by reference.
68
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements: See index to Consolidated Financial
Statements and Financial Statement Schedules on Page 40 hereof.
2. Consolidated Financial Statement Schedules: See index to Consolidated
Financial Statements and Financial Statement Schedules on Page 40
hereof.
3. Exhibits:
--------
3.1 Certificate of Incorporation of IMCO Recycling Inc., as amended
May 13, 1998, filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998,
and incorporated herein by reference.
3.2 By-laws of IMCO Recycling Inc., as amended, effective as of
February 25, 1997, filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
4.1 Specimen Stock Certificate of the Common Stock, $0.10 par value,
of IMCO Recycling Inc., filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-2 (No. 33-48571) and
incorporated herein by reference.
10.4 IMCO Recycling Inc. Amended and Restated Stock Option Plan, filed
as Exhibit 10.4 to the Company's annual Report on Form 10-K for
the year ended December 31, 1997, and incorporated herein by
reference.
*10.7 Specimen Split-Dollar Life Insurance Agreement. This agreement is
virtually identical to agreements between the Company and Richard
L. Kerr, Paul V. Dufour, Denis W. Ray, Thomas W. Rogers, C. Lee
Newton, Robert R. Holian and James B. Walburg.
10.8 Supply Agreement between Barmet Aluminum Corporation (now
Commonwealth Aluminum Corporation) and the Company, dated March
2, 1992, filed as Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and incorporated
herein by reference..
10.9 Right of First Refusal Agreement between Barmet Aluminum
Corporation (now Commonwealth Aluminum Corporation) and the
Company, dated March 2, 1992, relating to Commonwealth's Indiana
recycling plant, filed as Exhibit 10.23 to the Company's Annual
report on 1994 Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
69
<PAGE>
10.10 Agreement, effective as of December 1, 1995, between IMCO
Recycling of Ohio Inc.1and2 the United Mine Workers of America,
and filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference.
*10.11 Agreement, effective as of January 1, 1994, between IMCO
Recycling Inc. and Aluminum Company of America.
10.12 First Amendment to processing agreement by and among the Rigid
Packaging division of Aluminum Company of America, the Company
and Metal Resources Inc., filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1995, and incorporated herein by reference.
10.14 Stock Purchase Agreement by and among IMCO Recycling Inc.,
EnviroSource, Inc. and IMSAMET, Inc. dated November 26, 1996.
(In accordance with Item 601 of Regulation S-K, the copy of the
IMSAMET Agreement filed with the Securities and Exchange
Commission (the "Commission") does not include the Schedules or
exhibits thereto. The Company agrees to furnish such information
supplementally to the Commission upon request). This agreement
was filed as Exhibit 2.1 to the Company's Current Report on Form
8-K, dated January 21, 1997, and is incorporated herein by
reference.
10.15 Amendment No. 1 to Stock Purchase Agreement by and among IMCO
Recycling Inc., EnviroSource, Inc. and IMSAMET, Inc. dated
January 21, 1997. Filed as Exhibit 2.2 to the Company's Current
Report on Form 8-K, dated January 21, 1997, and incorporated
herein by reference.
10.16 Registration Rights Agreement dated as of January 21, 1997 among
IMCO Recycling Inc. and the former shareholders of Rock Creek
Aluminum, Inc., filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1997, and incorporated herein by reference.
10.17 IMCO Recycling Inc. 1992 Stock Option Plan, as amended December
15, 1994, February 28, 1996, February 25, 1997, May 13, 1997 and
May 13, 1998, filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998,
and incorporated herein by reference.
10.18 IMCO Recycling Inc. Annual Incentive Program, as amended February
25, 1997, April 1, 1997, May 13, 1997 and May 13, 1998, filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998, and incorporated herein
by reference.
10.19 Agreement and Plan of Merger by and among IMCO Recycling Inc.,
IMCO Recycling of Coldwater Inc., Alchem Aluminum, Inc. and the
Shareholders of Alchem Aluminum, Inc. dated November 14, 1997,
filed as Exhibit 10.3 to the
70
<PAGE>
Company's Current Report on Form 8-K/A-2 dated September 18,
1997, and incorporated herein by reference.
10.20 Registration Rights Agreement dated as of November 14, 1997 among
IMCO Recycling Inc. and the former shareholders of Alchem
Aluminum, Inc., filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K/A-2 dated September 18, 1997, and incorporated
herein by reference.
10.21 Amended and Restated Credit Agreement by and among the Company,
the Subsidiary Guarantors named therein, the Lenders thereunder,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Texas Commerce Bank National Association dated
November 5, 1997, filed as Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, and incorporated herein by reference.
*10.22 Amendment No. 1 dated June 25, 1998, to the Amended and Restated
Credit Agreement by and among the Company, the Subsidiary
Guarantors named therein, the Lenders thereunder, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Texas
Commerce Bank National Association dated November 5, 1997.
*10.23 Amendment No. 2 dated January 15, 1999, to the Amended and
Restated Credit Agreement by and among the Company, the
Subsidiary Guarantors named therein, the Lenders thereunder,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Texas Commerce Bank National Association dated
November 5, 1997.
10.24 Executive Option Exercise Loan Program, dated March 10, 1998,
filed as Exhibit 10.1 to the Company's Quarterly Report for the
quarterly period ended March 31, 1998, and incorporated herein by
reference.
10.25 Memorandum of Purchase and Sale Agreement by and among IMCO
Recycling Inc., The Minette and Jerome Robinson Community
Property Trust, The Minette and Jerome Robinson Foundation, The
Minette and Jerome Robinson Charitable Remainder Trust, M. Russ
Robinson, Howard Robinson and Mindy Robinson Brown, dated July
21, 1998, filed as Exhibit 2.1 to the Company's Current report on
Form 8-K, dated August 4, 1998, and incorporated herein by
reference.
10.26 Form of Common Stock Purchase Warrant, dated July 21, 1998, filed
as Exhibit 2.2 to the Company's Current report on Form 8-K, dated
August 4, 1998, and incorporated herein by reference.
*21 Subsidiaries of IMCO Recycling Inc. as of March 8, 1999.
*23 Consent of Ernst & Young LLP.
*27 Financial Data Schedule.
71
<PAGE>
- ------------------
* Filed herewith.
(b) Reports on Form 8-K filed in fourth quarter 1998: None.
(c) See sub-item (a) above.
(d) See sub-item (a) above.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 12, 1999 IMCO Recycling Inc.
By: /s/ Robert R. Holian
-----------------------------------
Robert R. Holian, Vice President and
Controller, Principal Accounting Officer
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>
<CAPTION>
Signature Title Date
- ------------------------------ -------------------------------------- ---------------------
<S> <C> <C>
Director, Chairman of the
/s/ Don V. Ingram Board, Chief Executive Officer March 12, 1999
- ------------------------------
Don V. Ingram
/s/ Jack M. Brundrett Director March 12, 1999
- ------------------------------
Jack M. Brundrett
/s/ Ralph L. Cheek Director March 12, 1999
- ------------------------------
Ralph L. Cheek
/s/ John J. Fleming Director March 12, 1999
- ------------------------------
John J. Fleming
/s/ Don Navarro Director March 12, 1999
- ------------------------------
Don Navarro
/s/ Jack C. Page Director March 12, 1999
- ------------------------------
Jack C. Page
/s/ Steve Bartlett Director March 12, 1999
- ------------------------------
Steve Bartlett
/s/ Jeb Hensarling Director March 12, 1999
- ------------------------------
Jeb Hensarling
Executive Vice President Finance and
/s/ Paul V. Dufour Administration (Principal Financial Officer) March 12, 1999
- ------------------------------
Paul V. Dufour
Vice President and Controller (Principal March 12, 1999
/s/ Robert R. Holian Accounting Officer)
- ------------------------------
Robert R. Holian
</TABLE>
73
<PAGE>
EXHIBIT 10.7
SPLIT-DOLLAR LIFE INSURANCE AGREEMENT
THIS AGREEMENT, effective as of this _____day of ________________, 1999, is
by and between IMCO RECYCLING INC., a Delaware corporation having its principal
executive offices located in Irving, Texas (the "Company") and [Employee] (the
"Employee").
WITNESSETH:
WHEREAS, this Agreement is a life insurance employee benefit plan as
described in Revenue Ruling 64-328, in accordance with an award made to the
Employee, who has rendered efforts on behalf of the Company; and
WHEREAS, the Company highly values the efforts, abilities, and
accomplishments of the Employee and wishes to retain his services, and as an
inducement thereto, the Company is willing to assist the Employee in the payment
of premiums on life insurance; and
WHEREAS, in exchange for such premium assistance, the Employee is willing
to return to the Company its Premium Advance as provided herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, it is
mutually agreed as follows:
1. The Insurance. In furtherance of the purposes of this Agreement, the
Company shall transfer to the Employee the policy(ies) described in Exhibit A
(the "Insurance") issued by one or more insurance companies (the "Insurer(s)").
Exhibit A may be amended by the parties to this Agreement, at any time and from
time to time, by a
<PAGE>
written instrument complying with Section 14 of this Agreement. Upon the
Employee's death, $XXX,XXX.XX (hereafter referred to as the "Employees Death
Benefit") shall be payable as the Employee shall have designated under the
Insurance, subject to Section 3 of this Agreement.
2. Ownership. The Employee shall be the sole owner of the Insurance and
shall hold the Insurance. The Employee shall have all the rights of "owner"
under the terms of the Insurance including, but not limited to, the right to
designate beneficiaries, select settlement and dividend options, borrow on the
security of the Insurance, and to surrender the Insurance. All such rights may
be exercised by the Employee without the Company's consent.
3. Repayment of Premium Advance to Company. The Company's "Premium
Advance" is an amount equal to the lesser of (i) the cumulative total of the
Company's share of premiums paid on the Insurance, or (ii) the cash surrender
value of the Insurance as of the applicable date. Subject to Section 6 below, in
the event of the death of the Employee, the "Premium Advance" shall be equal to
the greater of (i) the cumulative total of the Company's share of premiums paid
on the Insurance, or (ii) the total death benefits payable under the Insurance
less the Employee's Death Benefit. Subject to Section 6 below, in exchange for
the Company's payment of its premium contribution under Section 4, the Employee
agrees to pay to the company the amount of its Premium Advance on the earlier
of:
(1) Termination of this Agreement as provided in Section 6 or
(2) The Employee's death.
<PAGE>
Nothing herein shall give the Company any interest in the Insurance. The Company
will not take any action in dealing with the Insurer(s) that would impair any
right or interest of the Employee in the Insurance.
4. Payment of Premiums.
(a) Each annual premium on the Insurance shall be paid as follows:
(1) At the election of the Company, the Employee shall pay a
portion of each premium equal to (i) the current term rate for
the Employee's age, multiplied by the excess of the current death
benefit over the Company's current Premium Advance. If the
Company does not require the Employee to pay a portion of the
premium pursuant to the preceding sentence, the Company shall pay
such amount on behalf of the Employee and such amount shall be
treated as compensation to the Employee. Here, the "current term
rate" shall mean the lesser of the Insurer's annual term
insurance rate or the rates specified in Revenue Rulings 64-328
and 66-110.
(2) The Company shall pay all premium amounts not paid by the
Employee.
(b) The Employee's premium share (other than that paid with policy
loans) and the Company's premium share shall be remitted to the
Insurer before expiration of the grace period for payment of premiums.
<PAGE>
(c) Dividends on the Insurance shall be applied as elected by the
Employee.
5. Supplements and Riders. Should the Employee deem it desirable,
application may be made for a supplemental agreement or rider to be attached to
the Insurance. Ownership of any such agreement or rider shall be in the Employee
and any additional premiums shall be paid by the Employee.
