ITEM 1. BUSINESS
The Doe Run Resources Corporation (the Company) is a producer of base and precious metals with operations in the United States and Peru. The Company is the largest integrated lead producer in North America and the largest primary lead producer in the western world. In Peru, the Company operates the La Oroya smelter (La Oroya), one of the largest polymetallic processing facilities in the world offering an extensive product mix of non-ferrous and precious metals, including silver, copper, zinc, lead and gold.
All of the Company's issued and outstanding capital stock is indirectly owned by The Renco Group, Inc. (Renco). Renco is owned by trusts established by Mr. Ira Leon Rennert, Renco's Chairman and Chief Executive Officer, for himself and members of his family. As a result of such ownership, Mr. Rennert controls the Company and its subsidiaries. The Company owns 100% of Doe Run Cayman Ltd. (Doe Run Cayman), a Cayman Islands corporation. Doe Run Cayman owns in excess of 99% of the interest in Doe Run Peru S.R.L. (Doe Run Peru, a Peruvian corporation), with a DE MINIMIS number of shares owned by employees of both Doe Run Peru and Empresa Minera del Centro del Peru S.A. (Centromin) pursuant to Peruvian law. Centromin is the Peruvian government entity whose subsidiary held the assets and liabilities of La Oroya, which was purchased on October 23, 1997 by Doe Run Peru. The Company's business in the United States includes an integrated primary lead operation, a secondary lead operation and lead fabrication operations. In Peru, the Company produces various base metals and precious metals and has a copper mining and milling operation. These operations will be discussed in greater detail in the "Overview" sections below. Reference with respect to operating segment information is hereby made to "Item 8. Financial Statements and Supplementary Data", Note 13 to the Company's Consolidated Financial Statements. The Company's business does not involve: 1) seasonal fluctuations, 2) unusual working capital requirements, 3) significant order backlog or 4) federal contracting.
OVERVIEW -- U.S. OPERATIONS
The Company's U.S. primary lead operation consists of two primary smelters, which obtain concentrates from the Company's four operating mills, supplemented from time to time with concentrates purchased in the open market. The mills are supplied with ore mined from six production shafts along approximately 40 miles of the Viburnum Trend in southeastern Missouri, one of the world's most productive lead deposits. As of October 31, 2001, the Company's U.S. ore reserves consisted of approximately 50 million proven and probable tons, containing grades of 5.85% lead, 1.34% zinc and .25% copper. The Company also operates a secondary smelter in southeastern Missouri where it produces lead metal from recycled lead-acid batteries and other lead bearing materials. Through its subsidiary, Fabricated Products, Inc. (FPI), the Company produces value-added lead products such as lead oxide, lead sheet and lead bricks at facilities in Arizona, Washington and Texas. These operations permit the Company to participate in and manage the entire lead life cycle from mining lead ore, to producing refined lead metal, to fabricating value-added lead products, to recycling batteries and other materials containing lead.
In fiscal 2001, the Company's U.S. operations shipped approximately 490,000 tons of refined lead metal and lead alloy products, including recycled lead, representing approximately 23% of North American consumption and 8% of western world consumption and generating net sales of $303.1 million and a net loss of $48.4 million.
Approximately 67% of the U.S. operation's lead metal sales, in 2001, were to battery manufacturers or their suppliers. Historically the lead-acid battery has been the dominant technology for automotive and other starting, lighting and ignition (SLI) batteries. Management believes this will continue to be the case for the foreseeable future because of its cost competitiveness, recycleability and existing infrastructure. Refined lead is also used in products such as computer and television screens, ammunition, stationary batteries used as backup power sources and rolled and extruded lead products used in radiation shielding and roofing materials.
Fluctuations in lead and other base metal prices could have a material adverse effect on the results of operations, financial condition and liquidity of the Company. These prices are affected by numerous factors beyond the Company's control, including expectations for inflation, speculative activities, global and regional demand and production, political and economic conditions and production costs in major producing regions. The aggregate effect of these factors is impossible for the Company to predict. The Company, by taking advantage of its extensive polymetallic ore resources, is somewhat able to reduce its exposure to metal price volatility through adjustments to its mining and milling plans to take advantage of prevailing market conditions for lead and zinc. In addition, sales from tolling services, by-products and fabricated products provide the Company with sources of revenue largely independent of lead prices
The average market price for refined lead, determined on the London Metal Exchange (LME), was $428.80 per short ton in fiscal 2001. This represents a 4% increase compared to the average for fiscal 2000. From 1998 through 2000 the LME lead price declined as new mines were developed in Australia and Ireland, and as China increased its lead metal production and exports. During the second and third quarters of fiscal 2000 lead prices declined to near historic lows. Despite the modest improvement in fiscal 2001, lead prices remain substantially below the average for the ten years 1992 through 2001.
In the U.S. market, premiums over the LME were adversely impacted by the recessionary conditions in the U.S. economy during 2001. Slower automotive replacement battery shipments have weakened overall demand, compared to the prior year. Also, a significant drop in demand for batteries for the telecommunications industry occurred as a result of lower capital expenditures for the industry's infrastructure. In fiscal 2001, western world consumption of lead declined by 5% and U.S. consumption declined by 10%, reflecting weakened economic conditions. Management believes that demand is near its lowest point and is likely to increase as a result of economic recovery and worldwide economic growth.
Management believes that lead prices will recover from the current low level, as several large lead-producing mines will be depleted beginning in 2001 through 2006. In 2001, mine closures and cutbacks occurred in Spain, Sweden, Canada and the U.S., reducing supply by approximately 200,000 tons, or approximately 3% of western world consumption. These closures should significantly reduce western world production and bring about a deficit in supply versus demand. In recent months, the industry has seen evidence of this deficit as some primary smelters have cut back due to limited concentrate availability. In publications issued in December of 2001, international commodity consultants forecasted annual average lead prices for the years 2002 through 2007, which are higher than those experienced in 2001.
Zinc prices dropped precipitously in 2001 as a result of weak demand and excess production. The last several years have seen large zinc mines open in Australia, Ireland and Peru and a major expansion of a zinc mine in Alaska. In fiscal 2001, world zinc mine production increased 5% and zinc metal production increased 4%. Demand was weak during 2001 because of general economic conditions, and in particular because of weakness in the auto and construction industries. Western world zinc demand dropped 3% and U.S. zinc demand dropped 13% in 2001, compared to 2000. As a result, the average LME price for refined zinc declined more than 19% to $846.40 per ton in fiscal 2001. Industry analysts project this zinc surplus will continue to grow, making the prospects for a recovery in zinc prices unlikely in 2002. If zinc mine production is reduced, in order to balance supply and demand, lead concentrate supplies are likely to tighten even further as lead is a by product of many zinc mines.
OVERVIEW-- PERUVIAN OPERATIONS
The Company's Peruvian operations consist of the La Oroya smelting complex, acquired in October 1997, and the Cobriza mine and mill, acquired in August 1998. La Oroya's unique combination of base metal smelters, refineries and by-product circuits enable it to process complex polymetallic concentrates and to produce high quality finished metals and by-products. For the year ended October 31, 2001, net sales and net income were $434.3 million and $1.6 million, respectively. Refined silver, copper, zinc, lead and gold accounted for 36%, 25%, 17%, 14% and 5%, respectively, of fiscal 2001 net sales. Sales of various by-products accounted for the balance of fiscal 2001 sales. In 2001, La Oroya was one of Peru's largest exporters, exporting approximately 89% of its total shipments to North America, Europe and Asia, as well as other Latin American countries. Its customers include end-users of base metals and metal by-products, as well as international metal trading companies.
La Oroya 's operations consist of the smelting and refining of complex concentrates obtained from Cobriza and from unaffiliated mining operations. La Oroya typically purchases concentrate feedstock pursuant to contracts under which the cost of concentrates is based on a percentage of the payable base metal and precious metal content of the concentrates, reduced by processing fees, treatment charges to refine the concentrates and penalties for impurities within the concentrates, such as arsenic, antimony and bismuth, which the smelter can process and sell as by-products. Base metal prices are generally established by reference to international metal markets, primarily the LME. Treatment charges and penalties are negotiated with concentrate sellers. They are affected by numerous factors beyond the Company's control including: expectations for inflation, global and regional demand for smelter capacity, availability and quality of concentrates and production costs in major producing regions. The aggregate effect of these factors is impossible for the Company to predict. Currently, La Oroya has secured approximately 93% of its concentrate requirements for fiscal 2002, through material supplied by Cobriza and contracts with suppliers. For the year ended October 31, 2001, approximately 25% of the La Oroya smelter's copper concentrate requirements were met by Cobriza, representing 100% of Cobriza's output.
Because La Oroya pays for the majority of the metal content of the concentrates purchased, it derives its operating profit primarily from treatment charges and penalties. Additional operating profit is generated from the sale of by-products, as well as from premiums over market prices received on its refined metal sales. Because La Oroya's metallurgical recoveries are typically greater than the percentage of metal content paid for, it is able to sell the excess recoveries and increase its operating profit.
The markets for La Oroya's products are global and demand depends upon world wide economic conditions. Given the diversity of its products and by-products, the Company's financial performance is not solely dependent upon any single product or by-product. Also, because the La Oroya smelter is primarily a processor of complex concentrates that are purchased based on market prices, its financial performance is less sensitive to the volatility of metal prices.
THE COMPANY'S U.S. OPERATIONS
PRODUCTS AND SERVICES
The principal products produced by the Company's U.S. operations include refined lead from primary and secondary sources, zinc and copper concentrates, fabricated lead products and other by-products. The Company also generates revenue from tolling fees received for recycling spent lead-acid batteries and other lead-bearing materials for its customers. The following table sets forth net sales for the Company's products and services:
For the year ended October 31, 2001, exports represented approximately 1% of the U.S. operations' net sales. For each of the years ended October 31, 2000, and 1999 exports were approximately 2% of the U.S. operations' net sales
CUSTOMERS
The Company's U.S. operations had approximately 170 lead metal customers including six of the eight largest lead-acid battery manufacturers in the world. These six customers accounted for approximately 43% of U.S. net sales in fiscal 2001. The loss of any of the Company's large customers or curtailment of purchases by these customers could have a material adverse effect on the results of operations, financial condition and liquidity of the Company. For fiscal 2001, Johnson Controls Inc. accounted for approximately 11% of the U.S. operations' net sales. In fiscal 2000 and 1999 no single customer accounted for more than 10% of the U.S. operations' net sales.
COMPETITION
The Company is the largest integrated lead producer in North America and the largest primary producer in the western world. The Company competes primarily in the North American market where its competitors are other major primary and secondary lead producers. Competition within the North American market is based primarily on quality, price, service, timely delivery and reliability. Because lead is generally sold on a delivered basis with freight charges included, the Company's central U.S. location allows it to have transportation costs significantly lower than its major competitors with operations outside of North America. Due to its location, the Company is also
able to provide its customers just-in-time delivery at a lower cost than most of its competitors. In addition, management believes the Company's primary and secondary production capacities and focus on the lead business as its core business provide the Company with additional competitive advantages.
RAW MATERIALS
Lead concentrates are supplied by the Company's mining operations and, from time to time, purchased from third parties. For a discussion of the Company's mineral reserves, see "Item 2.
ITEM 2. PROPERTIES
U.S. OPERATIONS
The Company's Missouri mining operations have eight production shafts that form a north-south line along approximately 40 miles of the Viburnum Trend ore body. Three production shafts, Viburnum-28, Viburnun-29 and Viburnum-35, lie within a five-mile radius east, north and south, respectively, of Viburnum, Missouri. Viburnum is located approximately 125 miles southwest of St. Louis, Missouri. The Buick, Brushy Creek, Fletcher, West Fork and Sweetwater production shafts are within thirty miles of Viburnum. Six of the production shafts are currently operating. The Viburnum-29 and West Fork production shafts are on care and maintenance status.
The Company also has available five grinding/floatation mills located near its production shafts. Four of the mills are currently operating. The West Fork mill is on care and maintenance status. All of the mining and milling facilities are accessible by state or county roads or Company-owned haul roads. Products are shipped by truck over public roads or by rail. The Viburnum and Buick mills have rail access.
The production capacities of the Company's mills are as follows:
The Herculaneum primary lead smelter, with a capacity of 250,000 tons per year, is located approximately 35 miles south of St. Louis on the Mississippi River in Herculaneum, Missouri. The Herculaneum smelter is the largest primary lead smelter in North America and the second largest in the world.
Located in Glover, Missouri, approximately 20 miles southeast of the Sweetwater production shaft, the Glover primary smelter has a capacity of approximately 136,000 tons per year.
The secondary lead recycling smelter is located in Boss, Missouri approximately ten miles south of Viburnum. The annual capacity of the facility is approximately 165,000 tons. The facility operates under a Resource Conservation and Recovery Act (RCRA) permit allowing it to handle waste, primarily lead-bearing material.
The Company owns its two primary smelters and its secondary smelter.
The secondary facility submitted a PSD (Prevention of Significant Deterioration) air permit application to Missouri Department of Natural Resources, in October 2001, which would allow the facility to expand its production limit to nearly 200,000 tons annually. The permit review for this application should be completed by mid to late 2002.
The Company's fabricated products operations are leased facilities, located in Casa Grande, Arizona, Vancouver, Washington, and Houston, Texas.
The Company owns the property where the necessary surface structures for mining and milling are located. The mineral rights are held either by fee title or mineral leases with either private landowners or the federal government. There are also numerous prospecting permits, most of which are for exploration of new mineral ore deposits. Five of the production leases are private leases and 11 are government leases. The mineral leases with private landowners have no expiration periods. The government leases are for a period of either 10 or 20 years and are renewable. Although no assurance can be given, management anticipates that these leases will be renewed at similar royalty rates. The Company makes royalty payments under these leases.
The Company's leases from the federal government consist of the following:
The Company's $50 million Senior Secured Notes are secured by a first priority lien in the Sweetwater and West Fork mine and mill properties and the Glover smelter property. These properties were acquired from Asarco Incorporated's Missouri Lead Division (MLD) in September of 1998 (MLD Acquisition).
ORE RESERVES
The following table sets forth the mineable reserves, estimated by the Company, as of October 31, 2001 for the Viburnum Trend mineral deposits and the Higdon deposit, which is outside the Viburnum Trend.
MINEABLE RESERVES AS OF OCTOBER 31, 2001
+ The estimated average extraction recovery, of metals, after allowing for expected dilution for lead, zinc and copper are approximately 89%. These losses are included in the above reserve table. Estimated average metallurgical recoveries for lead, zinc and copper are 96.5%, 83.0% and 50.0%, respectively. Metallurgical recovery losses have not been included in the above reserve table.
