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, 2000
[_] 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 1500
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, 2001, the aggregate market value of voting and non-voting common
equity held by nonaffiliates of the Registrant was $62,579,294.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 2001.
Common Stock, $0.10 par value, 15,364,514
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its 2001
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
ITEM PAGE
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PART I
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Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 4A. Executive Officers of the Registrant 17
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 65
PART III
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Item 10. Directors and Executive Officers of the Registrant 65
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners and
Management 65
Item 13. Certain Relationships and Related Transactions 65
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 66
Signatures 70
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" for a
description of important factors which could cause actual results to differ
materially from those contained in the forward-looking statements. Forward-
looking statements include statements about plans, objectives, goals,
strategies, future events or performance and assumptions underlying those
statements. These forward-looking statements may be identified by words such as
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and the Company believes it has a
reasonable basis, through 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
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GENERAL
IMCO Recycling Inc. recycles aluminum and zinc. Except where the context
otherwise requires, the term "Company" as used herein refers to IMCO Recycling
Inc. and its subsidiaries. It is the largest aluminum recycler in the United
States and believes that it is the largest aluminum recycler in the world. The
Company's processing of aluminum includes used aluminum beverage cans ("UBCs"),
aluminum scrap and dross (a by-product of aluminum production). The Company
converts UBCs, scrap and dross into molten metal in furnaces at facilities owned
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 is the largest supplier of zinc secondaries in the U.S. and believes
that it is the largest recycler of zinc secondaries in the world. Its U.S. Zinc
Corporation subsidiary uses furnaces to convert zinc scrap and dross into
various value-added zinc products, such as zinc oxides, dust and metal.
A majority 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 2000, approximately 57% 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 ("product sales" business).
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 The Aluminum Association, over the past 20 years, U.S. annual
production of recycled aluminum has grown from 1.61 million to
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3.75 million metric tons. In addition, recycled aluminum in the U.S. currently
represents approximately 33% of the total domestic aluminum supply, compared
with 23% in 1978.
The U.S. is the world's leading consumer of zinc, currently consuming about
one-sixth of the world's production at more than one million metric tons
annually. However, the U.S. is only the fifth largest producer, and consequently
is also the largest importer of refined zinc. Over the past several years, U.S.
zinc recycling has grown at three times the rate of primary zinc metal
production and now accounts for about 40 percent of domestic zinc supply.
Worldwide, about 80% of zinc resources available for recycling are recovered.
This accounts for some 30% of world zinc supply.
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. Due to the
increasing use of aluminum in automotive components, 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. The
Company's principal aluminum customers include Aluminum Company of America
("Alcoa"), Commonwealth Aluminum Corporation ("Commonwealth"), Kaiser Aluminum
Corporation ("Kaiser"), Ford Motor Company ("Ford"), General Motors Corporation
("GM"), Toyota Tsusho America, Inc. 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.
GROWTH OF BUSINESS
Since its formation in 1988, the Company has increased its number of facilities
and capacity through acquisitions, construction of new facilities and expansion
of existing facilities. Implementation of this growth strategy was accelerated
during the mid 1990's. The Company has grown from owning and operating five
recycling plants having a total annual processing capacity of 735 million pounds
of aluminum and 50 million pounds of zinc and other metals as of January 1, 1993
to 24 recycling and processing plants at December 31, 2000, which have a total
annual melting capacity of approximately 2.9 billion pounds of aluminum and 290
million pounds of zinc, for a total annual processing capacity of 3.2 billion
pounds. Three plants ceased or suspended operations in January 2001. See "RECENT
DEVELOPMENTS" below.
In December 2000, operations commenced at the Company's new aluminum alloying
facility near Saginaw, Michigan, which supplies molten aluminum to GM under a
long-term supply agreement. In addition, the Company owns a 50% interest in an
aluminum recycling joint venture in Germany, VAW-IMCO Guss und Recycling
GmbH ("VAW-IMCO"), which has an annual melting capacity of 600 million pounds,
and an aluminum recycling facility in Swansea, Wales, which has an annual
melting capacity of 100 million pounds. The Company expects that planned
international expansions will add approximately 200 million pounds of annual
aluminum processing capacity during 2001 and 2002.
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RECENT DEVELOPMENTS
As a result of market and economic conditions, the Company decided in 2000 to
reduce some of its capacity and reallocate that processing work to other
facilities. In January 2001, it permanently closed its Bedford, Indiana aluminum
melting facility and its Chicago, Illinois zinc oxide plant. In February 2001,
it also temporarily shut down operations at its Wendover, Utah facility. See
ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - FISCAL 2000 SPECIAL FACTORS AND FISCAL 2001 OUTLOOK."
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 STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS" and
(iv) NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements.
SEGMENT REPORTING
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. 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.
The Company also manufactures specification aluminum alloy products, principally
at three of its facilities, for automotive equipment manufacturers and their
suppliers. In addition, two other plants 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 two facilities also manufacture a wide range of
proprietary briquetted products and offer toll briquetting services.
Since 1988, the Company's overall aluminum business has benefited from the trend
to include recycled materials in finished products and from the growth in the
use and recycling of aluminum beverage containers. However, the major force
behind increased demand for recycled aluminum in recent years has been
aluminum's increasing use in auto and truck components, including body
structures. This trend has made the transportation sector the largest and
fastest-growing
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aluminum market since 1994. The total amount of aluminum shipped to the North
American auto market has more than doubled since 1992 to about 4.2 billion
pounds per year.
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. 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 (fines) generated in the zinc metal recycling process
serve the zinc sulfate industry as fertilizer additives.
The Company's zinc business has benefited from the growth of secondary zinc
refining, which in recent years 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 about 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 countries where market conditions warrant. The Company anticipates
further capacity expansion at its VAW-IMCO facilities in Germany, and is in the
process of investigating opportunities in Latin America. General political and
economic conditions in foreign countries could affect the business prospects and
financial condition of the Company. Foreign operations are generally subject to
risks, including foreign currency exchange rate fluctuations, 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 use recycled
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aluminum to produce can sheet, building, automotive and other products. No
single aluminum customer of the Company accounted for 10% or more of the
company's consolidated revenues in fiscal 2000. Ford and its affiliates
accounted for approximately 8%, 8% and 10% of the Company's consolidated
revenues in 2000, 1999 and 1998, respectively. The Company does not have any
long-term commitments with Ford. The loss of Ford as a customer 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 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, Aluminum Norf GmbH, Kaiser,
Wise Metals, PBR Automotive USA LLC, and GM. The remaining terms of these
contracts as of December
6
31, 2000 ranged from 1 year to 11 years, although many of the contracts provide
for extension periods. For the year ended December 31, 2000, the Company melted
2.9 billion pounds of aluminum. Amounts melted pursuant to multi-year contracts
with its customers, represented approximately 32% of this total aluminum melting
volume. 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.
The Company plans to 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 or few customers with respect to a particular Company
facility. In such cases, the loss of such a customer, or the reduction of that
customer's business level, 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. 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 2000. 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. Reductions in processing can stock scrap and UBCs adversely affected
the Company's results of operations during 2000. 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 15%, 14% and 13% of
consolidated revenues in 2000, 1999 and 1998 respectively, and aluminum
shipments to customers located in Canada accounted for approximately 8%, 8% and
9% of consolidated revenues for 2000, 1999 and 1998, respectively. See ITEM 7.
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"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS" and
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 recovered from dross and then immediately switch to other types of
scrap. 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.
7
After the aluminum is melted, the recovered metal is poured directly into an
ingot mold or hot metal crucible for delivery to customers. Some of the
Company's plants deliver molten aluminum in crucibles directly to their
customers' manufacturing facilities. As of December 31, 2000, the Company had
the capacity to provide approximately 71% 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.
Alloying. At the Company's metal alloying facilities in Coldwater and Saginaw,
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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, Michigan alloying
facility generates dross, which is then recycled at the Company's adjacent
aluminum recycling plant.
By-products. A by-product of processing aluminum materials through reverberatory
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furnaces is aluminum dross, which is then sent to the Company's rotary furnaces
for processing. The 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 Company disposes of its salt cake and certain airborne contaminants (or
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 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 built and operates a lined landfill at its
Morgantown, Kentucky facility; its design 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, Kentucky plant to further process salt cake through the use of a
materials separation process, and extract additional aluminum that is left after
the melting process. 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, Kentucky landfill.
Certain of the Company's facilities also recycle salt cake and other by-products
from the aluminum recycling process into aluminum concentrates, aluminum oxide
and salt brine.
Zinc.
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Zinc oxide is produced by melting top dross, a low iron-content zinc by-product
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of continuous galvanizing, and re-melt die cast, a high zinc-content alloy, in a
sweat or premelt furnace.
Zinc dust produced by the Company consists of extra low lead and regular dust.
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Zinc dust with extra low lead content is preferred by the domestic industrial
paint industry. It is produced by converting primary zinc into a molten form
using an electro-thermal furnace. Regular zinc dust is produced by processing
bottom dross, an iron-bearing zinc residue created during the galvanizing
process, and re-melt die cast in a pot or ladle.
8
Zinc metal is produced by placing pieces of oxidized zinc-bearing metals into a
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ball mill where the Company separates out the oxidic zinc. The oxide zinc is
then sold as fertilizer additives. After the ball mill process, the metallic
zinc-bearing material is melted, refined, poured into molds and shipped to
galvanizers.
The Company's Coldwater, Michigan zinc recycling process involves melting
continuous galvanizers' top dross in an electric induction furnace which is 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
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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 often 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 processed.
For the year ended December 31, 2000, approximately 63% of the Company's total
pounds of aluminum processed involved tolling. Unlike tolling transactions,
product sales transactions increase the Company's exposure to the risk of
fluctuating metal prices and working capital requirements. See ITEM 7.
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"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and ITEM 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
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RISK."
Zinc. The Company's zinc operations primarily consist of product sales
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transactions. The Company's product sales from zinc operations represent
approximately 97% of its total zinc production; the remainder is from tolling
transactions.
General. The Company's production network of plants have traditionally achieved
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high overall operating rates due to demand for the Company's services and
products and 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 better allocate processing
work among its facilities, thereby maximizing utilization of available capacity.
To achieve reductions in energy consumption and increases in productivity, the
Company began in 2000 to retrofit its older rotary furnaces with new natural gas
burner technology. This initiative is expected to continue through 2001.
In addition to its increased emphasis on the product sales business, the Company
has also entered into an increasing amount of metal brokerage transactions
pursuant to which the Company buys metal from primary and other producers and
then sells the metal to end-users. These transactions involve buying and selling
metal without processing it. Additionally, in order 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.
When purchasing metals in the open market for its product sales business, the
Company attempts to reduce the risk of fluctuating metal prices by hedging
anticipated sales of aluminum and zinc
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and by avoiding large inventories, except to the extent necessary to allow its
plants to operate without interruption. See ITEM 7A. "QUANTITATIVE AND
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QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
COMPETITION
General. The aluminum and zinc recycling industries are fragmented and highly
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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
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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 product sales 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, 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. Declines in can stock
demand for these major producers during 2000 adversely affected the Company's
tolling business.
The aluminum alloys business has recently experienced a greater level of
competition as new aluminum alloy plants have been built or expanded. This has
had a negative impact on the Company's profitability as prices for its aluminum
alloy products have fallen and raw materials costs have increased. The Company
believes that the continuing trend to increased usage of aluminum in truck and
auto products will correct this situation, although there can be no assurance of
when this will occur.
Zinc. The principal factors of competition in the zinc segment are price,
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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. 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.
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SOURCE AND AVAILABILITY OF RAW MATERIALS AND ENERGY
Aluminum. The Company does not anticipate having difficulties in obtaining raw
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materials for its aluminum operations. However, over the last several years
certain locations have experienced from time to time sporadic availability of
can sheet and related materials. In the case of product sales business, the
primary sources of aluminum 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.
During 2000, the Company experienced lower demand from can stock customers, and
its alloy business was constrained by high costs of scrap and lower selling
prices for the finished aluminum due to additional capacity brought on line by
its competitors in the late 1990s.
Zinc. The Company's management believes that it is the largest worldwide
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purchaser of zinc-bearing secondary metals, thereby providing its customers an
outlet to sell the by-products of their manufacturing processes. A significant
portion of the Company's zinc products is produced from secondary materials
provided by the galvanizing and scrap metals industries. The Company also
purchases primary zinc to produce high-grade zinc 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. The Company's zinc brokerage unit
also procures raw materials for use in the Company's zinc manufacturing
operations. The availability of zinc dross is dependent upon the demand for
galvanized steel, 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
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the second largest component of operating costs. In an effort to acquire the
most favorable natural gas costs, the Company has secured some of its natural
gas at fixed price commitments for its 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 7. "MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
ITEM 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK." The
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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
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and lowest in the winter months. Therefore, the Company has, at times,
experienced lower volumes at certain facilities during the winter. 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
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industry is somewhat higher in the summer months, while demand for zinc products
used in fertilizers is lower in the winter months.
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TRANSPORTATION
The Company receives incoming metal by 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.
EMPLOYEES
As of December 31, 2000, the Company had 1,755 employees, consisting of 445
employees engaged in administrative and supervisory activities and 1,310
employees engaged in production and maintenance. Labor relations with employees
have been satisfactory. Several of the Company's production facilities are
represented by collective bargaining groups; the major ones are set forth below:
CONTRACT
FACILITY REPRESENTATIVE EXPIRES
------------------ ----------------------------------------------- ---------------
Rockwood, TN United Steelworkers of America September 2003
Hillsboro, IL Laborer's International Union of North America August 2003
Uhrichsville, OH United Mine Workers of America December 2001
ENVIRONMENTAL MATTERS
General. The Company's operations, like those of other basic industries, are
--------
subject to federal, state, local and foreign environmental laws, regulations and
ordinances. While the Company believes that current environmental control
measures at its facilities comply in all material respects with current and
anticipated future legal requirements, additional measures at some of the
Company's facilities may be required. See ITEM 3. "LEGAL PROCEEDINGS."
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.
See ITEM 3. "LEGAL PROCEEDINGS and ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS
------- -------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Due to relatively high costs and limited coverage, the Company does not carry
environmental impairment liability insurance. The Company made capital
expenditures for environmental control facilities of approximately $3,408,000 in
2000, most of which was related to air pollution control equipment and landfill
capacity additions. Environmental expenditures for 2001 and 2002, which
primarily relate to the Company's landfills and air pollution control equipment,
are currently estimated to be approximately $1,202,000 and $2,000,000,
respectively.
12
Aluminum. The processing of UBCs, dross and scrap generates solid waste in the
---------
form of salt cake and baghouse dust. Currently, this material is either disposed
of at off-site landfills or at the Company's permitted disposal sites at two of
its facilities. 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, Kentucky 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, planned utilization rates and remaining landfill capacity,
the estimated remaining life of the Company's landfill at its Sapulpa, Oklahoma
plant is three years. The Company estimates that its Morgantown, Kentucky
landfill cell has a remaining useful life of approximately three years. A
planned second expansion at Morgantown is anticipated to provide an additional
seven years of useful life. Landfill closure costs for the Company-owned
landfills are currently estimated to be approximately $9,000,000. The Company is
currently providing for this expenditure by accruing, on a current basis, these
estimated costs as the landfills are used.
Zinc. Several of the zinc manufacturing processes create various by-products
-----
which are either sold to downstream processors or re-used internally. There are
virtually no remaining by-products requiring disposal.
13
ITEM 2. PROPERTIES
-------
RECYCLING AND PROCESSING FACILITIES
The Company's principal aluminum segment facilities are located in:
Sapulpa, Oklahoma Goodyear, Arizona
Rockwood, Tennessee Elyria, Ohio
Morgantown, Kentucky Rock Creek, Ohio
Uhrichsville, Ohio Coldwater, Michigan
Loudon, Tennessee Swansea, Wales UK
Chicago Heights, Illinois Shelbyville, Tennessee
Post Falls, Idaho Saginaw, Michigan
These facilities recycle aluminum, manufacture specification aluminum alloy
products and manufacture aluminum products used in steelmaking.
The Company's zinc segment facilities are located in:
Houston, Texas Hillsboro, Illinois
Millington, Tennessee Clarksville, Tennessee
Coldwater, Michigan
The Company also owns a 50% interest in VAW-IMCO which owns and operates two
secondary aluminum facilities in Germany.
The average operating rates for all of the Company's facilities for 2000, 1999
and 1998 were 89%, 96% and 97%, respectively, of stated capacity. In January
2001, the Company determined to reduce some of its capacity, permanently closing
its Bedford, Indiana aluminum facility and its Chicago, Illinois zinc oxide
plant. It also temporarily shut down its Wendover, Utah aluminum facility. See
ITEM 7.
