<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7170
IMCO Recycling Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2008280
(I.R.S. Employer Identification No.)
5215 North O'Connor Blvd., Suite 940
Central Tower at Williams Square
Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(972) 401-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on July 30, 1999.
Common Stock, $0.10 par value, 16,513,624
-----------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 9,569 $ 6,075
Accounts receivable, net of allowance of $2,093 and $1,616
at June 30, 1999 and December 31, 1998, respectively 103,789 84,446
Inventories 52,048 50,921
Deferred income taxes 4,327 4,093
Other current assets 6,072 6,302
---------------- ------------------
Total Current Assets 175,805 151,837
Property and equipment, net 181,183 168,505
Excess of acquisition cost over the fair value of net assets acquired,
net of accumulated amortization of $9,103 and $7,156 at June 30, 1999
and December 31, 1998, respectively 119,195 112,559
Investments in joint ventures 13,998 14,502
Other assets, net 6,657 9,155
---------------- ------------------
$ 496,838 $ 456,558
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 67,842 $ 67,089
Accrued liabilities 13,283 10,365
Current maturities of long-term debt 5,461 1,415
--------------- ------------------
Total Current Liabilities 86,586 78,869
Long-term debt 194,812 168,700
Deferred income taxes 13,340 12,820
Other long-term liabilities 8,839 8,861
STOCKHOLDERS' EQUITY
Preferred stock; par value $.10; 8,000,000 shares authorized;
none issued - -
Common stock; par value $.10; 40,000,000 shares authorized;
17,052,530 issued at June 30, 1999; 17,048,585 issued at
December 31, 1998 1,705 1,705
Additional paid-in capital 106,117 106,046
Retained earnings 95,857 87,214
Accumulated other comprehensive loss from foreign currency
translation adjustments (3,159) (902)
Treasury stock, at cost; 573,926 shares at June 30, 1999; 530,539
shares at December 31, 1998 (7,259) (6,755)
--------------- ------------------
Total Stockholders' Equity 193,261 187,308
--------------- ------------------
$ 496,838 $ 456,558
=============== ==================
</TABLE>
Page 2
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IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------------- ------------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 184,731 $ 124,489 $ 359,963 $ 251,721
Cost of sales 165,958 110,315 323,183 223,921
------------- ------------- ------------- -------------
Gross profits 18,773 14,174 36,780 27,800
Selling, general and administrative expense 6,785 4,178 12,935 8,185
Amortization expense 1,189 748 2,227 1,481
Interest expense 2,945 1,801 5,925 3,799
Interest and other income (431) (96) (551) (199)
Equity in earnings of affiliates (542) (564) (1,020) (1,028)
------------- ------------- ------------- -------------
Earnings before provision for income taxes and
minority interests 8,827 8,107 17,264 15,562
Provision for income taxes 3,269 2,981 6,463 5,737
------------- ------------- ------------- -------------
Earnings before minority interests 5,558 5,126 10,801 9,825
Minority interests, net of provision for income taxes 85 115 187 203
------------- ------------- ------------- -------------
Net earnings $ 5,473 $ 5,011 $ 10,614 $ 9,622
============= ============= ============= =============
Net earnings per common share:
Basic $ 0.33 $ 0.30 $ 0.64 $ 0.58
Diluted $ 0.33 $ 0.30 $ 0.64 $ 0.57
Weighted average shares outstanding:
Basic 16,475 16,658 16,486 16,574
Diluted 16,653 16,842 16,601 16,766
Dividends declared per common share $ 0.06 $ 0.05 $ 0.12 $ 0.10
</TABLE>
Page 3
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IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 10,614 $ 9,622
Depreciation and amortization 13,030 10,152
Provision (benefit) for deferred income taxes 287 (307)
Equity in earnings of affiliates (1,020) (1,028)
Other noncash charges 1,153 1,228
Changes in operating assets and liabilities:
Accounts receivable (18,574) 6,031
Inventories 1,568 2,284
Other current assets 237 (1,019)
Accounts payable and accrued liabilities 3,243 7,219
-------------- ---------------
Net cash provided from operating activities 10,538 34,182
INVESTING ACTIVITIES
Payments for property and equipment (12,507) (16,149)
Acquisitions, net of cash acquired (21,619) -
Other (208) 102
-------------- ---------------
Net cash used by investing activities (34,334) (16,047)
FINANCING ACTIVITIES
Net proceeds from (repayments of) long-term revolver 33,000 (9,225)
Proceeds from issuance of long-term debt 679 1,541
Principal payments of long-term debt (3,523) (446)
Dividends paid (1,971) (1,660)
Purchases of treasury stock (649) -
Other (117) (57)
-------------- ---------------
Net cash provided from (used by) financing activities 27,419 (9,847)
-------------- ---------------
Effect of exchange rate differences on cash and cash equivalents (129) (13)
Net increase in cash and cash equivalents 3,494 8,275
Cash and cash equivalents at January 1 6,075 405
-------------- ---------------
Cash and cash equivalents at June 30 $ 9,569 $ 8,680
============== ===============
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 5,759 $ 3,893
Cash payments for income taxes $ 7,258 $ 4,445
</TABLE>
Page 4
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IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
(dollars in tables are in thousands, except per share data)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. The accompanying financial statements
include the accounts of IMCO Recycling Inc. and all of its subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998. Certain reclassifications have been
made to prior year statements to conform to the current year presentation.
NOTE B - INVENTORIES
The components of inventories are:
June 30, December 31,
1999 1998
----------- ------------
Finished goods $ 25,890 $ 26,668
Raw materials 23,660 23,012
Supplies 2,498 1,241
----------- ------------
$ 52,048 $ 50,921
=========== ============
NOTE C - LONG-TERM DEBT
In February 1999, the Company borrowed, under its long-term revolving credit
facility, approximately $22,000,000 to fund the acquisition of substantially all
of the assets of an aluminum alloying facility located in Shelbyville, Tennessee
and substantially all of the assets of a zinc oxide production facility located
in Clarksville, Tennessee.
At June 30, 1999 the Company had approximately $185,000,000 in indebtedness
outstanding under its long-term revolving credit facility. The terms of the
Company's Credit Agreement presently provide that the maximum amount which may
be borrowed under the Credit Agreement will be reduced from $200,000,000 to
$180,000,000 effective on December 31, 1999.
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NOTE D - NET EARNINGS PER SHARE
The following table sets forth the reconciliation between weighted average
shares used for calculating basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
for basic earnings per share 16,475 16,658 16,486 16,574
Effect of employee stock options 178 184 115 192
------------- ------------- ------------- -------------
Weighted average shares outstanding
for diluted earnings per share 16,653 16,842 16,601 16,766
============= ============= ============= =============
</TABLE>
NOTE E - OPERATIONS
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances that (1)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes and (2) impose liability for costs of cleaning
up, and certain damages resulting from past spills, disposals or other releases
of hazardous substances (together, "Environmental Laws"). It is possible that
more rigorous Environmental Laws will be enacted that could require the Company
to make substantial expenditures in addition to those referred to in this Form
10-Q.
From time to time, operations of the Company have resulted or may result in
certain noncompliance with applicable requirements under Environmental Laws.