The term "reserve" means that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. The term "proven (measured) reserves" means reserves for which: 1) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and 2) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. The term "probable (indicated) reserves" means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
PERUVIAN OPERATIONS
La Oroya's operations are located in the central Peruvian Andes town of La Oroya, approximately 110 miles from the Peruvian capital of Lima and at an altitude of approximately 12,000 feet above sea level. The complex is linked to port facilities by highway and railroad service. Most supply sources also have rail service. The facilities, which the Company owns, consist of a copper smelter, lead smelter, copper refinery, lead refinery, copper fabricating plant, zinc refinery, precious metals refinery, antimony plant, arsenic plant, coke plant, cadmium plant, maintenance shops and other support facilities. Current production capacities of primary products are as follows:
The Cobriza mine is located approximately 250 miles southeast of Lima in the district of San Pedro de Coris, Churcampa Province. Access to the site is by improved dirt road through rugged terrain. Concentrates produced at the mine are trucked 130 miles over dirt road to Huancayo and then an additional 70 miles over paved road to the La Oroya smelter. Cobriza's mill has a capacity of 10,000 short tons per day and its current throughput is approximately 5,000 short tons per day.
Landholdings at Cobriza include approximately 2,600 acres of surface ownership and approximately 128,000 acres of mining concessions. The current mining operation is located on a portion of the area held. Economic mineralization outside the existing mining area has not been confirmed. The Company's estimates, which have not been audited, indicate mineable proven and probable ore reserves of approximately 6.0 million short tons containing approximately 1.25% copper
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Doe Run is a defendant in twelve lawsuits alleging certain damages from lead emissions stemming from the operations at the Herculaneum smelter. The cases brought in the Circuit Court 23rd Judicial Circuit at Hillsboro, Jefferson County, Missouri are: KARLA RICHARDSON ET AL. V. THE DOE RUN RESOURCES CORP., ET AL, filed September 12, 1995; RONALD HEATH, ET AL. V. THE DOE RUN RESOURCES CORP. ET AL., filed November 20, 1995; ANDREA MASSA, ET AL. V. THE DOE RUN RESOURCES CORP., ET AL., filed December 8, 1995; GOVREAU, ET AL. V. THE DOE RUN RESOURCES CORP., ET AL, filed February 1, 1999, CASEY II, ET AL. V. THE DOE RUN RESOURCES CORP., ET AL., filed March 23, 2000, SWARTS, ET AL. VS. LEADCO INVESTMENTS, INC. ET AL., FILED JUNE 14, 1996, WARDEN, ET AL. VS. THE DOE RUN RESOURCES CORP. ET AL. filed September 21, 2001, and ENOS GREEN V. THE DOE RUN RESOURCES CORP. ET AL., filed November 30, 1999. The cases brought in the Circuit Court of the City of St. Louis are: MITCHELL, ET. AL. V. FLUOR CORPORATION, ET AL., DOYLE, ET AL. VS. FLUOR CORPORATION, ET AL., FIGGE, ET AL. VS. FLUOR CORPORATION ET AL., all filed July 9, 2001. The Company has been named as a defendant in JARROD GROSS VS. THE DOE RUN RESOURCES CORPORATION ET AL., but has not yet been served.
The HEATH, SWARTS, DOYLE AND MITCHELL cases are class action lawsuits. In the HEATH AND DOYLE cases, the plaintiffs seek to have certified a class of property owners in a certain section of Herculaneum, alleging that property values have been damaged due to the operations of the smelter. In the MITCHELL case, plaintiffs seek to have certified a class of children who lived in Herculaneum during a period of time when they were nine months to six years old and children born to mothers who lived in Herculaneum during their pregnancies. The remedy sought is medical monitoring for the class. In the SWARTS case, plaintiffs seek to have certified a class of employees of a certain contractor who worked at the Herculaneum smelter.
The RICHARDSON, MASSA, GOVREAU, CASEY, FIGGE, AND WARDEN cases are personal injury actions by thirty four individuals who allege damages from the effects of lead poisoning they attribute to operations at the smelter and seek punitive damages. The Company is vigorously defending all of these claims.
In the ENOS GREEN case, the plaintiff is seeking damages for the alleged disposal of lead contaminated fill material on plaintiff"s property.
The Company signed a voluntary Administrative Order of Consent (AOC) in September 2000 to study and address issues related to the operation of the primary smelter in Herculaneum. In December 2000 the Company entered into a consent judgment with the Missouri Department of Natural Resources and the Missouri Air Conservation Commission. The U.S. EPA and the Missouri DNR signed the AOC with an effective date of May 29, 2001. The Company signed a new AOC, with the U.S. EPA on December 21, 2001, which accelerates certain requirements of the May 29 AOC and requires certain additional cleanup activities. On April 26, 2002, the Company signed a Settlement Agreement with the State of Missouri whereby it agreed to offer buyouts to approximately 160 homeowners in an area close to the smelter. See "Item 8. Financial Statements and Supplementary Data", Note 16 to the Company's Consolidated Financial Statements. On April 11, 2002, a report in the media contained allegations by former employees of improper disposal of hazardous materials on the Herculaneum smelter site. The
Company does not believe that there has been any violation of law and is cooperating with State and federal agencies in their investigations into the allegations.
Doe Run is a defendant in five lawsuits alleging certain damages from past mining operations in St. Francois County. On July 9, 2001 DOWD, ET AL. V. FLUOR CORPORATION, ET AL. was filed in the Circuit Court of the City of St. Louis, Missouri. The case alleges injury to two children living in St. Francois County as a result of emissions from tailings, chat piles and other wastes from past mining operations. On December 13, 2001 Doe Run was served regarding LEE ANN STOTLER AND KEELY STOTLER V. FLUOR CORPORATION, ET AL. This case, which was filed in the Circuit Court of the City of St. Louis, Missouri, seeks a class action for property damages caused by tailings and related operations. On December 14, 2001 Doe Run was served regarding LAYNE STOTLER V. FLUOR CORPORATION, ET AL. This case, which was filed in the Circuit Court of the City of St. Louis, Missouri, seeks a class action for medical monitoring for minors who lived, went to school, or went to day care in Bonne Terre, St. Francois County, Missouri or whose mothers lived in Bonne Terre when they were pregnant. The action alleges damages caused by tailings and related operations. On April 29, 2002, Doe Run was served regarding CHARLES MULLINS V. THE DOE RUN RESOURCES CORPORATION and CHARLES MULLINS II V. THE DOE RUN RESOURCES CORPORATION, filed in the Circuit Court of the City of St. Louis, Missouri, class actions for property damage and medical monitoring, respectively, concerning alleged damages caused by chat, tailings, and related operations in six areas in St. Francois County, Missouri.
The Company, with several other defendants, was named in several lawsuits alleging personal injuries as a result of lead poisoning from exposure to lead paint and tetraethyl lead dust. These suits which have not yet been served on the Company include: HALL V. LEAD INDUSTRIES ASSOCIATION, INC. ET AL., HART V. LEAD INDUSTRIES ASSOCIATION, INC. ET AL., WILLIAMS V. LEAD INDUSTRIES ASSOCIATION, INC. ET AL. AND RANDLE V. LEAD INDUSTRIES ASSOCIATION, INC. ET AL. The suits were all filed in the Circuit Court for Baltimore City, Maryland and seek damages, including punitive damages.
On January 26, 2000, CITY OF ST. LOUIS V. LEAD INDUSTRIES ASSOCIATION, INC. ET AL was filed in the Circuit Court of the City of St. Louis, Missouri. The Company and several other parties were named defendants in the suit for costs allegedly incurred and to be incurred by the plaintiff for the care of lead-poisoned persons, education programs for children injured by exposure to lead and the abatement of lead hazards purportedly created by the defendants in the City of St. Louis. The complaint alleges that the defendants made material misrepresentations and intentional omissions of material facts to the City and/or its residents regarding the nature of lead and lead products, such as paint. The suit also seeks punitive damages. Discovery has yet to be initiated.
On November 1, 2000 one hundred and seven individual cases were filed in the Circuit Court of the City of St. Louis, Missouri, that list the Company among the defendants, alleging that the employees or ex-employees of Burlington Northern and Santa Fe Railway Co. who filed the cases were exposed to lead from the hauling of lead concentrates by the railroad. On April 8, 2002, the Company was served with an additional suit bringing this total to 108 cases. The Company was served with nine additional cases on May 14, 2002 for a total of one hundred and seventeen cases.
HARRIS V. TERMINAL RAIL ROAD ASSN., ET AL. was filed in the Circuit Court of the City of St. Louis, Missouri and the Company was served on November 9, 2001. This is an individual action for damages by an ex-employee of Terminal Rail Road alleging exposure to lead from hauling concentrates, similar to the one hundred and seventeen cases discussed above.
HERD V. ASARCO, INC. ET AL., REEVES V. ASARCO, INC., ET AL., and CARR V. ASARCO, INC., ET AL., each alleging injury to a child living in Picher, Oklahoma as a result of lead contamination from chat piles and/or tailings, were filed in the District Court of Ottawa County, Oklahoma on November 5, 2001, January 10, 2002, and February 5, 2002, respectively. HERD V. ASARCO, INC. ET AL. after originally being filed in state court, has been moved to the U.S. District Court for the Northern District of Oklahoma and the U.S. Department of Interior has been joined as a third party defendant.
CRAWFORD V. FABRICATED PRODUCTS, INC. ET AL, filed on February 28, 2002, is a wrongful death action regarding a former employee who died in an accident at the Company's FPI facility in Vancouver, Washington. The suit was filed in the Superior Court of Washington for Clark County.
On January 15, 2002, arbitration proceedings were also initiated against the Company's Fabricated Products subsidiary by the ITHACA CORPORATION, the former owners of the Seafab Metals Corporation. The former owners are claiming additional monies are owed to them under the Asset Purchase Agreement. The Company disputes this claim and has filed a counterclaim claiming overpayment.
TARACORP INDUSTRIES, INC. V. FABRICATED PRODUCTS, INC., filed on March 21, 2000, alleges the Company's Fabricated Products subsidiary sold impure lead to the plaintiff, who used the lead to manufacture a product commercially used in radiation shielding aprons. This is a suit for breech of contract and implied warranty.
The Company is unable at this time to estimate the expected outcome and the final costs of any of these cases. Therefore, there can be no assurance that these cases would not have a material adverse effect on the results of operations, financial condition and liquidity of Doe Run.
SARA DIXON, ET AL. V. THE DOE RUN RESOURCES CORP, filed August 25, 1995, was withdrawn without prejudice by the plaintiffs on July 9, 2001. COPPEDGE V. EAGLE-PICHER INDUSTRIES, INC., ET AL., filed January 23, 2001, was withdrawn without prejudice by plaintiffs on November 14, 2001. CHARLES MULLINS II, ET AL. V. THE DOE RUN RESOURCES CORP, filed May 21,1999, was withdrawn without prejudice by the plaintiffs on February 8, 2002. YOUNG, ET AL. V. THE LEAD INDUSTRIES ASSOCIATION, INC. and SMITH, ET AL. V. THE LEAD INDUSTRIES ASSOCIATION, INC., both filed September 21, 1999, were dismissed with prejudice on December 7, 2001 and February 21, 2002, respectively.
All existing litigation involving La Oroya at the time of the acquisition was retained by Centromin. In Peru, the Company is involved in various claims and lawsuits incidental to the ordinary course of its business that are not expected to have a material adverse effect on the business, financial condition and results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the year ended October 31, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's issued and outstanding common equity, 1000 shares of common stock, $.10 par value, are owned by a single stockholder, DR Acquisition Corp., a wholly-owned subsidiary of Renco, which Mr. Rennert controls. There is no established public trading market for these shares.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth historical consolidated financial data of The Doe Run Resources Corporation and subsidiaries for the five fiscal years ended October 31, 2001, which have been derived from the Company's audited consolidated financial statements. It is important that the selected historical consolidated financial data presented below be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's audited financial statements and the accompanying notes included elsewhere in this document.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis includes both the U.S. operations and the Peruvian operations of the Company and should be read in conjunction with the consolidated financial statements of the Company and the notes thereto, and other financial information included herein.
LIQUIDITY
The Company's primary available sources of liquidity are cash provided by operating activities and two revolving credit facilities. In the U.S., the Company has available a revolving credit facility (the Doe Run Revolving Credit Facility) that provides for advances by the lender to a maximum of $75.0 million less outstanding letters of credit, based on specific percentages of eligible receivables and inventories. In Peru, the Company has available a revolving credit facility (the Doe Run Peru Revolving Credit Facility) that provides for advances by the lender to a maximum of $40.0 million, less outstanding letters of credit, guarantee letters and customs bonds based upon specific percentages of eligible receivables and inventories. These credit facilities are discussed in more detail in the "Liquidity and Capital Resources" section below.
On January 4, 2002, the Company entered into an amendment to the Loan and Security Agreement governing the Doe Run Revolving Credit Facility, under which the lender agreed to make supplemental loans, in addition to those originally provided for under the facility, of up to $5.0 million. Renco provided the lender with $5.0 million of cash collateral and a limited guarantee of $2.0 million. The amendment also waived, through February 27, 2002, existing defaults resulting from the Company's failure to maintain consolidated net worth and EBITDA for U.S. operations, as required by the agreements governing the Doe Run Revolving Credit Facility. On February 28, 2002, the Company's lender issued a letter that extended the waiver of these existing defaults through March 14, 2002.
Net unused availability at October 31, 2001 was $1.8 million under the Doe Run Revolving Credit Facility and $9.7 million under the Doe Run Peru Revolving Credit Facility. In addition to availability under the credit facilities, the Company had $6.3 million of cash at October 31, 2001. At April 30, 2002 availability was $7.4 million under the Doe Run Revolving Credit Facility and $0.1 million under the Doe Run Peru Revolving Credit Facility, and the Company's cash balance was $2.3 million.
Low metal prices over the past four years, coupled with the Company's substantial debt service requirements, have severely reduced the Company's liquidity. In fiscal 2001, cash from operating activities was sufficient to meet the Company's capital and debt service requirements only because of a significant reduction in working capital. In addition to a $23.7 million reduction of taxes receivable in Peru, the Company reduced trade receivables by $4.0 million and reduced inventories by $11.3 during 2001. The reductions in receivables and inventory coupled with increases in borrowings on revolving credit lines have reduced availability under revolving credit facilities to the minimal levels discussed above. Further reductions of working capital of this magnitude are very unlikely.
Due to the non-payment of interest due March 15, 2002 on the 11 1/4% Senior Notes due 2005, Floating Interest Rate Senior Notes due 2003 and 11 1/4% Senior Secured Notes due 2005 (collectively, the Notes), and the expiration of the grace period during which the Company could cure the non-payment, and the violation of other financial covenants, the Company is in default of its covenants under the Notes indentures and its revolving credit facilities. In an event of default, the lenders have the right to accelerate the payment of any unpaid principal and interest balances. No actions have been taken by the lenders to accelerate the payment of outstanding debt balances. The Company is in restructuring negotiations as described below and in negotiations with the lenders of its revolving credit facilities to execute amended revolving credit facilities.
On April 15, 2002, the Company announced that it had reached an agreement in principle with Renco and Regiment Capital Advisors, LLC (Regiment) for Renco and Regiment to provide the Company with significant capital for the purpose of restructuring its existing debt. Pursuant to the agreement in principle, Renco will purchase $20 million of the Company's preferred stock and Regiment, a significant holder of the Notes, will commit to lend the Company $35 million and will offer other holders of Notes the opportunity to participate in making such loan.