-------
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The Company believes that its facilities are suitable and adequate
for its operations. Seven of the Company's facilities are mortgaged to secure
senior indebtedness of the Company.
Under a Supply Agreement with Commonwealth, the Company has granted Commonwealth
an option to purchase the Uhrichsville, Ohio facility, exercisable in 2008. In
the event of a "change of control" of the Company (as defined in the Supply
Agreement), the exercise date of this option would be accelerated to a date
before the change of control event. The exercise price is based on varying
multiples of earnings before interest, taxes, depreciation and amortization
(EBITDA) for the facility (five times EBITDA in the case of a non-change of
control exercise). In addition, the Company granted Commonwealth a right of
first refusal in the event the Company desires to sell the facility in a
non-change of control situation. In the event of a change of control of
Commonwealth, then Commonwealth's option and right of first refusal would
automatically terminate.
The potential purchase price for Commonwealth's exercise of these rights may be
above or below the fair value of the Uhrichsville plant. Should Commonwealth
exercise these rights, there can be no assurance that the production or earnings
attributable to the Uhrichsville facility could be replaced, and the Company's
cash flows and net earnings could be adversely affected.
14
SOLID WASTE DISPOSAL
All of the waste generated from the Company's salt cake processing facility at
its Morgantown site is deposited in a landfill adjacent to this facility.
Management anticipates that this landfill, assuming it is expanded as scheduled,
will serve the Company's landfilling needs for the majority of the salt cake
generated by facilities owned by the Company in the Eastern United States for
the next 10 years, based on current utilization. The Company also owns a
landfill at its Sapulpa, Oklahoma plant, which is estimated to have three years
of useful life remaining, based on planned utilization. The Goodyear, Arizona
facility recycles its own salt cake and sells the by-products to third parties.
See ITEM 1. "BUSINESS--ENVIRONMENTAL MATTERS."
-------
ADMINISTRATIVE
In Irving, Texas, the Company leases approximately 39,866 square feet of office
space for its principal executive, financial and management functions. This
lease expires in June 2007. In Houston, Texas, the Company owns approximately
30,000 square feet of office space for certain financial and management
functions for its zinc operations. The Company also has five zinc brokerage
offices that it leases, located in California, Texas, Pennsylvania, Canada and
Germany.
ITEM 3. LEGAL PROCEEDINGS
-------
In 1997, the Illinois Environmental Protection Agency ("IEPA") 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 have not yet been
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 liability at this site will
have a material adverse effect on its financial position or its results of
operations.
On February 15, 2001, the State of Michigan filed a lawsuit against the Company
in the State Circuit Court for the 30th District, Ingham County, Michigan. The
lawsuit arises out of disputes between the Michigan Department of Environmental
Quality and the Company's subsidiaries located in Coldwater, Michigan, (Alchem
Aluminum Inc. and IMCO Recycling of Michigan, LLC) concerning air permits and
emissions at the specification aluminum alloy production facilities in
Coldwater, Michigan. The plaintiffs claim injunctive relief and penalties for
alleged noncompliance with and violations of federal and state environmental
laws. The suit seeks compliance by the Company as well as potentially
substantial monetary penalties. The Company believes it has meritorious defenses
to the claims and plans a vigorous defense. While no assurances can be given,
the Company does not believe that this action will have a material adverse
effect on its financial condition or results of operation. Additionally, there
is the possibility that expenditures could be required at the Coldwater site and
at other Company facilities from time to time, because of new or revised
regulations that could require that additional expenditures be made for
compliance purposes. These expenditures could materially affect the Company's
results of operations in future periods.
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. 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.
15
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, 2000.
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 65 Chairman of the Board, Chief Executive Officer and
President
Richard L. Kerr 58 Executive Vice President; President, Specialty Alloys
Division
Paul V. Dufour 61 Executive Vice President, Chief Financial Officer and
Secretary
Thomas W. Rogers 54 Senior Vice President, Sales and Marketing, Aluminum
Recycling Division
C. Lee Newton 57 Senior Vice President, Technology, Engineering and
Environmental
Robert R. Holian 48 Senior Vice President, Controller and Chief Accounting
Officer
James B. Walburg 47 Senior Vice President, Finance and Administration and
Treasurer
M. Russ Robinson 43 President, U.S. Zinc Corporation
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 and assumed the role of President in May 2000. Mr. Ingram
played a major role in the formation of the Company in 1986.
Richard L. Kerr joined International Metal Co., a predecessor of the Company, in
April 1984. He was named Chief Operating Officer of the Company in 1991. In
1994, he became President of the Company's Metals Division. In 1997 he became
President of the Company, and in May 2000, he assumed the role of Executive Vice
President and President of the Specialty Alloys Division.
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 1988 and to Executive Vice President in 1994.
16
Thomas W. Rogers has served as Senior Vice President of Sales and Marketing
since July 1988. Mr. Rogers was employed as Plant Manager of the Company's
Sapulpa, Oklahoma plant in October 1986.
C. Lee Newton has served as Senior Vice President of the Company since 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 Senior Vice President and and Chief Accounting
Officer since 1999. He joined the Company in 1990 and was named Controller in
1992. He was promoted to Vice President and Controller in 1994.
James B. Walburg has served as Senior Vice President, Finance and Administration
of the Company since September 1999. He joined the Company as Vice President and
Treasurer in 1994.
M. Russ Robinson has served as President of the Company's U.S. Zinc Corporation
subsidiary since May 1999. Previously, Mr. Robinson served as President and
Chief Executive Officer of U.S. Zinc, which was acquired by the Company in 1998.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------
Stock Prices and Dividends. 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, 1999 through December 31, 2000, and the dividends declared per share
during the periods indicated.
CALENDAR PRICE RANGE DIVIDENDS
--------------------------
YEAR HIGH LOW DECLARED
------------------- ----------- ----------- ----------
1999
----
FIRST QUARTER $ 15 7/8 $ 10 13/16 $ 0.06
SECOND QUARTER 18 12 7/8 0.06
THIRD QUARTER 17 7/8 14 7/16 0.06
FOURTH QUARTER 15 1/16 10 1/4 0.06
2000
----
FIRST QUARTER $ 13 1/16 $ 9 9/16 $ 0.06
SECOND QUARTER 11 1/4 4 15/16 0.06
THIRD QUARTER 8 3/4 4 13/16 0.06
FOURTH QUARTER 6 1/8 4 1/16 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 legally available funds. The
Company's Second Amendment to the Second 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 this agreement, then the
Company is permitted to make cash dividend payments in an aggregate amount of up
to $8,000,000 in 2001 and for each year thereafter. See ITEM 7. "MANAGEMENT'S
------
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
In March 2001, the Company's Board of Directors elected not to pay a quarterly
cash dividend for the first quarter of 2001, in order to strengthen Company cash
flows. The Company intends to resume cash dividend payments when Company
earnings return to more historical levels. No assurances can be given as to
whether the Company will continue to pay dividends on its common stock, and if
so, the levels of dividends that may be paid. Future dividend declarations 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, 2001, the outstanding shares of Common Stock were held of record by
454 stockholders.
18
Sales of Unregistered Equity Securities. In October 2000, the Company awarded
---------------------------------------
Don V. Ingram, Chairman of the Board, President and Chief Executive Officer of
the Company, 400,000 shares of restricted common stock of the Company and
awarded Paul V. Dufour, Executive Vice President and Chief Financial Officer,
160,000 shares of restricted common stock. The restricted stock grants were made
pursuant to the terms of Employment Agreements entered into between the Company
and Messrs. Ingram and Dufour dated September 1, 2000. On February 1, 2001 the
Company awarded Richard L. Kerr, Executive Vice President and President,
Specialty Alloy Division, 90,000 shares of restricted common stock, in
connection with his Employment Agreement with the Company dated February 1,
2001.
These shares cannot be transferred or pledged and are subject to forfeiture if
the officers' employment with the Company terminates under certain circumstances
before the restriction period for the awards expire. The vesting period does not
begin unless there is a "change in control" of the Company (as defined under the
employment agreements). Dividends do not accrue and are not paid on these shares
awarded unless a change of control occurs. Additionally, upon a change of
control, all unexercised Company stock options owned by these officers as of the
date of grant of their restricted stock will automatically terminate. The
restricted stock awards were granted under exemptions from the requirements of
the Securities Act of 1933 under Section 4(2) of that Act in reliance upon the
fact that each of the recipients are accredited investors and are acquiring the
shares for investment purposes only without a view to distribution.
Except as described above, during the fourth quarter of 2000, the Company made
no unregistered sales of its equity securities.
ITEM 6. SELECTED FINANCIAL DATA
-------
(In thousands, except per share data)
For the Year Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------
Revenues $ 846,939 $ 764,831 $ 562,093 $ 337,377 $210,871
Earnings before extraordinary item 283 20,796 19,590 14,127 6,720
Earnings per common share before
extraordinary item:
Basic 0.02 1.26 1.18 1.08 0.57
Diluted 0.02 1.26 1.17 1.06 0.55
Total assets 433,671 543,637 456,558 332,536 164,707
Long-term debt (excluding current maturities) 128,786 214,993 168,700 109,194 48,202
Dividends declared per common share $ 0.24 $ 0.24 $ 0.21 $ 0.20 $ 0.20
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" of Notes to Consolidated Financial Statements. See
also ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------
RESULTS OF OPERATIONS."
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------
OF OPERATIONS
GENERAL
Over half of the Company's processing volumes consist of aluminum tolled for its
customers. Tolling revenues reflect only the processing cost and the Company's
profit margin. The Company's processing activities also consist of the
processing, recovery and specialty alloying of aluminum and zinc metal and the
production of 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 product sales business.
Variations in the mix between tolling and product sales business 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 facilities acquired by the Company since 1997 (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 2000 than in prior periods. This higher level of sales has also increased the
Company's working capital requirements and, as a result, has subjected the
Company to the additional risks associated with price fluctuations in the zinc
and aluminum commodity markets.
The following table shows total pounds processed, the percentage of total pounds
processed represented by tolled metals, total revenues and total gross profits
(in thousands, except percentages):
For the Years Ended December 31,
--------------------------------------
2000 1999 1998
--------------------------------------
Pounds processed 2,856,622 2,832,969 2,516,752
Percent of pounds tolled 57% 61% 68%
Revenues $ 846,939 $ 764,831 $ 562,093
Gross Profits $ 47,353 $ 70,638 $ 58,891
In addition to its increased emphasis on the product sales business, the Company
has also entered into an increasing amount of metal brokerage transactions each
year under 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. Also, in order 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 product sales business, the brokerage
business increases the Company's working capital requirements and subjects the
Company to greater price risk associated with fluctuations in the metals
commodity markets. See ITEM 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
--------
MARKET RISK" and NOTE A--"SIGNIFICANT ACCOUNTING POLICIES" of Notes to
Consolidated Financial Statements.
20
The following table sets forth, for the periods indicated, aluminum and zinc
segment information for pounds processed, revenues, income and assets (in
thousands, except percentages):
For the Year Ended December 31,
--------------------------------------------
2000 1999 1998
----------- ---------- ------------
Pounds Processed:
Aluminum 2,579,889 2,575,284 2,375,200
Zinc 276,733 257,685 141,552
----------- ---------- -----------
Total Pounds Processed 2,856,622 2,832,969 2,516,752
Percentage Tolled:
Aluminum 63% 66% 71%
Zinc 3% 5% 15%
Total Percentage Tolled 57% 61% 68%
Revenues:
Aluminum revenues from external customers $ 598,759 $ 568,327 $ 470,722
Zinc revenues from external customers 248,180 196,504 91,371
----------- ---------- -----------
Consolidated revenues $ 846,939 $ 764,831 $ 562,093
=========== ========== ===========
Income:
Aluminum income $ 24,687 $ 52,974 $ 52,897
Zinc income 13,052 12,788 4,218
Unallocated general and administrative expenses (19,788) (21,775) (17,360)
Unallocated interest expense (16,668) (12,478) (9,197)
Fees on receivables sale (1,082) -- --
Unallocated interest and other income 210 795 585
----------- ---------- -----------
Net earnings before provision for income taxes,
minority interests and extraordinary item $ 411 $ 32,304 $ 31,143
=========== ========== ===========
Assets:
Aluminum $ 281,394 $ 415,614 $ 328,891
Zinc 106,088 109,377 109,398
Other unallocated assets 46,189 18,646 18,269
----------- ---------- -----------
Consolidated assets $ 433,671 $ 543,637 $ 456,558
=========== ========== ===========
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, fees on receivables sale, 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
21
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.
FISCAL 2000 SPECIAL FACTORS AND FISCAL 2001 OUTLOOK
Certain of the statements below contain projections and estimates based on
current expectations for 2001. These statements are forward-looking in nature
and actual results may differ materially due to a number of reasons, as more
fully described under the section titled "CAUTIONARY STATEMENT FOR PURPOSES OF
FORWARD LOOKING STATEMENTS" below. These statements do not reflect the potential
impact of acquisitions or divestitures that may be completed or unforeseen
events that may occur after the date of this filing.
During 2000, market factors that negatively affected the Company's results of
operations and financial condition included:
. reduced volume at its aluminum recycling facilities due to lower market
demand from customers serving the aluminum can stock market;
. markedly higher natural gas fuel costs in both the aluminum and zinc
segments;
. softening of market conditions for its customers serving the truck, trailer
and construction sectors;
. higher costs of scrap coupled with lower selling prices for its finished
aluminum products (due to excess overall industry capacity) at the
Company's aluminum alloying facilities; and
. lower margins in both the aluminum and zinc segments.
The reduction in demand for Company recycling services from aluminium can stock
customers, which are also generally major primary processors, began in the
second half of 1999, when competition for UBC's drove UBC and scrap prices
higher for these customers. This price increase resulted in these customers
increasingly satisfying their supply needs for can stock production from their
primary aluminum processing capacity, instead of using secondary recycling
services. This trend continued through 2000 and is expected to continue until
lower prices for UBC's or higher prices for can stock improve these customers'
margins.
As a result of these market factors, the Company decided in 2000, to reduce some
of its capacity and reallocate that processing work to other facilities. In
January 2001 it permanently closed its Bedford, Indiana aluminum facility and
its Chicago, Illinois zinc oxide plant. It also temporarily shut down its
Wendover, Utah facility, due to a decrease in dross processing from primary
aluminum customers in the Pacific Northwest (caused by capacity curtailments by
those customers due to high power rates). The Post Falls, Idaho facility will
handle the Wendover plant's volumes until primary production at commercial
levels resumes in the Pacific Northwest. In 2000, the Company closed an aluminum
processing facility in Sikeston, Missouri.
For fiscal 2001, the Company expects many of the conditions currently prevailing
to continue. Continued weak demand from can stock customers and lower margins in
the alloys business, coupled with higher fuel costs, should continue to
negatively impact the Company's results of operations for its aluminum alloys
and aluminum recycling businesses. However, management anticipates some margin
improvement for its aluminum segment in 2001, due to expected increased demand
in the automotive sector, changes in Company scrap buying procedures, reduced
inventories, and reallocation of processing volumes among its aluminum plants.
22
The Company's zinc segment experienced declining margins during the fourth
quarter of 2000, due to the impact of higher fuel prices and a zinc price
decline due to weaker U.S. economic conditions.
The Company is continuing to focus on its cost reduction initiatives. In the
aluminum alloys business, the Company is working to improve margins by revising
contract terms with suppliers and customers where possible. The Company has
reduced personnel headcount by seven percent from the beginning of 2000 and is
reducing discretionary spending. Closing less efficient facilities and
reallocating those facilities' processing work to other facilities should result
in future cost savings. In addition, the Company is beginning to recover a
portion of the higher gas costs it experienced in 2000 through escalation
clauses that form a part of some customer contracts. These escalator provisions
generally take effect following the periods in which the Company actually incurs
the higher fuel costs. In certain instances where contracts do not provide for
escalator clauses, the Company has added natural gas surcharges to its tolling
or sales prices.
Additional positive factors which may positively affect fiscal 2001 results
include programs to improve the allocation of processing work throughout the
Company's network of facilities, new rotary furnaces designed to consume less
energy, and furnace burner technology retrofits to reduce energy consumption and
increase processing productivity.
The Company is also continuing to review expansion opportunities, particularly
in Europe and in Latin America, through expansion of its major customer
relationships, and project venture partnering opportunities. Further expansions
of the VAW-IMCO joint venture facilities are planned in 2001 as well.
No assurances can be made that any of these anticipated results will actually be
achieved. In addition, the Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
FISCAL 2000 CHARGES
During the fourth quarter of 2000, the Company recorded pretax charges of $5.6
million, including a $3.7 million charge related primarily to the shutdown of
the Bedford facility.