However, the Company believes that any such noncompliance 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") has notified the Company
that two of the Company's zinc subsidiaries are potentially responsible parties
("PRP") pursuant to the Illinois Environmental Protection Act for the cleanup of
contamination at a site in Marion County, Illinois to which these subsidiaries,
among others, in the past sent zinc oxide for processing and resale. These
subsidiaries have 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 the subsidiaries, the Company does not believe, while there can be no
assurance, that its potential liability (if any) at this site will have a
material adverse effect on its financial position or results of operations.
Page 6
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NOTE F - OTHER COMPREHENSIVE INCOME
SFAS 130 requires foreign currency translation adjustments to be reflected as a
component of other comprehensive income. As of June 30, 1999 the Company's
foreign currency translation adjustment increased to $3,159,000 from $902,000 as
of December 31, 1998. This resulted in other comprehensive loss of $1,834,000
for the three month period and $2,257,000 for the six month period ended June
30, 1999. Foreign currency translation adjustment resulted in a loss of $11,000
for the three month period and income of $137,000 for the six month period ended
June 30, 1998. This resulted in total comprehensive income of $3,639,000 for
the three month period ended June 30, 1999 and $8,357,000 for the six month
period ended June 30, 1999, compared to $5,000,000 and $9,759,000, respectively,
for the same periods in 1998.
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, effective January 1, 1999. The adoption
of SOP 98-1 did not have a material impact on the Company's results of
operations for the three month and six month periods ended June 30, 1999.
In July 1999, the Financial Accounting Standards Board delayed the effective
date of Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," for one year to fiscal years beginning after June 15, 2000. The
Company plans to adopt the statement at the revised effective date.
NOTE H - SEGMENT REPORTING
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 recovery activities, including investments in joint
ventures. 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.
There had been no material change in the Company's segment classifications as of
June 30, 1999 as compared to December 31, 1998.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Aluminum $ 135,621 $ 121,055 $ 269,412 $ 245,135
Zinc 49,123 3,434 90,587 6,586
Intersegment elimination (13) - (36) -
------------- ------------- ------------- -------------
Total revenues $ 184,731 $ 124,489 $ 359,963 $ 251,721
============= ============= ============= =============
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
INCOME:
Aluminum $ 13,766 $ 13,500 $ 27,566 $ 26,611
Zinc 3,921 206 7,174 344
--------------- --------------- -------------- ---------------
Total segment income 17,687 13,706 34,740 26,955
Unallocated amounts:
General and administrative expense 9,434 6,990 18,486 13,733
Interest expense 2,945 1,801 5,925 3,799
Interest income (165) (96) (285) (199)
--------------- --------------- -------------- ---------------
Income before provision for income
taxes and minority interests $ 5,473 $ 5,011 $ 10,614 $ 9,622
=============== =============== ============== ===============
</TABLE>
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------
CONDITION AND RESULTS OF OPERATIONS
Most of the Company's processing consists of aluminum tolled for its customers.
Tolling revenues reflect only the processing cost and the Company's profit
margin. To a lesser but increasing extent, the Company's processing also
consists of the processing, recovery and alloying of aluminum and zinc metal and
the production of other value-added zinc products for sale by the Company. The
revenues from these sales transactions include the cost of the metal, as well as
the processing cost and the Company's profit margin. Accordingly, tolling
business produces lower revenues and costs of sales than does the product sales
business. Variations in the mix between these two types of transactions could
cause revenue amounts to change significantly from period to period while not
significantly affecting gross profit. As a result, the Company considers
processing volume to be a more important determinant of performance than
revenues.
The companies recently acquired by the Company (see "ACQUISITIONS" below) are
primarily engaged in product sales activities as opposed to tolling; therefore,
the Company has experienced higher levels of product sales relative to tolling
in 1999. This higher level of sales has also increased the Company's working
capital requirements and, as a result, will subject the Company to the
additional risks associated with price fluctuations in the zinc and aluminum
commodity markets.
The following table shows the total pounds of aluminum and zinc processed, the
percentage of total pounds processed represented by tolled metal, total revenues
and total gross profits (in thousands, except percentages):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Pounds of aluminum processed 627,808 580,393 1,270,865 1,149,225
Pounds of zinc processed 69,434 10,942 126,561 21,499
Percentage of pounds tolled 59% 72% 60% 72%
Revenues $ 184,731 $ 124,489 $ 359,963 $ 251,721
Gross profits $ 18,773 $ 14,174 $ 36,780 $ 27,800
</TABLE>
ACQUISITIONS
In July 1998, the Company completed the acquisition of U. S. Zinc Corporation
("U. S. Zinc") for a total purchase price of approximately $72,000,000.
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 cash (not including acquisition
costs). Also in February 1999, the Company acquired, through its wholly-owned
subsidiary, U. S. Zinc, substantially all of the assets of a zinc oxide
production facility located in Clarksville, Tennessee from North American Oxide,
LLC for
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approximately $11,000,000 in cash (not including acquisition costs). Both
acquisitions were accounted for using the purchase method of accounting, and
their results of operations are included herein since their dates of
acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998 AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1998
Production. For the three and six month periods ended June 30, 1999, the
- -----------
Company melted 18% and 19%, respectively, more metal than it did during the same
periods in 1998. Increased aluminum processing at the Company's Morgantown,
Kentucky facility and processing from the zinc facilities acquired in 1998 and
1999 account for the majority of this increase. Significant processing gains
were also recorded at the Company's Swansea, Wales facility (which is now
operating near its capacity after beginning processing in late 1997) and at the
recently acquired Shelbyville, Tennessee facility. Tolling activity for the
three and six month periods ended June 30, 1999 represented 59% and 60%,
respectively, of total pounds processed, compared to 72% for the same periods in
1998. The Company currently believes that the percentage of tolling business in
1999 will more accurately reflect the levels which can be expected in future
periods.
Revenues. For the three months ended June 30, 1999, revenues increased 48% to
- ---------
$184,731,000 compared to $124,489,000 for the same period in 1998. In the first
six months of 1999, the Company's revenues totaled $359,963,000, which was 43%
higher than revenues of $251,721,000 for the same period in 1998. The
acquisition of the U. S. Zinc business in July 1998 and the recent acquisitions
of the Shelbyville, Tennessee and Clarksville, Tennessee facilities accounted
for most of the increase in revenues for the three and six month periods ended
June 30, 1999. In addition, higher product sales caused revenues to increase
at a greater rate than the rate of increase in processing volumes. As discussed
earlier, increased product sales generally result in a higher increase in
revenues than a similar increase in tolling business. The U. S. Zinc business
is represented by virtually all product sale business. In addition, the
Company's specialty alloying activities, which serve the auto component market,
primarily consist of product sale business. Increased product sales expose the
Company to a greater degree of market risk because of fluctuations in the price
of scrap metal which the Company must buy as raw material and fluctuations in
the then-prevailing aluminum and zinc market prices at which the Company sells
the resulting processed metal.