Under the proposed restructuring transaction, the Company would make a cash tender offer for a portion of the Notes and an exchange offer for the balance of the Notes. The $55 million in proceeds of the Renco investment and the loan, together with borrowings under its revolving credit facility would be used to finance the cash tender offer, to pay the accrued interest as of March 15, 2002 on the Notes exchanged in the exchange offer and to pay certain costs of the transactions. If successful, the cash tender offer and the exchange offer would significantly reduce the Company's future debt service and provide sufficient liquidity to continue to operate all its facilities at present levels and will not adversely affect the Company's trade creditors.
The non-binding agreement in principle is subject to agreement on the terms of definitive documentation and the successful completion of the transactions is subject to several conditions, including, among others, the participation by holders of at least 90% of the aggregate principal amount of each class of Notes in the cash tender offer and/or the exchange offer and the satisfactory modification of Doe Run's United States and Peruvian revolving credit facilities.
CONSOLIDATED FINANCIAL POSITION
During the fiscal year ended October 31, 2001 (2001), net cash provided by operating activities was $37.3 million, proceeds from asset sales were $5.0 million and capital expenditures were $24.5 million. As a result, total debt, mainly revolving loans and short-term borrowings, was reduced by $17.5 million. The Company's working capital declined $94.8 million in 2001 due primarily to the reclassification of revolving loan balances of $58.4 million to current maturities of long-term debt, the reduction of Peruvian prepaid income tax and value added tax balances due to the Company of approximately $25.4 million and a $11.3 million reduction in inventories.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
The Company reported a net loss of $46.8 million for 2001 compared to a net loss of $23.1 million for the twelve months ended October 31, 2000 (2000). The Company's U.S. operations reported a net loss of $48.4 million (excluding intercompany fees and eliminations of $9.3 million) for 2001 compared to a net loss of $36.2 million (excluding intercompany fee revenue of $18.9 million) for 2000, reflecting the effects of lower realized prices for zinc concentrates, lower premiums for lead metal, severance costs and increased energy costs, partially offset by improved LME lead prices and lower production costs.
Peruvian operations generated net income of $1.6 million for 2001 (excluding intercompany fees of $9.3 million) compared to net income of $13.1 million (excluding intercompany fees and eliminations of $18.9 million) for 2000. This decrease in net income is primarily due to the effects of lower realized prices for copper, zinc and silver and lower treatment charges, partially offset by lower production costs and lower selling and administrative, interest and other expenses. An income tax benefit in 2001 also helped to mitigate the lower realized prices and treatment charges.
The Company's results for the year ended October 31, 2001 reflect declines in the market prices of copper, zinc and silver and an increase in the price of lead compared to 2000. The following table sets forth average London Metal Exchange (LME) prices for lead, copper and zinc and the average London Bullion Market Association (LBMA) price for silver for the periods indicated:
Low metal prices, primarily lead and zinc, contributed to the operating loss generated by the Company's U.S. operations in 2001. The Company has implemented changes to its operations in an effort to mitigate the impact of low metal prices. These actions, which are described below, are expected to reduce certain costs, and achieve certain operating efficiencies resulting in lower production cost and improved margins. However, prices sustained at these levels, or decreasing further, are likely to result in the continuation of operating losses for the Company's U.S. operations.
The following table sets forth the Company's production statistics for the periods indicated:
In March 2001, in response to continued poor lead metal market conditions, the Company announced production changes at its U.S. primary lead operations (the Revised Operating Plan). The key elements of this plan are that the Company's Herculaneum primary smelter reduced its annual refined metal production rate by 80,000 tons from 250,000 to 170,000 tons by reducing blast furnace and sinter plant operating time. The Company eliminated purchases of lead concentrates and reduced production of concentrates at its southeast Missouri mining operations. In May, the Company placed its No. 29 mine on care and maintenance and plans to mine out its No. 28 mine during the second half of fiscal 2002. The Company also reduced total concentrate production at its other five mines. These production changes resulted in a workforce reduction of approximately 200 employees, which was completed in early May. The changes were made in an effort to allow the Company to compete more effectively in the global market and improve overall financial performance. The change in operating plan was made to reduce production costs and enhance product mix as the smelters focus on producing specialty and alloy products. In an additional step, the Company announced a management restructuring of its domestic operations in September 2001, which resulted in an additional production decrease at Herculaneum, to 155,000 tons annually, and another workforce reduction, of approximately 80 employees, involving both terminations and an early retirement program. This reduction was implemented in the first quarter of 2002.
The cost of severance benefits and outplacement services provided to certain employees of approximately $1.1 million was recorded during fiscal 2001 of which approximately $0.5 million was paid in 2001 and $0.6 million will be paid in 2002. In addition, the Company recorded a charge of $2.6 million to adjust its pension and other post retirement benefit liabilities. The cost of these benefits will be paid as part of the ongoing funding of these programs. The estimated cost of closing the No. 28 mine, the Viburnum mill and related surface structures and tailings areas of approximately $0.6 million was previously accrued during the operating life of the mine. These closure activities will be performed as personnel and funds are available.
Primarily due to changes associated with the Revised Operating Plan, the Company's U.S. mining operations reduced ore production during 2001 in an effort to increase grade and decrease unit production costs. Compared to 2000, ore production was scaled back approximately 309,000 tons or 7% while lead ore grade improved by 7%. The improvement in grade offset almost all of the impact of the reduction in ore tonnage, as production of lead metal contained in concentrates was approximately the same in fiscal years 2001 and 2000.
Primary lead metal production decreased 14% in 2001 period, compared to the prior year, due to partial implementation of the lower production rate at the Company's Herculaneum smelter and to production problems at both primary smelters during the year.
At Herculaneum, during 2001 production was reduced as a result of the partial implementation of the Revised Operating Plan. In addition, poor performance of the backup furnace during scheduled maintenance, multiple cooling system failures due to poor water quality, and poor coke quality caused outages and caused the furnaces to run poorly for much of the first nine months of the year. As a result, production was approximately 47,500 tons, or 19% lower in 2001, compared to 2000. The scheduled maintenance was completed during the second quarter and the water quality and coke problems have been resolved. Herculaneum's furnaces are currently operating at the planned 155,000 ton annual production rate.
The Company's Glover primary smelter was forced to shut down several times during the year due to mechanical failures of cooling system components, the failure of a blast furnace baghouse fan motor and bearing problems with a process baghouse fan. In addition, Glover was faced with the same coke quality problem as Herculaneum. As a result, production at Glover was down about 4% or 5,400 tons for 2001, compared to the prior year. Repairs to the cooling system and the blast furnace baghouse fan are complete and coke problems have been resolved. Installation of redesigned bearings for the process baghouse was completed during November 2001. The smelter is currently operating at its planned production rate.
The Company's Buick secondary smelter installed a larger burner on the reverberatory furnace and modifications were made to the feed delivery system during the first quarter of 2001 in order to increase capacity. In addition, operating procedures were changed in the plant's battery breaker, which eliminated bottlenecks and improved throughput by 15%, making more feed available to the furnaces. During the second quarter of 2001 Buick replaced its blast furnace. The material feed and air control systems on the new blast furnace were redesigned, improving output by approximately 25%. The results of all of these improvements are reflected in Buick's production volume, which improved approximately 9% for 2001, compared to 2000, in spite of downtime associated with the blast furnace replacement during the second quarter.
In Peru, at the La Oroya metallurgical complex, production of refined lead and zinc increased 2% and 1%, respectively, in 2001, compared to the prior year. Refined copper production was down 2% for 2001 primarily due to a ductwork failure in the copper circuit during the third quarter. Repairs were completed in October and the copper circuit is currently producing at planned levels. Refined silver and gold production were both lower in 2001 primarily due to lower metal content in the concentrate feed used.
In May 2000, the Company implemented changes in operations at its Cobriza copper mining operation intended to improve ore grade and reduce unit production cost. The changes involved a reduction in annualized ore production of approximately 31%. During the second quarter of 2001, a new ore zone was identified near the existing workings in the Cobriza mine. The Company is currently developing this area and drilling to determine whether measurable ore reserves can be identified. During 2001 approximately 3% of Cobriza's ore production, or 54,900 tons with a grade of approximately 1.6% were extracted from the new ore zone. At this time it is not known whether, or for how long, the area can continue to yield ore of similar tonnages and grades. The combination of the operational changes and production from the new ore zone resulted in an increase in ore grade of 18% in 2001 compared to 2000. Production of metal contained in concentrates was 9% lower due to the reduction in annualized ore production, partially offset by the improvement in grade. Efficiency improved significantly, as cost per ton of ore was lower by 6% and cost per ton of metal in concentrates was down 20% in 2001, compared to 2000.
The following tables set forth the separate operating results, sales volumes and realized prices for the Company's U. S. and Peruvian operations (excluding intercompany transactions) for the periods indicated:
RESULTS OF U.S. OPERATIONS
b) Net realized prices for metals, concentrates, and by-products include the effects of changes in: 1) premiums received, including charges for special alloys and shapes, 2) adjustments to provisionally priced sales, 3) treatment and refining charges and 4) net hedging activity.
RESULTS OF PERUVIAN OPERATIONS
b) Net realized prices for metals, concentrates, and by-products include the effects of changes in: 1) premiums received, including charges for special alloys and shapes, 2) adjustments to provisionally priced sales, 3) treatment and refining charges and 4) net hedging activity.
Results of operations for the years ended October 31, 2001, 2000, and 1999 include the results of the Company's U.S. and Peruvian operations. In order to provide a more meaningful analysis, the results of operations attributable to Peruvian operations will be noted and discussed separately under "Results of Peruvian Operations."
NET SALES for 2001 were $737.4 million compared to $815.0 million for 2000. A decrease of $51.7 million is attributable to Peruvian operations. U.S. net sales decreased $25.8 million in 2001, compared to 2000, primarily due to lower volume of lead metal, and lower realized prices for zinc concentrates, partially offset by an increase in purchased zinc sales and increased toll volume. Due primarily to partial implementation of the Revised Operating Plan, discussed previously, lead metal sales volume was off 27,100 tons or 6% in 2001, compared to the prior year, accounting for a $14.2 million reduction in net sales. As discussed in "Overview -- U.S. Operations" the LME average lead price improved approximately 4% during 2001, but premiums were lower. The net impact is that realized prices for lead metal were marginally higher in 2001, compared to 2000. Zinc concentrate net sales were $11.8 million lower in 2001, compared to 2000, primarily due to a 19% decline in the LME average zinc price and lower sales volume associated with the production changes discussed previously. By-product sales were $3.0 million lower in 2001 primarily due to a reduction of silver by-product produced by Herculanuem. Copper concentrate net sales decreased $2.5 million in 2001 due to lower realized prices and lower volume. These changes were partially offset by increases in purchased zinc metal sales and toll lead volumes, which added $6.2 million to net sales.
COST OF SALES in 2001 was $665.3 million compared to $723.2 million in 2000. Of this decrease, $42.3 million is attributable to Peruvian operations. U.S. cost of sales in 2001 was $15.6 million less than 2000. Volume changes, primarily lower lead metal, zinc concentrate and copper concentrate sales volumes reduced cost of sales by $14.0 million. Production costs for 2001 reflect cost reductions resulting from partial implementation of the Revised Operating Plan, including the impact of improved ore grade. During 2001, the Company recognized an adjustment of property tax expense at the Herculaneum smelter resulting from the settlement of a multi-year property tax dispute, which reduced cost of sales $1.2 million. As a result, lead metal unit production costs for 2001 were down approximately 1%, compared to 2000, which reduced cost of sales $1.3 million. This was accomplished despite the impacts of reduced production volumes associated with the Revised Operating Plan and the primary smelter problems, discussed earlier, and a significant increase in energy costs. Energy costs for 2001 were $2.8 million higher than 2000, due to price increases primarily for natural gas and propane, which increased approximately 66% and 16%, respectively. During the last quarter of 2001, natural gas and propane prices moderated to the point that they were lower than the average prices for 2000.
SELLING, GENERAL AND ADMINISTRATIVE expenses decreased by $2.4 million in 2001, compared to 2000. Of this decrease, $2.9 million is attributable to Peruvian operations. The increase in selling, general and administrative expenses for U.S. operations of $0.5 million for 2001 is primarily due to the $2.6 million charge related to the workforce reductions, discussed previously, partially offset by reductions in several other expense categories, including legal fees, professional fees, association dues, travel costs. Legal fees were down approximately $0.6 million for the 2001 period, compared to the prior year, primarily due to reduced activity on a case that was being prepared for trial in 2000. The other expense reductions are primarily the result of continuing efforts to reduce expenses in light of current economic conditions.
EXPLORATION expense decreased $2.7 million for 2001, compared to the prior year. A decrease of $1.5 million is attributable to Peruvian operations. The reductions in the U.S. are attributable to the suspension of all drilling and fieldwork on the Company's Missouri and South African exploration properties in an effort to conserve cash.
UNREALIZED GAIN ON DERIVATIVES relates to the change in fair market value of derivative financial instruments pursuant to FAS 133. For 2001 the unrealized gain on derivatives was $1.8 million, of which $1.2 million was attributable to Peruvian operations. Gains of $0.6 million in the U.S. resulted primarily from the factors discussed above, partially offset by the effect of falling zinc prices on purchased futures contracts at October 31, 2001.
INCOME FROM OPERATIONS for 2001 was $12.2 million compared to $24.9 million for 2000. A decrease of $4.3 million is attributable to Peruvian operations. In the U.S., the operating loss increased to $17.3 million in 2001 from $8.9 million in 2000 primarily due to the factors discussed above.
OTHER, net expense was $1.7 million in 2001, compared to other net income of $0.9 million in 2000. Of the $2.6 million difference, $0.6 million is attributable to Peruvian operations. For U.S. operations, other net expense was $0.4 million in 2001 compared to other net income of $1.5 million in 2000. The change is primarily due to a
$0.7 million reduction of rental income on the helicopter used for Peruvian operations, which was sold in the third quarter of 2001, and to a $1.1 million write-off, during the fourth quarter, of two dross furnaces at the Herculanuem smelter, which will no longer be used for production.
INCOME TAX EXPENSE for 2001 reflects the provision for the Company's Peruvian subsidiaries. As a result of the Company's tax status in the U.S., the Company is not subject to federal and most state income taxes.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE relates to the adoption of FAS 133. See "Item 8. Financial Statements and Supplementary Data - Note 1 to the Company's Consolidated Financial Statements" for a discussion of FAS 133.
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES for 2000 were $815.0 million compared to $800.3 million for 1999. An increase of $28.6 million is attributable to Peruvian operations. U.S. net sales for 2000 were $13.9 million less than the 1999 period primarily due to lower lead metal prices and volume, partially offset by increased realized prices for zinc concentrates. The average LME price for lead metal declined 10% in 2000, compared to 1999. However, as a result of improved premiums, the Company's net realized price was only 5% lower than the prior year, reducing net sales by $13.2 million. Lead metal sales volume was 2% lower than the prior year, reducing net sales by $4.1 million. Sales volume was adversely affected by reduced automotive battery demand and increased competition from imported lead. For 2000, automotive battery demand in the U.S. was down about 1%, compared to 1999, while imports of lead metal increased by approximately 80,000 tons or 40%. Zinc concentrate sales were $4.1 million higher in 2000 compared to 1999, primarily due to the increase in the LME zinc price.