ACQUISITIONS
In July 1998, the Company completed the acquisition of U.S. Zinc Corporation for
an aggregate 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 for approximately
$11,000,000 in cash (not including acquisition costs). Also in February 1999,
the Company acquired, through its wholly owned subsidiary, Midwest Zinc
Corporation, substantially all of the assets of a zinc oxide production facility
located in Clarksville, Tennessee for approximately $11,000,000 in cash (not
including acquisition costs). Both acquisitions were accounted for using the
purchase method of accounting.
23
RESULTS OF OPERATIONS
Fiscal Year 2000 vs. Fiscal Year 1999
-------------------------------------
PRODUCTION. During 2000, the Company melted 2.86 billion pounds compared with
-----------
2.83 billion pounds in 1999. The aluminum and zinc segments accounted for 19%
and 81%, respectively, of the overall production increase for 2000. Tolling
activity in 2000 represented 57% of total pounds processed compared to 61% in
1999.
The following table shows the total pounds processed and the percentage tolled
for the aluminum and zinc segments (in thousands, except percentages):
For the year ended
December 31,
-------------------------
2000 1999
---------- -----------
Pounds Processed:
Aluminum 2,579,889 2,575,284
Zinc 276,733 257,685
---------- ----------
Total Pounds Processed 2,856,622 2,832,969
========== ==========
Percentage Tolled:
Aluminum 63% 66%
Zinc 3% 5%
Total Percentage Tolled 57% 61%
ALUMINUM PRODUCTION: During 2000, the Company melted about the same amount
of aluminum as it did during 1999. The results reflected increases from the
Shelbyville, Tennessee facility acquired in February 1999, and from the
Uhrichsville, Ohio facility. The increase in the Ohio facility was the result of
adding two new reverberatory furnaces in late 1999. These increases were offset
by decreases, primarily in the can stock business. Production declined at the
Rockwood, Tennessee and Post Falls, Idaho facilities due to the reduction in
volumes from a major customer at each of these locations. Additionally, an
overall weakening in demand, caused by the slowing economy, affected production.
The decrease in aluminum percentage tolled is primarily due to the Shelbyville,
Tennessee facility, the production of which is dedicated primarily for product
sales instead of tolling, and to a lesser extent, increased product sale
business at the plants where toll customers reduced volumes.
ZINC PRODUCTION: During 2000, the Company melted 7% more zinc than it did
during 1999. The increase in zinc production was due to strong demand for value-
added products. The decrease in zinc percentage tolled is primarily due to
including a full year of production from the Clarksville, Tennessee facility
(acquired in February 1999), which is virtually 100% dedicated to product sales.
REVENUES. During 2000, the Company's consolidated revenues increased 11% to
---------
$846,939,000 compared to revenues of $764,831,000 in 1999. The aluminum and zinc
segments accounted for 37% and 63%, respectively, of the overall increase of
revenues.
24
The following table shows the total revenues for the aluminum and zinc segments
(in thousands):
For the year ended
December 31,
--------------------
2000 1999
--------- ---------
Revenues:
Aluminum $ 598,759 $ 568,327
Zinc 248,180 196,504
--------- ---------
Total Revenues $ 846,939 $ 764,831
========= =========
ALUMINUM REVENUES: During 2000, the Company's aluminum revenues increased
5% compared to 1999, due to slightly higher aluminum production volumes as a
result of facility expansions and the Shelbyville, Tennessee acquisition, and a
decrease in the proportion of volumes from tolling versus product sales (see
"ALUMINUM PRODUCTION" above). Increased product sales generally result in a
greater increase in revenues than a similar increase in tolling business.
ZINC REVENUES: During 2000, the Company's zinc revenues increased 26%
compared to 1999. Zinc revenues increased primarily due to higher zinc
production volumes and higher zinc product sale prices due to increased demand
for value-added zinc products such as zinc oxide.
GROSS PROFITS. During 2000, the Company's consolidated gross profits decreased
--------------
33% to $47,353,000 compared to gross profits of $70,638,000 in 1999. The
aluminum segment contributed to the overall decline in segment income by a
decrease of 53% over 1999. This decrease was off set by a slight increase of 2%
in zinc segment income.
25
The following table shows the total income for the aluminum and zinc segments
and a reconciliation of segment income to the Company's consolidated gross
profits (in thousands):
For the year ended
December 31,
--------------------
2000 1999
-------- --------
Segment Income:
Aluminum $ 24,687 $ 52,974
Zinc 13,052 12,788
-------- --------
Total segment income 37,739 65,762
Items not included in gross profits:
Plant selling expense 5,442 2,168
Management SG&A costs 7,301 5,613
Equity in earnings of affiliates (3,060) (2,265)
Other income (69) (640)
-------- --------
Gross Profits $ 47,353 $ 70,638
======== ========
ALUMINUM INCOME: During 2000, the Company's aluminum income decreased 53%
compared to 1999. The decrease was primarily due to weaker volumes at several
aluminum recycling plants, particularly those that serve the can stock
producers, coupled with lower margins in the specification alloys business and
much higher natural gas costs at all plant locations. The weak aluminum alloys
margins resulted from both higher raw material costs and weaker selling prices
for aluminum alloys. Recent capacity increases in the aluminum alloys business
resulted in heightened competition for available scrap metal units, which the
Company uses as raw material in its aluminum alloys production. This, in turn,
produced more intense competition for metal units, causing higher purchase
costs, and drove selling prices lower. Lower demand from a weakening economy
during 2000 was also a major contributor to the overall decline in aluminum
income.
ZINC INCOME: During 2000, the Company's zinc income increased 2% compared
to 1999. The increase was primarily due to an increase in demand for value-added
zinc products.
SG&A EXPENSES. Selling, general and administrative expenses in 2000 increased
--------------
10% to $27,334,000 compared to $24,924,000 in 1999. The increase is primarily
due to more production facilities on line in 2000 compared to 1999 and increased
incentive compensation expense for payments to certain senior management
employees of the Company's zinc segment under the terms of an earn out
agreement. Selling expenses trended higher in 2000 as well, primarily due to the
increase in product sales. Product sales require additional marketing efforts
and associated expenses, as opposed to tolling transactions.
26
AMORTIZATION EXPENSE. Amortization expense in 2000 increased 12% to $5,196,000
---------------------
compared to $4,653,000 in 1999. The increase is due almost entirely to
amortization of additional goodwill recorded as a result of the Shelbyville and
Clarksville, Tennessee acquisitions (see "ACQUISITIONS" above).
INTEREST EXPENSE. Interest expense in 2000 increased 34% to $16,668,000 compared
-----------------
to $12,478,000 in 1999. The increase is the result of increased interest rates
during 2000 and higher amounts of debt outstanding in 2000 compared to 1999,
primarily resulting from additional working capital requirements and higher
capital spending levels.
FEES ON RECEIVABLES SALE. On November 2, 2000, the Company and certain of its
-------------------------
originating subsidiaries entered into a Receivables Sale Facility with a
Qualified Special Purpose Entity ("QSPE") subsidiary of the Company, under which
the originators sold their right, title and interest in and to certain trade
accounts receivable (Pooled Receivables) to the QSPE, which in turn sold
undivided interests in the receivables pool to an unaffiliated issuer. Fees in
connection with this transfer for the year ended December 31, 2000, were
$1,082,000 (see NOTE C--"SALE OF RECEIVABLES" of Notes to Consolidated Financial
Statements).
NET EARNINGS. Net earnings decreased 99% to $283,000 in 2000 compared to
-------------
$20,796,000 in 1999. The decrease was primarily the result of lower profits in
the aluminum segment business (see "GROSS PROFITS" and "ALUMINUM INCOME" above).
In addition, the increases in amortization expense, interest expense, and
selling, general and administrative expense reduced net earnings.
At December 31, 2000, earnings contributed by VAW-IMCO, the Company's 50% joint
venture, were $2,704,000. See the VAW-IMCO financial statements under ITEM 8.
----
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
In the fourth quarter, the Company recorded a write-down of assets and related
costs totaling $3.8 million ($5.6 million before tax), or $.25 per diluted
common share, including non-cash charges of $3.0 million (see "FISCAL 2000
CHARGES" above). The Company recorded a net benefit from taxes at an effective
tax rate of 15% compared to recording a provision for taxes at a rate of 35% in
1999. The benefit recorded in 2000 was due mainly to reduced earnings and was
slightly effected by a greater percentage of the Company's income being derived
from the VAW-IMCO venture, which is reported on an after-tax basis.
Fiscal Year 1999 vs. Fiscal Year 1998
-------------------------------------
PRODUCTION. During 1999, the Company melted 2.83 billion pounds, 13% more metal
-----------
compared to 2.52 billion pounds in 1998. The aluminum and zinc segments
accounted for 63% and 37%, respectively, of the overall production increase for
1999. Tolling activity in 1999 represented 61% of total pounds processed
compared to 68% in 1998.
27
The following table shows the total pounds processed and the percentage tolled
for the aluminum and zinc segments (in thousands, except percentages):
For the year ended
December 31,
-----------------------
1999 1998
---------- ----------
Pounds Processed:
Aluminum 2,575,284 2,375,200
Zinc 257,685 141,552
---------- ----------
Total Pounds Processed 2,832,969 2,516,752
========== ==========
Percentage Tolled:
Aluminum 66% 71%
Zinc 5% 15%
Total Percentage Tolled 61% 68%
ALUMINUM PRODUCTION: During 1999, the Company melted 8% more aluminum than
it did during 1998. The increase in aluminum production for the year was
primarily due to the following: (1) a significant increase in production at the
Company's Morgantown, Kentucky facility (which was expanded late in the third
quarter of 1998), (2) processing from the Shelbyville, Tennessee facility
(acquired in February 1999), (3) higher production at the Swansea, Wales
facility and (4) increases in production at the Post Falls, Idaho and Wendover,
Utah facilities due to an increase in scrap supply. These increases in aluminum
production were partially offset by lower volumes at the Rockwood and Loudon,
Tennessee facilities due to a lack of supply of material for recycling from a
large tolling customer. The decrease in aluminum percentage tolled was primarily
due to the acquisition of the Shelbyville, Tennessee facility, the production of
which is dedicated primarily for product sales serving the transportation
market.
ZINC PRODUCTION: During 1999, the Company melted 82% more zinc than it did
during 1998. The February 1999 acquisition of the Clarksville, Tennessee
facility and a full year of processing from U.S. Zinc, which was acquired in
July 1998, accounted for virtually all of the increase in zinc production. The
decrease in zinc percentage tolled was primarily due to these acquisitions;
these businesses are almost totally dedicated to product sales.
REVENUES. During 1999, the Company's consolidated revenues increased 36% to
---------
$764,831,000 compared to revenues of $562,093,000 in 1998. The aluminum and zinc
segments accounted for 48% and 52%, respectively, of the overall increase of
revenues.
The Company's aluminum specialty alloying activities, which serve the
transportation market, and the Company's zinc segment, primarily consist of
product sales business. Tolling activity represented 61% of the Company's total
pounds melted during 1999 as compared to 68% in 1998. Due to the reasons
discussed above, the increase in product sales activity in 1999 compared to 1998
resulted in higher inventory, accounts receivable and accounts payable levels at
December 31, 2000 compared to December 31, 1999.
28
The following table shows the total revenues for the aluminum and zinc segments
(in thousands):
For the year ended
December 31,
---------------------
1999 1998
--------- ---------
Revenues:
Aluminum $ 568,327 $ 470,722
Zinc 196,504 91,371
--------- ---------
Total Revenues $ 764,831 $ 562,093
========= =========
ALUMINUM REVENUES: During 1999, the Company's aluminum revenues increased
21% compared to 1998. Aluminum revenues increased due to the combination of (1)
higher aluminum product sale prices, (2) higher aluminum production volumes as a
result of facility expansions and the Shelbyville, Tennessee acquisition and (3)
a decrease in the proportion of volumes from tolling versus product sales (see
"ALUMINUM PRODUCTION" above). Increased product sales generally result in a
greater increase in revenues than a similar increase in tolling business.
ZINC REVENUES: During 1999, the Company's zinc revenues increased 115%
compared to 1998. Zinc revenues increased primarily due to the combination of
higher zinc production volumes as a result of the 1998 and 1999 acquisitions
(see "ZINC PRODUCTION" above), and higher zinc product sale prices.
GROSS PROFITS. During 1999, the Company's consolidated gross profits increased
--------------
20% to $70,638,000 compared to gross profits of $58,891,000 in 1998. The
aluminum and zinc segments accounted for 12% and 88%, respectively, of the
overall increase of segment income.
29
The following table shows the total income for the aluminum and zinc segments
and a reconciliation of segment income to the Company's consolidated gross
profits (in thousands):
For the year ended
December 31,
--------------------
1999 1998
-------- --------
Segment Income:
Aluminum $ 52,974 $ 52,897
Zinc 12,788 4,218
-------- --------
Total segment income 65,762 57,115
Items not included in gross profits:
Plant selling expense 2,168 867
Management SG&A costs 5,613 3,050
Equity in earnings of affiliates (2,265) (1,750)
Other income (640) (391)
-------- --------
Gross Profits $ 70,638 $ 58,891
======== ========
ALUMINUM INCOME: During 1999, the Company's aluminum income increased 2%
compared to 1998. The increase was primarily due to higher overall aluminum
production volumes (see "ALUMINUM PRODUCTION" above). This increase in
production was partially offset by lower operating rates at certain facilities
(those principally serving the packaging market) and by narrowing spreads
between primary aluminum prices and certain scrap aluminum prices which
negatively affected aluminum product sales.
ZINC INCOME: During 1999, the Company's zinc income increased 181% compared
to 1998. The increase was primarily due to a full year's operation of U.S. Zinc
(see "ZINC PRODUCTION" above). In addition, the relative increase in zinc income
was greater than the increase in zinc processing volumes due to higher zinc
product sale prices and benefits from integrating the Company's previously owned
zinc business with the acquired U.S. Zinc and Clarksville, Tennessee facilities.
SG&A EXPENSES. Selling, general and administrative expenses in 1999 increased
--------------
41% to $24,924,000 compared to $17,714,000 in 1998. The increase is primarily
due to additional production facilities on line, higher employee costs
attributable to the acquisitions of the U.S. Zinc and the Shelbyville and
Clarksville, Tennessee facilities and the development and installation of a new
management information system.
AMORTIZATION EXPENSE. Amortization expense in 1999 increased 24% to $4,653,000
---------------------
compared to $3,748,000 in 1998. The increase is due almost entirely to
amortization of goodwill recorded as a result of the Shelbyville and
Clarksville, Tennessee acquisitions (see "ACQUISITIONS" above) and from a full
year's amortization of U.S. Zinc, which was acquired in July 1998.
30
INTEREST EXPENSE. Interest expense in 1999 increased 36% to $12,478,000 compared
-----------------
to $9,197,000 in 1998. The increase is the result of increased interest rates
and higher amounts of debt outstanding in 1999 compared to 1998, primarily
resulting from the 1998 and 1999 acquisitions (see "LIQUIDITY AND CAPITAL
RESOURCES" below).
NET EARNINGS. Net earnings increased 6% to $20,796,000 in 1999 compared to
-------------
$19,590,000 in 1998. The increase was primarily the result of improved
performance by the zinc segment as well as 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 expense
due to a higher level of borrowing, the effects of recent acquisitions and the
operation of more production facilities. The Company recorded a slight decrease
in its effective tax rate from 36% in 1998 to 35% in 1999 due to foreign
earnings that are considered permanently reinvested.
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 stock issuances.
CASH FLOWS FROM OPERATIONS. During 2000, operations provided cash of
---------------------------
$140,938,000 compared to $18,233,000 in 1999. Changes in operating assets and
liabilities provided $108,582,000 in cash during 2000 compared to using
$33,075,000 in 1999. The change in net operating assets and liabilities,
resulting in a net increase of cash, was primarily due to reductions in accounts
receivable and inventory levels during 2000. Accounts receivable decreased as a
result of the receivables sale transaction that occurred in November 2000 (see
NOTE C--"SALE OF RECEIVABLES" and NOTE G--"LONG-TERM DEBT" of Notes to
Consolidated Financial Statements). Inventories decreased as a result of a year
long effort to reduce inventory levels. Lower net earnings offset the favorable
impact from the change in operating assets and liabilities. As of December 31,
2000, the relationship of current assets to current liabilities, or current
ratio, had decreased to 1.00, compared to 1.98 as of December 31, 1999.