Gross Profit. Gross profits for the three month period ended June 30, 1999 were
- -------------
$18,773,000, an increase of $4,599,000, or 32%, over gross profits for the
second quarter of 1998. Gross profits were $36,780,000 for the six months ended
June 30, 1999, an increase of $8,980,000, or 32%, over the same period in 1998.
The relative increase in gross profit is greater than the increase in processing
volumes, due to a higher level of gross profit per pound of processing
attributed to the newly acquired U. S. Zinc business (compared to the Company's
aluminum processing business), and because of efficiencies gained at the
Company's Morgantown, Kentucky facility. Partially offsetting these items were
lower levels of activity at two plants which serve the can stock markets and the
continuing decrease in the spread between aluminum scrap prices and primary
aluminum prices, which had the effect of reducing customer demand for recycled
metal.
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SG&A Expenses. Selling, general and administrative expenses for the three month
- --------------
periods ended June 30, 1999 and 1998 were $6,785,000 and $4,178,000,
respectively, an increase of 62%. Selling, general and administrative expenses
for the six month periods ended June 30, 1999 and 1998 were $12,935,000 and
$8,185,000, respectively, an increase of 58%. The increase for both the three
and six month periods ended June 30, 1999, is primarily due to higher employee
and selling costs attributable principally to the acquisition of U.S. Zinc.
Amortization Expense. Amortization expense for the three month periods ended
- ---------------------
June 30, 1999 and 1998 was $1,189,000 and $748,000 respectively, an increase of
59%. Amortization expense for the six month periods ended June 30, 1999 and
1998 was $2,227,000 and $1,481,000, respectively, an increase of 50%. The
increase for both the three and six month periods ended June 30, 1999, is due
almost entirely to amortization of additional goodwill recorded as a result of
the U. S. Zinc, Shelbyville, Tennessee and Clarksville, Tennessee acquisitions
discussed above. See "ACQUISITIONS."
Interest. Interest expense, net of interest income, for the three month periods
- ---------
ended June 30, 1999 and 1998 was $2,780,000 and $1,705,000, respectively, an
increase of 63%. Interest expense, net of interest income, was $5,640,000 for
the first six months of 1999, or 57% higher than $3,600,000 for the first six
months of 1998. The increases for both the three month and six month periods
ended June 30, 1999, are because of higher amounts of debt outstanding in 1999
compared to 1998, primarily resulting from the 1998 and 1999 acquisitions. See
"LIQUIDITY AND CAPITAL RESOURCES."
Net Earnings. Net earnings increased 9% to $5,473,000 for the three month
- -------------
period ended June 30, 1999 compared to $5,011,000 for the same period in 1998
and increased 10% to $10,614,000 for the first six months of 1999 compared to
$9,622,000 for the same period in 1998. The increase was primarily the result
of increased processing volume provided by new plant construction, expansions
and acquisitions completed in 1998 and 1999. Partially offsetting the volume
increase was an increase in interest expense, amortization expense and selling,
general and administration due to a higher level of borrowing, the effects of
recent acquisitions and the operation of more production facilities,
respectively. The Company recorded a slight increase in its effective income
tax rate from 36.8% to 37.0% for the second quarter of 1998 and 1999,
respectively, and from 36.9% to 37.4% for the first half of 1998 and 1999,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations. Operations provided $10,538,000 and $34,182,000 of
- --------------------------
cash during the first six months of 1999 and 1998, respectively. Changes in
operating assets and liabilities utilized $13,526,000 of cash for the first six
months of 1999 compared to generating cash of $14,515,000 for the same period in
1998. The change in usage of net operating assets and liabilities was primarily
due to the increase in revenues in 1999, as discussed above, which resulted in
increases in receivables. The change in usage of net operating assets and
liabilities was partially offset by higher net earnings in 1999 of $10,614,000
compared to $9,622,000 for 1998 and higher depreciation and amortization of
$13,030,000 in 1999 compared to $10,152,000 in 1998.
Cash Flows from Investing Activities. During the six months ended June 30, 1999,
- ------------------------------------
net cash used by investing activities were $34,334,000 compared to $16,047,000
for the same period in 1998.
Page 11
<PAGE>
During the first quarter of 1999, the Company spent $21,619,000 (net of cash
acquired) on the acquisitions of the Shelbyville and Clarksville, Tennessee
facilities. See "ACQUISITIONS." There were no acquisitions during the six months
ended June 30, 1998. In addition, the Company's total payments for property,
plant and equipment in the first six months of 1999 decreased to $12,507,000,
compared to $16,149,000 spent in the first six months of 1998. Capital
expenditures for property, plant and equipment in 1999 are expected to be
approximately $35,000,000. Major 1999 projects include the installation of an
Enterprise Resource Planning (ERP) software system, installation of new furnaces
at the Millington, Tennessee and Uhrichsville, Ohio facilities and the
construction of a new aluminum alloying facility near Saginaw, Michigan.
Cash Flows from Financing Activities. Net cash provided by financing activities
- ------------------------------------
was $27,419,000 for the six months ended June 30, 1999, compared to net cash
used by financing activities of $9,847,000 in the same period of 1998. In the
first half of 1999, the Company borrowed $33,000,000 under its revolving line of
credit, most of which was used in the acquisitions of the Shelbyville and
Clarksville, Tennessee facilities. (see "ACQUISITIONS" above), and the remainder
of the funds were used to finance additional working capital requirements. In
the six month period ended June 30, 1998 the Company had net payments of
$9,225,000 on its long-term revolving credit facility. At June 30, 1999 the
Company had approximately $185,000,000 in indebtedness outstanding under its
long-term revolving credit facility, $5,000,000 of which is included in current
maturities of long-term debt (see below). In addition, there were standby
letters of credit outstanding with several banks totaling $2,202,000.
Financing activities also included cash payments of $1,971,000 in dividends for
the first six months of 1999 compared to $1,660,000 for the same period in 1998.
In addition, $649,000 was used to purchase 55,000 shares of common stock in open
market transactions,which will be held as treasury stock. No repurchase
transactions occurred in the first six months of 1998.
As of June 30, 1999, the Company had approximately $14,200,000 available for
borrowing under its reducing revolving line of credit facility. The terms of
the Company's Credit Agreement presently provide that the maximum amount which
may be borrowed under the Credit Agreement will be reduced from $200,000,000 to
$180,000,000 effective on December 31, 1999. The Company believes that its cash
on hand, the availability of funds under its lines of credit and its anticipated
internally generated funds will be sufficient to fund its current needs,
including its expected capital spending plans. The Company has experienced and
expects to continue to experience substantial capital funding requirements for
its new facilities, potential acquisitions and capital and environmental
improvement programs. While the Company believes it has sufficient funds
available to fund its current needs, securing additional financing sources may
be necessary to maintain its recent rate of growth and is presently reviewing
alternative sources of funding for these activities.
ENVIRONMENTAL
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances that (1)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes and (2) impose liability for costs of cleaning
up, and certain damages resulting from past spills, disposals or other releases
of hazardous substances (together, "Environmental Laws"). It is possible that
more rigorous Environmental
Page 12
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Laws will be enacted that could require the Company to make substantial
expenditures in addition to those referred to in this Form 10-Q and in other
filings made by the Company.