COST OF SALES for 2000 was $723.2 million compared to $686.0 million for 1999. Of this increase, $35.7 million is attributable to Peruvian operations. U.S. cost of sales for 2000 increased by $1.4 million compared to 1999. The unit production cost of primary lead metal increased by approximately 4%, compared to the prior year, accounting for an increase of $8.4 million in cost of sales. Unit production costs for zinc and copper concentrates also increased compared to the prior year. Primary production costs increased due to: 1) the impact of reduced mine production volume 2) repair costs and reduced production volume associated with the major blast furnace repairs at Herculaneum and repair of a failed and 3) costs related to increased production of lead alloy products. The primary production cost increases were partially offset by lower unit production costs at the Buick smelter, which reduced cost of sales by $5.7 million, and lower lead metal sales volume.
DEPLETION, DEPRECIATION AND AMORTIZATION for 2000 decreased by $0.9 million compared to 1999. An increase of $1.9 million is attributable to Peruvian operations. The decrease in depletion, depreciation, and amortization for U.S. operations of $2.8 million for 2000 was primarily attributable to a significant number of assets with five-year lives that were fully depreciated in March of 2000 and a reduction in depletion expense associated with lower mine production rates and the shifting of production to areas with lower depletion rates.
EXPLORATION expense for 2000 increased $0.4 million compared to the prior year. An increase $1.5 million is attributable to Peruvian operations. In the U.S., exploration expense decreased by $1.1 million due to the completion of underground test work on a Missouri property, which was in process during 1999. This reduction was partially offset by increased costs associated with an ongoing feasibility study on a South African property.
INCOME FROM OPERATIONS for 2000 was $24.9 million compared to $48.1 million for 1999. A decrease of $11.4 million is attributable to Peruvian operations. The remaining fluctuation is primarily due to the factors discussed above.
INTEREST EXPENSE for 2000 increased $2.2 million compared to 1999. An increase of $1.0 million was attributable to Peruvian operations. The remaining fluctuation is the result of higher average borrowings and a higher rate in 2000 on floating rate debt.
OTHER, net income was $0.9 million in 2000, compared to other net expense of $1.3 million in 1999. Of the $2.2 million difference, $0.6 million is attributable to Peruvian operations. For U.S. operations, other net income was $1.5 million in 2000 compared to other net expense of $0.2 million in 1999. The change is primarily due to a full year of rental income on the helicopter provided for Peruvian operations, compared to only four months of income in 1999.
INCOME TAX EXPENSE for 2000 reflects the provision for the Company's Peruvian subsidiaries of $884 and Peruvian taxes on intercompany fees earned by the U.S. operations. See also "Item 1. Financial Statements--Note 2 to the Company's Consolidated Financial Statements." As a result of a change in tax status, the Company is not subject to federal and most state income taxes.
RESULTS OF PERUVIAN OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES for 2001 were $51.7 million less than 2000 due to lower realized prices for copper, silver, zinc, and gold and lower sales volumes for gold bullion and by products, partially offset by increased sales volumes for lead and zinc and higher lead prices. Silver prices declined 12% in 2001, compared to 2000, reducing net sales $20.4 million. The net realized price for zinc was 18% lower in 2001, reducing net sales by $17.0 million. Lower prices for copper, gold and by products decreased net sales $11.5 million. Lower sales volumes of copper, silver, gold and by products reduced net sales another $11.3 million. These reductions were partially offset by higher realized prices for lead metal, which increased net sales by $3.6 million, and increased sales volumes of lead and zinc, which increased net sales $4.8 million.
COST OF SALES for 2001 was $384.5 million, compared to $426.8 million for 2000. Changes in unit production costs, which declined for all metals except lead, accounted for a $39.1 million reduction in cost of sales in the 2001 quarter, compared to the 2000 quarter. Unit costs declined, primarily due to lower feed costs, which reflected the impact of lower metal prices, partially offset by lower treatment charges. In addition, production costs at the Company's Cobriza copper mining operation were 20% lower in 2001, compared to 2000, due to improved grade and reduced operating costs resulting from the operating changes implemented in May of 2000 as well as the new ore zone identified during the second quarter of 2001. Conversion costs at La Oroya were somewhat lower, primarily due to the Company's efforts at cost containment. The volume changes discussed above reduced net sales $6.0 million.
SELLING, GENERAL AND ADMINISTRATIVE expenses decreased by $2.9 million for 2001, compared to the prior year, primarily due to reduced professional fees and expenses associated with the Company's helicopter, which was sold during the third quarter of 2001.
EXPLORATION Expense decreased $1.5 million in 2001, compared to 2000, as the current phase of exploration work done to further delineate reserves at the Company's Cobriza mine was completed during 2000.
UNREALIZED GAIN ON DERIVATIVES relates to the change in fair market value of derivative financial instruments pursuant to FAS 133. Gains for 2001 resulted primarily from the effect of falling copper prices on sold futures contracts.
INCOME FROM OPERATIONS decreased $4.3 million in 2001, compared to 2000, due primarily to the factors discussed above.
INTEREST EXPENSE decreased $1.6 million for 2001, compared to the prior year, primarily due to lower revolver interest resulting from lower interest rates, partially offset by higher average outstanding revolver balances. Increased capitalized interest and lower outstanding balances on capital lease obligations and short-term bank debt also contributed to the reduction in interest expense.
INTEREST INCOME increased $0.3 million in 2001, compared to the prior year, primarily due to interest on income taxes due to the Company, which was received during 2001.
Other, net expense increased $0.6 million the 2001, compared to 2000, primarily due to a reduction of miscellaneous sales from Cobriza and La Oroya, offset by other miscellaneous income and expenses.
INCOME TAXES increased $7.3 million in 2001, compared to 2000, primarily due to a change in the valuation allowance reflecting management's assessment regarding the future realization of deferred tax assets.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE relates to the adoption of FAS 133. See "Item 8. Financial Statements and Supplementary Data - Note 1 to Doe Run Peru's Financial Statements" for a discussion of FAS 133.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for 2000 were $486.1 million compared to $457.4 million in 1999. The increase is primarily the result of higher sales volumes for lead, zinc, silver and gold and improved realized prices for copper, zinc and gold, partially offset by lower realized prices for lead and silver, and reduced by-product sales. Capital investments and other process improvements increased the capacities of the lead and zinc refineries during 2000. These improvements resulted in increased refined silver sales volume of 1.9 million ounces or 6%, increased net sales by $9.6 million and a 10% increase in lead metal sales volume which added $5.7 million to net sales. Gold bullion sales volume was up more than 22 thousand ounces or 32%, compared to the prior year, accounting for $6.2 million of the sales increase and higher zinc volume added another $3.4 million to the net sales improvement. The Company's net realized price for refined copper increased by 19% in 2000, increasing net sales by $18.5 million. Improvements in zinc realized prices added $9.2 million to the net sales increase. These increases were partially offset by lower realized prices for lead metal and bullion lead, which reduced net sales by $8.8 million, and the absence $6.5 million of blister copper sales which were eliminated in 2000 in favor of more profitable refined copper sales.
COST OF SALES for 2000 was $426.8 million, compared to $391.0 million in 1999. A 27% increase in the unit production cost of refined copper increased cost of sales by $25.0 million. This increase was primarily the result of higher feed costs for copper due to a 12% increase in LME copper price, an increase in the cost of concentrates produced by Cobriza and a reduction in copper treatment and refining charges of approximately 11%. Higher sales volumes for refined lead, zinc, silver and gold increased cost of sales by $21.1 million. These increases were partially offset by lower feed cost for lead metal and bullion lead, and reduced by-product sales volume, primarily blister copper.
DEPRECIATION AND AMORTIZATION expense increased by $1.9 million in 2000, compared to 1999 prior year, primarily due to recent capital additions.
EXPLORATION Expense increased due to work done to identify additional reserves within, and in the immediate vicinity of, the Company's Cobriza mine.
INCOME FROM OPERATIONS decreased $11.4 million for 2000, compared to 1999 due primarily to the factors discussed above.
INTEREST EXPENSE increased $0.9 million in 2000 compared to 1999 due primarily to an increase in the average outstanding revolver balance of approximately $13.5 million.
INTEREST INCOME decreased $0.3 million for 2000, compared to 1999, due primarily to interest from a customer on a past due account receivable in 1999, which has been collected.
Other, net expense was $0.6 million in 2000 compared to $1.2 million in 1999. The decrease was primarily due to fluctuations in foreign currency transaction gains and losses and reductions in other miscellaneous expenses, offset by the reduction in the insurance recoveries related to the turbine failures at La Oroya's oxygen plant, which occurred in 1998 and 1999.
INCOME TAXES for 2000 reflect the non-deductibility of certain interest expenses, offset by the recognition of benefits relating to deferred tax assets for which benefit had not previously been recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from its working capital requirements, and capital investment and debt service obligations. The Company's primary available sources of liquidity are cash provided by operating activities and two revolving credit facilities. In the U.S., the Company has available a revolving credit facility (the Doe Run Revolving Credit Facility) that provides for advances by the lender to a maximum of $75.0 million less outstanding letters of credit, based on specific percentages of eligible receivables and inventories. As of October 31, 2001, $37.4 million, exclusive of $8.7 million of letters of credit, was outstanding under the Doe Run Revolving Credit Facility.
On January 4, 2002 the Company entered into an amendment to the Loan and Security Agreement governing the Doe Run Revolving Credit Facility, which increased the interest rate by .25% to prime plus 1%, reduced the maximum credit from $100.0 million to $75.0, reduced the maximum available to borrow based on eligible inventory from $50.0 million to $35.0 million and temporarily eased a reserve against calculated availability which gradually reverted back to a $5.0 million reserve on March 14, 2002. Under this amendment, the lender agreed to make supplemental loans, in addition to those originally provided for under the facility, of up to $5.0 million. Renco provided the lender with $5.0 million of cash collateral and a limited guarantee of $2.0 million. The amendment also waived, through February 27, 2002, existing defaults resulting from the Company's failure to maintain consolidated net worth and EBITDA for U.S. operations, as required by the agreements governing Doe Run Revolving Credit Facility. This waiver was subsequently extended on February 28, 2002 to run through March 14, 2002. No other significant terms of the original agreement were amended by this amendment.
In Peru, the Company has available a revolving credit facility (the Doe Run Peru Revolving Credit Facility) that provides for advances by the lender to a maximum of $40.0 million, less outstanding letters of credit, guarantee letters and customs bonds based upon specific percentages of eligible receivables and inventories. In addition the lender provides a separate line of $12.0 million for the issuance of certain classes of guarantee letters. The sum of the advances on both of these lines is limited to $42.0 million. At October 31, 2001, $21.0 million, exclusive of $2.5 million of guarantee letters, was outstanding under the Doe Run Peru Revolving Credit Facility. The Company also has available, in Peru, unsecured and uncommitted credit arrangements and additional availability related to letters of credit and customs bonds, provided by local financial institutions. At October 31, 2001, $1.9 million in customs bonds was outstanding under these arrangements.
Net unused availability at October 31, 2001 was $1.8 million under the Doe Run Revolving Credit Facility and $9.7 million under the Doe Run Peru Revolving Credit Facility. In addition to availability under the credit facilities, the Company had $6.3 million of cash at October 31, 2001. At April 30, 2002, availability was $7.4 million under the Doe Run Revolving Credit Facility and $0.1 million under the Doe Run Peru Revolving Credit Facility, and the Company's cash balance was $2.3 million.
For 2001, cash provided by operating activities was $37.3 million, cash used in investing activities was $19.5 million and cash used in financing activities was $19.8 million. The cash from operating activities for 2001 includes the refund mentioned above and reductions of other Peruvian prepaid income tax and value added tax balances due to the Company totaling approximately $25.4 million.
The Company had capital expenditures, including equipment financed with capital leases, of $25.2 million in 2001 and has projected total capital expenditures of approximately $29.2 million for fiscal 2002. In the U.S., the Company had capital expenditures of $12.7 million for 2001 and has projected capital expenditures of approximately $12.3 million for fiscal 2002, primarily for environmental and operational improvements and to support ongoing operations. In addition to these capital investments, the Company's U.S. operations expended an average of approximately $68.9 million per year on repairs and maintenance from fiscal 1996 through fiscal 2001. As a result of these expenditures, the Company believes that it operates and will continue to maintain modern and efficient facilities.
As part of the acquisition of its Peruvian operations, the Company has undertaken a capital investment program, in part to satisfy an investment commitment of $120.0 million as set forth in the Subscription Agreement. For expenditures through October 31, 2001 Centromin has approved qualifying expenditures under the investment commitment of approximately $103 million. Peruvian operations had capital expenditures, including equipment financed with capital leases, of $12.5 million in 2001 and have projected total capital expenditures of approximately $16.9 million for fiscal 2002, primarily for environmental improvements and to support ongoing operations.
The Company has substantial indebtedness and debt service requirements. As of October 31, 2001, on a consolidated basis, the Company had $496.0 million of indebtedness outstanding, or $371.0 million net of the Special Term Deposit made in a foreign bank as collateral for a loan made to Doe Run Peru, securing indebtedness of a like amount.
Low metal prices over the past four years, coupled with the Company's substantial debt service requirements, have severely reduced the Company's liquidity. In fiscal 2001, cash from operating activities was sufficient to meet the Company's capital and debt service requirements only because of a significant reduction in working capital. In addition to a $25.4 million reduction of taxes receivable in Peru, the Company reduced trade receivables by $4.0 million and reduced inventories by $11.3 during 2001. The reductions in receivables and inventory coupled with increases in borrowings on revolving credit lines have reduced availability under revolving credit facilities to the minimal levels discussed above. Further reductions of current assets of this magnitude are very unlikely.
At October 31, 2001 the Company failed to maintain consolidated net worth and EBITDA for U.S. operations, as required by the Doe Run Revolving Credit Facility. The amendments discussed above waived these defaults through March 14, 2002.
Management has made significant changes to operations, discussed previously, which it believes will significantly improve profit margins and cash generated from operations. In recent months the Company has also seen some improvement in lead prices, which should improve margins and cash position.
The Doe Run Revolving Credit Facility, the Doe Run Peru Revolving Credit Facility, and the indentures governing the Notes contain numerous covenants and restrictions. The more restrictive covenants included limitations on allowable indebtedness and maintenance of minimum net worth, as defined, a limitation on capital expenditures in the U.S. and EBITDA requirements in the U.S. The indentures covering the Notes limit principal outstanding under various Peruvian working capital facilities to $60 million.
The ability of the Company to meet its debt service requirements and to comply with these covenants is dependent upon future operating performance and financial results, which are subject to financial, economic, political, competitive and other factors affecting the Company, many of which are beyond the Company's control.