6. Release of Company's Right to Payment of Premium. This Agreement shall
terminate if the Employee retires from employment with the Company and all
affiliates after attaining age 62; in that event, the Company shall release, in
its entirety, the Company's right to repayment of its Premium Advance.
Retirement shall mean termination of employment for any reason after attaining
age 62, or voluntary termination of employment by the Employee with the consent
of the Company after attaining at least age 59.
7. Termination of Agreement. This Agreement shall terminate on the
earliest to occur of the following events:
(a) Surrender of the Insurance by the Employee, who has the sole and
exclusive right of surrender, subject to Section 3 above;
(b) Delivery by the Employee of written notice of termination to the
Company or delivery of written notice by the Company to the Employee;
(c) Failure of the Employee to make a premium contribution required
in Section 4;
(d) Termination of all employment relationships between the Employee
and the Company, and all affiliated entities (including any corporation,
partnership, or limited liability company which is controlled by, which
controls, or which is under common control with, the Company); or
<PAGE>
(e) Written agreement of the Employee and the Company to terminate
the Agreement.
Upon termination of the Agreement, the Employee shall pay to the Company
the Premium Advance. Upon termination of the Agreement, the Employee and the
Company may enter into further agreement to continue the terms of this
Agreement.
8. Policy Loans. It is agreed that no policy loans may be taken by the
Employee which would have the effect of reducing the cash surrender value below
the amount of the Premium Advance. Interest on any such policy loans shall be
paid by the Employee, as owner of the policy, as such interest becomes due.
9. Payment of Proceeds. At the death of the Employee, the Company and the
Employee shall execute such forms and furnish such other documents or
information as are required to receive payments under the Insurance as
contemplated herein.
All death benefits under this Agreement shall be paid in accordance with
the terms and conditions for the Insurance and pursuant to the claims and review
procedures of the Insurer. The Company's liability to provide benefits under
this Agreement shall be limited solely to the payment of its share of premiums,
as provided in Section 4. The Company assumes no responsibility for payment of
death benefits under the Insurance.
10. Payment Options. In lieu of a lump sum payment, the Employee, as owner
of the Insurance may, in accordance with the procedures of the Insurer(s), elect
any of the optional modes of payment for the death proceeds as enumerate in the
Insurance and known as "settlement options." If no such election is in effect,
the
<PAGE>
beneficiary of any portion of the Insurance shall have the right to elect
such settlement option.
11. Named Fiduciary. For purposes of the Employee Retirement Income
Security Act of 1974 (P.L. 93-406), as amended, the Company is the "named
fiduciary" of the split-dollar life insurance plan for which this Agreement is
hereby designated the written plan instrument.
12. Allocation Of Fiduciary Responsibilities. The Named Fiduciary may
allocate its responsibilities for the operation and administration of this
split-dollar life insurance plan, including the designation of persons to carry
out fiduciary responsibilities under such plan. The Named Fiduciary shall effect
such allocation of its responsibilities by delivering to the Company a written
instrument signed by it that specifies the nature and extent of the
responsibilities allocated, including the persons who are designated to carry
out those fiduciary responsibilities under the plan, together with a signed
acknowledgment of their acceptance.
13. Plan Administrator. The Named Fiduciary is hereby designated as the
"Plan Administrator" of this plan.
14. Amendment. This Agreement may be altered, amended, or modified,
including the addition of any extra policy provisions, by a written agreement
signed by the Company and the Employee. In addition, either party may assign its
rights, interests and obligations under this Agreement; provided, however, that
any assignment shall be made subject to the terms of this Agreement. The laws of
the State of Texas shall govern the construction and enforceability of this
Agreement.
<PAGE>
15. Interpretation. Where appropriate in this Agreement, words used in the
singular shall include the plural and words used in the masculine shall include
feminine and vice versa.
16. Miscellaneous. The waiver by either party of a breac4i of any
provision hereof will not be deemed a waiver of any succeeding breach of such
provision, or a waiver of the provision itself. The parties will not enter into
any agreement or contract with others that would tend to vary, rescind or
abrogate the provisions hereof, nor shall they hinder or interfere with, or
cause to be interfered with in any manner whatsoever, the operation of the terms
of this Agreement. Each party hereto acknowledges that any breach or attempted
breach of any provision of this Agreement will cause irreparable harm for which
there is no adequate remedy at law, and each party agrees that each of the other
parties hereto shall be entitled to specific performance and injunctive and
other equitable relief in case of any such breach or attempted breach. This
Agreement is severable and if, for any reason, any provision or provisions
hereof are determined to be invalid, inoperative, or contrary to any existing or
future law, the remainder of this Agreement shall continue to be valid after
giving effect to the intent manifested by the portion held invalid or
inoperative. This Agreement shall be binding upon and inure to the benefit of
the parties, their heirs, legal representatives, successors and assigns.
17. Notices. All notices, requests, demands or other communications
provided for herein shall be in writing and shall be deemed to have been given
when sent by registered or certified mail, return receipt requested, addressed
to the parties at their addresses set forth below or to such other person or
address as a party shall designate to the other parties from time to time in
writing forwarded in like manner:
<PAGE>
Company: Employee:
IMCO RECYCLING INC. Name
5215 North O'Connor Blvd. Address
Suite 940
Irving, Texas 75039
Any party may change such party's address by written notice to all other parties
to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first hereinabove written.
Employee:
------------------------------
Name
IMCO Recycling Inc.
------------------------------
By:
---------------------------
Title:
------------------------
<PAGE>
EXHIBIT A
INSURANCE COMPANY FACE AMOUNT
- ----------------- -----------
Pacific Life $ XXX,XXX
<PAGE>
EXHIBIT B
ASSIGNMENT OF LIFE INSURANCE
POLICY AS COLLATERAL
--------------------
A. For Value Received, the undersigned hereby assigns, transfers and sets over
to IMCO - RECYCLING INC., a Delaware corporation (herein called the
"Assignee"), a certain interest hereinafter specified in Policy No. XXXXXXX
(herein called the "Policy") issued by Pacific Life (herein called the
"Insurer"), upon the life of [Employee] subject to all the terms and
conditions of the Policy and to all superior liens, if any, which the
Insurer may have against the Policy. The undersigned by this instrument
agrees, and the Assignee by the acceptance of this assignment agrees, to
the conditions and provisions herein set forth. This Assignment is entered
into in accordance with a Transfer of Ownership Agreement by and between
the Assignee and [Employee] dated the same date as this Assignment (the
"Agreement").
B. It is expressly agreed that the following specific interest in the Policy
(including any divided accumulations or additions standing to the credit of
the Policy) passes by virtue hereof:
The Assignee shall have an interest in the Policy and any proceeds
becoming payable under the Policy due to death, maturity, policy loan
or surrender of the policy to the extent of any liability arising
under the Agreement.
C. Except as expressly provided in paragraph D below, it is expressly agreed
that the following specific rights are reserved and excluded from this
assignment and do not pass by virtue hereof:
1. The right to collect from the Insurer any disability benefit payable
in cash that does not reduce the amount of insurance;
2. The right to designate and change the beneficiary;
3. The right to elect any optional mode of settlement permitted by the
Policy or allowed by the Insurer; but any designation or change of
beneficiary or election of a mode of settlement shall be made subject
to this assignment and to the rights of the Assignee hereunder;
4. The right to surrender the Policy or to obtain policy loans from the
Insurer;
5. The right to elect a nonforfeiture provision, to change the
application of dividends or to exercise any other rights, privileges
and options available
<PAGE>
under the terms of the policy to the undersigned as owner of the
Policy; and
6. The right to select investment options with respect to the policy.
D. This assignment is made and the Policy is to be held as collateral security
under the Agreement for any and all liabilities of the undersigned to the
Assignee, either now existing or that may hereafter arise between the
undersigned and the Assignee (all of which liabilities secured or to become
secured are herein called "Liabilities"). It is expressly agreed that all
sums received by the Assignee hereunder, either in the event of death of
the Insured, the maturity or surrender of the Policy, the obtaining of a
loan or advance on the Policy, or otherwise, shall first be applied to the
payment of one or more of the following in such order of preference as the
Assignee shall determine: (a) principal of and/or interest on Liabilities;
or (b) premiums paid by the Assignee on the Policy. In the event that the
undersigned is obligated to pay any amount to the Assignee under the
Agreement, the Assignee shall be entitled to direct payment from the
Insurer, and the right to direct the surrender of the Policy or to obtain
policy loans from the Insurer in order to enforce its rights under the
Agreement, upon written notice to the Insurer.
E. The Assignee covenants and agrees with the undersigned as follows:
1. That any balance of the sums received hereunder from the Insurer
remaining after payment of the then existing Liabilities, matured or
unmatured, shall be paid by the Assignee to the persons entitled
thereto under the terms of the Policy had this assignment not been
executed;
2. That the Assignee will forward to the Insurer, upon request and
without unreasonable delay, the Policy for endorsement of any
designation or change of beneficiary or any election of an optional
mode of settlement.
F. The Insurer is hereby authorized to recognize the Assignee's claims to
rights hereunder without investigating the reason for any action taken by
the Assignee, or the validity or the amount of the Liabilities or the
existence of any default herein, or the giving of any notice, or the
application to be made by the Assignee of any amounts to be paid to the
Assignee. The sole receipt of the Assignee for any sums received shall be a
full discharge and release therefore to the Insurer. Checks for the sums
payable under the Policy and assigned herein shall be drawn to the
exclusive order of the Assignee if, when, and in such amounts, as may be
requested by the Assignee. The Insurer shall not take any notice of the
terms of any outside agreement or of any restrictions that may be imposed
on the Assignee thereby.
G. The Assignee shall be under no obligation to pay any premium, or the
principal of or interest on any loans or advances on the Policy, or any
other charges on the
<PAGE>
Policy, but any such amounts so paid by the Assignee from its own funds
shall become a part of the Liabilities hereby secured except as may be
provided by the Agreement.
H. The Assignee may take or release other security, may release any party
primarily or secondarily liable for any of the Liabilities, may grant
extensions, renewals or indulgences with respect to the Liabilities, or may
apply to the Liabilities proceeds of the Policy hereby assigned or any
amount received on account of the Policy by the exercise of any right
permitted under this assignment, without resorting or regard to other
security.
I. The undersigned declares that no proceedings in bankruptcy are pending
against him and that his property is not subject to any assignment for the
benefit of creditors.
J. It is the intent of the undersigned to assign an interest in proceeds
becoming payable under the Policy as security for certain advances from the
Assignee, without giving the Assignee any incidents of ownership in the
Policy as defined under Section 2042 of the Internal Revenue Code (and
Regulations thereunder) presently in effect, or any successor thereto.
Signed this _______ day of ________________________ , 1999.
------------------------------
Name
<PAGE>
EXHIBIT 10.11
PROCESSING AGREEMENT
by and between
Aluminum Company of America
(Rigid Packaging Division)
and
IMCO Recycling Inc.
DATED: Effective as of January 1, 1994
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
ARTICLE 1. UTILIZATION OF THE FACILITY............................ 2
Section 1.01 Conversion of Furnaces.......................... 2
Section 1.02 Processing Commitment........................... 2
ARTICLE II. AGREEMENT TO TOLL..................................... 3
Section 2.01 Toll Requirements............................... 3
Section 2.02 Supply Obligations.............................. 4
Section 2.03 Records......................................... 5
Section 2.04 Alcoa Default and IMCO Remedies................. 5
Section 2.05 IMCO Default and Alcoa Remedies................. 6
Section 2.06 Deficiency Payments............................. 7
ARTICLE III. TERM................................................. 11
Section 3.01 Term............................................ 11
Section 3.02 Expansion....................................... 12
Section 3.03 Final Contract Year............................. 13
ARTICLE IV. TOLLING............................................... 14
Section 4.01 Tolling Operation............................... 14
ARTICLE V.