From time to time, operations of the Company have resulted or may result in
certain noncompliance with applicable requirements under such Environmental
Laws. However, the Company believes that any such noncompliance 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") has notified the Company
that two of the Company's zinc subsidiaries are potentially responsible parties
("PRP") pursuant to the Illinois Environmental Protection Act for the cleanup of
contamination at a site in Marion County, Illinois to which these subsidiaries,
among others, in the past sent zinc oxide for processing and resale. These
subsidiaries have 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 the subsidiaries, the Company does not believe, while there can be no
assurance, that its potential liability (if any) 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 for the delivery of its services. The Company 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 Company 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 the third quarter of 1999.
All personal computer hardware compliance testing and remediation is anticipated
to be completed in the third quarter of 1999. Testing of embedded systems and
desktop application software is ongoing and is now expected to be completed by
September 1999.
The Company believes that its primary 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.
Page 13
<PAGE>
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 prior to
December 31, 1999.
The cumulative Year 2000 project expenditures have been immaterial to date, and
based upon results of current testing, the estimated remaining Year 2000 costs
are not expected to be material to the Company's results of operations and
financial position. The Company currently believes that it will be able to
manage its total Year 2000 transition without any material adverse effect on its
business, financial position or results of operations.
The Company cannot presently determine the impact on its customers and suppliers
in the event that they may not be Year 2000 compliant, and in such event,
whether such noncompliance may have a material adverse effect on the Company's
results of operations or financial position. The Company has contacted its
customers and suppliers (through written questionnaires and verbal inquiries) to
determine the status of their respective Year 2000 compliance programs and is
currently reviewing the responses and taking additional actions, such as further
inquiries and personal follow up interviews, on an as needed basis.
An unexpected or widespread Year 2000 problem involving the Company and/or its
suppliers and customers could result in a significant interruption to the
Company's normal business operations or activities, which could have a material
adverse effect on the Company's business reputation, 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 the results of its assessments and investigations discussed above,
intends to develop such a plan. Currently, the development of such a
contingency plan is anticipated to be completed in the third quarter of 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this ITEM 2. "MANAGEMENT'S DISCUSSION AND
-------
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" (as well as certain
oral statements made by or on behalf of the Company) may be deemed to be
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provisions in
that enacted legislation. This information includes, without limitation,
statements concerning future capacity, volumes, revenues, earnings, costs,
margins and expenses; the ability of the Company to be able to continue to grow
its business at recent rates of growth; anticipated refinancings of the
Company's debt facilities; the expected effects of strikes or work stoppages at
Company or customer facilities; future acquisitions or corporate combinations;
expected effects of recent acquisitions; future prices for metals; projected
completion dates and anticipated technological advances; prospects for the
Company's joint venture partners to purchase a portion of the Company's joint
venture interests; future (or extensions of existing) long-term supply contracts
with its customers; the outcome of and any liabilities resulting from any
claims, investigations or proceedings against the Company or its subsidiaries;
future levels of dividends (if any); the future mix of business; future costs
and asset recoveries; future operations, demand and industry conditions; future
capital expenditures and future financial condition; becoming "Year 2000"
compliant; and the impact of the "Year
Page 14
<PAGE>
2000" transition on the operations, results of operations and financial
condition of the Company, its customers and suppliers. These statements are
based on current expectations and involve a number of risks and uncertainties.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct.
When used in or incorporated by reference into this Quarterly Report on Form 10-
Q, the words "anticipate," "estimate," "expect," "may," "project" and similar
expressions are intended to be among the statements that identify forward-
looking statements. Important factors that could affect the Company's actual
results and cause actual results to differ materially from those results that
might be projected, forecasted, estimated or budgeted by the Company in these
forward-looking statements include, but are not limited to, the following:
fluctuations in operating levels at the Company's facilities, the mix of product
sales 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 and embedded technology,
and future levels and timing of capital expenditures.
These statements are further qualified by the following:
* Estimates of future operating rates at the Company's plants are based on
current expectations by management of the Company of future levels of volumes
and prices for the Company's services or metal, and are subject to
fluctuations in customer demand for the Company's services and prevailing
conditions in the metal markets, as well as certain components of the
Company's cost of operations, including energy and labor costs. Many of the
factors affecting revenues and costs are outside of the control of the
Company, including weather conditions, general economic and financial market
conditions, and governmental regulation and factors involved in administrative
and other proceedings. The future mix of product sales 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 product sales 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. Lower market prices for primary metals may adversely
affect the demand for the Company's recycled metals.
* 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
Page 15
<PAGE>
or affecting the Company's competitors and/or willingness of customers to
accept substitutions for aluminum products could affect the Company's
financial position and results of operations.
* Fluctuations in the costs of fuels, raw materials and labor can affect the
Company's financial position and results of operations.
* The Company's key transportation market is cyclical, and sales within that
market in particular can be influenced by economic conditions. Strikes and
work stoppages by automotive customers of the Company may have a material
adverse effect on the Company's financial condition and results of operations.
* The Company spends substantial capital and operating sums on an ongoing basis
to comply with environmental laws. In addition, the Company is involved in
certain investigations and actions in connection with environmental compliance
and past disposals of solid waste. Estimating future environmental compliance
and remediation costs is imprecise due to the continuing evolution of
environmental laws and regulatory requirements and uncertainties about their
application to the Company's operations, the availability and applicability of
technology and the allocation of costs among principally responsible parties.
Unanticipated material legal proceedings or investigations could affect the
Company's financial position and results of operations.
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Ernst & Young LLP, have reviewed the
Company's consolidated financial statements at June 30, 1999, and for the three
and six month periods then ended prior to filing, and their report is included
herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
There have been no material changes regarding market risk and the Company's
derivative instruments during the second quarter of 1999. Accordingly, no
additional disclosures have been provided in accordance with Regulation S-K Item
305 (c).
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- -------
In a private transaction, the Company issued a total of 4,000 shares to two
retiring directors of the Company.
Page 16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------
The Annual Meeting of Stockholders of the Company was held on May 12, 1999, at
which the election of two Class III Directors, approval of the Company's
Employee Stock Purchase Plan, approval of the Company's Annual Incentive
Compensation Plan and the ratification of the appointment of Ernst & Young LLP
as the Company's independent public accountants for 1999 were considered. Hugh
G. Robinson was elected as a director and received 12,692,823 votes for his
election, with 339,211 votes withheld. William Warshauer was elected as a
director and received 12,710,324 votes for his election, with 321,710 votes
withheld. The following directors continued in office: Don V. Ingram, Steve
Barlett, Jeb Hensarling, Don Navarro and John J. Fleming. The adoption of the
Company's Employee Stock Purchase Plan was approved with 12,548,792 votes in
favor of the adoption, 442,662 votes against and 40,580 votes abstaining. The
adoption of the Company's Annual Incentive Compensation Plan was approved with
12,584,540 votes in favor of the adoption, 359,249 votes against and 88,244
votes abstaining. Ernst & Young LLP was ratified as independent public
accountants for the Company for 1999 and received 12,897,870 votes for their
ratification, 53,600 votes against and 14,291 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------
(a) The following exhibits are included herein:
10.1 IMCO Recycling Inc. Annual Incentive Compensation Plan
15.1 Acknowledgment letter regarding unaudited financial information from
Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K:
None filed during quarter ended June 30, 1999.