Due to the non-payment of interest due March 15, 2002 on the 11 1/4% Senior Notes due 2005, Floating Interest Rate Senior Notes due 2003 and 11 1/4% Senior Secured Notes due 2005 (collectively, the Notes), and the expiration of the grace period during which the Company could cure the non-payment, and the violation of other financial covenants, the Company is in default of its covenants under the Notes indentures and its revolving credit facilities. In an event of default, the lenders have the right to accelerate the payment of any unpaid principal and interest balances. No actions have been taken by the lenders to accelerate the payment of outstanding debt balances. The Company is in restructuring negotiations as described below and in negotiations with the lenders of its revolving credit facilities to execute amended revolving credit facilities.
On April 15, 2002, the Company announced that it had reached an agreement in principle with Renco and Regiment Capital Advisors, LLC (Regiment) for Renco and Regiment to provide the Company with significant capital for the purpose of restructuring its existing debt. Pursuant to the agreement in principle, Renco will purchase $20 million of the Company's preferred stock and Regiment, a significant holder of the Notes, will commit to lend the Company $35 million and will offer other holders of Notes the opportunity to participate in making such loan.
Under the proposed restructuring transaction, the Company would make a cash tender offer for a portion of the Notes and an exchange offer for the balance of the Notes. The $55 million in proceeds of the Renco investment and the loan, together with borrowings under its revolving credit facility would be used to finance the cash tender offer, to pay the accrued interest as of March 15, 2002 on the Notes exchanged in the exchange offer and to pay certain costs of the transactions. If successful, the cash tender offer and the exchange offer would significantly reduce the Company's future debt service and provide sufficient liquidity to continue to operate all its facilities at present levels and will not adversely affect the Company's trade creditors.
The non-binding agreement in principle is subject to agreement on the terms of definitive documentation and the successful completion of the transactions is subject to several conditions, including, among others, the participation by holders of at least 90% of the aggregate principal amount of each class of Notes in the cash tender offer and/or the exchange offer and the satisfactory modification of Doe Run's United States and Peruvian revolving credit facilities.
The following tables summarize Doe Run's contractual obligations and commercial commitments at October 31, 2001. For a discussion of environmental and reclamation obligations, see "Item 8. Financial Statements and Supplementary Data - Note 16 to the Company's Consolidated Financial Statements".
(a) Total long-term debt, net of the $125 special term deposit, is $308.4. Subsequent to October 31, 2001, the Company was in default of the covenants related to long-term debt. See "Item 8. Financial Statements and Supplementary Data - Note 8 to the Company's Consolidated Financial Statements".
(b) The Company has entered into tolling arrangements with major battery manufacturers whereby the manufacturers will deliver spent lead-acid batteries and other lead-bearing material to the Company's recycling facility and, for a processing fee, the Company will return finished lead metal. The largest of these contracts expire in September and December 2003. The agreements cover approximately 10% of the Company's anticipated combined primary and secondary lead metal production for the 2002 fiscal year. (c) The Company has minimum-take purchase agreements for coke and zinc under which it has committed to purchase minimum quantities of these products. For coke, the annual minimum-take quantity is 87,000 tons and the contracts run through December 2003. The coke contracts are fixed priced contracts. For zinc, the monthly minimum-take quantity is 140 tons and the contracts run through February and March 2003, respectively. Pricing for the zinc contracts is the average market price of zinc for the month of delivery plus a premium. (d) The Company has commitments to sell approximately 66%, 74%, 75%, 38% and 100% of its anticipated 2002 lead, copper, zinc, silver and gold metal production, respectively under agreements, with terms of generally less than one year. Sales prices are generally based on the average quoted exchange prices for the month of shipment, plus a premium.
IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.
The Company plans to adopt the provisions of Statement No. 143 as of November 1, 2002. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report. It is currently the Company's practice to accrue for mine and other closure obligations at their estimated, undiscounted cost. See "Item 8. Financial Statements and Supplementary Data", Note 16 to the Company's Consolidated Financial Statements for disclosures related to these obligations.
In August 2001, the Financial Accounting Standards Board issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes both FASB Statements No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business.
The Company plans to adopt the provisions of Statement No. 144 as of November 1, 2001. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements.
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Significant accounting policies and estimates that most impact the consolidated financial statements are those related to revenue recognition, ore reserves, and estimated reserves for environmental and legal claims.
The Company's sales revenues are generally recognized at the time products are shipped to the customer or, in the case of tolling revenues, as the tolling services are performed. Actual selling prices are determined by customer contract. The Company has both fixed price contracts where the unit selling price is fixed at the time the contract is entered into and market price based contracts where the unit selling price is tied to some future market price or average future market price. The Company may also have contracts that are tied to future market prices whereby the actual selling price cannot be determined until after the date of actual shipment. In these cases, the Company will invoice the customer provisionally at the time of shipment and then subsequently true-up the provisional billing with a final invoice once the actual market price is known. Provisional invoices are based on the
then current market price of the product shipped. The final, actual selling price may be more or less than the amount of the provisional invoice and can result in subsequent period revenue adjustments.
The selling prices of certain of the Company's products and by-products may also be dependent on the actual assay or composition of the material shipped. The assaying process involves the exchange and independent testing of product samples with the customer before a final assay can be determined for billing purposes and can take several months or more to complete after the shipment is made. In these cases, the Company will generally invoice the customer provisionally at the time of shipment using a previously agreed upon assay with the customer and subsequently follow this up with a final, settlement invoice once the actual assay is known. This final, settlement invoice can result in either a debit or credit billing to the customer and a subsequent period revenue adjustment to the Company.
The Company's ore reserves are based on geological studies and test hole drillings conducted by the Company's geologists. These estimates are reviewed and certified every two years by an independent mining consultant. The most recent independent report on the Company's ore reserves was issued in January 2001. The ore reserves are adjusted monthly to reflect the current month's mining activity. Ore reserves can and do fluctuate with the underlying market price or prices of the ores to be mined. As such, there can be no assurances that the reserves currently reported will be economic to mine in the future.
Environmental and reclamation reserves are established by the Company for probable and known commitments and where a reasonable estimate of the commitment can be made. In general, these reserves are based on engineering cost studies and estimates as well as the Company's past experiences, if any, in completing work of a similar nature. All reserves are reviewed periodically and adjusted as necessary and when circumstances change. However, there can be no assurance the reserves will be sufficient to cover the costs of the actual commitments or that in the future, new commitments will not arise that could have a material adverse effect on the results of operations, financial condition and liquidity of the Company. See "Item 8. Financial Statements and Supplementary Data", Note 16 to the Company's Consolidated Financial Statements for a more detailed discussion of environmental related matters.
Similar to the environmental and reclamation reserves discussed previously, reserves for legal claims and judgements are established when the expected outcome is either known or reasonably likely and where a reasonable estimate of the claim can be determined. All legal claims and their associated reserves are periodically reviewed with the Company's internal and external attorneys and the reserves adjusted as necessary and when circumstances change. As of the reporting date, no amounts had been accrued for legal claims. See "Item 8. Financial Statements and Supplementary Data", Note 16 to the Company's Consolidated Financial Statements for a more detailed discussion of litigation related matters.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties, and other important factors include, among others: general economic and business conditions; increasing industry capacity and levels of imports of non-ferrous metals or non-ferrous metals products; industry trends, including product pricing; competition; currency fluctuations; the loss of any significant customer; availability of qualified personnel; effects of future collective bargaining agreements; outcome of litigation; changing environmental requirements, political uncertainty and major equipment failures. These forward-looking statements speak only as of the date of this report. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of its business, the Company has used in the past, and may use in the future, forward sales commitments and commodity put and call option contracts to manage its exposure to fluctuations in the prices of lead, copper, zinc, silver, and gold. Contract positions are designed to ensure that the Company will receive a defined minimum price for certain quantities of its production. Gains and losses and the related costs paid or premiums received for option contracts which hedge the sales prices of commodities are recognized in net sales when the related production is sold. None of the aforementioned activities have been entered into for speculative purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data follow immediately and are listed in Item 14 of Part IV of this report.
[KPMG LOGO]
10 South Broadway Suite 900 St. Louis, MO 63102-1761
INDEPENDENT AUDITORS' REPORT
The Board of Directors The Doe Run Resources Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Doe Run Resources Corporation and subsidiaries as of October 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income and shareholder's equity (deficit), and cash flows for each of the years in the three-year period ended October 31, 2001. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Doe Run Resources Corporation and subsidiaries as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has suffered recurring net losses, has a net capital deficiency, and liquidity issues that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2001.
St. Louis, Missouri December 14, 2001, except as to Notes 8 and 17, which are as of April 15, 2002
KPMG LLP
THE DOE RUN RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
THE DOE RUN RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
THE DOE RUN RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND SHAREHOLDER'S EQUITY(DEFLICIT) (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
THE DOE RUN RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of The Doe Run Resources Corporation and its wholly owned subsidiaries (the Company). All material intercompany balances and transactions have been eliminated.
RECLASSIFICATIONS
Certain balances have been reclassified from their previous presentation in order to conform to their current presentation.
NATURE OF BUSINESS
The principal domestic business of the Company is the exploration, development, mining and processing of base metals, primarily lead, and recycling of lead-acid batteries and other lead-bearing materials. The Company's fabrication businesses fabricate lead products used in radiation and X-ray shielding, pollution control devices, and medical equipment; produce lead oxide for use in automotive batteries and fabricate and repair lead-lined process equipment. In Peru, the Company is engaged in the mining, smelting and refining of polymetallic concentrates, mainly copper, lead, zinc and silver which are sold as refined metals primarily to customers located outside of Peru.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the U.S. Dollar. Accordingly, foreign currency transaction gains and losses are included in determining net income.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
INVENTORIES
Finished metals and concentrates, metals and concentrates in process and raw materials are stated at the lower of cost or market. The last-in, first-out (LIFO) method of determining cost is used for the majority of the Company's inventories. Supplies and repair parts are principally stated at average cost, net of reserves for obsolescence.
Inventory costs include labor, material and other production costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at the lower of cost or fair value. Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of the assets may not be recoverable. The impairment loss on such assets, as well as long-lived assets and certain identifiable intangibles to be disposed of, is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Major additions and improvements to property, plant and equipment are capitalized, at cost, when they significantly increase the productive capacity or the life of the asset. Routine or unanticipated repair and maintenance expenditures, which do not extend the useful life or increase the productive capacity of the asset, are charged to operations as incurred. Major expenditures required to maintain the originally anticipated productive capacity and life of the asset (such as furnace rebuilds), for which both the amount and timing can be reasonably estimated, are accrued and charged to operations over the period through the next anticipated maintenance date.
Mineral interests are amortized using the units of production method.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:
Facilities at which operations have temporarily ceased may be placed on a standby care and maintenance basis. The Company continues to depreciate the related assets during the standby period and the expected useful lives are adjusted prospectively to reflect the reduced usage. During the standby period all care and maintenance expenditures incurred are expensed.
DEFERRED FINANCING COSTS
Deferred financing costs represent fees paid in conjunction with the acquisition of long-term debt or amending debt agreements and are amortized using the interest method over the term of the respective debt.
EXPLORATION AND DEVELOPMENT COSTS
Exploration costs are charged to operations as incurred. Development costs incurred to maintain production at operating mines are charged to operations as incurred. Development expenditures for mining properties that are considered to be commercially feasible, but are not yet producing, and major development expenditures at operating mines that are expected to benefit future production are capitalized and amortized using the units of production method over the estimated proven ore reserves to be benefited.
RECLAMATION COSTS
The Company's mines and related processing facilities are subject to governance by various agencies that have established minimum standards for reclamation. Company estimates of mine closure costs are accrued and charged to expense using the units of production method during the estimated life of the operations. A reserve for reclamation costs has been established for the restoration of certain abandoned mining and processing sites based on current estimates of the cost to comply with existing standards. Routine environmental expenditures are expensed as incurred or capitalized and depreciated depending on their future economic benefit.
COMMITMENTS AND CONTINGENCIES
The Company accrues for loss contingencies, including costs associated with environmental remediation obligations, when such costs are probable and reasonably estimable. Accruals are reviewed and adjusted as circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
REVENUE RECOGNITION
Sales are recorded as products are shipped to customers or as tolling services are performed. Concentrate and certain smelter product sales are recorded based on estimated weights, metal contents and prices using applicable customer agreements and hedge contracts. Revenues with respect to such sales are adjusted to reflect settlement when final weights, metal contents and prices are determined.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the Financial Accounting Standards Board in June 1998, and amended by Statement No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133, issued in June 2000 (collectively, FAS 133). Under FAS 133, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e. gains and losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and if so, whether the derivative instrument is designated as a hedge of exposures to changes in fair values, cash flows or foreign currencies. If the hedged exposure is changes in fair values, the gain (loss) is recognized in earnings in the period of change, with an equal and offsetting (loss) gain recognized on the change in value of the hedged item. If the hedged exposure is changes in cash flows, the effective portion of the gain (loss) is reported as a component of other comprehensive income (outside earnings) until the forecasted hedged transaction affects earnings, when it is reclassified into earnings.
The Company adopted FAS 133 as of November 1, 2000, in the first quarter in which it was required by the standard, as amended. The adoption of FAS 133 resulted in a net transition loss of $3,774, net of income tax benefit of $480, and a gain recorded in other comprehensive income of $70.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred and are included in selling, general and administrative expenses on the consolidated statements of operations. Research and development costs are not significant.
INCOME TAXES
On January 15, 1999, The Renco Group Inc. (Renco), the Company's ultimate parent, filed an election, with the consent of its shareholders, with the Internal Revenue Service to change its taxable status from that of a subchapter C corporation to that of a subchapter S corporation, effective November 1, 1998. At the same time, Renco elected for the Company to be treated as a qualified subchapter S subsidiary (QSSS). Most states in which the Company operates will follow similar tax treatment. QSSS status requires the ultimate shareholders to include their pro rata share of the Company's income or loss in their individual tax returns. The election does not affect foreign income taxes related to the Company's foreign subsidiaries.
Deferred tax assets and liabilities are recognized in foreign jurisdictions for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which addresses financial accounting and reporting for obligations associated with the
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of Statement No. 143 for the quarter ending January 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report. It is currently the Company's practice to accrue for mine and other closure obligations at their estimated, undiscounted cost. See "Item 8. Financial Statements and Supplementary Data", Note 16 to the Company's Consolidated Financial Statements for disclosures related to these obligations.
In August 2001, the Financial Accounting Standards Board issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes both FASB Statements No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business.
The Company is required and plans to adopt the provisions of Statement No. 144 for the quarter ending January 31, 2003. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements.
(2) RELATED PARTY TRANSACTIONS
The Company has entered into a management consulting agreement with Renco. Under the agreement, Renco will provide the Company with management services for an annual fee. The agreement is automatically renewed every three years, unless either party gives six months prior notice, with the current term ending October 31, 2003. Fees expensed under this agreement were $2,400 in each of the years ended October 31, 2001, 2000, and 1999, respectively. Fees outstanding and unpaid were $1,600 and $0 at October 31, 2001 and 2000, respectively.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
To obtain the advantages of volume, Renco purchases certain categories of property and casualty insurance for a number of its subsidiaries, including the Company, and the actual cost of such insurance, without markup, is reimbursed by the covered subsidiaries. For the years ended October 31, 2001, 2000 and 1999, the Company expensed costs of approximately $1,822, $4,294, and $3,695, respectively, under the Renco insurance program. Outstanding and unpaid broker fees due to Renco were $131 and $0 at October 31, 2001 and 2000, respectively.