CASH FLOWS FROM INVESTING ACTIVITIES. During 2000, net cash used by investing
-------------------------------------
activities was $39,115,000 compared to $54,139,000 in 1999, primarily due to the
acquisition of the Shelbyville and Clarksville, Tennessee facilities during
1999. The Company spent approximately $21,600,000 (net of cash acquired) in the
acquisitions of the two facilities during 1999. The Company's total payments for
property, plant and equipment in 2000 increased to $37,701,000 compared to
$30,856,000 spent in 1999. This increase is attributed to the construction of
the new aluminum alloying facility near Saginaw, Michigan. The Company expects
that capital expenditures for property, plant and equipment in 2001 will total
approximately $12,500,000.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used by financing activities was
-------------------------------------
$99,248,000 for 2000, compared to net cash provided by financing activities of
$32,405,000 for 1999, mainly due to the pay down of approximately $86,000,000 of
the Company's revolving credit facility debt mainly using cash from the
receivables sale transaction that occurred in November 2000 (see NOTE C--"SALE
OF RECEIVABLES" and NOTE G--"LONG-TERM
31
DEBT" of Notes to Consolidated Financial Statements). Additionally, the company
spent $9,120,000 to purchase 788,900 shares of the Company's common stock in
2000 compared to $7,080,000 to purchase 576,500 shares in 1999. In 1999, the
Company borrowed $44,377,000 under its revolving credit facility, a significant
portion of which was used in the acquisitions of the Shelbyville and
Clarksville, Tennessee facilities (see "ACQUISITIONS" above), and the remainder
was used to finance additional working capital requirements. At December 31,
2000, the Company had $113,900,000 in indebtedness outstanding under its long-
term revolving credit facility and had approximately $59,224,000 available for
borrowing. In addition, there were standby letters of credit outstanding with
several banks totaling $2,716,000. As of March 1, 2001, the Company had
$154,100,000 outstanding under the credit facility and $18,849,000 available for
additional borrowings. However, the Company is currently unable to use all of
the borrowing capacity available under its Credit Agreement due to limitations
imposed under the Agreement.
Financing activities also included cash payments of $3,555,000 in dividends for
2000 compared to $3,931,000 for 1999.
Equity Purchases and Sales. During 1999, the Company repurchased 576,500 shares
---------------------------
of its common stock in open market or privately negotiated transactions at an
aggregate purchase price of $7,080,000. In January 2000, the Company's Board of
Directors authorized an increase in the aggregate maximum amount to be expended
by the Company under its share repurchase program to $35,000,000. In May 2000,
the Company entered into a forward share purchase transaction to facilitate
additional purchases of the Company's common stock. The contract, which must be
settled by May 2001, provides at the Company's option for the Company to
purchase up to 644,500 of the Company's shares from a financial institution.
However, the Company, at its option, may also elect to settle the contract on a
net share basis in lieu of a cash payment. During 2000, the company spent
$9,120,000 to repurchase a total of 788,900 shares. The terms of the Company's
senior credit facility currently limits additional purchases of the Company's
common stock by the Company or its subsidiaries. Shares repurchased are to be
held as treasury shares to be used for the Company's stock option and other
equity plans and for general corporate purposes.
Credit and Receivables Sale Facility. On October 20, 2000, the Company amended
-------------------------------------
the terms of its long-term credit facility with its lenders. The Second
Amendment to the Second Amended and Restated Credit Agreement (the "Amendment")
permitted the Company to sell, convey or otherwise contribute up to $100,000,000
in certain accounts receivable to a Qualifying Special-Purpose Entity
subsidiary (the "QSPE") under the terms of an accounts receivables sale and
securitization facility (the "Receivables Sale Facility"), with a simultaneous
reduction in the maximum credit facility commitment from $250,000,000 to
$175,000,000 upon the closing of the Receivables Sale Facility. The Amendment
also eliminated the Company's option to request increases to the revolving
credit commitment of up to $50,000,000 in the aggregate; eliminated the
Company's option to issue up to $125,000,000 in convertible subordinated debt;
amended the credit margins applied to alternate base rate loans and LIBOR loans;
and amended certain financial covenants.
The Amended Credit Agreement imposes certain restrictions on the Company,
including: (i) a prohibition against incurring certain additional indebtedness,
(ii) maintenance of certain financial ratios, (iii) limitations on dividends and
repurchases of shares of capital stock, and (iv) limitations on capital
expenditures, investments and acquisitions, except for mergers, consolidations
and acquisitions in any fiscal year having an aggregate consideration of up to
$75,000,000. There is an $8,000,000 annual limitation on cash dividends on
capital stock. The amended Credit Agreement limits repurchases of the Company's
common stock,
32
under the terms of a forward share repurchase agreement entered into by the
Company in May 2000, to $5,000,000. The forward share repurchase agreement,
which must be settled by May 2001, provides at the Company's option for the
Company to repurchase up to 644,500 shares of common stock from a financial
institution. However, the Company may also elect to settle the contract on a net
share basis in lieu of a cash payment. As of December 31, 2000, 644,500 shares
had been committed to the contract at an average price of $7.67 per share.
The indebtedness under the amended credit facility is secured by substantially
all of the Company's personal property (except for the accounts receivable and
certain related assets, which were sold under the Receivables Sale Facility) and
a first lien mortgage on certain real property at seven of the Company's plants,
as well as a pledge of the capital stock of substantially all of the Company's
subsidiaries.
On November 2, 2000, the Company and various subsidiaries of the Company entered
into the Receivables Sale Facility with the QSPE. The QPSE is a special purpose
corporation which exists as a subsidiary of the Company. The Company and other
originating subsidiaries have sold receivables and other related assets to the
QPSE that in turn has sold undivided interests in the receivables to an
unaffiliated financial institution-issuer. The net proceeds under this sale at
December 31, 2000 were $90,000,000. As of February 28, 2001, the proceeds were
$66,800,000 due to a reduced level of trade accounts receivable that were
available for sale.
At December 31, 2000, the Company had $113,900,000 in indebtedness outstanding
under its long-term revolving credit facility and had approximately $59,224,000
available for borrowing. In addition, there were standby letters of credit
outstanding with several banks totaling $2,716,000. As of March 1, 2001, the
Company had $154,100,000 outstanding under the credit facility and $18,849,000
available for additional borrowings. The Company does not have to make a
significant payment on its long-term debt until 2003.
The Company believes that its cash on hand, the availability of funds under its
credit facility and its anticipated internally generated funds will be
sufficient to fund its current needs, including its expected capital spending
plans. The Company is currently unable to use all of the borrowing capacity
available under its Amended Credit Agreement due to limitations imposed under
this Agreement. Therefore, its growth rate for the foreseeable future should not
be expected to approximate its growth rate in recent years (i.e. 1995-1999).
IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The Company, which
enters into production derivatives to hedge the cost of energy and the sales
price of certain aluminum and zinc products, evaluates and documents each hedge
item when entered into. It is the Company's policy not to speculate in hedging
activities. The Company has evaluated the impact of Statement No. 133 as amended
by SFAS 138 and believes the impact will not have a material adverse effect upon
the Company's future operating results. Had the Company adopted the standards as
of December 31, 2000, the effect would have been to increase current assets by
$4,289,000, increase current liabilities by $3,014,000 and increase other
comprehensive income by $1,275,000. See ITEM 7A. "QUANTITATIVE AND QUALITATIVE
--------
DISCLOSURES ABOUT MARKET RISK."
ENVIRONMENTAL
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (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 described in this Form
10-K. See ITEM 1. "BUSINESS - ENVIRONMENTAL MATTERS."
33
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
environmental laws would not have a material adverse effect on the Company's
financial position or results of operations. See ITEM 3. LITIGATION and NOTE L--
"OPERATIONS" of Notes to Consolidated Financial Statements.
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 European Union 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 adverse effect on the
Company's financial position or results of operations.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in ITEM 1. "BUSINESS," ITEM 3. "LEGAL PROCEEDINGS"
------- -------
and 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 legislation. This information includes
statements regarding whether currently prevailing business conditions in the
Company's aluminum and zinc segments will continue, the effects of continued
high natural gas fuel prices and the ability of the Company to successfully
hedge against future natural gas price fluctuations and pass on price increases
to its customers, anticipated margins improvement in 2001, expected increased
demand from the automotive sector, trends for can sheet demand, anticipated cost
reductions from work reallocation among the Company's facilities and technology
changes affecting fuel usage, future dividend payments (if any), potential
expansion opportunities and estimated net earnings and cash flows.
34
Other forward-looking information includes, without limitation, statements
concerning future profit margins, plant capacity, volumes, revenues, earnings,
costs, energy costs, and expenses (including capital expenditures); future
prices for metals; anticipated results of the Company's cost reduction
initiatives; the ability of the Company to be able to continue to grow its
domestic and foreign business through expansion, acquisition or partnering;
access to adequate energy supplies at advantageous rates; anticipated cost
savings from new and modified furnace designs; the expected effects of strikes,
work stoppages or production shutdowns at Company or customer facilities; future
acquisitions or corporate combinations; expected effects of acquisitions;
projected completion dates and anticipated technological advances; future (or
extensions of existing) long-term supply contracts with its customers;
anticipated environmental control measures; the outcome of and liabilities
resulting from any claims, investigations or proceedings against the Company or
its subsidiaries; effects of the Company's metals brokerage activities on
results of operations and financial condition; the future mix of business
(product sales vs. tolling); future costs and asset recoveries; future
operations, demand and industry conditions; future sources of capital and future
financial condition. 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.
These forward-looking 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.
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: uncertainties in the
U.S. and worldwide economies and the aluminum and zinc markets; the current
industry production capacity exceeding the demand for aluminum spec alloy
products and aluminum recycling services; the effects of future energy prices
and related fuel costs; the ability of the Company to successfully hedge against
energy price fluctuations; competition for raw materials costs and pricing
pressures from competitors; fluctuations in operating levels at the Company's
facilities; fluctuations in demand from the automotive, construction and
packaging markets, which are more subject to cyclical pressures; the mix of
product sales business as opposed to tolling business; unforeseen difficulties
in the operation or performance of the Company's new ERP software system, and
the Company's other operations and reporting systems; retention and financial
condition of major customers; collectibility of receivables; the inherent
unpredictability of adversarial or administrative proceedings; effects of
environmental and other governmental regulations; currency exchange rate and
interest rate fluctuations; trends in the Company's key markets and the price of
and supply and demand for aluminum and zinc (and their derivatives) on world
markets; the effects of shortages and oversupply in used aluminum beverage
containers and can scrap at facilities; the continuation of reduced spreads
between primary aluminum prices and aluminum scrap prices; business conditions
and growth in the aluminum and zinc industries and recycling industries; and
future levels and timing of capital expenditures.
35
These statements are further qualified by the following:
* Any 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 energy commodity prices, weather conditions, general
economic and financial market conditions; work stoppages, maintenance
programs and other production shutdowns at Company and customer facilities;
and governmental regulation and factors involved in administrative and
other proceedings. The future mix of product sales and 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. An
increase in demand for raw materials can and has adversely affected profit
margins for the Company's product sales business. Prices can be volatile,
which could affect the Company's product sales 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 recycling services and 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 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 materially
affect the Company's financial position and results of operations from
period to period.
* 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
36
responsible parties. Unanticipated material legal proceedings or
investigations could affect the Company's financial position and results of
operations.
* The Company's share acquisition program, repurchasing its outstanding
shares of Common Stock in 1999 and 2000 may affect trends in earnings per
share, and may adversely impact the Company's liquidity and future
financial condition by increasing its debt-to-equity ratio and increasing
its borrowing costs.
* The Company's growth rate in recent years (i.e. 1995-1999) should not be
expected to continue in 2001 and for the foreseeable future because of
current constraints on borrowing and limited access to other capital
sources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------
In the ordinary course of its 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.
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 then
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"). As part of its efforts 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 Morgantown, Kentucky and some of the aluminum generated
from the processing of other scrap metal. These futures sale contracts are
settled in the month of shipment. Estimated 2001 total production covered under
these futures sale contracts as of December 31, 2000 was 4,380 metric tonnes
(mt). The impact of a 10% change in the December 31, 2000 LME price of aluminum
ingot would not be material to the Company's estimated gross profit for the year
ending December 31, 2001.
Zinc. In the normal course of business, the Company enters into fixed-price
-----
forward sale contracts with a number of its zinc customers. At December 31,
2000, such contracts had metal
37
deliveries committed during 2001 of 15,118 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, 2000, the contracts hedging 2001
deliveries totaled 15,118 mt. The impact of a 10% change in the December 31,
2000 LME price of zinc ingot would not be material to the Company's estimated
gross profit for the year ending December 31, 2001.
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 has utilized natural gas swap contracts. Under the terms of the swap
contracts, the Company has fixed the price for approximately 25% of its expected
2001 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 10% change in the December 31, 2000 NYMEX closing price would not be
material to the Company's estimated gross profit for the year ending December
31, 2001.
Interest. Approximately 88% of the Company's outstanding long-term debt as of
---------
December 31, 2000 bears interest 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 31, 2001. Under the terms of this rate cap
transaction, the Company's interest rate will not exceed 8% per annum for
$22,800,000 (the notional amount as of December 31, 2000) of the Company's
outstanding floating-rate debt. The counter-party to the rate cap transaction is
a major commercial bank, and management believes that losses related to the
credit risk are remote. The Company may renew this rate cap transaction or
substitute another facility to limit its exposure to interest rate fluctuations.
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, 2000, interest expense for the year ended December 31, 2001 would
increase by approximately $2,209,000. 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, 2000, adjusted for known cash
commitments during 2001 .
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, 2000, 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
$1,096,000. 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.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------
INDEX OF FINANCIAL STATEMENTS
PAGE
----
IMCO RECYCLING INC. AND SUBSIDIARIES:
------------------------------------
Report of Ernst & Young LLP, Independent Auditors 40
Consolidated Balance Sheets at December 31, 2000 and 1999 41
Consolidated Statements of Earnings for the three years ended
December 31, 2000 42
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000 43
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 2000 44
Notes to Consolidated Financial Statements 45
VAW-IMCO:
--------
Table of Contents 64
Report of Arthur Andersen, Independent Auditors F-1
Balance Sheet as of December 31, 2000 F-2
Statement of Income for the Year Ended December 31, 2000 F-3
Statement of Shareholders' Equity for the Year Ended
December 31, 2000 F-4
Statement of Cash Flows for the Year Ended December 31, 2000 F-5
Notes to Financial Statements for the Year Ended December 31, 2000 F-6
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.
39
REPORT OF 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, 2000 and December 31, 1999, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. 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. The financial statements of VAW-IMCO GuB und Recycling GmbH
(VAW-IMCO), (a corporation in which the Company has a 50% interest), have been
audited by other auditors whose report has been furnished to us; in so far as
our opinion on the consolidated financial statements relates to data included
for VAW-IMCO, it is based solely on their report. In the consolidated financial
statements, the Company's investment in VAW-IMCO is stated at $15,179,000 and
$13,322,000 respectively, at December 31, 2000 and 1999, and the Company's
equity in the net income of VAW-IMCO is stated at $2,704,000 and $1,709,000 for
the years then ended.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, 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, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 31, 2001
40
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
---------------------------------
2000 1999
-------------- --------------
ASSETS
Current Assets
Cash and cash equivalents $ 5,014 $ 2,578
Accounts receivable (net of allowance of $2,421 and $1,950
at December 31, 2000 and 1999, respectively) 21,229 125,917
Inventories 56,318 74,568
Deferred income taxes 3,726 3,008
Other current assets 10,450 9,228
------------- -------------
Total Current Assets 96,737 215,299
Property and equipment, net 196,133 189,987
Excess of acquisition cost over the fair value of net assets
acquired, net of accumulated amortization of $17,215 and
$11,149 at December 31, 2000 and 1999, respectively 117,845 117,861
Investments in joint ventures 15,249 13,901
Other assets, net 7,707 6,589
------------- --------------
$ 433,671 $ 543,637
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 83,552 $ 101,458
Accrued liabilities 13,097 7,164
Current maturities of long-term debt 112 181
------------- -------------
Total Current Liabilities 96,761 108,803
Long-term debt 128,786 214,993
Deferred income taxes 15,899 15,104
Other long-term liabilities 10,368 9,081
STOCKHOLDERS' EQUITY
Preferred stock; par value $.10; 8,000,000 shares
authorized; none issued - -
Common stock; par value $.10; 40,000,000 shares authorized;
17,119,420 issued at December 31, 2000; 17,110,620
issued at December 31, 1999 1,712 1,711
Additional paid-in capital 106,137 106,549
Retained earnings 100,807 104,079
Accumulated other comprehensive loss from foreign currency
translation adjustments (5,143) (3,131)
Treasury stock, at cost; shares at 1,789,152 December 31, 2000;
1,083,406 shares at December 31, 1999 (21,656) (13,552)
------------- -------------
Total Stockholders' Equity 181,857 195,656
------------- -------------
$ 433,671 $ 543,637
============== =============
See Notes to Consolidated Financial Statements.