Page 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMCO Recycling Inc.
(Registrant)
Date: August 13, 1999 By: /s/ ROBERT R. HOLIAN
----------------------
Robert R. Holian
Senior Vice President
Controller and Chief Accounting Officer
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<PAGE>
Independent Accountants' Review Report
Stockholders and
Board of Directors
IMCO Recycling Inc.
We have reviewed the accompanying consolidated balance sheet of IMCO Recycling
Inc. as of June 30, 1999, and the related consolidated statements of earnings
for the three-month and six-month periods ended June 30, 1999 and 1998, and the
consolidated statement of cash flows for the six-month periods ended June 30,
1999, and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of IMCO Recycling Inc. as of December
31, 1998, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for the year then ended, not presented herein, and in our
report dated February 1, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1998, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ ERNST & YOUNG LLP
Dallas, Texas
July 26, 1999
<PAGE>
Exhibit 10.1
IMCO RECYCLING INC.
ANNUAL INCENTIVE COMPENSATION PLAN
Purpose
The purpose of the IMCO Recycling Inc. Annual Incentive Compensation Plan
(the "Plan") is to advance the interests of IMCO Recycling Inc. (the "Company")
and its stockholders by (a) providing certain key employees with annual
incentive compensation which is tied to the achievement of preestablished and
objective performance goals, (b) identifying and rewarding superior performance
and providing competitive compensation to attract, motivate, and maintain key
employees who have outstanding skills and abilities and who achieve superior
performance, and (c) fostering accountability and teamwork throughout the
Company. The Plan is intended to provide Participants with annual incentive
compensation which is not subject to the deduction limitation rules prescribed
under Section 162(m) of the Code, and should be construed to the extent possible
as providing for remuneration which is "performance-based compensation" within
the meaning of Section 162(m) of the Code and the regulations promulgated
thereunder.
Article I
Definitions
-----------
For the purposes of this Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:
"Base Salary Midpoint" for any Participant and for any Plan Year,
means the dollar amount assigned by the Committee to such Participant with
respect to his job classification for purposes of the Plan.
"Board" means the board of directors of the Company.
"Business Unit Performance Goals" means, for any Performance Period,
the key financial and strategic objectives established in accordance with
Article II hereof for any operating business unit or profit center of the
Company for that Performance Period.
"Change in Control" means the occurrence of any of the following
events: (i) there shall be consummated any merger or consolidation pursuant
to which shares of the Company's Common Stock would be converted into cash,
securities or other property, or any sale, lease, exchange or other
disposition (excluding disposition by way of mortgage, pledge or
hypothecation), in one transaction or a series of related transactions, of
all or substantially all of the assets of the Company (a "Business
Combination"), in each case unless, following such Business Combination,
all or substantially all of the holders of the outstanding Common Stock
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50.1% of the outstanding common stock or
equivalent equity interests of the corporation or entity resulting from
such Business Combination (including, without limitation, a corporation
which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or
more subsidiaries) in substantially the same proportions as
<PAGE>
their ownership, immediately prior to such Business Combination, of the
outstanding Common Stock, (ii) the stockholders of the Company approve any
plan or proposal for the complete liquidation or dissolution of the
Company, (iii) any "person" (as such term is defined in Section 3(a)(9) or
Section 13(d)(3) under the Exchange Act) or any "group" (as such term is
used in Rule 13d-5 promulgated under the Exchange Act), other than the
Company or any successor of the Company or any Subsidiary of the Company or
any employee benefit plan of the Company or any Subsidiary (including such
plan's trustee), becomes a beneficial owner for purposes of Rule 13d-3
promulgated under the Exchange Act, directly or indirectly, of securities
of the Company representing 50.1% or more of the Company's then outstanding
securities having the right to vote in the election of directors, or (iv)
during any period of two consecutive years, individuals who, at the
beginning of such period constituted the entire Board, cease for any reason
(other than death) to constitute a majority of the directors, unless the
election, or the nomination for election, by the Company's stockholders, of
each new director was approved by a vote of at least a majority of the
directors then still in office who were directors at the beginning of the
period.
"Chief Executive Officer" means the chief executive officer of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" has the meaning assigned to it in Article II.
"Company" means IMCO Recycling Inc., a Delaware corporation.
"Corporate Performance Goals" means, for any Performance Period, the
key financial and strategic objectives for the Company and its Subsidiaries
as a whole established in accordance with Article II hereof for that
Performance Period.
"Covered Employee" shall have the same meaning as the term "covered
employee" (or its counterpart, as such term may be changed from time to
time) contained in the treasury regulations promulgated under Code Section
162(m), or their respective successor provision or provisions, that being
an employee for whom the limitation on deductibility for compensation
pursuant to Code Section 162(m) is applicable.
"Employee" means any person employed full-time by the Company or a
Subsidiary on a salaried basis, and the term "Employment" means full-time
salaried employment by the Company or a Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Final Payment Date" means the business day selected by the Committee
upon which the Committee shall calculate and declare final Incentive Awards
in accordance with Article V, which shall be a date after the Company's
independent accounting firm issues its audit report on the Company's
financial statements with respect to the Plan Year in question.
2
<PAGE>
"Incentive Award" means the incentive compensation payment awarded to
a Participant pursuant to Article V of the Plan.
"Incentive Percentage" means, for any Performance Period, the
percentage which is derived from multiplying the Target Incentive
Percentage times the Performance Achievement.
"Individual Performance Goals" means, for any Performance Period, the
specific individual performance goals and objectives established in
accordance with Article II hereof for each Participant selected to
participate for that Performance Period, and to whom such goals and
objectives are determined to apply.
"Maximum Performance" means, for any Performance Period, the level of
performance in relation to Performance Goals that will permit the maximum
Incentive Award, expressed as a percentage of Base Salary Midpoint, to be
paid under this Plan.
"Officer Participant" means any Participant who is an officer of the
Company.
"Participant" means any key Employee of the Company or any of its
Subsidiaries that the Committee has determined to be eligible for
participation in the Plan.
"Payment Date" means either a Preliminary Payment Date or a Final
Payment Date.
"Performance Achievement" means, for any Performance Period, the
degree, expressed as a cumulative percentage, of the Participant's actual
performance level(s) achieved, calculated from the aggregate of the
percentages of achievement the Participant has accomplished with respect to
each of his Performance Goals, and determined in accordance with Article VI
hereof.
"Performance Goals" means, for any Performance Period (and as may be
applicable to a particular Participant), the Corporate Performance Goals,
the Business Unit Goals, and the Individual Performance Goals.
"Performance Period" means, for any Plan Year, the Plan Year or the
portion of such Plan Year established in accordance with Article II hereof
for determination of the achievement of a Performance Goal.
"Plan" means the IMCO Recycling Inc. Annual Incentive Compensation
Plan, as it may be amended from time to time.
"Plan Year" means the fiscal year of the Company and its Subsidiaries
with respect to which an Incentive Award is calculated.