PRICE, PACKAGING AND TERMS AND CONDITIONS OF SALE................ 15
Section 5.01 Price........................................... 15
Section 5.02 Price Adjustment................................ 15
Section 5.03 Packaging and Delivery Procedure................ 15
Section 5.04 Terms and Conditions of Sale.................... 15
ARTICLE VI. TITLE AND RELATED RIGHTS.............................. 15
Section 6.01 Invoices and Documentation...................... 15
Section 6.02 Title........................................... 16
Section 6.03 Disclaimer of Other Warranties.................. 16
ARTICLE VII. ENVIRONMENTAL........................................ 17
Section 7.01 By-Products and Residues Generated by IMCO...... 17
Section 7.02 Worker Exposure................................. 17
Section 7.03 Notice of Non-Compliance........................ 19
Section 7.04 Indemnity....................................... 19
ARTICLE VIII. FORCE MAJEURE....................................... 20
Section 8.01 Force Majeure................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX. PROPRIETARY AND CONFIDENTIAL INFORMATION.......... 21
Section 9.01 Proprietary Information......................... 21
Section 9.02 Non-Disclosure.................................. 23
Section 9.03 Procedures...................................... 24
Section 9.04 Labeling Confidential Information............... 24
Section 9.05 Equitable Relief................................ 24
ARTICLE X. NOTICES AND COMMUNICATIONS............................. 24
Section 10.01 Notices and Communications..................... 24
ARTICLE XI. INSPECTION; REJECTIONS AND RETURNS.................... 26
Section 11.01 Inspection; Rejection and Returns.............. 26
ARTICLE XII. DELIVERY COSTS....................................... 27
Section 12.01 Cost Allocation................................ 27
ARTICLE XIII. DELIVERY INSTRUCTIONS............................... 27
Section 13.01 Direction...................................... 27
ARTICLE XIV. SPECIFICATIONS....................................... 27
Section 14.01 Conformity..................................... 27
ARTICLE XV. INDEPENDENT STATUS OF PARTIES AND LIMITATION
OF AUTHORITY ...................................... 27
Section 15.01 Independent Status of Parties.................. 27
ARTICLE XVI. INDEMNITY............................................ 28
Section 16.01 Alcoa's Indemnity.............................. 28
Section 16.02 IMCO's Indemnity............................... 28
ARTICLE XVII. TERMINATION......................................... 29
Section 17.01 Termination.................................... 29
ARTICLE XVIII. REPRESENTATIONS.................................... 30
Section 18.01 Representations of Alcoa....................... 30
Section 18.02 Representations of IMCO........................ 31
ARTICLE XIX. INSURANCE............................................ 32
Section 19.01 Minimum Coverages.............................. 32
ARTICLE XX. TAXES................................................. 33
Section 20.01 Taxes.......................................... 33
</TABLE>
ii
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<TABLE>
<S> <C>
ARTICLE XXI. BAILMENT.......................................... 33
Section 21.01 BAILMENT......................................... 33
ARTICLE XXII. SETTLEMENT OF DISPUTES........................... 34
Section 22.01 Referral to Officers............................. 34
ARTICLE XXIII. MISCELLANEOUS................................... 34
Section 23.01 Benefit And Assignment........................... 34
Section 23.02 Non-Waiver....................................... 35
Section 23.03 Severability..................................... 36
Section 23.04 Entire Agreement................................. 36
Section 23.05 Captions......................................... 37
Section 23.06 Governing Law.................................... 37
Section 23.07 Further Assurances............................... 37
Section 23.08 Finder's and Broker's Fees....................... 37
Section 23.09 Counterparts..................................... 37
Section 23.10 Time of the Essence.............................. 38
Section 23.11 Approvals........................................ 38
Section 23.12 Exhibits and Schedules........................... 38
Section 23.13 Substantiation................................... 38
Section 23.14 References....................................... 38
</TABLE>
iii
<PAGE>
PROCESSING AGREEMENT
This Processing Agreement (the "Agreement") is made and entered into
effective as of the 1st day of January, 1994, by and between the Rigid Packaging
Division of Aluminum Company of America, a Pennsylvania corporation with its
principal place of business at 1100 Riverview Tower, 900 South Gay Street,
Knoxville, Tennessee 37902 (referred to in this Agreement and Exhibits as
"Alcoa") and IMCO Recycling Inc., a Delaware corporation with its principal
executive offices at 5215 North O'Connor Blvd., Suite 940, Central Tower at
Williams Square, Irving, Texas 75039 (referred to in this Agreement and Exhibits
as "IMCO").
WITNESSETH:
WHEREAS, Alcoa is engaged in the business of producing aluminum rolled
products at its rolling mill facility in Alcoa, Tennessee (the "Alcoa Plant");
and
WHEREAS, Alcoa produces or acquires (a) used beverage containers ("UBC's"),
(b) dross, (c) scrap and (d) ingot with respect to its operations at the
Alcoa Plant which, with further processing, can be recovered and recycled as
Remelt Scrap Ingot ("RSI") or molten metal ("Molten Metal"); and
WHEREAS, IMCO owns and operates a recycling and processing facility in
Rockwood, Tennessee (the "Facility") for the purpose of recycling dross, UBC's,
and aluminum scrap into RSI and Molten Metal; and
WHEREAS, the parties desire to enter into a processing agreement whereby
IMCO will provide tolling/converting services to Alcoa to satisfy Alcoa's
requirements of secondary metal in the form of RSI and Molten Metal and Alcoa
will purchase said services from IMCO; and
<PAGE>
WHEREAS, IMCO desires to have assurances from Alcoa that Alcoa will deliver
certain specified quantities of dross, UBC's, aluminum scrap and concentrates
and other metal units to be processed by IMCO at the Facility ("Specified
Deliveries"); and
WHEREAS, in consideration of such Specified Deliveries, IMCO has agreed to
produce and process secondary metal in the form of RSI and Molten Metal of
particular quality and at certain agreed to designations, all as provided
herein.
NOW, THEREFORE, for Ten and No/100 Dollars ($10.00) and in consideration of
and in reliance upon the mutual covenants and conditions set forth herein, the
sufficiency of which is hereby acknowledged, Alcoa and IMCO agree as follows:
ARTICLE 1. UTILIZATION OF THE FACILITY
Section 1.01 Conversion of Furnaces. IMCO has converted two (2) of its
-----------------------------------
rotary furnaces at the Facility to Molten Metal delivery capability
specifications so that at the Effective Date of this Agreement (as defined in
Section 3.01 of this Agreement) IMCO has a total of six (6) furnaces in the
Facility having Molten Metal delivery capabilities, which, in the aggregate,
shall represent a total recycling capacity at the Facility (the "Plant
Capacity") of 18 million pounds per month.
Section 1.02 Processing Commitment. It is intended that Alcoa shall be the
----------------------------------
principal customer of the Facility and shall always receive priority scheduling
and toll conversion pricing over IMCO's other customers of the facility. Subject
to the terms of this agreement, IMCO shall toll/convert the quantities of
Alcoa's Product (as defined in Section 4.01 below) delivered for toll/conversion
as set forth in this
2
<PAGE>
Agreement. So long as IMCO at all times meets its tolling and supply obligations
to Alcoa hereunder, it shall not be prohibited from tolling or selling any ingot
or molten metal it produces at the Facility.
ARTICLE II. AGREEMENT TO TOLL
Section 2.01 Toll Requirements. It is intended that, to the extent that the
------------------------------
Alcoa Plant requires external secondary processing and recycling of Product,
that IMCO shall be the principal and preferred supplier of such services. The
target monthly volume of deliveries by Alcoa to the Facility shall be 15 million
pounds per month for the Initial Term of this Agreement, as it may be extended
in accordance with the terms hereof. With respect to the Alcoa Plant, IMCO shall
be Alcoa's (i) exclusive external source of secondary processing and recycling
of Product, in an amount up to the target monthly volume of 15 million pounds,
and (ii) primary and preferential external source of processing of Product in
excess of 15 million pounds per month up to the maximum capacity of the Facility
provided that prices, terms, and services provided to Alcoa by IMCO with respect
to such incremental volumes exceeding 15 million pounds per month are
substantially similar to those provided by IMCO's competitors. The target
monthly delivery requirements of Alcoa may be subject to adjustment as provided
in Sections 3.02 and 3.03 of this Agreement. Notwithstanding the above, it is
understood that, from time to time, the external processing requirements of the
Alcoa Plant may not achieve the target monthly level. During such months and so
long as the Alcoa Plant is not utilizing any other external secondary processor,
target volumes shall be deemed to have been met, except during
3
<PAGE>
the final Contract Year of this Agreement, for purposes of Deficiency Payments
calculations as set forth in Section 2.06.
Section 2.02 Supply Obligations. As contemplated in Section 2.01 above, at
-------------------------------
any time other than the final Contract Year during which Alcoa is not delivering
the target volume of 15 million pounds per month, subject to adjustment as
provided in Section 3.02, of Product (as defined in Section 4.01 below) to the
Facility for processing by IMCO, and is utilizing a third party or third parties
other than IMCO for secondary processing with respect to the Alcoa Plant or,
during the Initial Term of this Agreement, is accepting molten metal deliveries
from a third party processor under tolling arrangements with another third
party, Alcoa will be liable to IMCO for a Deficiency Payment as defined in
Section 2.06. During the final Contract Year, Alcoa will be liable to IMCO for a
Deficiency Payment in the event that Alcoa does not deliver the monthly minimum
requirement of nine (9) million pounds of Product as provided in Section 3.03
hereof.
After the Initial Term and in the event that Alcoa is unable to deliver to
IMCO the target volume of Product for secondary processing directly as a result
of entering into any arrangement or arrangements whereby Alcoa would accept
molten metal deliveries from a third party processor under tolling arrangements
with another third party, Alcoa agrees to use its best efforts to secure for
IMCO preferential status as secondary processor in such a tolling arrangement.
Additionally, if and to the extent at any time and from time to time that the
Alcoa Plant is unable, for any reason, to deliver the target monthly volume of
Product for processing to the Facility, Alcoa
4
<PAGE>
agrees that during such period of time IMCO will be accorded preferential status
by Alcoa with respect to deliveries of Product for secondary processing from
Alcoa's facilities other than the Alcoa Plant, provided that prices, terms, and
services provided to Alcoa by IMCO are substantially similar to those provided
by IMCO's competitors.
Section 2.03 Records. IMCO shall not co-mingle the Product, processing by-
--------------------
products and residues, dunnage, or finished products relating to any other
customers at the Facility with those of Alcoa. IMCO shall maintain and make
available to Alcoa accurate and complete records of the Product, processing by-
products and residues, dunnage, and finished products relating to services
performed for Alcoa under this Agreement. The exact content of such records
shall include such detail as may reasonably be requested by Alcoa from time to
time but shall include, and not be limited to, the data described in Exhibit
"A".