41
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For the Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues $ 846,939 $ 764,831 $ 562,093
Cost of sales 799,586 694,193 503,202
----------- ----------- -----------
Gross profits 47,353 70,638 58,891
Selling, general and administrative expense 27,334 24,924 17,714
Amortization expense 5,196 4,653 3,748
Fees on receivables sale 1,082 - -
Interest expense 16,668 12,478 9,197
Interest and other income (278) (1,456) (1,161)
Equity in earnings of affiliates (3,060) (2,265) (1,750)
----------- ----------- -----------
Earnings before provision for (benefit) from
income taxes and minority interests 411 32,304 31,143
Provision for (benefit) from income taxes (424) 11,162 11,275
----------- ----------- -----------
Earnings before minority interests 835 21,142 19,868
Minority interests, net of provision for income taxes 552 346 278
----------- ----------- -----------
Net earnings $ 283 $ 20,796 $ 19,590
=========== =========== ===========
Net earnings per common share:
Basic $ 0.02 $ 1.26 $ 1.18
=========== =========== ===========
Diluted $ 0.02 $ 1.26 $ 1.17
=========== =========== ===========
Weighted average shares outstanding:
Basic 15,353 16,448 16,670
Diluted 15,436 16,555 16,802
Dividends declared per common share $ 0.24 $ 0.24 $ 0.21
See Notes to Consolidated Financial Statements.
42
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
--------------------------------------
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Earnings $ 283 $ 20,796 $ 19,590
Depreciation and amortization 29,708 27,038 22,828
Provision for (benefit from) deferred income taxes 76 3,369 (674)
Equity in earnings of affiliates (3,080) (2,265) (1,750)
Other noncash charges 5,369 2,370 1,818
Changes in operating assets and liabilities:
Accounts receivable 13,476 (39,588) (9,504)
Accounts receivable sold 90,000 - -
Inventories 18,055 (20,962) (6,505)
Other current assets (1,373) (129) (531)
Accounts payable and accrued liabilities (11,576) 27,604 27,926
---------- ---------- ----------
Net cash from operating activities 140,938 18,233 53,198
INVESTING ACTIVITIES
Payments for property and equipment (37,701) (30,856) (35,199)
Acquisition of U.S. Zinc Corporation, net of cash acquired - - (59,497)
Acquisitions of other businesses and investments in joint ventures - (21,480) (700)
Other (1,414) (1,803) 1,523
---------- ---------- ----------
Net cash used for investing activities (39,115) (54,139) (93,873)
FINANCING ACTIVITIES
Net (payments of) proceeds from long-term revolving credit facility (86,100) 44,377 55,775
Net (payments of) proceeds from issuance of long-term debt (164) 679 705
Debt issuance costs (813) (1,041) (158)
Dividends paid (3,555) (3,931) (3,503)
Purchases of treasury stock (9,120) (7,080) (6,377)
Other 504 (599) (116)
---------- ---------- ----------
Net cash (used for) from financing activities (99,248) 32,405 46,326
Effect of exchange rate differences on cash and cash equivalents (139) 4 19
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 2,436 (3,497) 5,670
Cash and cash equivalents at January 1 2,578 6,075 405
---------- ---------- ----------
Cash and cash equivalents at December 31 $ 5,014 $ 2,578 $ 6,075
========== ========== ==========
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 16,674 $ 13,417 $ 9,098
Cash payments for income taxes $ 1,323 $ 9,825 $ 10,152
Fair value of the shares and warrants issued in the acquisition
of U.S. Zinc Corporation - - $ 8,500
See Notes to Consolidated Financial Statements.
43
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------- PAID-IN RETAINED ---------------------- TOTAL
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT DOLLARS
----------- ---------- -------------- ------------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 16,515,750 $ 1,652 $ 96,519 $ 71,096 (39,354) $ (343) $ 168,924
Comprehensive income:
Net earnings - - - 19,590 - - 19,590
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments - - - (871) - - (871)
-----------
Net comprehensive income 18,719
-----------
Cash dividend - - - (3,503) - - (3,503)
Public stock offering costs - - (65) - - - (65)
Purchase of U.S. Zinc Corporation 298,010 30 8,470 - - - 8,500
Issuance of common stock for services 7,625 1 123 - - - 124
Exercise of stock options 227,200 22 1,554 - (2,285) (35) 1,541
Executive option exercise loan program - - (1,360) - - - (1,360)
Tax benefit from the exercise of non-
qualified stock options - - 994 - - - 994
Common stock repurchased - - - - (488,900) (6,377) (6,377)
Other - - (189) - - - (189)
----------- ---------- ------------- ------------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1998 17,048,585 1,705 106,046 86,312 (530,539) (6,755) 187,308
Comprehensive income:
Net earnings - - - 20,796 - - 20,796
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments - - - (2,229) - - (2,229)
-----------
Net comprehensive income 18,567
-----------
Cash dividend - - - (3,931) - - (3,931)
Purchase of B&F Metals, Inc. 17,890 2 268 - - - 270
Issuance of common stock for services 7,945 1 122 - 4,000 51 174
Exercise of stock options 36,200 3 165 - 21,120 252 420
Executive option exercise loan program - - (264) - - - (264)
Tax benefit from the exercise of non-
qualified stock options - - 218 - - - 218
Common stock repurchased - - - - (576,500) (7,080) (7,080)
Other - - (6) - (1,487) (20) (26)
----------- ---------- ------------- ------------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1999 17,110,620 1,711 106,549 100,948 (1,083,406) (13,552) 195,656
Comprehensive income:
Net earnings - - - 283 - - 283
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments - - - (2,012) - - (2,012)
-----------
Net comprehensive loss (1,729)
-----------
Cash dividend - - - (3,555) - - (3,555)
Issuance of common stock for services 8,800 1 62 - - - 63
Common stock repurchased - - - - (788,900) (9,120) (9,120)
Stock issued in connection with ESPP - - (474) - 83,154 1,016 542
----------- ---------- ------------- ------------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 2000 17,119,420 $ 1,712 $ 106,137 $ 95,664 (1,789,152) $ (21,656) $ 181,857
=========== ========== ============= ============= ========== ========= ===========
See Notes to Consolidated Financial Statements.
44
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(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 of cash
equivalents approximates fair value because of the short maturity of those
instruments.
Receivable Sales:
-----------------
Trade accounts receivables are sold through a qualified special purpose entity,
a wholly owned subsidiary of the Company. The fair value of the trade accounts
receivable balances retained by the Company approximate the carrying value less
any reserves required for credit losses.
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'
45
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 $1,502,000,
$1,602,000 and $1,325,000 in 2000, 1999 and 1998, respectively.
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 $9,000,000
and are being accrued as space in the landfills is used. The construction costs
of the landfills are depreciated as space in the landfills 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 2000, 1999 and 1998 were $1,067,000, $520,000 and
$339,000 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.
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 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
G--"LONG-TERM DEBT" in Notes to Consolidated Financial Statements). The cost of
the rate cap is included in other long-term assets and is being amortized as
interest expense over the term of the agreement. The fair value of the rate cap
transaction is considered to be immaterial.
46
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 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, 2000,
the Company had outstanding swap agreements to hedge its anticipated domestic
natural gas requirements on approximately 1,800,000 Mmbtus of natural gas, which
represents approximately 25% of its expected 2001 fuel needs.
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 Morgantown, Kentucky and some of the aluminum generated from the processing
of other scrap metal. At December 31, 2000, estimated 2001 total production
covered under these futures sales contracts was 4,380 metric tonnes (mt). 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. At December 31, 2000, such contracts had metal
deliveries committed during 2001 of 15,118 mt. In conjunction with these futures
sales contracts, the Company has also entered into options contracts covering
15,118 mt. These contracts are settled in the month of the corresponding
production and/or shipment, with all gains and 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. The Company
does not require collateral to support broker transactions.
The fair value of the Company's financial hedging agreements at December 31,
2000, representing the amount the Company would pay (net of tax) to terminate
the agreements, totaled $1,275,000.
Effective January 1, 2001, the Company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The Company, which
enters into production derivatives to hedge the cost of energy and the sales
price of certain aluminum and zinc products, evaluates and documents each hedge
item when entered into. It is the Company's policy not to speculate in hedging
activities. The Company has evaluated the impact of Statement No. 133 as amended
by SFAS 138 and believes the impact will not have a material adverse effect upon
the Company's future operating results. Had the Company adopted the standards as
of December 31, 2000, the effect would have been to increase current assets by
$4,289,000, increase current liabilities by $3,014,000 and increase other
comprehensive income by $1,275,000. See ITEM 7A. "QUANTITATIVE AND QUALITATIVE
-------
DISCLOSURES ABOUT MARKET RISK."
Foreign Currency Translation:
-----------------------------
The Company's foreign subsidiaries in the U.K., Germany, 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 Statements of Earnings. The gains and
losses on foreign currency exchange rate fluctuations and the translation
adjustments for the three years ended 2000 were immaterial. As of December 31,
2000, the Company's accumulated foreign currency translation adjustment totaled
$5,143,000 and the annual change is included in other comprehensive income in
the Statements of Changes in Stockholders' Equity.
47
NOTE B--ACQUISITIONS
In February 1999, the Company acquired substantially all the assets of an
aluminum alloying facility located in Shelbyville, Tennessee for approximately
$11,000,000 in cash (not including acquisition costs). Also in February 1999,
the Company acquired, through its wholly owned subsidiary, Midwest Zinc
Corporation, substantially all the assets of a zinc oxide production facility
located in Clarksville, Tennessee for 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 acquisitions. Pro forma results from these
acquisitions would not vary significantly from actual results for 1999 and 1998.
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 and continued employment with the Company. The
acquisition was accounted for using the purchase method of accounting and its
results of operations are included herein since the date of acquisition. The
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 six
production facilities located in Illinois, Michigan, 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 290 million pounds of zinc- bearing
materials.
48
The 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
=============
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, assuming the
acquisition had been consummated on January 1 of that 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
acquisition been consummated on such date or of future results of the combined
companies under the ownership and management of the Company:
1998
-------------
(unaudited)
Revenues $ 650,561
Gross profit $ 67,576
Earnings $ 20,248
Net earnings $ 20,248
Earnings per common share:
Basic $ 1.20
Diluted $ 1.19
Net earnings per common share:
Basic $ 1.20
Diluted $ 1.19
The table above reflects certain pro forma adjustments including additional
depreciation expense as a result of the increased basis of the fixed assets
acquired, additional amortization expense related to the goodwill recorded, a
reduction in general and administrative expenses for the elimination of
duplicate management costs, additional interest expense related to debt incurred
on the acquisition and adjustments for related income taxes and minority
interests.
NOTE C--SALE OF RECEIVABLES
On November 2, 2000, the Company entered into a Receivables Purchase and Sale
Agreement with a newly formed subsidiary of the Company organized as a Qualified
Special Purpose Entity (QSPE). Under the Receivables Purchase and Sale
Agreement, the Company agreed to sell, from time to time, their right, title and
interest in certain trade accounts receivable (Pooled Receivables) to the QSPE.
On November 2, 2000, the Company and the QSPE entered into a Receivables
Purchase Agreement with a third party financial institution. Under the
Receivables Purchase Agreement, the QSPE agreed to sell an undivided interest in
the Pooled Receivables, up to $100,000,000, to the third party financial
institution. The sales price of the Pooled Receivables to the third party
financial institution is calculated as the total outstanding balance times a
discount rate based on total days outstanding of the Pooled Receivables, as
defined, and the prime interest rate plus .25%. Under the Receivables Purchase
Agreement, the Company
49
agreed to service and collect the Pooled Receivables for a servicing fee
calculated as .5% per annum of the daily average aggregate outstanding balance
of the Pooled Receivables. The amount retained is calculated on a monthly basis
as the eligible pool balance less the greater of the customer concentration
reserve and the performance reserve. The third party financial institution has
no recourse to the Company's other assets for failure of debtors to pay when
due. The QSPE's retained interest in the Pooled Receivables are subordinate to
the third party financial institution's interest. The value of the Pooled
Receivables is subject to credit risk.
At December 31, 2000, receivables retained by the QSPE amounting to $17,153,000
were included in trade receivables. The cumulative net proceeds under the
Receivables Sale Facility from November 2, 2000 through December 31, 2000 were
$90,000,000. During fiscal 2000, the Company incurred fees on the sale of its
receivables in the amount of $1,082,000.
NOTE D--INVENTORIES
The components of inventories are:
December 31,
--------------------------------
2000 1999
------------- --------------
Finished goods $ 30,357 $ 35,130
Raw materials 23,790 36,768
Supplies 2,171 2,670
------------- --------------
$ 56,318 $ 74,568
============= ==============
NOTE E--PROPERTY AND EQUIPMENT
The components of property and equipment are:
December 31,
-------------------------------
2000 1999
------------- --------------
Land, buildings and improvements $ 153,795 $ 140,530
Production equipment and machinery 136,152 129,745
Office furniture, equipment and other 17,376 13,086
------------- --------------
307,323 283,361
Accumulated depreciation (111,190) (93,374)
------------- --------------
$ 196,133 $ 189,987
============= ==============
Depreciation expense for 2000, 1999 and 1998 was $24,512,000, $22,405,000 and
$19,074,000, 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.
50
NOTE F--INCOME TAXES
The provision (benefit) for income taxes was as follows:
For the Year Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Current:
Federal $ (891) $ 7,293 $ 11,498
State 390 500 451
---------- ----------- -----------
(501) 7,793 11,949
Deferred:
Federal 320 3,221 (45)
State (576) 577 (211)
Foreign 333 (429) (418)
---------- ----------- -----------
77 3,369 (674)
---------- ----------- -----------
$ (424) $ 11,162 $ 11,275
========== =========== ===========
The income tax expense, computed by applying the federal statutory tax rate to
earnings before income taxes, differed from the provision (benefit) for income
taxes as follows:
For the Year Ended December 31,
-----------------------------------------
2000 1999 1998
------------ ------------ ------------
Income taxes (benefit) at the federal statutory rate $ (308) $ 11,231 $ 11,854
Foreign taxes at the statutory rate 537 67 (845)
Goodwill amortization, nondeductible 864 807 453
State income taxes, net (162) 693 150
Foreign income not currently taxable (1,130) (871) (593)
Other, net (225) (765) 256
----------- ----------- ------------
Provision (benefit) for income taxes $ (424) $ 11,162 $ 11,275
=========== =========== ============
51
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:
December 31,
--------------------------
2000 1999
------------ ------------
Deferred tax liabilities:
-------------------------
Accelerated depreciation and amortization $ 19,473 $ 18,270
Federal effect of state income taxes 1,232 918
Other 1,150 460
----------- -----------
Total deferred tax liabilities 21,855 19,648
Deferred tax assets:
--------------------
Net operating loss carryforwards 2,171 1,798
Tax credit carryforwards 2,041 1,958
Expenses not currently deductible 5,433 3,653
Federal effect of state income taxes 1,150 1,038
----------- -----------
Total deferred tax assets 10,795 8,447
Valuation allowance (1,113) (895)
----------- -----------
Net deferred tax assets 9,682 7,552
----------- -----------
Net deferred tax liability $ 12,173 $ 12,096
=========== ===========
At December 31, 2000 and 1999, the Company had a $1,113,000 and $895,000
valuation allowance, respectively, to reduce certain deferred tax assets to
amounts that are more than likely not to be realized. The majority of the
valuation allowance relates to the Company's potential inability to utilize
state recycling credits.
At December 31, 2000, the Company had approximately $1,545,000 of unused net
operating loss carryforwards for foreign tax purposes, which do not expire, and
had approximately $24,177,000 for state purposes, which expire in 2001 to 2015.
At December 31, 2000, the Company had $2,041,000 of unused state tax credit
carryforwards, $194,000 of which expire in 2004 to 2015, and $1,847,000 of which
do not expire.
Undistributed earnings of the Company's non-United States investment in a joint
venture amounted to approximately $5,133,000 at December 31, 2000. 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 practicable.