On January 4, 2002 Renco signed a Cash Collateral Pledge Agreement and a Limited Guarantee with the Company's primary lender in the U.S. Under the Cash Collateral Agreement, Renco posted $5,000 cash collateral to the lender and under the Limited Guarantee, Renco temporarily guaranteed $2,000 of the Company's obligations to the lender. See Note 8.
(3) INVENTORIES
Inventories consist of the following:
Materials, supplies and repair parts are stated net of reserves for obsolescence of $5,484 and $4,472 at October 31, 2001 and 2000, respectively.
The FIFO cost of inventories valued under the LIFO cost method were approximately $70,812 and $79,032 at October 31, 2001 and 2000, respectively. If the FIFO cost method had been used to determine cost, inventories would have been $5,526 lower and $1,116 higher at October 31, 2001 and 2000, respectively.
As a result of reducing certain inventory quantities valued on the LIFO basis, inventory costs prevailing in previous years were charged to cost of sales in 2001 and 2000. The Company calculates the effect of LIFO liquidations on net income based on the current cost method. The effect was a decrease in net income of $59 and increases in net income of $27, and $400 for the years ended October 31, 2001, 2000 and 1999, respectively.
(4) PREPAID TAXES AND TAX CREDITS
Certain of the Company's Peruvian subsidiaries had been required to prepay income taxes monthly in previous years. The balance of prepaid taxes was $0 and $11,893 at October 31, 2001 and 2000, respectively.
In Peru, value added tax (VAT) paid on purchases can be offset against the VAT resulting from local sales, Peruvian income tax obligations and other taxes collected by the Peruvian Public Treasury. In addition, the Company may apply for a refund in the form of cash or negotiable credit notes from the tax authorities. The tax credits receivable were $4,433 and $19,550 at October 31, 2001 and 2000, respectively. The credits on Peruvian value added tax outstanding as of October 31, 2001 and 2000 were collected subsequent to the respective year-end.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
Depreciation and depletion expense are as follows:
Rental expense applicable to minimum rentals under operating leases was $9,726, $8,633, and $7,567 for the years ended October 31, 2001, 2000, and 1999, respectively. Contingent rental payments, based primarily on equipment usage, were $520, $1,210, and $405 for the years ended October 31, 2001, 2000, and 1999, respectively.
The Company's operating leases relate primarily to operating equipment, office facilities and office equipment. The minimum rental commitments under noncancellable leases, with terms in excess of one year are as follows:
(6) SPECIAL TERM DEPOSIT
The Special Term Deposit represents a deposit made in a foreign bank as collateral for a loan made to Doe Run Mining. See further discussion in Note 8.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Reclamation and environmental costs represents the estimate of reclamation and environmental spending for the following fiscal year. See Note 16.
(8) DEBT
Long-term debt consists of the following:
The Company has available two revolving credit facilities. The first facility allows the Company to borrow up to $100,000 and expires January 15, 2003. The availability of loans under the facility is limited to a percentage of eligible U.S. accounts receivable and inventories, less any outstanding loans and letters of credit. The facility bears interest at the prime rate plus .75% per annum for an effective rate of 6.75% at October 31, 2001. The Company is also obligated to pay an unused line fee equal to .25% on the amount by which the maximum credit
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
of $100,000 exceeds the average daily balance of outstanding loans and letters of credit. The facility is secured by accounts receivable and inventories generated by the Company's U.S. operations. All cash received from the Company's domestic operations is transferred by wire daily to the financial institutions to pay down the outstanding loan balance, if any. Revolving loans outstanding under this facility were $37,375 and $24,891 at October 31, 2001 and 2000, respectively. Actual availability was $1,796 at October 31, 2001 and $9,823 at March 31, 2002.
On January 4, 2002, the Company entered into an amendment of its U.S. revolving credit facility. The amendment increased the interest rate by .25% to prime plus 1%, reduced the maximum credit to $75,000, reduced the maximum available to borrow based on eligible inventory from $50,000 to $35,000 and temporarily eased a reserve against calculated availability which gradually reverted back to a $5,000 reserve on March 14, 2002. The amendment provided for supplemental loans of up to $5,000. Renco provided the lender with $5,000 million of cash collateral and a limited guarantee of $2,000. See Note 2 for details of the credit support provided by Renco. The amendment also waived, through February 27, 2002, existing defaults resulting from the Company's failure to maintain consolidated net worth and EBITDA for U.S. operations, as required by the agreements governing the credit facility. On February 28, 2002, the Company's lender issued a letter that extended this waiver through March 14, 2002.
The second facility allows Doe Run Peru to borrow up to $40,000 and expires June 19, 2002. In addition, the lender approved an independent line of $12,000 for the issuance of guarantee letters. Unlike the Revolving Credit Facility, this independent line is not committed and is subject to modification or cancellation at the option of the lender. The sum of the advances on both of these lines is limited to $42,000. The Doe Run Peru facility bears interest at LIBOR (1-month, 3-month or 6-month rate, depending on the term of the loan) plus 2.0% per annum. The facility is secured by accounts receivable and inventories generated by the Company's Peruvian operations. The effective rate was 6.59% at October 31, 2001. An unused line fee of .375% per annum on the average unused portion of the line is payable quarterly, in arrears. Availability of loans under the facility is limited to a percentage of Doe Run Peru's eligible accounts receivable and inventories, less any outstanding loans and letters of credit. Revolving loans outstanding under this facility were $21,000 and $33,000 at October 31, 2001 and 2000, respectively. Actual availability was $9,692 at October 31, 2001 and $2,402 at March 31, 2002. The Company is currently in negotiations with its lender to extend the facility, but has not yet received any commitment.
The $200,000 11.25% senior notes (the Fixed Rate Notes) and $55,000 Floating Interest Rate Senior Notes due 2003 (collectively, the Unsecured Notes) are guaranteed by certain subsidiaries of the Company. See Note 18 for disclosures regarding guarantor subsidiaries. The Company used $125,000 of the proceeds from the Unsecured Notes to make the Special Term Deposit into a foreign bank, which in turn loaned such amount to Doe Run Peru. The Special Term Deposit and note payable to the foreign bank have payment terms that match the timing and amount of the payments on $125,000 of the Fixed Rate Notes, except that additional interest of 0.25% through September 11, 2004 is payable on the note payable to the foreign bank. The note payable to the foreign bank is collateralized by the Special Term Deposit.
The 11.25% senior secured notes (the Secured Notes) have a face value of $50,000 and are secured by the property, plant and equipment acquired and are guaranteed by certain subsidiaries of the Company. See Note 18.
The deferred purchase price obligation was payable to the former owner of the Company's Peruvian subsidiary for mining assets purchased. The last of three annual payments of $1,495 was made in August 2001. The note had no stated interest rate and the balance at October 31, 2000 was discounted to an effective rate of 10%.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The 9.89% note payable outstanding at October 31, 2000 financed the purchase of certain equipment, and was secured by that equipment. The equipment was sold in the current year, and the note paid off with the proceeds. In doing so, the Company incurred prepayment penalties of $314, for which it signed a noninterest-bearing note, payable in 36 monthly installments, commencing November 1, 2001. The new note was discounted to a fair value of $159.
In January 1999, Doe Run Peru finalized an agreement for the sale and leaseback of its oxygen plant at the La Oroya facility for $17,162. Doe Run Peru has an option to repurchase the oxygen plant at the end of the five-year lease term for $200. In April 1999, Doe Run Peru entered into a sale and leaseback of computer equipment for $761. These transactions have been accounted for as financing arrangements. The interest rates applicable under the oxygen plant and computer equipment leases are 12.35% and 8.50%, respectively.
A capital lease for computer equipment caused property, plant and equipment, prepaid expenses and long term debt to increase by $647, $99 and $746, respectively, during the year ended October 31, 2001.
The aggregate estimated amounts of long-term debt maturing after October 31, 2001 are as follows:
At October 31, 2001, the Company's various debt agreements contained certain requirements with respect to net worth, a limitation on capital expenditures in the U.S., and requirements for earnings before interest, taxes, depreciation, depletion and amortization (EBITDA). These agreements also place limitations on dividend payments and other outside borrowings. The Company was in violation of its net worth and EBITDA covenants at October 31, 2001 but had received a waiver of any violations through March 14, 2002, through the amendment and subsequent extension discussed previously. Accordingly, the balance under the U.S. revolving credit facility is classified as current.
Due to the non-payment of interest due March 15, 2002 on the 11 1/4% Senior Notes due 2005, Floating Interest Rate Senior Notes due 2003 and 11 1/4% Senior Secured Notes due 2005 (collectively, the Notes), and the expiration of the grace period during which the Company could cure the non-payment, and the violation of other financial covenants, the Company is in default of its covenants under the Notes indentures and its revolving credit facilities. In an event of default, the lenders have the right to accelerate the payment of any unpaid principal and interest balances. No actions have been taken by the lenders to accelerate the payment of outstanding debt balances. The Company is in restructuring negotiations as described below and in negotiations with the lenders of its revolving credit facilities to execute amended revolving credit facilities.
On April 15, 2002, the Company announced that it had reached an agreement in principle with Renco and Regiment Capital Advisors, LLC (Regiment) for Renco and Regiment to provide the Company with significant capital for the purpose of restructuring its existing debt. Pursuant to the agreement in principle, Renco will purchase $20 million of the Company's preferred stock and Regiment, a significant holder of the Notes, will commit to lend the Company $35 million and will offer other holders of Notes the opportunity to participate in making such loan.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Under the proposed restructuring transaction, the Company would make a cash tender offer for a portion of the Notes and an exchange offer for the balance of the Notes. The $55 million in proceeds of the Renco investment and the loan, together with borrowings under its revolving credit facility would be used to finance the cash tender offer, to pay the accrued interest as of March 15, 2002 on the Notes exchanged in the exchange offer and to pay certain costs of the transactions. If successful, the cash tender offer and the exchange offer would significantly reduce the Company's future debt service and provide sufficient liquidity to continue to operate all its facilities at present levels and will not adversely affect the Company's trade creditors.
The non-binding agreement in principle is subject to agreement on the terms of definitive documentation and the successful completion of the transactions is subject to several conditions, including, among others, the participation by holders of at least 90% of the aggregate principal amount of each class of Notes in the cash tender offer and/or the exchange offer and the satisfactory modification of Doe Run's United States and Peruvian revolving credit facilities.
Doe Run Peru has had available from time to time unsecured and uncommitted lines of credit and additional availability for letters of credit and custom bonds provided by local banks. Borrowings take the form of short-term notes, with interest rates determined at the borrowing date. Borrowings under the unsecured and uncommitted lines of credit were $0 and $9,316 at October 31, 2001 and 2000, respectively.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 2001 and 2000, the fair values of the Company's financial instruments, except for long-term debt and the hedge positions described in Note 15, were not materially different from their carrying amounts.
The fair values of the Company's long-term debt were based on the estimates of incremental borrowing rates for similar types of borrowing arrangements or dealer quotes. The fair value of the Company's long-term debt was approximately $291,109 and $327,042 at October 31, 2001 and 2000, respectively.
(10) INCOME TAXES
On January 15, 1999, Renco filed an election, with the consent of its shareholders, with the Internal Revenue Service to change its taxable status from that of a subchapter C corporation to that of a subchapter S corporation, effective November 1, 1998. At the same time, Renco elected for the Company to be treated as a qualified subchapter S subsidiary (QSSS). Most states in which the Company operates will follow similar tax treatment. QSSS status requires the ultimate shareholders to include their pro rata share of the Company's income or loss in their individual tax returns. The election does not affect foreign income taxes related to the Company's foreign subsidiaries. As a result of this change in tax status, the elimination of federal and most state deferred tax assets and liabilities for income tax purposes totaling $6,200 was recorded as income tax.
Doe Run Cayman is subject to the regulations of the Cayman Islands, which currently have no corporate income or capital gains tax. Doe Run Cayman's subsidiaries located in Peru are subject to Peruvian taxation. The statutory income tax rate in Peru is 30%. Doe Run Peru has obtained a ten-year tax stabilization agreement with the Peruvian government, which provides for Peruvian taxation based on tax statutes and regulations prevailing on November 6, 1997, beginning with the Peruvian tax year ending on December 31, 1997 through December 31, 2006.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Income tax expense is comprised of the following:
As a result of the change in tax status, the Company was not subject to federal income taxation for the years ended October 31, 2001, 2000 and 1999.
The deferred tax expense in fiscal 2001 results from the increase in the valuation allowance resulting from the assessment of the Company's ability to use loss carryforwards in the future, see Note17. Current tax expense decreased as a result of a merger between Doe Run Mining and Doe Run Peru, offsetting taxable income of Doe Run Mining with losses of Doe Run Peru.
The income tax expense recorded in the consolidated statement of operations for the year ended October 31, 1999 reflects primarily: 1) deferred federal income tax expense of $6,200 relating to the elimination of net U.S. federal and state deferred tax assets, including related valuation allowances, as a result of the change in tax status, 2) current U.S. federal income tax expense resulting from the change in tax status, which will be paid by Renco and 3) the income tax provision of the Company's Peruvian subsidiaries. The net deferred income tax benefit generated by the Peruvian subsidiaries for the years ended October 31, 2000 and 1999 results primarily from the recognition of benefits related to tax losses generated in 2000 and 1999 and to the recognition in 1999 of an acquired tax loss of Cobriza for which no previous benefit was recognized.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
The deferred tax balances as of October 31, 2001 and 2000 relate solely to the Company's Peruvian subsidiaries. The deferred tax assets and liabilities related to property, plant and equipment are principally due to differences in book and tax allocations of the excess of the fair value of the sum of assets acquired, less liabilities assumed over the purchase price paid and accelerated depreciation methods used for tax purposes.
Net operating loss carryforwards in Peru are available for use for four years beginning with the first year the Company has taxable income against which it can take a credit.
Management believes that sufficient uncertainty exists regarding the realization of certain deferred tax assets and that a valuation allowance is required. The valuation allowance increased (decreased) $4,256 and $(7,180) in the years ended October 31, 2001 and 2000, respectively. The increase in the valuation allowance reflects a change in management's assessment regarding the future realization of deferred tax assets as a result of current projections of liquidity and taxable income, see Note 17. Benefits were realized in 2000 relating to certain deferred tax assets against which a valuation allowance had previously been provided.
(11) EMPLOYEE BENEFITS
DOMESTIC PLANS
DEFINED BENEFIT PLANS
The Company sponsors a noncontributory defined benefit plan for its U.S. and expatriate employees. Benefits provided to salaried employees under the defined benefit plan are based on final average compensation and years of service. Benefits provided to hourly employees are based on a flat rate and years of service. The Company has also adopted a supplemental defined benefit plan, The Supplemental Employee Retirement Plan (SERP), effective November 1, 1996. The SERP provides benefits to those participants of the defined benefit plan whose benefits under the plan are limited by Sections 401(a)(17) or 415 of the Internal Revenue Code. Benefits under the SERP
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
represent the amount by which the benefits under the defined benefit plan, if such benefits were not limited, exceed those benefits the participants are entitled to receive. The SERP plan is unfunded.