Section 2.04 Alcoa Default and IMCO Remedies. Alcoa default for the
--------------------------------------------
purposes of this Agreement shall mean (i) Alcoa's failure to deliver at least 12
million pounds of Product per month to IMCO at the Facility for a period of
three (3) consecutive months, which failure is a result of Alcoa's utilization
of or arrangement(s) with any third party or third parties for secondary
processing with respect to the Alcoa Plant as described in Section 2.02; (ii)
Alcoa's failure to pay IMCO the payment amounts referred to in Section 5.01 and
specified in Exhibit "C", as such amounts may be adjusted in accordance with the
terms hereof; (iii) Alcoa's failure to pay IMCO any Deficiency payments when due
and owing by Alcoa to IMCO as provided in
5
<PAGE>
Section 2.06; (iv) failure by Alcoa to honor Alcoa's indemnity agreements
hereunder; (v) Alcoa's failure to pay IMCO an invoice issued pursuant to the
terms of Section 6.01; or (vi) any other failure or refusal by Alcoa to perform
its material obligations hereunder, provided that IMCO has given written
--------
notification of such failure to Alcoa; and provided further that for so long as
-------- -------
any such matter has been referred for resolution pursuant to Section 22.01 of
this Agreement, then any such default shall be deemed to be continuing (unless
cured) but any remedial action by IMCO with respect to such default shall be
suspended for such time as the provisions of such Section 22.01 are operative.
Alcoa acknowledges that IMCO is relying upon Alcoa's minimum delivery
requirements as described in Section 2.01, above, and that without Alcoa's
covenant to deliver the minimum quantities specified herein, IMCO would not be
willing to dedicate to Alcoa the total capacity of the Facility or to construct
certain planned expansions of the Facility. In the event of an Alcoa default and
not as a limitation of any other right or remedy as expressed in Section 23.02
below, IMCO may elect (i) to seek specific performance of Alcoa's contractual
obligations hereunder, (ii) damages, or (iii) to the extent not inconsistent
under the circumstances, both specific performance and damages.
Section 2.05 IMCO Default and Alcoa Remedies. IMCO default for purposes of
--------------------------------------------
this Agreement shall mean (i) IMCO's failure to toll convert at least 12 million
pounds of Product per month and deliver to Alcoa the RSI and Molten Metal
recovered therefrom in the volumes required by Alcoa, which failure persists for
a
6
<PAGE>
period of three (3) consecutive months, and which is a result of IMCO's
utilization of the Facility for secondary processing of Product for third
parties other than Alcoa and not a result of Alcoa's failure to deliver the
minimum quantities of Product as set forth herein; (ii) failure by IMCO to honor
IMCO's indemnity agreements hereunder; (iii) or any other failure or refusal by
IMCO to perform its material obligations hereunder, provided that Alcoa has
--------
given written notification of such failure to IMCO; and provided further that
-------- -------
for so long as any such matter has been referred for resolution pursuant to
Section 22.01 of this Agreement, then any such default shall be deemed to be
continuing (unless cured) but any remedial action by Alcoa with respect to such
default shall be suspended for such time as the provisions of such Section 22.01
are operative.
IMCO acknowledges that Alcoa is relying upon IMCO's minimum processing
commitment as described in Section 1.02 above, and that without IMCO's covenant
to process the minimum quantities specified herein, Alcoa would not be willing
to commit to IMCO the quantity of Product hereunder. In the event of an IMCO
default and not as a limitation of any other right or remedy as expressed in
Section 23.02 below, Alcoa may elect (i) to seek specific performance of IMCO's
contractual obligations hereunder, (ii) damages, or (iii) to the extent not
inconsistent under the circumstances, both specific performance and damages.
Section 2.06 Deficiency Payments. (a) In the event that Alcoa fails to
--------------------------------
deliver with respect to any Contract Month (as defined in Section 3.01) at least
15 million pounds of Product to IMCO at the Facility (provided that IMCO has the
capability
7
<PAGE>
to process at least 15 million pounds of Product during such Contract Month)
which failure to deliver is a result of Alcoa's utilization of or arrangement(s)
with any third party or third parties for secondary processing (as described in
Section 2.02) with respect to the Alcoa Plant (a "Deficiency"), Alcoa shall,
subject to the terms of this Section 2.06, be liable to IMCO for a Deficiency
payment equal to $0.01 per pound of the amount of the Deficiency. Such
Deficiency amounts, if any, will be calculated and computed on a monthly basis
by IMCO and communicated in writing to Alcoa. Deficiencies in subsequent months
will be added to accumulated Deficiencies incurred in prior months. Any pounds
of Product delivered in a particular Contract Month which exceed 15 million
pounds with respect to that month ("Overages") shall be credited against any
accumulated Deficiencies, calculated in accordance with paragraph (b) below. If,
as of the end of a Contract Year (as defined in Section 3.01 below), a net
cumulative Deficiency amount exists, calculated as provided herein, Alcoa will
pay IMCO the net Deficiency payment within sixty (60) days after the end of such
Contract Year. If, as of the end of a Contract Year, a net cumulative Overage
amount exists, calculated as provided herein, the Overage shall be carried over
to the next Contract Year; provided that any Overage amount so carried over from
--------
a prior Contract Year and not fully utilized in the current Contract Year shall
not be eligible to be carried over to and applied in any subsequent Contract
Year.
(b) When a Deficiency occurs with respect to any Contract Month, the
amount of the Deficiency up to one million pounds shall be classified as a
"Class I Deficiency." If such Deficiency exceeds one million pounds, the amount
of the
8
<PAGE>
Deficiency which exceeds one million pounds up to three million pounds shall be
classified as a "Class II Deficiency." If such Deficiency exceeds three million
pounds, the amount of the Deficiency that exceeds three million pounds shall be
classified as a "Class III Deficiency." Thus, with respect to a Deficiency of
four million pounds incurred with regards to any Contract Month, one million
pounds shall be categorized as a Class I Deficiency, two million pounds shall be
categorized as a Class II Deficiency and one million pounds shall be categorized
as a Class III Deficiency.
Any Overages shall be credited against Deficiency amounts in order to
reduce cumulative Deficiencies. Such Overages (including carried over cumulative
Overages) shall be credited against such Deficiency amounts calculated as
follows:
Class I Class II Class III
Deficiency Deficiency Deficiency
---------- ---------- ----------
Monthly Deficiency less than 1,000,000 more than
amount (in pounds 1,000,000 to 3,000,000
of Product) 3,000,000
Percentage of
each Overage pound
to be credited 100% 75% 50%
against Deficiency
pounds by Class of
Deficiency
In this respect, if a Deficiency of one million pounds is incurred with
respect to a Contract Month, any Overage of one million pounds (or any portion
thereof equal to one million pounds) will be 100% credited against such
Deficiency and eliminate such Deficiency.
9
<PAGE>
If a Deficiency of four million pounds is incurred in a Contract Month, an
Overage of five million, six hundred sixty six thousand, six hundred and sixty
seven (5,666,667) pounds would be required to eliminate such Deficiency,
computed as follows:
First: one million pounds of Overage would be 100% credited against
-----
the first one million pounds of the total Deficiency (the Class I Deficiency);
Second: two million, six hundred sixty six thousand, six hundred
------
sixty seven (2,666,667) pounds of Overage would be credited against the next two
million pounds of the Deficiency (the Class II Deficiency); and
Third: two million pounds of Overage would be credited against the next
-----
one million pounds of the Deficiency (the Class III Deficiency).
Current Overages and Overages previously created and carried over shall be
credited against currently-incurred and accumulated Deficiencies in the
following order:
First - against Class I Deficiencies;
-----
Second - against Class II Deficiencies; and
------
Third - against Class III Deficiencies.
-----
Any Deficiencies remaining after fully utilizing current and carried-over
Overages shall be carried over to subsequent periods and shall continue to be
categorized in the same Class until eliminated by subsequent Overages or until
Deficiency payments with respect thereto are paid.
10
<PAGE>
(c) During the final Contract Year of this Agreement, any Overage balance
accumulated during and remaining at the end of the prior Contract Year shall be
rolled over, but Alcoa shall not have the right to accrue any further Overage
amounts incurred during the final Contract Year. In the event that Alcoa does
not deliver the monthly minimum requirement of nine (9) million pounds of
Product as provided in Section 3.03 hereof, Alcoa shall be liable for the
Deficiency payment resulting from the Deficiency thereby created, without any
right to credit any new Overage against such Deficiencies. In addition, for the
purposes of the immediately preceding sentence, any Deficiency calculated with
respect to any Calendar Month during the final Contract Year shall be deemed
incurred (i) so long as IMCO has the capability to process at least nine million
pounds of Product for such Contract Month, and (ii) regardless of whether
Alcoa's failure to deliver the requisite nine (9) million pounds per month is a
result of Alcoa's utilization of or arrangement(s) with any third party or third
parties for secondary processing with respect to the Alcoa Plant. The final
Deficiency payment shall be payable by Alcoa within sixty (60) days after the
termination of this Agreement.
ARTICLE III. TERM
Section 3.01 Term. This Agreement shall be effective as of January 1, 1994
-----------------
(the "Effective Date"). Subject to the termination provisions of Section 16.01
below, the obligations of the parties with respect to the delivery and the
processing of Product (as defined in Section 4.01) shall commence at the
beginning of the First Contract Year, as defined in this Section 3.01, and shall
be in effect for a three (3)
11
<PAGE>
year term thereafter (the "Initial Term"), unless further extended or terminated
as herein provided. On the last day of each Contract Year, the term of this
Agreement shall automatically be extended by one (1) additional Contract Year so
that the Agreement will be in effect for three (3) Contract Years from and after
such last day of each such Contract Year, unless written notice of termination
has been given by either party to the other as provided herein. If notice of
termination is given at any time during the First Contract Year, the Agreement
will expire at the end of the Initial Term. If notice of termination is given at
any time after the First Contract Year, the Agreement will terminate on the
second anniversary date of the last day of the particular Contract Year in which
the notice of termination is given. For purposes of this Agreement the term
"Contract Year" shall refer to a consecutive twelve (12) month period commencing
on January 1st of each year, with the First Contract Year commencing on January
1, 1994. Similarly, "Contract Quarter" shall refer to each consecutive three (3)
month period beginning on the first day of the Contract Year and "Contract
Month" shall refer to a full calendar month within a Contract Year.
Section 3.02 Expansion. At a time and place to be agreed upon prior to the
----------------------
end of each calendar year while this Agreement is in effect, IMCO and Alcoa will
meet to review their respective annual volume requirements and their projected
overall volume requirements and will each use their reasonable best efforts to
determine whether any expansion of the Facility should be implemented. At or
following the end of the second Contract Year during the term of this Agreement,
IMCO may elect
12
<PAGE>
to expand the Facility by constructing two additional Molten Metal furnaces so
that the Plant capacity would be increased to 24 million pounds per month. If
such expansion is undertaken, Alcoa shall have the right to elect to have such
additional incremental capacity at the Facility (i.e., that amount above 18
million pounds per month) (the "Incremental Capacity") dedicated to Alcoa, which
would be evidenced by a written amendment of this Agreement to reflect such
modifications as agreed to by the parties. If Alcoa chooses not to have such
Incremental Capacity so dedicated to it, IMCO shall be free to utilize such
Incremental Capacity for IMCO's other customers, and while Alcoa may continue to
use the services of the Facility to the extent of more than 18 million pounds
per month, its usage with respect to such incremental amounts shall be governed
by mutual agreement between IMCO and Alcoa and the then-prevailing market terms
at the time of such usage from time to time by Alcoa.
Section 3.03 Final Contract Year. Notwithstanding any provision in this
--------------------------------
Agreement to the contrary, during the final Contract Year of this Agreement,
after a notice of termination has been given as provided herein, the processing
volumes committed hereunder by Alcoa to IMCO may be reduced by agreement of the
parties; provided however that in such event, the minimum monthly delivery
-------- -------
requirements of Alcoa with respect to Product shall be reduced from the monthly
requirement level in effect immediately prior to the first day of the final
Contract Year to a level equal to nine (9) million pounds per month, and the
remaining terms and conditions of this
13
<PAGE>
Agreement shall remain in full force and effect as they pertain to such nine (9)
million pounds per month minimum level with respect to such final Contract Year.