52
NOTE G--LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
------------------------------
2000 1999
-------------- --------------
Revolving credit loans $ 113,900 $ 200,000
7.65% Morgantown, Kentucky Solid Waste
Disposal Facilities Revenue Bonds-1996 Series 5,696 5,693
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 4,100 4,100
Other 602 781
------------- -------------
Subtotal 128,898 215,174
Less current maturities 112 181
------------- -------------
Total $ 128,786 $ 214,993
============= =============
On October 20, 2000, the Company amended the terms of its long-term credit
facility with its lenders. The Second Amendment to the Second Amended and
Restated Credit Agreement (the "Amendment") (i) permitted the Company to sell,
convey or otherwise contribute up to $100,000,000 in certain accounts receivable
to a Qualifying Special-Purpose Entity (the "QSPE") under the terms of an
accounts receivables sale and securitization facility (the "Receivables Sale
Facility"),(ii) reduced the maximum credit facility commitment from $250,000,000
to $175,000,000 upon the closing of the Receivables Sale Facility;(iii)
eliminated the Company's option to request increases to the revolving credit
commitment of up to $50,000,000 in the aggregate; (iv)eliminated the Company's
option to issue up to $125,000,000 in convertible subordinated debt; (v) amended
the credit margins applied to alternate base rate loans and LIBOR loans;(vi) and
amended certain financial covenants.
The Credit Agreement, as amended by the Amendment (the "Credit Agreement"),
imposes certain restrictions on the Company, including: (i) a prohibition
against incurring certain additional indebtedness, (ii) maintenance of certain
financial ratios, (iii) limitations on dividends and repurchases of shares of
capital stock, (iv) limitations on capital expenditures, investments and
acquisitions, except for mergers, consolidations and acquisitions in any fiscal
year having an aggregate consideration of up to $75,000,000. The annual
limitations on cash dividends on capital stock are as follows: $6,000,000 for
2000, and $8,000,000 for each year after 2000. The Credit Agreement limits
repurchases of the Company's common stock to $5,000,000 under the terms of an
existing forward share repurchase agreement. The indebtedness under the amended
credit facility is secured by substantially all of the Company's personal
property, (except for the accounts receivable (and certain related assets),
which were sold under the Receivables Sale Facility) and a first lien mortgage
on certain real property at seven of the Company's operating plants, as well as
a pledge of the capital stock of substantially all of the Company's
subsidiaries.
53
As of December 31, 2000, the Company had $113,900,000 of indebtedness
outstanding under the Credit Agreement and had $59,224,000 available for
borrowing. At December 31, 2000, the Company had standby letters of credit
outstanding in the aggregate amount of $2,716,000. The Company is currently
unable to use all of the borrowing capacity available under its Credit
Agreement due to limitations imposed under this Agreement.
In order to reduce the fluctuating interest rate exposure on the term loan, the
Company entered into an interest rate cap transaction agreement ("Rate Cap
Transaction") with the primary lender under The Credit Agreement 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. Under the terms of
this Rate Cap Transaction, the Company's interest rate will not exceed 8% per
annum for $22,800,000 (the notional amount as of December 31, 2000) of the
Company's outstanding floating-rate debt. As of December 31, 2000, the floating
interest rate was capped at 8% per annum for 20% of the total borrowings under
the Credit Agreement. The fair value of the rate cap is considered to be
immaterial.
The fair value of the Company's outstanding indebtedness under the 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 $15,186,000.
Scheduled maturities of long-term debt subsequent to December 31, 2000 are as
follows:
2001 $ 112
2002 110
2003 114,010
2004 105
2005 165
After 2005 14,396
-----------
Total $ 128,898
===========
54
NOTE H--NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
------------- -------------- -------------
Numerators for basic and diluted earnings per share:
Net earnings $ 283 $ 20,796 $ 19,590
============= ============== =============
Denominator:
Denominator for basic earnings per share--
weighted-average shares 15,353,383 16,447,949 16,669,768
Dilutive potential common shares--stock options 4,204 106,740 132,300
Dilutive potential common shares--equity forward 78,861 - -
------------- -------------- -------------
Denominator for diluted earnings per share 15,436,448 16,554,689 16,802,068
============= ============== =============
Net earnings per share:
Basic $ 0.02 $ 1.26 $ 1.18
============= ============== =============
Diluted $ 0.02 $ 1.26 $ 1.17
============= ============== =============
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:
2000 1999 1998
-------------- -------------- --------------
Anti-dilutive stock options as of December 31 2,182,388 2,099,996 1,098,856
============== ============== ==============
NOTE I--EMPLOYEE BENEFIT PLANS
With the exception of the employees at the 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 1999
and 1998 were $2,302,000 and $1,994,000, respectively. There were no
contributions made for 2000.
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 $1,053,000,
$876,000 and $707,000 for 2000, 1999 and 1998 respectively.
NOTE J--STOCKHOLDERS' EQUITY
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
55
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 provided
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 on a
discretionary basis. Nonqualified and incentive stock options may be granted,
and the 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 Stock 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 Stock Option Plan
and to pay federal and state taxes realized upon such exercises. Under this loan
program 35,000 and 196,800 shares were exercised in 1999 and 1998, respectively.
As of December 31, 2000, the Company had extended $2,266,000 in executive loans
to these individuals ($1,624,000 of which represented a reduction to additional
paid-in capital and $642,000 of which was included in other long-term assets)
and recorded $38,000 in interest income.
During 1999, the Company repurchased 576,500 shares of its common stock in open
market or privately negotiated transactions at an aggregate purchase price of
$7,080,000. In January 2000, the Company's Board of Directors authorized an
increase in the aggregate maximum amount to be expended by the Company under its
share repurchase program to $35,000,000. During 2000, the Company spent
$9,120,000 to repurchase a total of 788,900 shares. In May 2000, the Company
entered into a forward share purchase contract, which must be settled by May
2001. The contract provides at the Company's option, for the Company to purchase
up to 644,500 of the Company's shares from a financial institution at an average
price of approximately $7.67 for a total consideration of $4,941,000. However,
the Company, at its option, may also elect to settle the contract on a net share
basis in lieu of a cash payment.
In October 2000, the Company awarded to certain officers, 560,000 shares of
restricted Common Stock of the Company. The restricted stock grants were made
pursuant to the terms of their Employment Agreements. These shares cannot be
transferred or pledged and are subject to forfeiture if the officers' employment
with the Company terminates under certain circumstances before the restriction
period for the awards expire. The vesting period does not begin unless there is
a "change in control" of the Company (as defined under the employment
agreements). After such change in control, the shares have a two-year vesting
period and all unexercised Company stock options owned by these officers as of
the date of grant of their restricted stock will automatically terminate. These
shares are not included in the calculation of earnings per share.
56
Transactions under the option plans are as follows:
2000 1999 1998
----------------------- ----------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------- ----------------------- ---------------------
Options outstanding Jan. 1 2,342,028 $ 14.56 2,240,363 $ 14.71 1,868,433 $ 14.25
Options granted 26,711 $ 4.56 214,832 $ 11.49 627,696 $ 13.36
Options exercised - $ - (62,647) $ 8.05 (227,200) $ 6.94
Options forfeited (159,940) $ 15.00 (50,520) $ 16.34 (28,566) $ 16.79
----------- ---------- ----------
Options outstanding Dec. 31 2,208,799 $ 14.40 2,342,028 $ 14.56 2,240,363 $ 14.71
=========== ========== ==========
Options exercisable Dec. 31 1,881,050 $ 14.82 1,571,098 $ 15.17 1,131,961 $ 15.11
=========== ========== ==========
Information related to options outstanding at December 31, 2000, is summarized
below:
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Options Life Price Options Price
-------------------------------------- --------------- ------------- ------------ ------------
$ 4.50 - $ 7.55 85,611 3.2 Years $ 6.61 59,200 $ 7.55
$ 9.88 - $ 13.75 1,096,199 6.2 Years $ 12.82 834,860 $ 13.01
$ 14.25 - $ 19.00 894,192 4.7 Years $ 15.85 854,193 $ 15.87
$ 22.75 - $ 23.38 132,797 4.8 Years $ 22.75 132,797 $ 22.75
------------ ------------
2,208,799 1,881,050
============ ============
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:
2000 1999 1998
--------- --------- ---------
Expected option life in years 2.0 3.9 4.0
Risk-free interest rate 5.36% 5.94% 4.58%
Volatility factor 0.439 0.329 0.312
Dividend yield 5.30% 2.11% 1.80%
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
57
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 options' vesting period.
The Company's pro forma information is as follows:
December 31,
---------------------------------------
2000 1999 1998
------------ ----------- ------------
Net earnings:
As reported $ 283 $ 20,796 $ 19,590
Pro forma $ (526) $ 19,629 $ 18,528
Net earnings per common share:
As reported--basic $ 0.02 $ 1.26 $ 1.18
As reported--diluted $ 0.02 $ 1.26 $ 1.17
Pro forma--basic $ (0.03) $ 1.19 $ 1.11
Pro forma--diluted $ (0.03) $ 1.19 $ 1.10
Weighted-average fair value of options granted during the year $ 1.00 $ 3.25 $ 3.56
NOTE K--EMPLOYEE STOCK PURCHASE PLAN
Effective July 1, 1999 the Company adopted a qualified, non-compensatory
employee stock purchase plan, which allows employees to acquire shares of common
stock through payroll deductions over a six-month period. The purchase price is
equal to 85% of the fair market value of the common stock on either the first or
last day of the offering period, whichever is lower. Purchases under the plan
are limited to 15% of an employee's eligible compensation. A total of 800,000
shares are available for purchase under the plan. The Company issued 83,154
shares under the plan in 2000.
NOTE L--OPERATIONS
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (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 described in this Form
10-K.
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
58
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.
In 1997, the Illinois Environmental Protection Agency ("IEPA") 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 have not yet been
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 liability at this site will
have a material adverse effect on its financial position or results of
operations.
On February 15, 2001, the State of Michigan filed a lawsuit against the Company
in the State Circuit Court for the 30th District, Ingham County, Michigan. The
lawsuit arises out of disputes between the Michigan Department of Environmental
Quality and the Company's subsidiaries located in Coldwater, Michigan,(Alchem
Aluminum Inc. and IMCO Recycling of Michigan, LLC) concerning air permits and
emissions at the specification aluminum alloy production facilities in
Coldwater, Michigan. The plaintiffs claim injunctive relief and penalties for
alleged noncompliance with and violations of federal and state environmental
laws. The suit seeks compliance by the Company as well as potentially
substantial monetary penalties. The Company believes it has meritorious defenses
to the claims and plans a vigorous defense. While no assurances can be given,
the Company does not believe that this action will have a material adverse
effect on its financial condition or results of operation. Additionally, there
is the possibility that expenditures could be required at the Coldwater site and
at other Company facilities from time to time, because of new or revised
regulations that could require that additional expenditures be made for
compliance purposes. These expenditures could materially affect the Company's
results of operations in future periods.
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. 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.
NOTE M--SEGMENT INFORMATION
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 recovery activities, including investment 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.
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.
59
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 produce distinct products and services and sell to
different types of customers.
Reportable Segment Information:
-------------------------------
Selected reportable segment disclosures for the three years ended December 31,
2000 are as follows:
ALUMINUM ZINC TOTALS
---------------- --------------- --------------
2000
----
Revenues from external customers $ 598,759 $ 248,180 $ 846,939
Segment income $ 24,687 $ 13,052 $ 37,739
Depreciation and amortization expense $ 22,472 $ 4,913 $ 27,385
Equity in earnings of affiliates $ 3,060 $ - $ 3,060
Segment assets $ 281,394 $ 106,088 $ 387,482
Equity investments in joint ventures $ 15,249 $ $ 15,249
Payments for plant and equipment $ 28,288 $ 6,582 $ 34,870
1999
----
Revenues from external customers $ 568,327 $ 196,504 $ 764,831
Segment income $ 52,974 $ 12,788 $ 65,762
Depreciation and amortization expense $ 20,718 $ 4,615 $ 25,333
Equity in earnings of affiliates $ 2,265 $ - $ 2,265
Segment assets $ 415,614 $ 109,377 $ 524,991
Equity investments in joint ventures $ 13,901 $ - $ 13,901
Payments for plant and equipment $ 19,612 $ 3,670 $ 23,282
1998
----
Revenues from external customers $ 470,722 $ 91,371 $ 562,093
Segment income $ 52,897 $ 4,218 $ 57,115
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
60
Reconciliations of total reportable segment disclosures to the Company's
consolidated financial statements are as follows:
2000 1999 1998
------------ ------------ ------------
PROFITS
-------
Total profits for reportable segments $ 37,739 $ 65,762 $ 57,115
Unallocated amounts:
General and administrative expense (19,788) (21,775) (17,360)
Interest expense (16,668) (12,478) (9,197)
Fees on receivables sale (1,082) - -
Interest and other income 210 795 585
----------- ----------- -----------
Income before provision for income taxes and minority interests $ 411 $ 32,304 $ 31,143
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
-------------------------------------
Total depreciation and amortization expense for reportable
segments $ 27,385 $ 25,333 $ 21,557
Other depreciation and amortization expense 2,323 1,705 1,271
----------- ----------- -----------
Total consolidated depreciation and amortization expense $ 29,708 $ 27,038 $ 22,828
=========== =========== ===========
ASSETS
------
Total assets for reportable segments $ 387,482 $ 524,991 $ 438,289
Other assets 46,189 18,646 18,269
----------- ----------- -----------
Total consolidated assets $ 433,671 $ 543,637 $ 456,558
=========== =========== ===========
PAYMENTS FOR PLANT AND EQUIPMENT
--------------------------------
Total payments for plant and equipment for reportable segments $ 34,870 $ 23,282 $ 32,025
Other payments for plant and equipment 2,831 7,574 3,174
----------- ----------- -----------
Total consolidated payments for plant and equipment $ 37,701 $ 30,856 $ 35,199
=========== =========== ===========
61
Geographic Information:
-----------------------
The following table sets forth the geographic breakout of revenues (based on
customer location) and property and equipment (net of accumulated depreciation):
2000 1999 1998
----------- ----------- ------------
REVENUES
--------
Domestic $ 719,863 $ 658,261 $ 488,253
Foreign 127,076 106,570 73,840
----------- ----------- ------------
Consolidated total $ 846,939 $ 764,831 $ 562,093
=========== =========== ============
PROPERTY AND EQUIPMENT
Domestic $ 187,041 $ 180,342 $ 157,844
Foreign 9,092 9,645 10,661
----------- ----------- ------------
Consolidated total $ 196,133 $ 189,987 $ 168,505
=========== =========== ============
Aluminum shipments to customers located in Canada accounted for approximately 8%
of consolidated revenues for 2000. Substantially all of the Company's foreign
property and equipment are located at the Company's aluminum facility in
Swansea, Wales. Earnings from foreign operations, including foreign joint
ventures, for the fiscal years ending 2000, 1999 and 1998 amounted to
$4,490,000, $3,049,000 and $1,028,000, respectively.
Major Customers:
----------------
During 1999 and 2000, no single customer accounted for more than 10% of
consolidated revenues. During 1998, aluminum sales to Ford Motor Company
("Ford") accounted for 10% of consolidated revenues. The loss of Ford as a
customer would have a material adverse effect upon the business of the Company
and its future operating results.
NOTE N--VAW-IMCO
The Company owns a 50% interest in an aluminum recycling joint venture in
Germany, VAW-IMCO Guss und Recycling GmbH ("VAW-IMCO"). At December 31, 2000 and
1999, the Company's equity in the net income of VAW-IMCO is stated at $2,704,000
and $1,709,000 for the years then ended. The following table represents the
condensed balance sheets and income statements of VAW-IMCO as of and for the
three years ending December 31, 2000, 1999 and 1998 (in thousands). See VAW-IMCO
financial statements included elsewhere herein.
2000 1999 1998
------------ ------------ ------------
Assets
Current assets $ 57,075 $ 48,122 $ 54,945
Long-term assets 28,220 25,643 25,411
------------ ------------ ------------
$ 85,295 $ 73,765 $ 80,356
============ ============ ============
Liabilities
Current liabilities $ 25,680 $ 13,073 $ 15,852
Long-term liabilities 31,470 36,608 40,177
Total stockholders' equity 28,145 24,084 24,327
------------ ------------ ------------
$ 85,295 $ 73,765 $ 80,356
============ ============ ============
Revenues $ 214,625 $ 170,527 $ 206,859
Gross Profit $ 19,744 $ 15,661 $ 17,171
Net Income $ 5,646 $ 3,418 $ 2,540
NOTE O--RELATED PARTY TRANSACTION
The Company has entered into an agreement with one of the Company's executive
officers and his brother, both former stockholders of the Company's U.S. Zinc
Corporation subsidiary, under which the Company sold real property for
$2,450,000 in exchange for cash and a secured promissory note. The Company
believes the sale price of the property is equivalent to sale prices for
comparable properties in the area. The $2,440,000 note, due on June 30, 2002,
bears interest at a rate of 8% per annum, is payable in monthly installments,
and is secured by a first lien mortgage on the property. The transaction
resulted in an after-tax gain of approximately $295,000 recorded in 1999.