3
<PAGE>
"Preliminary Payment Date" means a business day during the last month
of the fiscal year constituting the Plan Year in question selected by the
Committee, upon which date the Committee shall calculate and declare
Incentive Awards in accordance with Article V.
"Subsidiary" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain owns stock possessing more
than 50% of the total combined voting power of all classes of stock in one
of the other corporations in the chain, and "Subsidiaries" means more than
one of any such corporations.
"Target Incentive Award" means, for any Performance Period, the dollar
amount derived by multiplying the Target Incentive Percentage times the
Base Salary Midpoint.
"Target Incentive Percentage" means, for any Performance Period, the
percentage, not to exceed 100%, of the Base Salary Midpoint established in
accordance with Article II hereof.
"Target Performance" means, for any Performance Period, the level(s)
of performance in relation to the relevant Performance Goals that have been
established in accordance with Article II hereof.
"Termination for Cause" means termination of a Participant's
Employment by the Company or a Subsidiary for (a) breach of a written
employment agreement by that Participant; or (b) misconduct, dishonesty,
disloyalty, disobedience or action that might reasonably injure the Company
or any of its Subsidiaries or their business interests or reputation.
"Termination for Good Reason" means resignation by a Participant of
his Employment with the Company or a Subsidiary within two years following
a Change in Control if such resignation was caused by any of the following
occurrences, and so long as the Participant resigns within 30 days of the
particular occurrence: (a) the Company assigns the Participant duties
which are materially inconsistent with the Participant's position, duties,
and status with Company at the time of the Change in Control; (b) the
Company takes action without the Participant's written consent which
results in a material diminution in the position, duties, or status of the
Participant at the time of the Change in Control; (c) without the
Participant's written consent, the Company transfers or proposes to
transfer the Participant for any extended period (i.e., more than three
consecutive months) to a location outside his principal place of employment
at the time of the Change in Control; or (d) the Company reduces the annual
base salary of the Participant.
"Threshold Performance" means, for any Performance Period, the minimum
level of performance in relation to the Performance Goals for payment of
any Incentive Award under this Plan.
4
<PAGE>
Article II
Administration
--------------
Subject to the terms of this Article II, the Plan shall be administered by
the Compensation Committee of the Board, or a subcommittee thereof (the
"Committee"), which shall consist of at least two members. Any member of the
Committee may be removed at any time, with or without cause, by resolution of
the Board. Any vacancy occurring in the membership of the Committee may be
filled by appointment by the Board.
The Board shall select one of its members to act as the Chairman of the
Committee, and the Committee shall make such rules and regulations for its
operation as it deems appropriate. A majority of the Committee shall constitute
a quorum, and the act of a majority of the members of the Committee present at a
meeting at which a quorum is present shall be the act of the Committee. Subject
to the terms hereof, the Committee shall have the discretionary power and
authority to construe and interpret the Plan, to supply any omissions therein,
to reconcile and correct any errors or inconsistencies, to decide any questions
in the administration and application of the Plan, and to make equitable
adjustments for any mistakes or errors made in the administration of the Plan.
Except as provided below, all such actions or determinations made by the
Committee, and the application of rules and regulations to a particular case or
issue by the Committee, in good faith, shall not be subject to review by any
person, but shall be final, binding and conclusive on all persons ever
interested hereunder.
The Committee shall have full authority to select the key Employees who are
officers of the Company who will participate in the Plan. The Chief Executive
Officer shall have full authority to select the Employees who are not officers
of the Company who will participate in the Plan. With respect to all Officer
Participants, the Committee shall have full authority to establish the
Performance Period for each Plan Year for each such Officer Participant, to
determine the Base Salary Midpoint for each such Officer Participant, to
establish Performance Goals with respect to each such Officer Participant and
certify the extent of their achievement, and to establish and certify the
achievement of any other criteria or objective for payment of Incentive Awards
hereunder for such Officer Participants. With respect to all Participants who
are not Officer Participants, the Chief Executive Officer shall have full
authority to establish the Performance Period for each Plan Year for each such
Participant, to determine the Base Salary Midpoint for each such Participant, to
establish Performance Goals with respect to each such Participant and certify
the extent of their achievement, and to establish and certify the achievement of
any other criteria or objective for payment of Incentive Awards hereunder for
such Participants.
With respect to participation in the Plan by a Covered Employee, any
decision concerning the awarding of an Incentive Award hereunder (including,
without limitation, establishment of Base Salary Midpoint, Performance Goals,
Incentive Percentage, Target Incentive Percentage, Target Incentive Award,
Target Performance, Threshold Performance, Maximum Performance, maximum
Incentive Award, and any other information necessary to calculate Incentive
Awards for such Covered Employees for such Plan Year) shall be made exclusively
by the members of the Committee who are at that time "outside" directors, as
that term is used in Code Section 162(m) and the treasury regulations
promulgated thereunder.
5
<PAGE>
Article III
Eligibility
-----------
An Employee may be designated as a Participant by the Committee or by the
Chief Executive Officer, as the case may be, in accordance with Article II
hereof, if the Employee holds a position of responsibility and has the
opportunity to make a significant contribution to the management, growth and
profitability of the business of the Company and its Subsidiaries. Employees
who participate in the Plan may also participate in other incentive or benefit
plans of the Company or any Subsidiary.
Article IV
Performance Goals
-----------------
4.1 Corporate Performance Goals. For each Performance Period, one or more
Corporate Performance Goals may be established in accordance with Article II
hereof for the Company and its Subsidiaries as a whole, which shall be based on
such measures and objectives as are determined by the Committee, including
(without limitation): free cash flow; earnings before interest, taxes,
depreciation and amortization; revenue growth; return on operating assets; and
return on equity.
4.2 Business Unit Performance Goals. For each Performance Period, one
or more Business Unit Performance Goals may be established in accordance with
Article II hereof for any operating business unit or profit center of the
Company, which may be based on financial measures and objectives which are
similar to or different from those established as Corporate Performance Goals
for such Performance Period, as well as any other non-financial measures and
objectives.
4.3 Individual Performance Goals. For each Performance Period, one or
more Individual Performance Goals may be established in accordance with Article
II hereof for each Participant to whom such goals are determined to apply. The
Chief Executive Officer may recommend Individual Performance Goals for any one
or more Participants (other than himself), and the Chief Executive Officer may
deliver a written report to the Committee setting forth his determination of the
level of achievement of such Individual Performance Goals by such Participants.
The Committee shall consider, but shall not be bound by, the recommendations and
determinations of the Chief Executive Officer with respect to such Individual
Performance Goals of Officer Participants.
Article V
Calculation of Incentive Award
------------------------------
5.1 Incentive Schedule. On a date which is not later than the 83rd day of
the Plan Year in question, the Committee shall determine and set forth in
writing the following information for such Plan Year: (i) the key Employees
designated as Officer Participants for the Plan Year; (ii) the Threshold
Performance, Target Performance, and Maximum Performance levels for Officer
Participants; (iii) the Target Incentive Percentage and Target Incentive Award
6
<PAGE>
for each such Officer Participant; (iv) the Performance Goal(s) with respect to
each such Officer Participant; and (v) to the extent applicable to an Officer
Participant, the weighting assigned, expressed as percentages, to the various
component(s) of the Incentive Award that is to be paid based on the level of
achievement of the Corporate Performance Goals, the Business Unit Performance
Goals, and the Individual Performance Goal(s). The Committee may establish
groups of Officer Participants based on such Officer Participants' positions or
job classifications, for the purpose of weighting the Performance Goals. The
Chief Executive Officer may make similar determinations for all Participants who
are not Officer Participants.