ARTICLE IV. TOLLING
Section 4.01 Tolling Operation.
------------------------------
(a) For purposes of this Agreement, Product shall be classified into the
categories of dross, UBC's, RSI, aluminum scrap (Class I, II and III),
concentrates and other agreed upon material (the "Product").
(b) IMCO shall, as part of its tolling operations, supply and at all
times maintain at its expense a sufficient number of crucibles and sow molds
necessary to comply with its supply obligations under this Agreement.
(c) IMCO represents and warrants that it: (i) shall promptly and before
commencing work procure, at its own expense, all permits and licenses necessary
to carry out its obligations under this Agreement (including licenses to
transact business), and shall maintain such permits and licenses in effect
during its performance of this Agreement; (ii) possesses the requisite
qualifications for processing the Products as contemplated by this Agreement;
(iii) possesses sufficient business, professional and technical expertise in
order to handle, load, transport, treat, store and dispose of any processing by-
products and residues; (iv) possesses or will possess the equipment, plant and
employee resources required to perform the Agreement; and (v) shall comply in
all material respects with all applicable federal, state and local laws, rules,
regulations and ordinances necessary for it to carry out
14
<PAGE>
its obligations hereunder, including but not limited to applicable environmental
laws, rules and regulations.
ARTICLE V.
PRICE, PACKAGING AND TERMS AND CONDITIONS OF SALE
Section 5.01 Price. For the performance by IMCO of the processing described
------------------
in this Agreement, Alcoa shall pay IMCO as set forth in Exhibit "B" which is
attached hereto and made a part hereof.
Section 5.02 Price Adjustment. From and after the First Contract Year, the
-----------------------------
prices referred to in Section 5.01 above and Exhibit "B" hereto shall be subject
to adjustment from time to time in the manner specified in Exhibit "C" which is
attached hereto and made a part hereof.
Section 5.03 Packaging and Delivery Procedure. Packaging, preparation for
---------------------------------------------
transport, delivery, and identification of RSI, Molten Metals and Product shall
be in accordance with Exhibit "A" hereto.
Section 5.04 Terms and Conditions of Sale. All orders placed and services
-----------------------------------------
performed pursuant to this Agreement shall be subject to the terms of this
Agreement. Notwithstanding the fact that either party may submit purchase
orders, acknowledgments, invoices, or similar documentation, any terms or
conditions contained in said documents or instruments inconsistent with the
terms of this Agreement shall be superseded by the terms hereof.
15
<PAGE>
ARTICLE VI. TITLE AND RELATED RIGHTS
Section 6.01 Invoices and Documentation.
---------------------------------------
(a) IMCO shall issue to Alcoa (i) invoices on a semi-monthly basis covering
Base Toll Conversion Charges as described in Exhibit "B"; and (ii) invoices on a
monthly basis covering Molten Metal delivery charges. Alcoa shall pay all such
invoices within thirty (30) days from the date of the invoice.
(b) All invoices shall refer to this Agreement and shall show the precise
quantities of materials which are covered thereby.
(c) IMCO shall provide Alcoa with the original copy of all Bills of Lading
on shipments made by it of Alcoa material or converted materials.
(d) IMCO and Alcoa agree to use their reasonable best efforts to cooperate
and work toward the streamlining and simplification of the documentation
required with respect to shipments and billing, to the extent reasonably
practicable under the circumstances.
Section 6.02 Title. All Product supplied by Alcoa to IMCO under the
------------------
terms of this Agreement, as well as the resulting RSI and/or Molten Metal, shall
at all times remain the sole property of and be at all times titled in the name
of Alcoa. IMCO will take no action nor omit to take any action that could cause
a diminution of such title or allow a lien, security interest or other
encumbrances to be placed upon said property.
16
<PAGE>
Section 6.03 Disclaimer of Other Warranties. EXCEPT FOR ANY EXPRESS
-------------------------------------------
WARRANTIES CONTAINED IN THIS AGREEMENT, IMCO MAKES NO WARRANTY THAT THE PRODUCT
OR SERVICE COVERED BY THIS AGREEMENT IS MERCHANTABLE OR FIT FOR ANY PARTICULAR
PURPOSE AND THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED, WHICH EXTEND BEYOND
THIS AGREEMENT.
ARTICLE VII. ENVIRONMENTAL
Section 7.01 By-Products and Residues Generated by IMCO. All by-products of
-------------------------------------------------------
and/or residues generated by IMCO from the processing of the Products, including
salt cake derivatives, shall be owned by IMCO. As part of the processing fee
paid by Alcoa, IMCO shall arrange for the proper handling of such by-products
and/or residues. For salt cake, proper handling includes at a minimum the
storage of such material in a landfill designed, constructed and operated in
accordance with RCRA Subtitle "C" requirements (or any such subsequently-
promulgated successor requirements) as in effect as of the time that such
landfill is first constructed. IMCO represents and warrants to Alcoa that, other
than permitting requirements, the landfill or landfills to be used by IMCO for
the disposal of any salt cake generated by IMCO from the processing of Alcoa
Product under this Agreement has been or will be designed, constructed and
operated in accordance with RCRA Subtitle "C" requirements as in effect as of
the time that such landfill was or is first constructed.
Section 7.02 Worker Exposure. Notwithstanding any other term or condition
----------------------------
contained in the Agreement, IMCO agrees to indemnify, defend and hold harmless
17
<PAGE>
Alcoa, its present and future officers, directors, shareholders, employees,
representatives, agents, successors and assigns from and against all
liabilities, claims, penalties, forfeitures, causes of action, suits and the
costs and expenses incident thereto (including reasonable costs of defense,
settlement and attorneys' fees, including the reasonable costs of attorneys
employed by Alcoa), which Alcoa, its present and future officers, directors,
shareholders, employees, representatives, agents, successors and assigns, or any
of them may hereafter suffer, incur, become responsible for or pay out as a
direct or indirect result of IMCO's employees being exposed to or coming into
contact with the Products or the by-products and/or residues generated by IMCO
in processing Alcoa's Products, provided that the proximate cause of any such
exposure or contract is not the result of any act or omission of Alcoa.
Notwithstanding any other term or condition contained in the Agreement,
Alcoa agrees to indemnify, defend and hold harmless IMCO, its present and future
officers, directors, shareholders, employees, representatives, agents,
successors and assigns from and against all liabilities, claims, penalties,
forfeitures, causes of action, suits and the costs and expenses incident thereto
(including reasonable costs of defense, settlement and attorneys' fees,
including the reasonable costs of attorneys employed by IMCO), which IMCO, its
present and future officers, directors, shareholders, employees,
representatives, agents, successors and assigns, or any of them may hereafter
suffer, incur, become responsible for or pay out as a direct or indirect result
of Alcoa's employees being exposed to or coming into contact with the
18
<PAGE>
Products or the by-products and/or residues generated by IMCO in processing
Alcoa's Products, provided that the proximate cause of any such exposure or
contract is not the result of any act or omission of IMCO.
Section 7.03 Notice of Non-Compliance. IMCO shall give Alcoa written notice
---------------------- --------------
of any notice of noncompliance or withdrawal of approved treatment, storage or
disposal site status received by IMCO within five (5) business days of receipt
for any site where the treatment, storage or disposal of any by-product and/or
residue generated hereunder by IMCO from Alcoa-owned material may occur,
including without limitation any landfill owned and operated by IMCO. IMCO shall
use its best efforts to remedy such non-compliance or to obtain reinstatement of
any such necessary approvals, and shall provide Alcoa with adequate written
assurance of such remedying of non-compliance or reinstatement of approval.
Section 7.04 Indemnity. IMCO agrees to indemnity, defend and hold harmless
----------------------
Alcoa, its present and future officers, directors, shareholders, employees,
representatives, agents, successors and assigns from and against all
liabilities, claims, penalties, forfeitures, causes of action, suits and the
costs and expenses incident thereto (including reasonable costs of defense,
settlement and attorneys' fees, including those reasonable costs of attorneys in
the employ of Alcoa) which Alcoa, its present and future officers, directors,
shareholders, employees, representatives, agents, successors and assigns, or any
of them may hereafter suffer, incur, become responsible for or pay out as a
result of any suit, administrative proceeding, citation, remediation demand, or
judgment by any person or entity arising out of the spillage,
19
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INSERTS TO SECTION 7.04 OF
IMCO PROCESSING AGREEMENT
1. Page 20, line 6, insert "other than those acts or omissions of Alcoa
contemplated by this Agreement" after "act or omission of Alcoa".
2. Page 20, line 16-7, delete "or indirectly".
3. Page 20, line 19-20, replace "as a consequence of or in any manner connected
with Alcoa's performance of this Agreement" with "other than those acts or
omissions of Alcoa (or of any subcontractor other than IMCO, representative,
agent employee or invitee acting on Alcoa's behalf) contemplated by this
Agreement".
<PAGE>
release, discharge, disposal, or placement of any substance in or upon the air,
soil or water directly or indirectly caused, in whole or in part, by any act or
omission of IMCO or any subcontractor of IMCO, their representatives, agents,
employees and invitees as a consequence of or in any manner connected with
IMCO's performance of this Agreement, provided that the proximate cause of any
such spillage, release, discharge, disposal or placement is not the result of
any act of omission or Alcoa.
Alcoa agrees to indemnify, defend and hold harmless IMCO, its present and
future officers, directors, shareholders, employees, representatives, agents,
successors and assigns from and against all liabilities, claims, penalties,
forfeitures, causes of action, suits and the costs and expenses incident thereto
(including reasonable costs of defense, settlement and attorneys' fees) which
IMCO, its present and future officers, directors, shareholders, employees,
representatives, agents, successors and assigns, or any of them may hereafter
suffer, incur, become responsible for or pay out as a result of any suit,
administrative proceeding, citation, remediation demand, or judgment by any
person or entity arising out of the spillage, release, discharge, disposal, or
placement of any substance in or upon the air, soil or water directly or
indirectly caused, in whole or in part, by any act or omission of Alcoa or any
subcontractor of Alcoa (other than IMCO), their representatives, agents,
employees and invitees as a consequence of or in any manner connected with
Alcoa's performance of this Agreement, provided that the proximate cause of any
such spillage, release, discharge, disposal or placement is not the result of
any act or omission of IMCO.
20
<PAGE>
ARTICLE VIII. FORCE MAJEURE
Section 8.01 Force Majeure. The term "Force Majeure," as used herein, shall
--------------------------
mean any and all causes beyond the control and without the fault or negligence
of the party failing to perform, such as acts of God, act of public authorities
or regulatory agencies, acts of the public enemy, insurrections, riots, labor
disputes, boycotts, labor and material shortages (including vendor failure),
fires, explosions, floods, breakdowns of or damage to plants, equipment, or
facilities, interruptions to transportation, embargoes, acts of military
authorities, or other causes of a similar nature which wholly or partly prevent
the performance by Alcoa or IMCO of their respective obligations hereunder.
If, because of Force Majeure, either party hereto is unable to carry out
any of its obligations under this Agreement (other than the obligation of a
party to pay money in connection with the performance of this Agreement), and if
such party shall promptly give to the other party concerned written notice of
such Force Majeure, then the obligation of the party giving such notice shall be
suspended as of the date of such notice to the extent made necessary by such
Force Majeure event, but the party giving such notice shall use its best efforts
to eliminate such Force Majeure insofar as possible with a minimum of delay.
Either party hereto shall have the right to elect to suspend its
obligations under this Agreement to deliver and accept RSI and Molten Metal or
deliver and accept Product, as the case may be, for the period of time during
which such Force Majeure may exist.