62
NOTE P--QUARTERLY FINANCIAL DATA (Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter /1/ Year
------------ ------------ ------------ ------------ -----------
2000:
-----
Revenues $ 223,259 $ 225,819 $ 205,619 $ 192,242 $ 846,939
Gross profits $ 16,102 $ 13,531 $ 12,932 $ 4,788 $ 47,353
Net earnings (loss) $ 2,564 $ 1,537 $ 1,017 $ (4,835) $ 283
Net earnings (loss) per common share:
Basic
Diluted $ 0.17 $ 0.10 $ 0.07 $ (0.32) $ 0.02
1999:
----
Revenues $ 172,778 $ 182,301 $ 196,347 $ 213,405 $ 764,831
Gross profits $ 17,198 $ 17,680 $ 18,200 $ 17,560 $ 70,638
Net earnings $ 5,141 $ 5,473 $ 5,645 $ 4,537 $ 20,796
Net earnings per common share:
Basic $ 0.31 $ 0.33 $ 0.34 $ 0.28 $ 1.26
Diluted $ 0.31 $ 0.33 $ 0.34 $ 0.28 $ 1.26
/1/ During the fourth quarter of 2000, the Company recorded pretax charges of
$5.6 million, comprised primarily of $3.7 million related to the shutdown
of the Bedford facility and other asset write downs.
VAW-IMCO Guss und Recycling GmbH, Grevenbroich, Germany
Financial statements as of December 31, 2000 together with report of independent
public accountants
63
CONTENTS
Page
----
Report of independent public accountants F-1
Balance sheet as of December 31, 2000 F-2
Statement of income for the year ended December 31, 2000 F-3
Statement of shareholders' equity for the year ended December 31, 2000 F-4
Statement of cash flows for the year ended December 31, 2000 F-5
Notes to financial statements for the year ended December 31, 2000 F-6
64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of VAW-IMCO Guss und Recycling GmbH:
We have audited the accompanying balance sheet of VAW-IMCO Guss und Recycling
GmbH (a limited liability corporation, Grevenbroich, Germany) as of December 31,
2000, and the related statements of income, shareholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VAW-IMCO Guss und Recycling
GmbH as of December 31, 2000, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
/s/ Gerd Luetzeler /s/ ppa. marcus senghaas
Cologne, Germany
February 12, 2001
F-1
VAW-IMCO Guss und Recycling GmbH
BALANCE SHEET
AS OF DECEMBER 31, 2000
thousands thousands
EURO USD/1)/
--------------- --------------
A S S E T S
-----------
Current Assets:
Cash and cash equivalents 12,991 12,212
Accounts receivable, net of allowance for doubtful
Accounts of KEUR 142 23,709 22,287
Inventories 22,528 21,176
Other receivables 703 661
Other current assets 27 25
Receivables from affiliates 760 714
-------------- -------------
Total Current Assets 60,718 57,075
Property and equipment, net 29,241 27,487
Intangible assets, net 780 733
-------------- -------------
Total Assets 90,739 85,295
============== =============
L I A B I L I T I E S A N D
----------------------------
S H A R E H O L D E R S ' E Q U I T Y
--------------------------------------
Current Liabilities:
Accounts payable 20,437 19,211
Accrued liabilities 3,413 3,208
Deferred income taxes 2,175 2,044
Current maturities of long-term debt 888 835
Payables to affiliates 406 382
-------------- -------------
Total Current Liabilities 27,319 25,680
Long-term debt 22,732 21,368
Deferred income taxes 2,215 2,082
Pension and other long-term liabilities 8,532 8,020
Shareholders' Equity:
Share capital 10,226 9,613
Additional paid-in capital 8,251 7,756
Retained earnings 11,464 10,776
Total Shareholders' Equity 29,941 28,145
-------------- -------------
Total Liabilities and Shareholders' Equity 90,739 85,295
============== =============
The accompanying notes to financial statements are an integral part of these
financial statements.
1) The financial information expressed in US Dollars (USD) is presented for the
convenience of the reader and is translated from EURO at the Noon buying rate
in New York City for cable transfers in EURO as certified by the Federal
Reserve Bank of New York on December 29, 2000 which was EURO 1.00 to USD
0.94.
F-2
VAW-IMCO Guss und Recycling GmbH
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
thousands thousands
EURO USD/1)/
-------------- --------------
Revenues 228,324 214,625
Cost of sales (207,320) (194,881)
------------- -------------
Gross profits 21,004 19,744
Selling, general and administrative expense (10,656) (10,017)
Other operating income 3,278 3,081
Other operating expense (1,833) (1,723)
------------- -------------
Income from operations 11,793 11,085
Interest expense (2,086) (1,961)
Interest and other income 302 284
------------- -------------
Income before provision for income taxes 10,009 9,408
Provision for income taxes (2,193) (2,061)
Provision for deferred income taxes (1,810) (1,701)
------------- -------------
Net Income 6,006 5,646
============= =============
The accompanying notes to financial statements are an integral part of these
financial statements.
1) The financial information expressed in US Dollars (USD) is presented for the
convenience of the reader and is translated from EURO at the Noon buying rate
in New York City for cable transfers in EURO as certified by the Federal
Reserve Bank of New York on December 29, 2000 which was EURO 1.00 to USD
0.94.
F-3
VAW-IMCO Guss und Recycling GmbH
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000
ADDITIONAL
SHARE PAID-IN RETAINED
CAPITAL CAPITAL EARNINGS TOTAL TOTAL
thousands thousands thousands thousands thousands
EURO EURO EURO EURO USD 1)
---------- ----------- ---------- ----------- ----------
BALANCE AT JANUARY 1, 2000 10,226 5,618 8,091 23,935 22,499
Net income - - 6,006 6,006 5,646
Cash dividend - - (2,633) (2,633) (2,475)
Capital contribution - 2,633 - 2,633 2,475
---------- ----------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 2000 10,226 8,251 11,464 29,941 28,145
========== =========== ========== =========== ==========
The accompanying notes to financial statements are an integral part of these
financial statements.
1) The financial information expressed in US Dollars (USD) is presented for the
convenience of the reader and is translated from EURO at the Noon buying rate
in New York City for cable transfers in EURO as certified by the Federal
Reserve Bank of New York on December 29, 2000 which was EURO 1.00 to USD
0.94.
F-4
VAW-IMCO Guss und Recycling GmbH
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
thousands thousands
EURO USD/1)/
--------------- ---------------
Operating activities:
---------------------
Net income 6,006 5,646
Depreciation and amortization 3,418 3,213
Provision for deferred income taxes 1,810 1,701
Changes in operating assets and liabilities:
Accounts receivable (1,601) (1,505)
Receivables from affiliates 2,633 2,475
Inventories (7,007) (6,587)
Other receivables (291) (273)
Other current assets 39 37
Accounts payable 11,660 10,960
Accrued liabilities (1,382) (1,299)
Pension and other long term liabilities 899 845
Payables to affiliates 325 305
------------- -------------
Net cash provided by operating activities 16,509 15,518
Investing activities:
---------------------
Payments for property and equipment (7,975) (7,496)
------------- -------------
Net cash used in investing activities (7,975) (7,496)
Financing activities:
---------------------
Long term debt (1,686) (1,585)
Capital contribution 2,633 2,475
Dividends paid (2,633) (2,475)
------------- -------------
Net cash used in financing activities (1,686) (1,585)
Net increase in cash and cash equivalents 6,848 6,437
Cash and cash equivalents at January 1 6,143 5,775
------------- -------------
Cash and cash equivalents at December 31 12,991 12,212
============= =============
Supplementary information
-------------------------
Cash payments for interest 1,565 1,471
Cash payments for income taxes 2,150 2,021
The accompanying notes to financial statements are an integral part of these
financial statements.
1) The financial information expressed in US Dollars (USD) is presented for the
convenience of the reader and is translated from EURO at the Noon buying rate
in New York City for cable transfers in EURO as certified by the Federal
Reserve Bank of New York on December 29, 2000 which was EURO 1.00 to USD
0.94.
F-5
VAW-IMCO GUSS UND RECYCLING GMBH, GREVENBROICH, GERMANY
-------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000
------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
-----------------------------------
The accompanying financial statements represent the accounts of VAW-IMCO Guss
und Recycling GmbH, Grevenbroich, Germany (hereinafter also referred to as the
`Company' or `VAW-IMCO Guss und Recycling GmbH').
The Company's principal business activities include the ownership and operation
of aluminum recycling and alloying facilities in Europe. 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
scrap is also purchased on the open market, recycled and sold. Aluminum melting,
alloying, tolling of aluminum dross and scrap recovery activities represent the
Company's only operating segment.
The Company is a joint-venture of IMCO Recycling Holding B.V., Amsterdam,
Netherlands, which is a subsidiary of IMCO RECYCLING INC., Delaware, and VAW
aluminium AG, Bonn, Germany, who is a 100 % subsidiary of E.ON AG, Dusseldorf,
Germany. Both joint venture partners hold 50 % each of the Company. The Company
is included at equity in the consolidated financial statements of IMCO RECYCLING
INC., Delaware.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Revenue recognition
-------------------
Revenues are generally unconditional sales that are recorded when product is
shipped and invoiced to independently owned and operated customers, provided,
among other things, persuasive evidence of a contract exists, the price is fixed
or otherwise determinable, and collectability is reasonably assured. Sales are
recognized net of sales tax, trade discounts and returns. Provisions for
warranty are estimated and accrued at the time of sale. Actual warranty costs do
not materially differ from estimates. Provisions are recorded for returns and
bad debts.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 outlines the SEC's views on applying generally accepted accounting
principles to revenue recognition in financial statements. Specifically, the
bulletin provides both general and specific guidance as to the periods in which
companies should recognize revenues. In addition, SAB 101 also highlights
factors to be considered when determining whether to recognize revenues on a
gross or net basis. SAB 101, as amended by SAB 101/A and SAB 101/B, is effective
beginning no later than their fourth fiscal quarter of the fiscal year beginning
after December 15, 1999; as the Group is a calendar year-end company, this would
be the quarter ending December 31, 2000. The Company believes that its policies
in regards to the recognition of revenues are in compli-
F-6
ance with the guidance of SAB 101 and does not expect that the adoption of this
standard will have any material effects on its results of operations, cash flows
or financial position.
Cost of sales
-------------
Cost of sales primarily consist the cost of purchased raw materials, production
costs and material costs and direct manufacturing overheads in relation to
manufactured products sold.
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.
Accounts Receivable and Credit Risk
-----------------------------------
The majority of the Company's accounts receivable are due from companies in the
aluminum and automotive industries. Credit is extended based on evaluation of
the customers' financial condition and, generally, collateral is not required.
Accounts receivable amounting to KEUR 23,709 are net of allowance for doubtful
accounts amounting to KEUR 142, which management believes is adequate to provide
for the risk of loss that is present in the accounts receivable at December 31,
2000.
Inventories
-----------
Inventories are stated at the lower of cost or market value. Cost is determined
using the average cost method taking the average cost of the production
quantities and the purchased raw material quantities and includes all applicable
costs incurred in bringing goods to their present location and condition. Cost
of work-in-progress and finished goods includes manufacturing overheads.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated depreciation. Major
additions and improvements are capitalized, while maintenance and repairs which
do not improve or extend the life of the respective assets are expensed when
incurred. Major replacements or charges for the significant improvements to
property and equipment are capitalized. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Interest is capitalized in connection with the construction of major facilities.
Low value items (cost below EUR 409) are expensed immediately. This policy does
not have a material effect on the accompanying financial statements.
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.
Intangible Assets
-----------------
Intangible assets (purchased software) are amortized on a straight-line basis
over the expected life, currently from 3 to 5 years.
F-7
Pensions
--------
VAW-IMCO Guss und Recycling GmbH maintains a defined benefit pension plan for
its employees. This plan is based on final pay and service, but some executives
are entitled to received enhanced pension benefits. It is a book reserve plan,
i.e. no plan assets are provided and the employer sets up a book reserve
(pension accrual) for payment of the benefits. Under SFAS 87 "Employers'
Accounting for Pensions" a book reserve plan under German law is an unfunded
plan and a liability item has to be recognized as unfunded accrued pension cost.
This amount is partially covered by an insurance plan.
Disclosures are made in accordance with SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits".
Early retirement
----------------
Based on the "Early Retirement-Law" and the collective agreement of the chemical
industry, employees have the opportunity to shorten their working life time
without reducing the (net) wages by receiving additional compensation. Since the
compensation is paid without a return from the employee's side, the compensation
is treated as `postemployment benefit' as defined by SFAS 112 "Employers'
Accounting for Postemployment Benefits". The amount of the compensation payments
has been accrued proportionally.
Income-taxes
------------
The Company utilizes the liability method of accounting for income taxes in
accordance with SFAS 109, "Accounting for Income Taxes". Under the liability
method, deferred taxes are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized.
In Germany, prior to fiscal year 2001, income was taxed at two different rates.
A higher ,,undistributed" tax rate is applied to income generated but not
distributed to shareholders. Upon distribution, such income was taxed at a lower
"distributed" tax rate. Effective Fiscal year 2001, all income will be taxed at
one rate. Accordingly, the Company has applied this enacted rate when measuring
deferred tax assets and liabilities as of December 31, 2000.
Forward contracts
-----------------
Forward contracts are contracts negotiated between the Company and reputable
metal brokers to purchase and sell a specific quantity of aluminum at a price
specified at origination of the contract, with delivery and settlement at a
specified future date. Often, the Company enters into these contracts on behalf
of its customers with agreed upon terms. These transactions qualify and are
accounted for as hedges based on SFAS 80 "Accounting for future contracts"
(fixed rate, amount of cash inflows/ outflows is certain and not effected by
changes in market interest rate). The cumulative change in the market value on
the effective date as of December 31, 2000 is shown as a gain/ loss of the
aluminum purchase/ sale (anticipated transaction). The forward premium is
expensed with settlement. Evidence at December 31, 2000 indicates recovery on
sale of the finished goods. The nature of the assets, liabilities, firm
commitments or anticipated transactions that are hedged with future contracts
are disclosed in note 10.
F-8
Earnings per share
------------------
Since the Company is a German GmbH (limited liability corporation), there are no
authorized or issued shares outstanding. Therefore, earnings per share
information has not been presented in the accompanying financial statements.
Fair value disclosures
----------------------
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and short-term debt approximate fair value due to the short maturity of
the instruments.
Long-term debt
--------------
The fair value of long-term debt is measured using discounted cash flows, based
on a discount rate that approximates market rates for similar debt and risk. At
December 31, 2000, the payables to financial institutions bear interest at fixed
rates of interest. The fair value of these payables approximate their carrying
value.
Forward contracts for aluminum
------------------------------
The Company has forward contracts for aluminum outstanding as of December 31,
2000. These contracts call for the payment of KEUR 23,076 at notional value.
These contracts mature between January and December 2001. The fair value of
these contracts at December 31, 2000 is KEUR 23,433, based on quoted market
prices as of December 31, 2000.
The notional or fair values of these contracts have not been recorded in the
accompanying financial statements, as they represent a hedge of underlying
future purchase and sales contracts maturing on the same date (month) as the
related contract.
The Company's credit risk associated with these contracts is generally limited
to the unrealized gain/ loss should any counter party fail to perform as
contracted. The counter party to the Company's forward contract consists of
major international broker institutions. The Company continually monitors the
credit quality of these institutions and does not expect non-performance by the
counter party.
Recently issued accounting standards
------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
accounting criteria are met. If a derivative instrument qualifies for hedge
accounting, the gains or losses from the derivative may offset results from the
hedged item in the statement of operations or other comprehensive income,
depending on the type of hedge. To adopt hedge accounting, a Company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
This Statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this Statement amends
the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities.
F-9
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000. A Company may implement the statements as of the beginning of any
fiscal quarter after issuance; however, SFAS 133 cannot be applied
retroactively.
The adoption of SFAS 133, SFAS 137, and SFAS 138 will not have a material impact
on the results of operations of the Company.
NOTE 2 -- INVENTORIES
---------------------
The components of inventories as of December 31, 2000 are as follows:
KEUR
--------------
Raw materials and supplies 12,825
Work-in-process 3,114
Finished goods 6,589
-------------
22,528
=============
NOTE 3 -- PROPERTY AND EQUIPMENT
--------------------------------
The components of property and equipment at December 31, 2000 are as follows:
KEUR
--------------
Land, buildings and improvements 5,832
Production equipment and machinery 30,794
Office furniture, equipment and other 4,825
Construction-in-progress 585
-------------
42,036
Accumulated depreciation (12,795)
-------------
29,241
=============
Major investments during the year 2000 were the second IMCO constructed furnace
in the plant located in Toging, Germany, amounting to KEUR 1,515 and the third
IMCO constructed furnace in Grevenbroich, Germany, amounting to KEUR 963. Both
investments were financed in cash. Furthermore, during the year 2000 extensive
repair work on two existing capitalized furnaces was undertaken.