5.2 Determination; Adjustments. Subject to the terms of this Plan, the
Committee shall, from time to time, determine the time or times at which
Incentive Awards will be awarded to Officer Participants, select the Preliminary
Payment Date and the Final Payment Date for such Officer Participants, determine
and authorize the payment of the Incentive Awards to Officer Participants, and
determine all other terms and conditions regarding the Incentive Awards for
Officer Participants, which terms and conditions shall be consistent with this
Plan. The Incentive Award for each Officer Participant will be calculated by
multiplying each such Officer Participant's Base Salary Midpoint times each such
Officer Participant's Incentive Percentage. The Committee shall certify, in
accordance with Section 6.1 hereof, the Incentive Awards for the Officer
Participants for a Plan Year on the basis of the criteria approved for such Plan
Year and the level of achievement of Performance Goals for each such Officer
Participant. The Chief Executive Officer may make similar determinations for
all Participants who are not Officer Participants.
After such Incentive Award amounts have been calculated, the Committee, in
its sole discretion and upon the recommendation of the Chief Executive Officer,
may adjust the Incentive Award upwards or downwards for any Officer Participant
who is not a Covered Employee by adjusting the relative weights applied to the
Performance Goals to reflect any material change in circumstances during the
Plan Year. In determining whether an Incentive Award will be adjusted, the
Committee shall consider any extraordinary changes which may occur during the
Plan Year, such as acquisitions or divestitures, changes in accounting practices
or applicable law, and shall consider such individual or business performance
criteria that it deems appropriate, including, but not limited to, the Company's
net income, operating earnings, gross margins, return on investment, return on
equity and other relevant operating and strategic business indicia and results
applicable to an individual Officer Participant. The Chief Executive Officer
may similarly adjust the Incentive Awards for all Participants who are not
Officer Participants. The resulting amount for each such Participant shall be
his or her Incentive Award for such Plan Year. The potential Incentive Award
amounts calculated in accordance with Article V of this Plan for any Participant
who is a Covered Employee with respect to the Plan Year in question may be
reduced by the Committee in its sole discretion; provided, however, that under
no circumstances may the amount of a potential Incentive Award determined under
this Article V with respect to any Participant who is a Covered Employee with
respect to the Plan Year in question be increased.
5.3 Change in Control. In the event of a Change in Control, all Incentive
Awards for the Plan Year in which the Change in Control occurred and any prior
Plan Year for which all
7
<PAGE>
Incentive Awards have not been paid shall be calculated on the basis of the
applicable Performance Goals, weighting, and other criteria in effect prior to
the Change in Control.
Article VI
Payment of Incentive Awards and General Provisions
--------------------------------------------------
6.1 Certification. With respect to all Officer Participants, after the
end of a Performance Period, the Committee shall certify, as applicable, with
respect to that Performance Period: (i) whether or not the Company achieved its
Threshold Performance for its Corporate Performance Goals; (ii) whether or not
each business unit achieved its Threshold Performance for its Business Unit
Performance Goals; (iii) whether or not the Officer Participant achieved his
Threshold Performance for his Individual Performance Goals; (iv) the level of
achievement of Performance Goals for the Company and each business unit, and of
the Individual Performance Goals for each Officer Participant; (v) the
Performance Achievement for each Officer Participant; and (vi) the Incentive
Percentage and the amount of Incentive Award payable to each Officer Participant
under the Plan for the Plan Year (subject in all respects to Section 6.2
hereof). The Chief Executive Officer will make similar determinations for all
Participants who are not Officer Participants after the end of a Performance
Period.
6.2 Payment. As a condition to eligibility for payment of an Incentive
Award with respect to any particular Performance Period, a Participant shall be
required to be in the employ of the Company or one of its Subsidiaries through
the applicable Payment Date, unless (i) such Participant terminated his or her
Employment during the Plan Year in question due to retirement from the Company
and its Subsidiaries in accordance with standard retirement policies of the
Company and its Subsidiaries then in effect, (ii) the Participant, while in the
employ of the Company or one of its Subsidiaries, became totally and permanently
disabled (as that term is defined in Section 22(e) of the Code) or died during
the Plan Year in question , or (iii) the Participant resigned under
circumstances constituting Termination for Good Reason during the Plan Year in
question. In the event of such retirement, death, disability, or Termination
for Good Reason, the Participant (or, in the case of death or disability, the
Participant's estate or legal representative, as the case may be, or a
designated beneficiary in accordance with Section 10.6) shall receive the
Incentive Award to which such Participant would have been entitled if he were
employed on the last day of such Plan Year and the Payment Date in question.
In addition, if a Participant was in the employ of the Company or one of
its Subsidiaries through the Preliminary Payment Date, but the Participant's
Employment is terminated under circumstances constituting Termination for Cause
before the Final Payment Date for the Incentive Award for such Plan Year, the
Participant shall have no right to any payment with respect to any portion of
that Incentive Award which has not already been made.
In the event that a person becomes an Employee of the Company or one of its
Subsidiaries during a Plan Year and the Committee determines that such person is
not a Covered Employee, such person may be designated as a Participant by the
Committee as of the date determined by the Committee, and any such Participant
shall be entitled to receive a prorated portion of his Incentive Award based on
the portion of the Plan Year that such Participant was in the employ of the
Company or one of its Subsidiaries. If a Participant who is a Covered
8
<PAGE>
Employee ceases to be employed by the Company or any Subsidiary or such
Participant's status with the Company or any Subsidiary as an officer changes as
a result of a reassignment of duties, any person who succeeds the Participant in
the same or a comparable position within the Company or any Subsidiary, may be
designated by the Committee as a Participant for the duration of the applicable
Plan Year, effective as of the date such person assumes such position.
On the Preliminary Payment Date, the preliminary Incentive Award amounts
shall be calculated in accordance with Article V, and the Committee may
authorize payment of 70% of the preliminary Incentive Award, if any, payable to
each Participant. The Committee shall instruct the Company, or instruct the
Company to cause any Subsidiary, as applicable, to pay to each Participant his
preliminary Incentive Award in accordance with this Article VI, as promptly as
reasonably practicable after such Preliminary Payment Date.
On the Final Payment Date, each Participant's Incentive Award shall be
calculated in accordance with Article V, and the Committee shall either:
(a) allocate and distribute the portions of the Incentive Award which
had not been previously paid to each Participant following the Preliminary
Payment Date; provided, however, that subject to the foregoing provisions
of this Section 6.2, in order for a Participant to receive an Incentive
Award on the Final Payment Date, it shall be a requirement that such
Participant shall be employed by the Company or its Subsidiaries on such
Final Payment Date; or
(b) if the amount of a Participant's Incentive Award for the entire
Plan Year calculated as of the Final Payment Date is less than the portion
of the Incentive Award which had previously been paid to such Participant
on the Preliminary Payment Date, the difference shall be subtracted from
the amount of the Incentive Award payable in the next succeeding Plan Year
or Plan Years, if any, until such difference has been eliminated.