21
<PAGE>
ARTICLE IX. PROPRIETARY AND CONFIDENTIAL INFORMATION
Section 9.01 Proprietary Information. Alcoa and IMCO acknowledge that, in
------------------------------------
the course of performing their duties under this Agreement, they will
necessarily be supplied with confidential and/or proprietary information of the
other party concerning business affairs, methods of operation, processes and
other information.
(a) For purposes of this Article VIII, the term "Confidential Information"
shall mean any and all proprietary, trade secret, technical and other
confidential information concerning the business or affairs of the provider,
including but not limited to:
(i) information concerning the design or method of production of
any of the provider's products or services, including but not limited to
all records, files, memorandum, reports, price lists, customer lists,
drawings, plans, sketches, documents, equipment, production specifications,
manufacturing processes and methods, production machinery, quality
assurance methods, accounting systems, and the like;
(ii) discoveries, inventions, copyrights, whether patentable or not,
and including, without limitation, the nature and result of research,
development, manufacturing, marketing, planning and other business
activities and, in particular with respect to IMCO, all designs, concepts,
processes and operational techniques in connection with IMCO's rotary
furnaces; and
(iii) ideas, concepts and mathematical formulas which comprise all of
said confidential information.
22
<PAGE>
(b) It is agreed that the Confidential Information shall include all
information described in Section 9.01(a) except for any information:
(i) which is already in recipient's possession, by recipient's
development;
(ii) which is generally available to the public or which becomes
generally available to the public through no act or failure to act on the
part of recipient or recipient's agents or employees;
(iii) which is disclosed to recipient on a non-confidential basis by
a third party having no obligation to provide it on a confidential basis or
to refrain from so doing; or
(iv) which the recipient can demonstrate by written record was
independently developed by persons who did not have access to provider's
information.
Alcoa hereby acknowledges that IMCO's rotary furnace design, construction
and process is not known to or generally available to the public.
Section 9.02 Non-Disclosure. The parties hereby acknowledge that all
---------------------------
Confidential Information has been developed or acquired at considerable expense,
and has independent economic value from not being known or readily ascertainable
by others, and hereby covenant and agree that each will not communicate or
divulge to, or use for the benefit of itself or any other person, firm,
association, or corporation, without the prior written consent of the other
party, any Confidential Information or
23
<PAGE>
Procedures (as defined in Section 9.03 below) that maybe communicated to,
acquired by, or learned by the other party in the course of or as a result of
this Agreement.
Section 9.03 Procedures. The parties hereby recognize that the other party
-----------------------
has a property interest not only in the actual Confidential Information but also
in the ideas, concepts, and mathematical formulas ("Procedures") which comprise
said information. In addition to each party's duty not to disclose the
Procedures as provided in Section 9.02, each further agrees that it will not
integrate any of the Procedures into any of its products which it develops.
Section 9.04 Labeling Confidential Information. The failure of either
----------------------------------------------
party to designate or label any property or information as confidential,
proprietary or trade secret shall in no way affect the property's classification
as such. In no instance shall any information disclosed to the other party,
regardless of whether said information would constitute Confidential
Information, be reproduced by the other party in any form whatsoever.
Section 9.05 Equitable Relief. The parties hereby acknowledge and agree
-----------------------------
that a breach by it of the provisions of this Article IX would cause the other
party irreparable injury and damage which could not be reasonably or adequately
compensated by damages at law. Therefore, each party expressly agrees that in
addition to any other remedies provided for by law, in equity or pursuant to
this Agreement, either party shall be entitled to injunctive or other equitable
relief to prevent a breach of this Article IX by the other party.
24
<PAGE>
ARTICLE X. NOTICES AND COMMUNICATIONS
SECTION 10.01 Notices and Communications. All notices, demands, requests
----------------------------------------
and other communications required or permitted hereunder shall be in writing,
and shall be deemed to be delivered, upon the earlier to occur of (i) actual
receipt (ii) electronic transmission (fax) confirmed by the recipient and (iii)
the deposit of both the original and the copy, as provided below, in a regularly
maintained receptacle for the United States mail, registered or certified,
return receipt requested, postage prepaid addressed as follows:
As to Alcoa:
(When personally delivered)
Aluminum Company of America
Attn: George E. Bergeron
1100 Riverview Tower
900 South Gay Street
Knoxville, Tennessee 37902
or
(If transmitted by mail)
Alcoa - RPD
Attn: George E. Bergeron
1100 Riverview Tower
900 South Gay Street
Knoxville, Tennessee 37902
As to IMCO:
(When personally delivered)
25
<PAGE>
IMCO Recycling Inc.
Attention: Richard L. Kerr
Roane Industrial Park
Highway 27 South
Rockwood, Tennessee 37854
or
(If transmitted by mail)
IMCO Recycling Inc.
Attention: Richard L. Kerr
Roane Industrial Park
Highway 27 South
Rockwood, Tennessee 37854
ARTICLE XI. INSPECTION; REJECTIONS AND RETURNS
Section 11.01 Inspection; Rejection And Returns. IMCO shall inspect all
-----------------------------------------------
Alcoa-supplied items upon arrival at the Facility and shall advise Alcoa (i)
promptly of any shortage or failure to meet any applicable specifications, and
(ii) whether conversion is affected by any such failure, as more fully described
on Exhibit "A". In the event conversion is anticipated to be affected, IMCO
shall delay conversion pending advice from Alcoa.
All converted materials are subject to inspection by Alcoa or Alcoa's
customers, as the case may be within a reasonable time after arrival at their
indicated destination. If upon such inspection any such converted materials are
found to be defective or of inferior quality or workmanship or not in compliance
with the applicable specifications, Alcoa, in addition to any other remedies it
may have, at its election may (i) return such products to IMCO's Facility for
reprocessing and reshipment all at IMCO's cost and expense, (ii) require IMCO to
reimburse Alcoa for
26
<PAGE>
Alcoa's sales price of the converted materials less their scrap value or (iii)
require IMCO to reimburse Alcoa for all transportation costs of such materials
to and from IMCO's Facility and to and from their indicated destination, plus
allocable conversion charges paid, and an amount equal to the cost of such
materials in their unconverted form less the scrap value of the materials.
ARTICLE XII. DELIVERY COSTS
Section 12.01 Cost Allocation. Alcoa shall deliver Product to IMCO and all
-----------------------------
costs and charges for transportation of Product to IMCO shall be borne by Alcoa.
All costs and charges for transportation of RSI and Molten Metal from IMCO to
Alcoa shall be paid by Alcoa as provided herein.
ARTICLE XIII. DELIVERY INSTRUCTIONS
Section 13.01 Direction. IMCO shall process and convert Product and arrange
-----------------------
for delivery of Molten Metal to the Alcoa Plant and delivery of RSI pursuant to
Alcoa's instructions to such points as Alcoa may from time to time designate.
ARTICLE XIV. SPECIFICATIONS
Section 14.01 Conformity. The composition of RSI and/or MOlten Metal to be
------------------------
reclaimed from Product by IMCO shall conform to the applicable chemical
specifications set forth in Exhibit "A." It is acknowledged that such relevant
portions of Exhibit "A" may be revised by Alcoa and IMCO from time to time.
ARTICLE XV. INDEPENDENT STATUS OF PARTIES
AND LIMITATION OF AUTHORITY
Section 15.01 Independent Status Of Parties. This Agreement does not
-------------------------------------------
appoint either party the other's agent, or partner for any purpose whatsoever,
nor does it
27
<PAGE>
grant to either party any right or authority to create any obligation or
responsibility, expressed or implied, on behalf of or in the name of the other
party, nor to bind the other party in any manner whatsoever. No partnership or
joint venture is intended nor is created as a result of this Agreement but
rather the parties' relationship shall be that of a supplier/customer and except
as otherwise provided herein, each shall be solely answerable for the cost and
expenses, consequences and damages arising out of their own acts and from the
operation and maintenance of their respective businesses.
ARTICLE XVI. INDEMNITY
Section 16.01 Alcoa's Indemnity. Alcoa hereby agrees to indemnify and hold
-------------------------------
IMCO, its officers, directors and shareholders harmless from and against any and
all damages, losses, liabilities, suits, actions, demands, proceedings (whether
legal or administrative), and expenses (including but not limited to attorneys
fees) arising, directly or indirectly, out of any action or failure to act by
Alcoa, its employees or agents or any negligence, breach of this Agreement, or
misrepresentation, on the part of Alcoa, its employees or agents. Subject to the
provisions of Section 2.04, IMCO shall only be entitled to recover direct and
incidental damages and not consequential damages.
Section 16.02 IMCO's Indemnity. IMCO hereby agrees to indemnify and hold
------------------------------
Alcoa, its officers, directors and shareholders harmless from and against any
and all damages, losses, liabilities, suits, actions, demands, proceedings
(whether legal or administrative), and expenses (including but not limited to
attorneys fees) arising,
28
<PAGE>
directly or indirectly, out of any action or failure to act by IMCO, its
employees or agents or any negligence, breach of this Agreement, or
misrepresentation, on the part of IMCO, its employees or agents. Notwithstanding
anything contained this Agreement to the contrary, Alcoa shall only be entitled
to recover direct and incidental damages and not consequential damages.
ARTICLE XVII. TERMINATION
SEction 17.01 Termination.
-------------------------
(a) Either of the parties hereto may terminate this agreement by notice in
writing to the other party in any of the following events:
(i) In accordance with the terms of Section 3.01 above;
(ii) Application for or appointment of a receiver by the
non-terminating party;
(iii) Assignment for the benefit of creditors by the non-terminating
party;
(iv) Appointment of a committee of creditors or a liquidating agent
by the non-terminating party;
(v) An offer of composition or extension to creditors generally by
the non-terminating party;
(vi) The adjudication of the non-terminating party as bankrupt or
insolvent;
29
<PAGE>
(vii) The non-terminating party files a voluntary petition for
bankruptcy or admits in writing that it is unable to pay its debts as they
become due; or
(viii) Either party fails to cure a material default hereunder within
sixty (60) days after receipt of written notice thereof from the non-
defaulting party.
The grace periods provided for in Subpart (viii) shall be extended during
such period as the parties are negotiating in good faith with regard to a
legitimate dispute with respect to the parties' obligations hereunder.
(b) On any termination of this Agreement, IMCO shall ship all Alcoa-owned
material in its possession as directed by Alcoa, provided that IMCO shall
complete conversion of all Product shipped by Alcoa to IMCO prior to receipt of
the notice of termination, unless Alcoa requests otherwise in writing.
(c) No termination of this Agreement shall in any way affect the
obligation of the other party with regard to the provisions of this Agreement
previously matured and/or in effect, including, but not limited to, the
obligations relating to confidentiality under Article IX hereof, the right to
enforce any remedy for the breach of any terms of this Agreement or the
indemnity obligations under Article XVI, which obligations and provisions shall
survive any termination of this Agreement.
30
<PAGE>
ARTICLE XVIII. REPRESENTATIONS
Section 18.01 Representations Of Alcoa.
--------------------------------------
(a) Authorization and Validity of Agreement. The execution, delivery and
---------------------------------------
performance by Alcoa of this Agreement have been duly authorized. No other
corporate action on the part of Alcoa is necessary for the execution, delivery
and performance by Alcoa of this Agreement. This Agreement has been duly
executed and delivered by Alcoa and is a legal, valid and binding obligation of
Alcoa, enforceable against Alcoa in accordance with its terms, except to the
extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies,
including specific performance, is subject to the discretion of the court before
which any proceedings therefor may be brought.