As a result of the significant repair and improvement work of the two melting
furnaces, their useful lives have been extended from 7 to 15 years (change of
accounting estimate). The change in useful life had the effect of reducing
depreciation expense and increasing net earnings by KEUR 517.
In general, the useful life for new furnace is 15 years. Estimated useful lives
for buildings and improvements range from 10 to 25 years, machinery and
equipment as well as office furniture and equipment, range from 3 to 15 years.
Depreciation expense for 2000 (Property and equipment) amounts to KEUR 3,154.
F-10
NOTE 4 -- INCOME TAXES
----------------------
German trade tax on income is levied on a company's taxable income adjusted for
certain revenues which are not taxable for trade tax purposes and for certain
expenses which are not deductible for trade tax purposes. The trade tax rate is
dependent on the municipality in which the company operates. The effective
statutory trade tax rate was 16.7 % for the reported year. Trade tax is
deductible for corporate income tax purposes which is reflected in the rate
shown above.
German corporate income tax is levied at 30 % on that portion of taxable income
which will be distributed as a dividend and at 40 % on that portion of taxable
income which will be retained. For the calculation of the tax rate as of
December 31, 2000, VAW-IMCO Guss und Recycling GmbH assumed the distribution of
the actual earnings. Additionally, there is a solidarity surcharge on income tax
of 5.5 %.
The provision for income taxes for the year ended December 31, 2000 is as
follows:
KEUR
--------------
Current:
--------
Corporate 1,211
Trade 982
-------------
2,193
Deferred:
---------
Corporate 924
Trade 886
-------------
1,810
-------------
4,003
=============
The income tax expense, computed by applying the effective tax rate of 43 % to
income before income taxes, differed from the provision for income taxes at the
statutory rate and is as follows for the year ended December 31, 2000:
KEUR
--------------
Income taxes at the effective rate 4,304
Change in tax rate (458)
Other 157
-------------
Provision for income taxes 4,003
=============
F-11
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 as of December 31, 2000 are as
follows:
KEUR
--------------
Deferred tax liabilities:
-------------------------
Property and equipment 2,523
Inventories 1,582
Accrued liabilities 661
-------------
Total deferred tax liabilities 4,766
Deferred tax assets:
--------------------
Pension 172
Accrued liabilities 204
-------------
Total deferred tax assets 376
-------------
Net deferred tax liability
(thereof current: KEUR 2,175 and long-term: KEUR 2,215) 4,390
=============
At December 31, 2000, management believes that it is more likely than not that
the deferred tax assets will be realized; therefore, no valuation allowance has
been recorded at December 31, 2000.
As of July 14, 2000 a law relating to a tax reduction has been enacted in
Germany (effective fiscal year 2001). The income tax rate for corporate income
has been reduced to an uniform level amounting to 25 %. Hence, there are no
longer different rates depending on whether that income is distributed to the
shareholders or not (the difference of the distribution rate (30%) to the
undistributed rate (40%) has been 10 %). According to SFAS 109 the passed law
has been taken into consideration for the valuation of deferred taxes.
The increase in taxable differences results mainly from different depreciation
methods for US-GAAP and German GAAP purposes, as well as from a different
approach for the valuation of inventories. Additionally, the provision for
pensions under SFAS 87 is higher than the amount accrued in the tax books, which
reflects the calculation under the German tax law.
F-12
NOTE 5 -- LONG-TERM DEBT
------------------------
Long-term debt at December 31, 2000 is summarized as follows:
KEUR
--------------
(1) Commerzbank bank loan,
interest rate, fixed at 6.644 %
matures in May 15, 2003 10,226
(2) Landesbank Rheinland-Pfalz bank loan,
interest rate, fixed at 6.710 %
matures in May 15, 2003 10,226
(3) Various Commerzbank investment credits,
interest rates ranging from 4.200 % to 5.875 % at
December 31, 2000
mature in 2004 3,168
--------------
Subtotal 23,620
Less current maturities (888)
--------------
Long-term debt 22,732
==============
The purpose of long-term debts (1) and (2) are for investments in furnaces as
well as for necessary working capital, whereas long-term debts (3) are for
equipment investments only.
In addition, the Company entered into a KEUR 10,226 short-term working capital
loan with Commerzbank which is not utilized as of December 31, 2000.
As of December 31, 2000 VAW-IMCO Guss und Recycling GmbH is in compliance with
all financial ratios and other covenants related to the above debt arrangements.
The total amount of interest cost amounting to KEUR 2,086 incurred during the
period is charged to expense.
Scheduled maturities of long-term debt subsequent to December 31, 2000 are as
follows:
KEUR
--------------
2002 888
2003 21,340
2004 504
--------------
Total 22,732
==============
F-13
NOTE 6 -- PENSION PLAN
----------------------
The Company maintains a defined benefit pension plan for its employees.
Change in Projected Benefit Obligation (PBO)
KEUR
--------------
Projected benefit obligation (PBO) at January 1, 2000 7,539
Amendments 158
Unrecognized net loss 80
--------------
Projected benefit obligation (PBO) at December 31, 2000 7,777
Unrecognized net loss (80)
--------------
7,697
Provision for pension insurance 51
Other 113
--------------
Pension liability at December 31, 2000 7,861
==============
Net periodic pension costs for 2000 amount to KEUR 757, including interest cost
of KEUR 499 and service cost of KEUR 258.
Actuarial assumptions as of December 31, 2000 are as follows:
Interest rate 7.0 %
Compensation increase 3.0 %
Cost-of-living increase for pensions 2.0 %
The computation of the accrual is based on the following retirement ages which
reflect present legal early retirement provisions in Germany:
Males 63 years
Females 60 years
Disabled 60 years
The Projected Benefit Obligation (PBO) as of December 31, 2000 amounts to KEUR
7,777 and includes an unrealized loss amounting to KEUR 80. The loss does not
exceed 10 % of the PBO (KEUR 777), so an amortization is not necessary. The
Accumulated Benefit Obligation (ABO) amounts to KEUR 6,454, the Current Service
Cost (CSC) amounts to KEUR 258.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (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 possibly require the
Company to make substantial expenditures in the future. At December 31, 2000,
the Company is in compliance with all environmental laws and management is not
aware of any amendments of laws which might result in noncompliance in the
future.
F-14
Purchase commitments amount to KEUR 30,839 as of December 31, 2000. Bill
gurantees for the customer amounting to KEUR 409 have been issued by a bank.
NOTE 8 -- SEGMENT INFORMATION
-----------------------------
The Company adopted SFAS 131 "Disclosure About Segments of an Enterprise and
Related Information". These rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments. The Company's business consists solely of aluminum recycling and
alloying (one integrated process), therefore the product-line segment disclosure
has been omitted. This product has been provided in Germany, where the company
operates, for various customers in Europe. The Company evaluates performance and
allocates resources at the geographic country level. The key operating
performance criteria used in this evaluation includes revenue growth, operating
income before depreciation and amortization ("Adjusted EBITDA"), and capital
expenditures. The Company does not view segment results below Adjusted EBITDA,
therefore, net interest expense and income, foreign exchange gain (loss) and
income tax expense are not broken out below.
Description of types of products
--------------------------------
The aluminum segment represents all of the Company's aluminum melting, alloying,
recycling of aluminum dross and scrap recovery activities. The Company delivers
aluminum in molten (just-in-time delivery) and ingot form to aluminum producers.
It primarily serves the European auto industry but also supplies the
construction sector and other markets.
Geographic information
----------------------
The following table sets forth the geographic breakout of revenues (based on
customer location):
KEUR
--------------
Revenues from external customers
--------------------------------
Domestic (Germany) 182,377
European Union and other Europe 15,112
-------------
Total 197,489
=============
A great part of the non domestic revenues to third parties (76% in 2000) has
been realized within the European Union. The Company does not have any foreign
property and equipment.
Major Customers
---------------
In the fiscal year 2000, there are three major customers with revenues above 10
% of the total revenues (representing 14 %, 12% and 10% of the total revenues).
Although unlikely, the loss of one of these customers could have a material
adverse effect upon the business of the Company and its future operating
results.
F-15
NOTE 9 -- RELATED PARTY TRANSACTION
-----------------------------------
In connection with the new furnaces described in note 3, the Company purchased
certain materials from IMCO Recycling UK Ltd. (affiliate of IMCO RECYCLING INC.,
Delaware) in the total amount of KEUR 1,775 during the year 2000. As of December
31, 2000, payables due to IMCO Recycling UK Ltd. amount to KEUR 190. These
purchases were made on an arms length basis in the normal course of business.
IMCO RECYCLING INC., Delaware, has no common control, since it does not own
greater than a 50 % equity interest in the Company. Furthermore, there is no
management control by IMCO RECYCLING INC., Delaware.
Further, certain transactions as described below have been undertaken with VAW
aluminium AG, Bonn and various subsidiaries thereof. VAW aluminium AG, Bonn has
no common control, since it does not own greater than a 50 % equity interest in
the Company. Furthermore, there is no management control by VAW aluminium AG.
These purchases are made at arms length basis in the normal course of business:
. Metal Services Division of VAW aluminium AG, Bonn is the main counter party
for handling forward contracts described in Note 10, below.
. With Aluminium Norf GmbH, Neuss-Norf (50 % subsidiary of VAW aluminum AG),
the Company has entered into an agreement for tolling aluminum dross of
annually about 22,000 tons.
. There are various service agreements with other subsidiaries of VAW
aluminium AG, Bonn.
In total KEUR 30,834 of total revenues has been realized with VAW aluminium AG,
Bonn and various subsidiaries in the year 2000.
NOTE 10 -- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
----------------------------------------------------
In order to manage its price exposure for metal purchases and sales, the Company
has entered into forward contracts for aluminum with metal brokers on behalf of
its customers and its production needs. As of December 31, 2000, forward
purchase contracts for aluminum (reference: London Metal Exchange, LME HL, Al
99.7 %), determined to secure open orders and forward sales contracts (mainly
with customers), determined to close open purchase contracts are as follows:
. The open amount of forward purchase contracts covers 6,675 tons with a
notional contract value of KEUR 11,738 and an estimated fair value amounting
to KEUR 11,522 (maturity: January to June 2001).
. The open amount of forward sales contracts covers 6,225 tons with a notional
contract value of KEUR 11,338 and an estimated fair value amounting to KEUR
11,911 (maturity: January to December 2001).
. The fair value of the Company's forward contracts at December 31, 2000 was
KEUR 23,433.
. The unrealized net gain as of December 31, 2000 amounts to KEUR 357
(unrealized loss related to forward purchase contracts amounting to KEUR 216
and unrealized gain related to forward sales contracts amounting to KEUR
573).
The main part of forward contracts is handled by the Metal services division of
VAW aluminium AG, Bonn who only works with reputable metal brokers. Apart from
VAW aluminium AG, Bonn as counterpart, 375 tons of forward purchase contracts
and 100 tons of open forward sales contracts are concluded with Prudential Bache
International Ltd., London.
F-16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- FINANCIAL DISCLOSURE
Not applicable.
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 2001 Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission (SEC) pursuant to Regulation 14A of the Securities
Exchange Act of 1934, which information is incorporated herein by reference. It
is anticipated that the Proxy Statement will be publicly available and mailed to
stockholders in April 2001. 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 Officers--Stock Options", "--Certain Transactions" and
"Compensation Committee Report to Stockholders -- Compensation Committee
Interlocks and Insider Participation" in the definitive Proxy Statement, which
information is incorporated herein by reference.
65
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 42 hereof.
2. Consolidated Financial Statement Schedules: See index to Consolidated
Financial Statements and Financial Statement Schedules on Page 42 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 March 24,
1999, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, and incorporated herein by
reference.
*3.3 Amendment to By-laws adopted in August 2000.
10.1 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.
10.2 Specimen Split-Dollar Life Insurance Agreement, filed as Exhibit 10.7
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference. 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.
10.3 Agreement, effective as of January 1, 1994, between IMCO Recycling
Inc. and Aluminum Company of America, filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999, and incorporated herein by reference.
66
10.4 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.
*10.5 Amendment to the IMCO Recycling Inc. 1992 Stock Option Plan dated
February 12, 2001.
10.6 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.
*10.7 Amendment to the IMCO Recycling Inc. Annual Incentive Program dated
February 12, 2001.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 Second Amended and Restated Credit Agreement, by and among the
Company; Subsidiary Guarantors named therein; the Lenders thereunder;
Bank of America, N.A.; PNC Bank, National Association and Chase Bank
of Texas National Association dated October 25, 1999, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999, and incorporated herein by reference.
10.13 First Amendment dated January 5, 2000 to the Second Amended and
Restated Credit Agreement, by and among the Company; Subsidiary
Guarantors named therein; the Lenders thereunder; Bank of America,
N.A.; PNC Bank, National Association and Chase Bank of Texas National
Association dated October 25, 1999, filed as exhibit 10.13 to the
Company's Annual report on Form 10K for the year ended December 31,
1999, and incorporated by reference.
67
10.14 IMCO Recycling Inc. Annual Incentive Compensation Plan, filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, and incorporated herein by
reference.
10.15 Employee Stock Purchase Plan, filed as Exhibit 4.4 to the Company's
Form S-8 dated June 30, 1999, and incorporated herein by reference.
10.16 Registration Rights Agreement dated as of July 21, 1998 among IMCO
Recycling Inc. and the former shareholders of U.S. Zinc Corporation,
filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, and incorporated by reference.
10.17 Split-Dollar Life Insurance Agreement, filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999, and incorporated by reference.
10.18 IMCO Recycling Inc. Performance Share Unit Plan, filed as Exhibit
10.18 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, and
incorporated by reference.
*10.19 IMCO Recycling Inc. 2000 Restricted Stock Plan
*10.20 Employment Agreement between the Company, IMCO Management Partnership
L.P. and Don V. Ingram dated September 1, 2000.
*10.21 Restricted Stock Award Agreement between the Company and Don V. Ingram
dated October 12, 2000. This agreement is virtually identical (except
as to dates and number of shares of restricted stock awarded) to
Restricted Stock Award Agreements between the Company and (i) Paul V.
Dufour dated October 12, 2000 and (ii) Richard L. Kerr dated February
1, 2001.
*10.22 Employment Agreement between the Company, IMCO Management Partnership
L.P. and Paul V. Dufour dated September 1, 2000.
*10.23 Employment Agreement between the Company, IMCO Management Partnership
L.P. and Richard L. Kerr dated February 1, 2001.
*10.24 Modified Earn-Out Agreement by and among the Company and Russ Robinson
and Howard Robinson dated May 31, 2000.
*21 Subsidiaries of IMCO Recycling Inc. as of March 1, 2001.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Arthur Anderson
-----------------
68
* Filed herewith.
(b) No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal 2000.
(c) See sub-item (a) above.
(d) VAW-IMCO (50% joint venture) audited consolidated financial statements as
of and for the year ended December 31, 2000.
69
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 23, 2000 IMCO Recycling Inc.
By: /s/ ROBERT R. HOLIAN
------------------------------------
Robert R. Holian, Senior Vice President,
Controller and Chief 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:
Signature Title Date
------------------------------ -------------------------------------------------- --------------------
Director, Chairman of the Board, Chief Executive
/s/ DON V. INGRAM Officer and President March 23, 2001
------------------------------
Don V. Ingram
/s/ JOHN J. FLEMING Director March 23, 2001
------------------------------
John J. Fleming
/s/ DON NAVARRO Director March 23, 2001
------------------------------
Don Navarro
/s/ STEVE BARTLETT Director March 23, 2001
------------------------------
Steve Bartlett
/s/ JEB HENSARLING Director March 23, 2001
------------------------------
Jeb Hensarling
/s/ WILLIAM WARSHAUER Director March 23, 2001
------------------------------
William Warshauer
/s/ HUGH G. ROBINSON Director March 23, 2001
------------------------------
Hugh G. Robinson
Executive Vice President, Chief Financial
Officer and Secretary (Principal Financial
/s/ PAUL V. DUFOUR Officer) March 23, 2001
------------------------------
Paul V. Dufour
Senior Vice President, Controller and Chief
/s/ ROBERT R. HOLIAN Accounting Officer (Principal Accounting Officer) March 23, 2001
------------------------------
Robert R. Holian
70