6.3 Partial Fiscal Years. In the event that the Company and its
Subsidiaries adopt any different fiscal year which results in a fiscal year
having less than twelve months, the Committee shall, in its sole discretion,
award Incentive Awards computed as provided in Article V, but reduced by the
Committee for such shortened fiscal year, or defer any awards of Incentive
Awards for such fiscal period until a Payment Date following such full twelve-
month fiscal year.
6.4 No Rights to Incentive Award. The prospective recipient of an
Incentive Award shall not have any rights with respect to any Incentive Award,
or any portion thereof, until the actual award thereof on the Payment Date to
which the particular Incentive Award amount relates.
6.5 Limitation on Total Incentive Award. Notwithstanding any provision to
the contrary contained herein, the maximum Incentive Award payable to any
Participant with respect to any Plan Year shall not exceed 200% of such
Participant's Base Salary Midpoint for such Plan Year. In addition, in no event
may a total Incentive Award amount be paid under this Plan to a Participant for
any Plan Year which exceeds $1,000,000.
9
<PAGE>
Article VII
Amendment or Discontinuance
---------------------------
The Committee may at any time and from time to time, without the consent of
the Participants, alter, amend, revise, suspend, or discontinue the Plan in
whole or in part; provided that any amendment that modifies any preestablished
performance goal for a Participant who is a Covered Employee (or his
successor(s), as may be applicable) under this Plan with respect to any
particular Plan Year may only be effected on or prior to the last day for
establishment of an Incentive Schedule by the Committee for such Plan Year in
accordance with Section 5.1. In addition, the Board shall have the power to
amend the Plan in any manner advisable in order for Incentive Awards granted
under the Plan to qualify as "performance-based" compensation under Section
162(m) of the Code (including amendments as a result of changes to Section
162(m) or the regulations thereunder to permit greater flexibility with respect
to Incentive Awards granted under the Plan).
Article VIII
Effect of the Plan
------------------
Neither the adoption of this Plan nor any action of the Board or the
Committee shall be deemed to give any Participant any right to be granted an
Incentive Award or any other rights. In addition, nothing contained in this
Plan and no action taken pursuant to its provisions shall be construed to (a)
give any Participant any right to any compensation, except as expressly provided
herein; (b) be evidence of any agreement, contract or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant in any
particular position; (c) give any Participant any right, title, or interest
whatsoever in or to any investments which the Company may make to aid it in
meeting its obligations hereunder; or (d) create a trust of any kind or a
fiduciary relationship between the Company and a Participant or any other
person.
Article IX
Term
----
The effective date of this Plan shall be as of January 1, 1999, subject to
stockholder approval of its material terms. This Plan and any benefits granted
hereunder shall be null and void if stockholder approval of its material terms
is not obtained at the 1999 annual meeting of stockholders of the Company. This
Plan shall remain in effect until it is terminated by the Board.
Article X
Miscellaneous Provisions
------------------------
10.1 No Right to Continue Employment. Nothing in the Plan confers upon any
Participant the right to continue in the employ of the Company or any Subsidiary
or interferes with or restricts in any way the right of the Company or any
Subsidiary to discharge any Employee at any time (subject to any contract rights
of such Employee).
10
<PAGE>
10.2 Tax Requirements. The Company (and, where applicable, its
Subsidiaries) shall have the power and the right to deduct or withhold, or
require a Participant to remit to the Company, an amount sufficient to satisfy
applicable taxes required by law to be withheld with respect to any payment of
any Incentive Award to a Participant.
10.3 Indemnification of Board and Committee. No member of the Committee,
nor any officer, employee or agent of the Company or any Subsidiary acting on
behalf of the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Committee and each and every officer, employee or
agent of the Company or any Subsidiary acting on their behalf shall, to the
fullest extent permitted by law, be fully indemnified and protected by the
Company in respect of any such action, determination or interpretation. Each
member of the Committee shall, in the performance of his or her duties under the
Plan, be fully protected in relying in good faith upon the financial statements
of the Company as contemplated by the terms of the Plan.
10.4 Effect on Participation. The award of an Incentive Award to a
Participant shall not by itself be deemed either to entitle the Participant to,
or to disqualify the Participant from, as the case may be, participation in any
other future grant of bonuses under the Plan or otherwise, or in any other
compensation or benefit plan of the Company or any of its Subsidiaries currently
existing or hereafter established.
10.5 Other Compensation Agreements. Nothing contained in this Plan shall
prevent the Board from adopting other or additional compensation arrangements,
subject to stockholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in specific
cases.
10.6 Applicability to Successors. The Plan shall be binding upon and inure
to the benefit of the Company and each Participant, the successors and assigns
of the Company, and the beneficiaries, personal representatives and heirs of
each Participant. Any interests of Participants under the Plan may not be
voluntarily sold, transferred, alienated, assigned or encumbered, other than by
will or pursuant to the laws of descent and distribution; provided however, that
a Participant may designate a beneficiary or beneficiaries to receive payments
after the Participant's death, by written notice to the Committee. If the
Company becomes a party to any merger, consolidation or reorganization, the Plan
shall remain in full force and effect as an obligation of the Company or its
successors in interest.
10.7 Gender and Number. Where the context permits, words in the masculine
gender shall include the feminine and neuter genders, the plural form of a word
shall include the singular form, and the singular form of a word shall include
the plural form.
10.8 Stockholder Vote. The material terms of this Plan shall be disclosed
to the stockholders of the Company for approval in accordance with Section
162(m) of the Code. No award or payment of any Incentive Award under this Plan
to any Covered Employee shall be made unless such stockholder approval is
obtained.
11
<PAGE>
10.9 Governing Law. This Plan shall be construed in accordance with the
laws of the State of Delaware and the rights and obligations created hereby
shall be governed by the laws of the State of Delaware.
10.10 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any Incentive Awards
granted but not yet paid to a Participant by the Company, nothing contained
herein shall give any such Participant any rights that are greater than those of
a general unsecured creditor of the Company.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
pursuant to prior action taken by the Board.
IMCO RECYCLING INC.
By: /s/ PAUL V. DUFOUR
--------------------------------
Name: Paul V. Dufour
--------------------------------
Title: Executive Vice President and CFO
--------------------------------
12
<PAGE>
Exhibit 15.1
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-26641, Form S-8 No. 33-34745, Form S-8 No. 33-76780, Form S-8
No. 333-00075, Form S-8 No. 333-07091 and Form S-8 No. 333-81949) 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, the IMCO Recycling Inc. Annual Incentive Program and the IMCO Recycling
Inc. Employee Stock Purchase Plan of our report dated July 26, 1999 relating to
the unaudited consolidated interim financial statements of IMCO Recycling Inc.
which are included in its Form 10-Q for the quarter ended June 30, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Dallas, Texas
August 13, 1999
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