(b) No Conflict. Neither the execution and delivery of this Agreement, nor
-----------
any other agreement or instrument executed and delivered by Alcoa under this
Agreement does (i) conflict with, violate or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or accelerate or
permit the acceleration of the performance under, the Certificate or Articles of
Incorporation or Bylaws, as amended, of Alcoa, or any contract, judgment, order
award or decree to which Alcoa is a party or is subject or by which it is bound
or to which any of its assets is subject; (ii) require the approval, consent,
authorization or other order or action of any court, governmental authority or
regulatory body or filing or registration therewith or notice thereto; (iii)
result in the violation by Alcoa of any law, rule, regulation or order of
31
<PAGE>
any jurisdiction; or (iv) require the consent, approval or authorization of any
other person.
Section 18.02 Representations of IMCO.
-------------------------------------
(a) Authorization and Validity of Agreement. The execution, delivery and
---------------------------------------
performance by IMCO of this Agreement have been duly authorized. No other
corporate action on the part of IMCO is necessary for the execution, delivery
and performance by IMCO and is a legal, valid and binding obligation of IMCO,
enforceable against IMCO in accordance with its terms, except to the extent that
its enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceedings therefor may be brought.
(b) No Conflict. Neither the execution and delivery of this Agreement, nor
-----------
any other agreement or instrument executed and delivered by IMCO under this
Agreement does (i) conflict with, violate or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or accelerate or
permit the acceleration of the performance under, the Certificate of
Incorporation or Bylaws, as amended, of IMCO, or any contract, judgment, order,
award or decree to which IMCO is a party or is subject or by which it is bound
or to which any of its assets is subject; (ii) require the approval, consent,
authorization or other order or action of any court, governmental authority or
regulatory body or filing or registration therewith or notice thereto; (iii)
result in the violation by IMCO of any law, rule, regulation or order of
32
<PAGE>
any jurisdiction; or (iv) require the consent, approval or authorization of any
other person.
ARTICLE XIX. INSURANCE
Section 19.01 Minimum Coverages. IMCO, at its expense, shall procure and
-------------------------------
maintain in force so long as its business relationship with Alcoa as
contemplated under this Agreement remains in effect, comprehensive general
liability insurance, worker's compensation insurance (or a comparable self-
insurance program) and cargo coverage insurance which IMCO in good faith deems
reasonably sufficient to protect against any loss, liability, personal injury,
death, property damage or expense whatsoever arising or occurring upon or in
connection with the acts or omissions of IMCO, its employees, agents, common
carriers and contractors, in connection with IMCO's movement or transportation
of molten and/or cold metal aluminum and related products in the manner
contemplated herein. IMCO shall, from time to time upon Alcoa's reasonable
request, provide Alcoa with evidence that such insurance has been obtained.
ARTICLE XX. TAXES
SECTION 20.01 Taxes. IMCO shall be responsible for all applicable taxes
-------------------
imposed by any government in connection with the processing of Product pursuant
to this Agreement, including, by way of example, taxes imposed on the creation,
transportation, disposal, treatment, landfilling, stabilization, or incineration
of waste or any byproducts or residues generated from the processing of Product,
but not with
33
<PAGE>
respect to any state or federal income taxes imposed on sales of aluminum by
Alcoa after being processed by IMCO from Product.
ARTICLE XXI. BAILMENT
Section 21.01 Bailment. Toll transactions contemplated by this Agreement
----------------------
shall be considered as bailments involving the manipulation of the goods. Alcoa
shall retain title and risk of loss to the Alcoa Products delivered to IMCO for
conversion into aluminum pursuant to this Agreement. IMCO shall exercise such
care in regard to the Alcoa Products as a reasonably careful person would
exercise under like circumstances, including without limitation, care in the
transportation of Molten Metal and RSI to the Alcoa Plant.
ARTICLE XXII. SETTLEMENT OF DISPUTES
Section 22.01 Referral to Officers. Any disputes between Alcoa and IMCO
----------------------------------
which may arise from, or in consequence of this Agreement shall, unless settled
by mutual agreement of the parties or by conciliation procedures agreed to by
the parties, be referred for settlement by the officer of Alcoa who is then
responsible for the Alcoa Plant or such other officer of Alcoa as may be
designated by the Chief Executive Officer of Alcoa and the officer within IMCO
who is then in charge of the Facility or such other officer as may be designated
by the Chief Executive Officer of IMCO. Such officers may, if they so desire and
agree, consult outside experts for assistance in arriving at the settlement of
such dispute. Neither Alcoa nor IMCO shall take any action relating to the
subject matter of a dispute during the dispute resolution period. If after sixty
(60) days following the initial notice of any such
34
<PAGE>
dispute to such officers the dispute has not been resolved, the parties may
pursue any remedy available to them in law or in equity.
ARTICLE XXIII. MISCELLANEOUS
Section 23.01 Benefit and Assignment. Subject to the restrictions contained
------------------------------------
in this Agreement prohibiting the assignment of this Agreement, this Agreement
shall inure to the benefit of and be binding upon, the respective successors and
assigns of the parties hereto. This Agreement shall not be assigned by either
party without the express written consent of the other which consent shall not
be unreasonably withheld or delayed. If Alcoa or IMCO proposes to assign this
Agreement in accordance with terms of this Section 23.01, then Alcoa or IMCO, as
the case may be, agrees to cause the person or entity to whom this Agreement
will be assigned or transferred to assume in writing Alcoa's or IMCO's, as the
case may be, obligations under this Agreement. Notwithstanding anything
contained herein to the contrary, either party shall have the right to assign
this Agreement to its direct or indirect wholly owned subsidiary. In addition,
notwithstanding any provision herein to the contrary, no provision in this
Agreement shall affect in any way the right or power of either Alcoa or IMCO, or
their respective shareholders, to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in their respective capital
structure or business, or any merger or consolidation of either of them, or any
other corporate act or proceeding respecting them, whether of a similar
character or otherwise. Notwithstanding anything in this Agreement to the
contrary, the assignment of this Agreement by either party to a
35
<PAGE>
direct or indirect wholly owned subsidiary or any adjustment, recapitalization,
reorganization, or other change or merger or consolidation described above shall
in no way release said assignor of its obligations and duties under this
Agreement.
Section 23.02 Non-Waiver. The failure of either party at any time to
------------------------
enforce any provision of this Agreement shall not be construed to be a waiver of
such provision or of the right of any party hereunder to enforce any such
provision. No waiver by either party of any default shall operate as a waiver of
any other default or of the same default on another occasion. No delay or
omission by either party in exercising any right, power or remedy shall operate
as a waiver thereof or of any other right, power or remedy. Subject to the
limitations on consequential damages set forth in Sections 16.01 and 16.02, and
in addition to the specific remedies of specific performance and damages
described in Sections 2.04 and 2.05, each party acknowledges that the pursuit by
the other party of any remedy hereunder is not exclusive and shall not limit,
modify or be deemed to waive such other party's right to pursue any claim
against such party by any action or actions brought in the appropriate judicial
forum, in tort, by set off, by counterclaim, action for breach of contract or by
the exercise of any other rights and remedies available at law or in equity.
Section 23.03 Severability. If any provision of this Agreement or the
--------------------------
application thereof to any party or circumstance shall for any reason and to any
extent be deemed invalid or unenforceable, the remainder of this Agreement and
application of such provision to the other parties and other circumstances shall
not
36
<PAGE>
be affected thereby, but rather the invalid or unenforceable provision as
applied to the particular party or circumstance shall be modified to the extent
necessary so as to render said provision valid and enforceable while to the
greatest extent possible accomplishing the intended purpose of said provision.
Section 23.04 Entire Agreement. This writing constitutes the entire
------------------------------
Agreement between the parties relating to the subject matter described herein
during the term hereof, and any extensions thereof, and supersedes all previous
contracts. Neither party to this Agreement makes any representation to the other
party except as expressly set forth in this Agreement. No modification or waiver
of any of the terms of this Agreement shall bind either party unless in writing
signed by duly authorized representatives of both Alcoa and IMCO.
Section 23.05 Captions. Captions of the sections of this Agreement are for
----------------------
convenience and reference only and the words contained therein shall in no way
be held to explain, modify, amplify, or aid in the interpretation, construction,
or meaning of the provisions of this Agreement.
Section 23.06 Governing Law. This Agreement shall be construed under and
---------------------------
enforced according to the laws of the State of Texas.
Section 23.07 Further Assurances. Subject to the terms and conditions
--------------------------------
herein provided, Alcoa and IMCO shall use their reasonable best efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
reasonably necessary, proper or advisable to make effective as promptly and
practicable the transactions
37
<PAGE>
contemplated by this Agreement and to cooperate with each other in connection
with the foregoing.
Section 23.08 Finder's and Broker's Fees. Alcoa and IMCO each represent and
----------------------------------------
warrant to the other that there are no claims (or any basis for any claims) for
brokerage commissions, finder's fees or like payments in connection with this
Agreement or the transactions contemplated hereby resulting from any action
taken by either of them or on either of their behalf.
Section 23.09 Counterparts. This Agreement may be executed in several
--------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 23.10 Time of the Essence. It is expressly agreed by Alcoa and IMCO
---------------------------------
that time is of the essence with respect to this Agreement.
Section 23.11 Approvals. Unless otherwise provided in this Agreement,
-----------------------
whenever approval or consent is required of any party, consent shall not be
unreasonably withheld or delayed.
Section 23.12 Exhibits and Schedules. The Exhibits which are referenced in
------------------------------------
and attached to this Agreement are incorporated in and made a part of this
Agreement for all purposes.
Section 23.13 Substantiation. For purposes of substantiating IMCO's
------- ----- --------------
operating costs, as well as any other financial information or data of IMCO
which relates to this Agreement and exhibits, including but not limited to
increases in certain operating costs, IMCO shall record and account for such
items in a manner which is consistent
38
<PAGE>
with its historical practice applied in a consistent manner or if it is
determined by IMCO's independent Certified Public Accountants that it is
appropriate to change said historical practice, then in a manner in conformity
with generally accepted accounting principles with all said changes being fully
disclosed to Alcoa.
Section 23.14 References. When references appear in this Agreement to a
------------------------
Section, such reference where applicable, should also be deemed to refer to the
appropriate Exhibit to this Agreement.
* * *
39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the date first written above by their duly authorized
representatives.
Aluminum Company of America
By /s/ GEORGE BERGERON
-----------------------------------
Title President
--------------------------------
IMCO Recycling Inc.
By /s/ RICHARD L. KERR
-----------------------------------
Title Exec V.P.
--------------------------------
40
<PAGE>
EXHIBIT 10.22
AMENDMENT No. 1
---------------
AMENDMENT No. 1 (the "Amendment"), dated as of June 25, 1998, to that
---------
certain Amended and Restated Credit Agreement, dated as of January 21, 1997 (as
amended and restated as of November 5, 1997, the "Credit Agreement"; capitalized
-----------------
terms used herein and not defined shall have the meaning set forth in the Credit
Agreement), among IMCO RECYCLING INC., a Delaware corporation ("Borrower," which
--------
term shall include its successors and assigns); the Subsidiary Guarantors from
time to time party thereto; each of the Lenders party thereto; MERRILL LYNCH &
CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, as arranger and
syndication agent (in such capacities, together with its successors in such
capacities, the "Arranger"); and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
--------
formerly known as TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as administrative
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Administrative Agent").
--------------------
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, pursuant to Section 12.04 of the Credit Agreement, the
Obligors and each of the undersigned Lenders hereby agree to amend or waive
certain provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION ONE - Amendments.
----------- ----------
(a) Section 9.09(g) is amended by replacing it with the following:
"advances, loans or extensions of credit by Borrower or any Subsidiary to
employees of Borrower or any Subsidiary; provided, however, that the aggregate
-------- -------
amount of all such loans, advances and extensions of credit shall not at any
time exceed in the aggregate $5.0 million (without giving effect to any write-
down or write-off thereof)".