Net periodic pension expense is comprised of the following:
The following assumptions were used in the determination of net periodic pension expense:
The following table sets forth the funded status of the Company's defined benefit plan:
(a) Includes accumulated benefit obligation related to the SERP plan of $3,297 and $3,534, respectively
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The special termination benefits relate to an early retirement incentive that was offered to certain eligible employees retiring between November 1, 2001 and January 1, 2002. The early retirement incentive provided an enhanced retirement benefit based on years of benefit service and age compared to what is normally provided for in the plan.
POSTRETIREMENT BENEFIT PLANS
The Company sponsors three postretirement medical plans for its U.S. and expatriate employees. Two of these plans are self-insured plans. The plans generally cover medical expenses subject to deductibles, copayments and limits on specified coverage. For persons retired on or before January 1, 1992, the retiree's contribution to the cost of these plans varies primarily based upon the date of retirement and the respective plan. Effective January 1, 1992, the Company's contribution to the cost of coverage of employees retiring after that date decreased gradually, until, beginning in 1997, retirees pay 100% of the cost of coverage. The Company maintains stop-loss insurance for claims exceeding $200 per person in any calendar year for those plans that are self-insured.
Net periodic postretirement benefit cost includes the following components:
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The postretirement benefit plans are unfunded. The following illustrates the Company's postretirement benefit obligation:
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for the medical plans was 8% for fiscal 2001, with a decrease to 5% over 6 years, remaining level thereafter. A one percentage point increase/(decrease) in each year would increase/(decrease) the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost by $552/$(530) and $36/$(35), respectively.
The special termination benefits relate to the early retirement incentive discussed above with respect to the defined benefit plan. Most of the employees accepting the incentive received healthcare coverage benefits for up to seven years at a cost that would not normally be available to retirees, a portion of which will be covered by the Company.
DEFINED CONTRIBUTION PLANS AND PROFIT SHARING PROGRAM
The Company sponsors a 401(k) plan that covers substantially all U.S. and expatriate employees. Participants can contribute up to 15% of compensation on a before-tax basis. The Company's mandatory match under the plan is 25% of the first 6% of a participant's before-tax contribution. The Company may make additional contributions at management's discretion. For the fiscal year ended October 31, 2001, the Company increased the match to 40% of the first 6% of a participant's before-tax contribution. The Company's expense representing its matching contribution was $1,101, $686, and $607 for the years ended October 31, 2001, 2000 and 1999, respectively. Plan assets consist primarily of investments in common stock and debt securities.
The Company has a profit sharing program, which covers substantially all U.S. employees. The program provides for a distribution to employees equal to 15% of U.S. income before income tax expense, plus any extraordinary items, excluding the related tax effect. At management's discretion, a portion of the distribution may be made in the form of a contribution to the 401(k) plan. The remainder is paid in cash to employees. The Company had no expense for the years ended October 31, 2001, 2000 and 1999 as a result of losses before income tax expense in the U.S.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
FOREIGN PLANS
Doe Run Peru is required to make semiannual deposits into a bank account for severance indemnity benefits for Peruvian employees under Peruvian government regulations. The balance in the account represents the full benefit due to such employees upon termination. The Company accrues for the additional amount that would be contributed to the account since the last deposit date as if all such employees were to terminate as of the balance sheet date. The Company's expense related to severance indemnity benefits was $2,946 $2,951 and $2,786 for the years ended October 31, 2001, 2000 and 1999, respectively.
In accordance with government regulations in Peru, employees are entitled to receive 8% of the Doe Run Peru's taxable income, 50% of which is distributed to employees based on number of days worked, and the remaining distributed in proportion to their salaries. Such profit sharing, which is tax deductible, is limited to 18 times the annual salary for each worker. Any excess is to be reserved and used for training of the workers. The Company had no expense relating to workers' profit sharing payments years ended October 31, 2001, 2000 and 1999, due to tax losses in those years.
In addition, the Company recorded a deferred workers' profit sharing asset of $0 and $2,094 at October 31, 2001 and 2000, respectively, representing the amount the Company expects to recover through future reduction of workers' profit sharing payments.
(12) BUSINESS AND CREDIT CONCENTRATIONS
Metal prices fluctuate and are affected by numerous factors beyond the Company's control, including expectations for inflation, speculative activities, the relative exchange rate of the U.S. dollar, global and regional demand and production, political and economic conditions and production costs in major producing regions. The aggregate effect of these factors makes it impossible for the Company to predict metal prices. Fluctuations in metal prices could have a material adverse effect on the results of operations, financial condition and liquidity of the Company.
For the years ended October 31, 2001, 2000 and 1999, approximately 67%, 70%, and 65%, respectively, of the Company's U.S. operations' revenues from unaffiliated customers were from U.S. battery manufacturers (primarily automotive) or their suppliers. At October 31, 2001 and 2000, the accounts receivable balances related to these U.S. battery manufacturers were $33,425 and $33,239, respectively.
No single customer accounted for greater than 10% of consolidated revenues for the years ended October 31, 2001, 2000 and 1999.
(13) SEGMENT INFORMATION
The Company's operating segments are separately managed business units that are distinguished by products, location and production process. The primary lead segment includes integrated mining, milling and smelting operations located in Missouri. The secondary lead segment, located in Missouri, recycles lead-bearing feed materials, primarily spent batteries. The fabricated products segment produces value-added lead products. The Peruvian operations produce an extensive product mix of non-ferrous and precious metals through the Company's subsidiary, Doe Run Peru.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies, except that the primary lead, secondary lead and fabricated products segments value finished metals and concentrates, work in process and raw materials inventories at FIFO cost. Certain functions are performed at the Company's corporate office for the primary lead and secondary lead segments, such as sales and billing, as well as
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
the general administration of the Company. Related accounts receivable and corporate overhead expenses are not allocated to operating segments.
(1) Transactions between segments consist of metal sales recorded based on sales contracts that are negotiated between segments on an arms-length basis. (2) Other revenues consist of metal sales not attributed to operating segments and gains (losses) on hedging transactions.
(3) Revenues are attributed to countries based on destination of shipments.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(4) Other revenues and expenses include primarily exploration expenses, gains and losses recognized on hedge transactions, and adjustments necessary to state inventories at LIFO cost.
(5) Unallocated corporate assets consist primarily of the Special Term Deposit, cash, primary lead and secondary lead segments' accounts receivable, investments in subsidiaries, pension assets, and deferred financing costs.
(14) COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENT
Doe Run Peru is obligated to expend $120,000 through October 23, 2002 to expand and modernize its operations, including certain expenditures to comply with environmental regulations within Peru, as discussed below. In the event that Doe Run Peru has not fulfilled its obligations under the investment commitment by the end of October 23, 2002, it will be obligated to pay a penalty equal to 30% of any shortfall to Empresa Minera del Centro del Peru S.A. (Centromin), the previous owner of the La Oroya assets. As of October 31, 2001, Centromin had approved qualifying expenditures through October 31, 2001 totaling approximately $102,712. The Company has planned expenditures for fiscal year 2002 which management believes will satisfy the investment commitment.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
However, there can be no assurance that all of these expenditures will be completed or that these expenditures will be accepted in their entirety as qualifying under the Contract.
TOLLING
The Company has entered into tolling arrangements with major battery manufacturers whereby the manufacturers will deliver spent lead-acid batteries and other lead-bearing material to the Company's recycling facility and, for a processing fee, the Company will return finished lead metal. The largest of these contracts expire in September and December 2003. The agreements cover approximately 10% of the Company's anticipated combined primary and secondary lead metal production for the 2002 fiscal year.
SALES
The Company has commitments to sell approximately 66%, 74%, 75%, 38% and 100% of its anticipated 2002 lead, copper, zinc, silver and gold metal production, respectively under agreements, with terms of generally less than one year. Sales prices are generally based on the average quoted exchange prices for the month of shipment, plus a premium.
LETTERS OF CREDIT
At October 31, 2001, the Company had issued irrevocable standby letters of credit totaling $11,211 in connection with the Company's insurance and bonding activities. The Company also had outstanding customs bonds of $1,945 respectively, relating to concentrate and other purchases.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with a number of its senior executives through October 31, 2002, with automatic renewal annually unless written notice is given at least three months prior to the expiration date.
(15) HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
A significant portion of the Company's sales contracts are priced based on an average London Metal Exchange (LME) or other exchange prices for the respective metal plus a negotiated premium. As such, the prices of the Company's products fluctuate due to factors in the market that are beyond the Company's control. These price changes expose the Company to variability in its cash receipts. The purpose of the Company's price risk management program is to limit the Company's risk to acceptable levels, while enhancing revenue through the receipt of option premiums.
The Company's price risk management program uses various derivative instruments in its attempt to mitigate commodity price risks. The Company uses purchased futures contracts as a fair value hedge of the change in fair value of inventory related to firm sales commitments with customers or as a cash flow hedge to lock in the price of lead purchases for its fabricated products subsidiary. In fair value hedges, the futures contracts are established at terms (quantities, prices and timing) that mirror those of the firm commitments. The Company uses sold futures contracts as a cash flow hedge to lock in the price of a portion of forecasted lead metal sales and to lock in the price of by-product sales whose prices are based on an average for a period after they are shipped.
The Company routinely writes call options that, if exercised, will create sold futures contracts that will be designated as cash flow hedges of forecasted lead metal sales. The options generate premium income, which enhance revenues. The Company also uses futures contracts and options and combinations thereof to enhance revenue at contract prices that are acceptable to the Company, should the options be exercised. Because these
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
instruments do not meet the requirements for hedge accounting under FAS 133, the changes in fair market value related to these instruments (including the time value portion), which reflect market prices and volatility at the balance sheet date, are recorded in results of operations, and are expected to increase the volatility of reported results.
The unrealized gain reflected in the consolidated statement of operations relates to the change in fair market value of derivative financial instruments that are not designated as hedges. For derivative instruments designated as hedges (futures contracts), the Company assesses effectiveness based on changes in the forward rate, and as a result, does not expect hedge ineffectiveness.
The fair market value of the Company's derivative financial instruments reflected in the Company's balance sheet as of October 31, 2001 is the difference between quoted prices at the balance sheet date and the contract settlement value. The fair market value represents the estimated net cash the Company would receive (pay) if the contracts were canceled on the balance sheet date.
The Company's open derivative financial instruments at October 31, 2001 were:
SOLD (PURCHASED) FUTURES CONTRACTS (NUMBERS NOT IN THOUSANDS)
SOLD (PURCHASED) CALL OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
SOLD (PURCHASED) PUT OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
At October 31, 2001, the Company had recorded an asset of $1,593 and a liability of $5,872 related to the fair market values of these instruments. The Company also had recorded an asset of $178 for the fair value of firm commitments designated as the hedged item in fair value hedges. The balance of $(8) in comprehensive income will be recognized in earnings as the forecasted sales/purchases occur through December 2001.
The Company's open derivative financial instruments at October 31, 2000 were:
FUTURES SALES (PURCHASE) CONTRACTS (NUMBERS NOT IN THOUSANDS)
SOLD CALL OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
SOLD PUT OPTION CONTRACTS (NUMBERS NOT IN THOUSANDS)
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Sold put option contracts used by the Company to offset certain fixed price sales to customers did not meet the definition of a hedge prior to the adoption of FAS 133, and the net mark to market adjustment related to these contracts was a loss of $242, for the year ended October 31, 2000. No net mark to market adjustment was required in the year ended October 31, 1999.
The Company does not obtain collateral or other security to support hedge instruments subject to credit risk, but assesses the reliability and reputation of its counterparties before contracts are established.
(16) ENVIRONMENTAL AND LITIGATION MATTERS
ENVIRONMENTAL
The Company has recorded a liability of approximately $30,110 as of October 31, 2001, which represents management's best estimate of known obligations relating to the environmental and reclamation matters that are discussed below.
DOMESTIC OPERATIONS
The Company is subject to numerous federal, state and local environmental laws and regulations governing, among other things, air emissions, waste water discharge, solid and hazardous waste treatment, and storage, disposal and remediation of releases of hazardous materials. In common with much of the mining industry, the Company's facilities are located on sites that have been used for heavy industrial purposes for decades and may require remediation. The Company has made and intends to continue making the necessary expenditures for environmental remediation and compliance with environmental laws and regulations. Environmental laws and regulations may become more stringent in the future which could increase costs of compliance.
Primary smelter slag produced by and stored at the primary smelter in Herculaneum, Missouri is currently exempt from hazardous waste regulation under the Resource Conservation and Recovery Act of 1976, as amended (RCRA), but is subject to a state closure permit. The Company has accrued approximately $1,000 related to the cost of closure pursuant to this permit, which is management's best estimate of closure costs under the current requirements of the permit.
The Company signed a voluntary Administrative Order on Consent (AOC) in September 2000 to study and address issues related to the slag pile, plant property, community soils adjacent to the primary smelter in Herculaneum, elevated blood lead levels in the community and lead releases from the plant. The U.S. Environmental Protection Agency (EPA) and the Missouri Department of Natural Resources (DNR) signed the AOC with an effective date of May 29, 2001. In addition, the Company has agreed to replace the soil in yards of private residences within a four-tenths of a mile radius of the smelter. The Company also agreed to test soils in an area outside the half-mile zone to determine if additional remediation is required. In September 2001, the Company agreed to an acceleration of the lead testing program on the remaining area within one mile of the smelter. As a result of the completion of this testing, the Company signed an AOC with the U.S. EPA on December 21, 2001. The new AOC requires additional yard replacement relating to those residences with the highest soil lead measurements and those with children. The current total estimated cost of community cleanup included in the Company's accrual for remediation costs, is approximately $2,600, with the spending to be completed by the end of calendar 2002. At this time, it is not possible to determine the outcome of the remaining areas of study or what additional remediation actions, if any, may be required after the study is completed. Estimated costs may change if required levels of remediation are different than currently estimated or if additional homes are identified as a result of additional regulatory decisions.
On April 26, 2002, the Company signed a Settlement Agreement with the State of Missouri whereby it agreed to offer buyouts to approximately 160 homeowners in an area close to the smelter. Under the terms of the proposed
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
buyout plan, an estimated 26 homeowners, each having children less than 72 months old living in them, would be offered immediate buyouts with the remaining affected homeowners to be extended buyout offers by the end of 2004. The amount to be paid to the homeowners who accept the buyout offer will be based on an appraisal of the property's value at August 31, 2001. The accrual for cleanup at January 31, 2002 does not include any cost associated with the buyout plan, which could be as high as $10,000 if all qualifying homeowners accept the Company's buyout offer. Management believes that it is highly unlikely that all of the qualifying homeowners will accept the offer, but it cannot currently be estimated how many of the homeowners will accept the buyout offer, or, if the buyout offer is accepted, what the price to be paid for the property will be. The Company will attempt to rent out certain purchased houses, once they are remediated to the standards required by the regulatory agencies. To the extent the Company will be able to rent these properties, the fair value will be capitalized. To the extent the properties cannot be rented out, or the amount paid exceeds the fair value of the property at the buyout date, an impairment loss will be recognized.