SECTION TWO - Conditions to Effectiveness. This Amendment shall
----------- ---------------------------
become effective as of the date first above written when, and only when, the
Administrative Agent shall have received counterparts of this Amendment executed
by each Obligor and the Majority Lenders or, as to any of the Lenders,
<PAGE>
advice satisfactory to the Administrative Agent that such Lender has executed
this Amendment.
SECTION THREE - Representations, Warranties and Covenants. In order
-------------- -----------------------------------------
to induce the Lenders and the Agents to enter into this Amendment, each Obligor
represents and warrants to each of the Lenders and the Agents that after giving
effect to this Amendment, (i) no Default or Event of Default has occurred and is
continuing; and (ii) all of the representations and warranties in the Credit
Agreement, after giving effect to this Amendment, are true and complete in all
material respects on and as of the date hereof as if made on the date hereof
(or, if any such representation or warranty is expressly stated to have been
made as of a specific date, as of such specific date).
SECTION FOUR - Reference to and Effect on the Credit Agreement and the
------------ -------------------------------------------------------
Notes. On and after the effectiveness of this Amendment, each reference in the
- -----
Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the Notes and
each of the other Basic Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement, as amended by this Amendment. The
Credit Agreement, the Notes and each of the other Basic Documents, as
specifically amended by this Amendment, are and shall continue to be in full
force and effect and are hereby in all respects ratified and confirmed. Without
limiting the generality of the foregoing, the Security Documents and all of the
Collateral described therein do and shall continue to secure the payment of all
Obligations of the Obligors under the Basic Documents, in each case as amended
by this Amendment or limited as described in Section Two hereof. The execution,
delivery and effectiveness of this Amendment shall not, except as expressly
provided herein, operate as a waiver of any right, power or remedy of any Lender
or any Agent under any of the Basic Documents, nor constitute a waiver of any
provision of any of the Basic Documents. Each Guarantor ratifies and confirms
its Guarantee as in full force and effect after giving effect to the waivers
herein set forth and to any prior amendment or waiver to the Credit Agreement.
SECTION FIVE - Costs, Expenses and Taxes. Borrower agrees to pay all
------------ -------------------------
reasonable costs and expenses of the Agents in connection with the preparation,
execution and delivery of this Amendment and the other instruments and documents
to be delivered hereunder, if any (including, without limitation, the reasonable
fees and expenses of Cahill Gordon & Reindel) in ac-
<PAGE>
cordance with the terms of Section 12.03 of the Credit Agreement. In addition,
Borrower shall pay or reimburse any and all stamp and other taxes payable or
determined to be payable in connection with the execution and delivery of this
Amendment and the other instruments and documents to be delivered hereunder, if
any, and agrees to save each Agent and each Lender harmless from and against any
and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
SECTION SIX - Execution in Counterparts. This Amendment may be
----------- -------------------------
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
SECTION SEVEN - Governing Law. This Amendment shall be governed by,
------------- -------------
and construed in accordance with, the law of the State of New York, without
regard to the principles of conflicts of laws thereof.
[Signature pages follow]
<PAGE>
EXHIBIT 10.23
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") dated as of January ___, 1999 is executed by and among IMCO
Recycling Inc. ("Borrower"), the Subsidiary Guarantors to the Credit Agreement
(hereinafter defined), the Lenders to the Credit Agreement, Merrill Lynch & Co.
("Merrill Lynch"), Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Arranger") and Chase Bank of Texas, N.A. ("Administrative Agent"), in its
capacity as Administrative Agent under the Credit Agreement.
RECITALS:
A. Borrower, Subsidiary Guarantors, Lenders, Merrill Lynch, Arranger and
Administrative Agent are parties to that certain Amended and Restated
Credit Agreement, dated as of November 5, 1997 (the "Credit Agreement"),
pursuant to which Lenders have made a loan to Borrower in the amount of up
to $200,000,000.
B. Borrower, Subsidiary Guarantors, Lenders and Administrative Agent desire to
amend the Credit Agreement in accordance with the terms hereinafter set
forth pursuant to the amendment procedures specified in Section 12.04 of
the Credit Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINED TERMS. All capitalized terms used herein and not otherwise
defined shall have the meaning given to such term in the Credit Agreement.
2. AMENDMENT TO SECTION 9.09(K) OF THE CREDIT AGREEMENT. Section 9.09(k)
--------------- ---------------
of the Credit Agreement is hereby amended by deleting the words "$75.0 million"
and replacing such words with "$125.0 million," so that following such
amendment, Section 9.09(k) of the Credit Agreement reads in its entirety as
--------------
follows:
(k) Investments made in order to consummate Acquisitions; provided,
--------
however, that (v) no Default or Event of Default exists or will result
-------
therefrom, (w) on a pro forma basis, after giving effect to such
--- -----
Acquisition(s), Borrower would have been in compliance with Section 9.11 on
the last day of the most recently completed fiscal quarter (assuming, for
purposes of Section 9.11, that such Acquisition had occurred on the first
day of the Measurement Period ending on such last day) as evidenced in an
Officers' Certificate delivered to the Administrative Agent and each Lender
at least 10 days prior to the consummation thereof, (x) the aggregate
amount of the consideration (which for each Acquisition shall be measured
at the date of consummation thereof and shall include debt incurred or
assumed, working capital deficits and deferred payments) paid for all
Acquisitions consummated after the Original Closing Date shall not exceed
$125.0 million (exclusive of the Alchem Acquisition), (y) such Acquisition
shall be effected through Borrower or a Wholly Owned Subsidiary which is an
Obligor (other than IMSAMET or any of its Subsidiaries or any of their
successors) (it being understood that proceeds of Revolving Credit Loans
shall not be used to finance hostile acquisitions), and (z) with respect to
the Alchem Acquisition, the conditions set forth in Section 7.04 shall have
been satisfied;
1
<PAGE>
3. AMENDMENT TO SECTION 9.11(A) OF THE CREDIT AGREEMENT. The table set
---------------
forth in Section 9.11(a) of the Credit Agreement shall be deleted in its
---------------
entirety and replaced with the following:
<TABLE>
<CAPTION>
==========================================================================
PERIOD RATIO
--------------------------------------------------------------------------
<S> <C>
Amendment and Restatement Date through 12/31/1997 0.55:1.0
--------------------------------------------------------------------------
1/1/1998 through 12/31/1999 0.55:1.0
--------------------------------------------------------------------------
1/1/2000 through 12/31/2000 0.50:1.0
--------------------------------------------------------------------------
1/1/2001 and thereafter 0.45:1.0
==========================================================================
</TABLE>
4. AMENDMENT TO SECTION 9.11(B) OF THE CREDIT AGREEMENT. The table set
---------------
forth in Section 9.11(b) of the Credit Agreement shall be deleted in its
---------------
entirety and replaced with the following:
<TABLE>
<CAPTION>
=========================================================================
PERIOD RATIO
--------------------------------------------------------------------------
<S> <C>
Amendment and Restatement Date through 12/31/1997 1.50:1.0
--------------------------------------------------------------------------
1/1/1998 through 12/31/1999 2.25:1.0
--------------------------------------------------------------------------
1/1/2000 and thereafter 2.75:1.0
==========================================================================
</TABLE>
5. NO FURTHER AMENDMENTS. Except as modified and amended by this
Amendment, the Credit Agreement shall remain in full force and effect with no
other changes or amendments.
6. COUNTERPARTS. This Amendment may be executed in counterparts and by
different parties on separate counterparts, each of which shall constitute an
original, and all of which together shall constitute one and the same Amendment.
7. EXPENSES. Borrower hereby agrees to pay or reimburse all reasonable
out-of-pocket costs and expenses incurred by Administrative Agent and the
Lenders in connection with the preparation, execution and delivery of this
Amendment, including but not limited to reasonable attorney's fees and expenses.
8. EFFECTIVE DATE. The agreements and amendments set forth herein shall
not be effective until executed by Administrative Agent and Lenders which
constitute "Majority Lenders" as defined in the Credit Agreement, whereupon this
Amendment shall become a binding agreement, enforceable in accordance with its
terms.
2
<PAGE>
EXHIBIT 21
LIST OF IMCO RECYCLING INC. SUBSIDIARIES
Wholly owned unless otherwise indicated as of March 12, 1999.
1. IMCO Investment Company, a Delaware Corporation
2. Interamerican Zinc, Inc., a Delaware Corporation
3. IMCO Recycling of Ohio Inc., a Delaware Corporation
4. IMCO Management Partnership L.P., a Texas Limited Partnership
5. IMCO Recycling of California, Inc., a Delaware Corporation
6. IMCO Energy Corp., a Delaware Corporation
7. IMCO International, Inc., a Delaware Corporation
8. IMCO Recycling of Indiana Inc., a Delaware Corporation
9. IMCO Recycling of Illinois Inc., an Illinois Corporation
10. IMCO Indiana Partnership L.P., an Indiana Limited Partnership
11. Pittsburg Aluminum, Inc., a Kansas Corporation
12. VAW-IMCO Gu(beta) und Recycling GmbH, a private company with limited
liability organized under the laws of Germany (50% owned)
13. IMCO Recycling of Michigan L.L.C., a Delaware Limited Liability Company
14. IMCO Recycling (UK) Ltd., a private company limited by shares and organized
under the laws of England and Wales
15. IMSAMET, Inc., a Delaware Corporation
16. IMCO Recycling of Idaho Inc., a Delaware Corporation
17. IMCO Recycling of Utah Inc., a Delaware Corporation
74
<PAGE>
LIST OF IMCO RECYCLING INC. SUBSIDIARIES
18. Imsamet of Arizona, an Arizona General Partnership (70% owned)
19. Solar Aluminum Technology Services, a Utah General Partnership (50% owned)
20. Rock Creek Aluminum, Inc., an Ohio Corporation
21. Alchem Aluminum, Inc., a Delaware Corporation
22. IMCO Recycling Holding B.V., a private company with limited liability
organized under the laws of the Netherlands
23. IMCO (UK) Limited Partnership, a limited partnership organized under the
laws of England and Wales
24. U.S. Zinc Corporation, a Delaware Corporation
25. Gulf Reduction Corporation, a Delaware Corporation
26. Midwest Zinc Corporation, a Delaware Corporation
27. MetalChem, Inc., a Pennsylvania Corporation
28. Western Zinc Corporation, a California Corporation
29. U.S. Zinc Export Corporation, a Texas Corporation
30. U.S. Zinc - FSC, Inc., a Barbados Corporation
31. MetalChem Canada Incorporated, an Ontario Corporation
32. MetalChem Handel GmbH, a private company with limited liability organized
under the laws of Germany
33. Alchem Aluminum Shelbyville Inc., a Delaware Corporation
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to 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, respectively, of our report dated
February 1, 1999, with respect to the consolidated financial statements of IMCO
Recycling Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Dallas, Texas
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,075
<SECURITIES> 0
<RECEIVABLES> 87,262
<ALLOWANCES> 2,816
<INVENTORY> 50,921
<CURRENT-ASSETS> 151,837
<PP&E> 240,446
<DEPRECIATION> 71,941
<TOTAL-ASSETS> 456,558
<CURRENT-LIABILITIES> 78,869
<BONDS> 168,700
0
0
<COMMON> 1,705
<OTHER-SE> 185,603
<TOTAL-LIABILITY-AND-EQUITY> 456,558
<SALES> 568,514
<TOTAL-REVENUES> 568,514
<CGS> 506,994
<TOTAL-COSTS> 506,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,325
<INTEREST-EXPENSE> 9,197
<INCOME-PRETAX> 31,143
<INCOME-TAX> 11,275
<INCOME-CONTINUING> 19,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,590
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.17
</TABLE>