On April 11, 2002, a report in the media contained allegations by former employees of improper disposal of hazardous materials on the Herculaneum site. The Company does not believe that there has been any violation of law and is cooperating with State and federal agencies in their investigations into the allegations.
The Company, working with the Missouri DNR and the Missouri Air Conservation Commission, has developed a plan to bring the Herculaneum smelter in compliance with the ambient air quality standard for lead promulgated under the federal Clean Air Act. The plan was included in a consent judgement entered into by the Company in December 2000, and has been approved at the state level and by the U.S. EPA. Capital expenditures for this plan were $5,900 in fiscal 2001. Future capital expenditures are expected to total $4,500 in fiscal 2002, and $1,000 in 2003. A substantial part of the equipment is now in place and the monitors have been reflecting compliance.
The Company has received notice that it is a potentially responsible party (PRP) subject to liability under The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) at the following sites: six sites in St. Francois County, Missouri, including the Big River Mine Tailings site, the Bonne Terre site, the Federal site, the National site, the Rivermines site and the Leadwood site; the Oronogo-Durenweg site in Jasper County, Missouri; the Cherokee County site in Cherokee County, Kansas; the Tar Creek site in Ottawa County, Oklahoma; the Block "P" site in Cascade County, Montana; and the Missouri Electric Works site in Cape Girardeau, Missouri. There are two additional sites in St. Francois County for which the EPA has indicated it will issue notice. These sites involve historical operations of predecessors of the Company. CERCLA provides for strict and, in certain circumstances, joint and several liability for response costs and natural resource damages. The Company has a reserve as of October 31, 2001 of approximately $7,800 for these sites, including the two additional sites in St. Francois County, which the Company believes is adequate based on its investigations to date. However, depending upon the types of remediation required and certain other factors, costs at these sites, individually or collectively, could have a material adverse effect on the results of operations, financial condition and liquidity of the Company.
The Company has completed an Engineering Evaluation/Cost Analysis (EE/CA) for the Bonne Terre site, and has signed two AOCs to conduct removal actions on the west and east portions of the site. Work began in late fiscal 2001 and is scheduled for completion within two years.
The Company signed a voluntary AOC in 1994 with the EPA to remediate the Big River Mine Tailings site. The remediation work required by the AOC has been substantially completed, and will be followed by revegetation and ongoing monitoring and maintenance activities.
The Company has also signed AOC's to perform an EE/CA on each of the National, Rivermines, and Leadwood sites for remediation of the mine waste areas at these sites. The National EE/CA is complete, the Rivermines EE/CA is due by the end of fiscal 2002 and the Leadwood EE/CA is due by the end of fiscal 2003. In addition, the Company has signed an AOC with the EPA to conduct a Remedial Investigation/Feasibility Study (RI/FS) to
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
assess potential off-site impacts of site operations on and the need for remediation regarding groundwater, residential soils, several creeks and a river. The initial draft of the RI/FS was submitted in early March 2002. The Company has signed an order to conduct interim measures until the RI/FS is complete, consisting of blood lead testing of young children, residential soil sampling, and limited soil remediation as indicated by the testing and sampling results. The Company believes the current reserves assigned to these sites are adequate. However, should remediation goals or areas change, requiring substantially increased measures, there can be no assurance that the reserves would be adequate.
The Company has been advised by the EPA that it is considering taking certain response actions at a mine site in Madison County, Missouri known as the Mine LaMotte Site. The Company and the owner of the other 50% share have signed an AOC to conduct an RI/FS at the site. This site is substantially smaller than the sites in St. Francois County where the Company has been named a PRP, and the potential issues are less complex. The Company has also been advised that remediation is required at a related small satellite mine site. After conducting an investigation, the Company has determined that it was not involved in operations at the satellite site. Further review will be required before a determination can be made as to whether the Company has any liability at the main site. At this time, based on this preliminary information and an inspection of the sites, management does not believe that any future action will result in a material adverse impact to the results of operations, financial condition or liquidity of the Company.
The Company's Buick recycling facility is subject to corrective action requirements under RCRA as a result of a storage permit for certain wastes issued in 1989. This will involve remediation of solid waste management units at the site, although the plan for corrective action has not yet been finalized. The Company has reserves as of October 31, 2001 of approximately $1,200 for corrective action and $2,900 for closure costs for the permitted storage area. While management believes these reserves are adequate based on expectations of the closure plan requirements, regulators could require that additional measures be included in the finalized plan, which could change the estimate of the costs for corrective action.
The Company's domestic operating facilities have wastewater discharge permits issued under the federal Clean Water Act, as amended. It is possible that stricter discharge limits than previously in effect may be included in certain permits now in renewal. If additional treatment facilities were required under these permits, capital expenditures of approximately $2,500 would be required. Management does not expect an appreciable increase in operating costs.
The Company's mining and milling operations include six mine waste disposal facilities that are subject to Missouri mine closure permit requirements. Certain closure requirements have already been performed, and the remaining estimated cost of future closure activities is approximately $7,600. The Company's mine and mill closure reserves were approximately $7,500 as of October 31, 2001.
FOREIGN OPERATIONS
Doe Run Peru submitted to and received approval from the Peruvian government for an Environmental Adjustment and Management Program (PAMA) that consisted of an environmental impact analysis, monitoring plan and data, mitigation measures and closure plan. The PAMA also sets forth the actions and corresponding annual investments the concession holder agrees to undertake in order to achieve compliance with the maximum applicable limits prior to expiration of the PAMA (ten years for smelters, such as Doe Run Peru's operations in La Oroya, and five years for any other type of mining or metallurgical operation like Cobriza). The required amount of annual investment must not be less than one percent of annual sales. Once approved, the PAMA functions as the equivalent of an operating permit with which the operator must comply. After expiration of the PAMA, the operator must comply with all applicable standards and requirements. Future changes in legal rules and maximum permissible levels would not be applicable to Doe Run Peru for the remaining period of the PAMA.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Doe Run Peru has committed under its PAMA to implement the following projects at its La Oroya smelter through December 31, 2006:
o New sulfuric acid plants o Treatment plant for the copper refinery effluent o Industrial waste water treatment plant for the smelter and refinery o Improve Huanchan lead and copper slag deposits o Build an arsenic trioxide deposit o Management and disposal of lead and copper slag wastes o Domestic waste water treatment and domestic waste disposal o Monitoring station
Through October 31, 2001, the Company had spent approximately $25,000 on projects under the La Oroya PAMA.
Annual spending on a calendar year basis approved in the La Oroya PAMA, as amended, most recently on January 25, 2002, are as follows:
The current estimate for the total to be expended on environmental projects under the PAMA and on additional related process changes for Doe Run Peru is approximately $174,000 for the remaining term of the PAMA.
Doe Run Peru's operations historically and currently exceed some of the applicable Ministry of Energy and Mines (MEM) maximum permissible limits pertaining to air emissions, ambient air quality and waste water effluent quality. The PAMA projects, which are more fully discussed below, have been designed to achieve compliance with such requirements prior to the expiration of the PAMA on January 13, 2007. No assurance can be given that implementation of the PAMA projects is feasible or that their implementation will achieve compliance with the applicable legal requirements by the end of the PAMA period. Further, there can be no assurance that the Peruvian government will not in the future require compliance with additional or different environmental obligations that could adversely affect Doe Run Peru's business, financial condition or results of operations. Under the purchase agreement related to the acquisition of the La Oroya assets in October 1997, Centromin agreed to indemnify Doe Run Peru against environmental liability arising out of its prior operations, and performance of the indemnity has been guaranteed by the Peruvian government through the enactment of the Supreme Decree No. 042-97-PCM. However, there can be no assurance that Centromin will satisfy its environmental obligations and investment requirements, including those in its PAMA, or that the guarantee will be honored. Any failure by Centromin to satisfy its environmental obligations could adversely affect Doe Run Peru's business, financial condition or results of operations.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The Cobriza mine has a separate PAMA in which the Company has committed to complete projects to manage tailings, mine drainage, sewage and garbage by mid-2002. The Company has spent approximately $8,800 under the PAMA as of October 31, 2001. After beginning construction on the largest of the projects, the tailings backfill project, revisions to the cost estimate increased substantially. As a result, the Company has requested a revision of its PAMA from the MEM, which would allow it to operate for a time after the end of the current PAMA without completing the backfill project. Future economic and operating conditions could affect the Company's ability to complete the backfill project. The Company is currently in compliance with its requirement to reduce emissions from the mine under the PAMA through a decrease in production. In April 2002, the MEM proposed a pending regulation extending the PAMA for all companies for an additional 18 months for work remaining under the PAMA. For companies still not in compliance at the end of this 18-month extension period, each company would have an additional six months to close the operation. In light of this pending regulation, Doe Run will be re-evaluating its options with the expectation that a decision will be made within the next six to twelve months regarding the future course of action to be taken.
The Company is responsible for the closure costs relating to a zinc ferrite disposal site. The Company has accrued $7,200 for the closure costs and, although a plan for closure of the site has not been finalized, management believes that this reserve is adequate.
CONSOLIDATED
The Company believes its reserves for domestic and foreign environmental and reclamation matters are adequate, based on the information currently available. Depending upon the type and extent of remediation activities required, costs in excess of established reserves are reasonably possible. Therefore, there can be no assurance that additional costs, both individually and in the aggregate, would not have a material adverse effect on the results of operations, financial condition and liquidity of the Company.
LITIGATION
The Company is a defendant in twelve lawsuits alleging certain damages stemming from the operations at the Herculaneum smelter. Four of these cases are class action lawsuits. In two separate cases, the plaintiffs seek to have certified a class of property owners in a certain section of Herculaneum, alleging that property values have been damaged due to the operations of the smelter. In a third case, plaintiffs seek to have certified a class of children who lived in Herculaneum during a period of time when they were nine months to six years old and children born to mothers who lived in Herculaneum during their pregnancies. The remedy sought is medical monitoring for the class. In a fourth case, plaintiffs seek to have certified a class of employees of a certain contractor who worked at the Herculaneum smelter. Seven of the cases are personal injury actions by 35 individuals who allege damages from the effects of lead poisoning due to operations at the smelter. Punitive damages also are being sought in each case. The last suit is a property damage case alleging lead contamination of fill material used on the plaintiff's property.
A resident of Herculaneum has retained counsel who has forwarded to the Company information about personal injuries allegedly because of exposure to emissions from the smelter. No suit has yet been filed against the Company in this matter.
The Company is a defendant in five lawsuits alleging certain damages from discontinued mine facilities in St. Francois County. Four of the cases are class action lawsuits. The first case seeks to have certified a class consisting of property owners, alleging that property values have been damaged due to the tailings from the discontinued operations. In the second case plaintiffs seek to have certified a class of children who lived, went to school or day care in Bonne Terre, Missouri or whose mothers lived in Bonne Terre during their pregnancies. The third and fourth cases are class actions for property damage and medical monitoring concerning alleged damages
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
caused by chat, tailings, and related operations in six areas in St. Francois County. The fifth case, filed in July 2001, alleges personal injury against two children living in St. Francois County.
Three lawsuits have been filed against the Company each alleging personal injury to a child living in Picher, Oklahoma as a result of lead contamination from chat piles and/or tailings generated by historic operations of the Company's predecessor.
The Company, with several other defendants, has been named in four cases in Maryland, but not joined as a defendant in any of these cases. These suits seek damages, alleging personal injuries as a result of lead poisoning from exposure to lead paint and tetraethyl lead dust. The suits seek punitive damages. The Company has recently been dismissed from two similar cases in which it was joined as a defendant. Until The Company is actually joined as a defendant in one or more of these cases, material liability from these cases is considered remote.
The Company and several other parties have been named defendants in a suit brought by the City of St. Louis, Missouri for costs allegedly incurred and to be incurred by the plaintiff for the care of lead-poisoned persons, education programs for children injured by exposure to lead and the abatement of lead hazards purportedly created by the defendants in the City of St. Louis. The complaint alleges that the defendants made material misrepresentations and intentional omissions of material facts to the City and/or its residents regarding the nature of lead and lead products, such as paint. The suit also seeks punitive damages.
One hundred and seventeen individual cases have been filed that list the Company among other defendants, alleging that the employees or ex-employees of Burlington Northern Railroad who filed the cases were exposed to lead from the hauling of lead concentrates by the railroad. An ex-employee of the Terminal Rail Road Association of St. Louis has filed a similar case.
The Company has been named as a defendant in a breach of contract/warranty action for damages arising from the sale of allegedly impure lead. The plaintiff has indicated, although the amount has not been confirmed through depositions, that its claims exceed $1,000.
On January 15, 2002, The Doe Run Company received a Demand for Arbitration regarding payments Fabricated Products, Inc. was to make under an Asset Purchase Agreement.
On February 28, 2002, Fabricated Products, Inc. (FPI) and others were served with a wrongful death action on behalf of the estate of a former worker at FPI's Vancouver facility.
Since all of the above cases are either in the pleading or discovery stages, the Company is unable at this time to estimate the expected outcome of and the final costs of any of these actions. Therefore, there can be no assurance that these cases would not have a material adverse effect, both individually and in the aggregate, on the results of operations, financial condition and liquidity of the Company. The Company has and will continue to vigorously defend itself against these all these claims.
(17) LIQUIDITY
Low metal prices over the past four years, coupled with the Company's substantial debt service requirements, have severely reduced the Company's liquidity. In fiscal 2001, cash from operating activities was sufficient to meet the Company's capital and debt service requirements only because of a significant reduction in working capital. Reductions in receivables and inventory coupled with increases in borrowings on revolving credit lines and accounts payable have reduced availability under
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
revolving credit facilities to the minimal levels discussed in Note 8. Further reductions of current assets of this magnitude are very unlikely.
At October 31, 2001 the Company failed to maintain consolidated net worth and EBITDA for U.S. operations, as required by the Doe Run Revolving Credit Facility. The amendment and subsequent extension discussed above waived these defaults through March 14, 2002.
Due to the non-payment of interest due March 15, 2002 on the 11 1/4% Senior Notes due 2005, Floating Interest Rate Senior Notes due 2003 and 11 1/4% Senior Secured Notes due 2005 (collectively, the Notes), and the expiration of the grace period during which the Company could cure the non-payment, and the violation of other financial covenants, the Company is in default of its covenants under the Notes indentures and its revolving credit facilities. In an event of default, the lenders have the right to accelerate the payment of any unpaid principal and interest balances. No actions have been taken by the lenders to accelerate the payment of outstanding debt balances. The Company is in restructuring negotiations as described below and in negotiations with the lenders of its revolving credit facilities to execute amended revolving credit facilities.
On April 15, 2002, the Company announced that it had reached an agreement in principle with Renco and Regiment Capital Advisors, LLC (Regiment) for Renco and Regiment to provide the Company with significant capital for the purpose of restructuring its existing debt. Pursuant to the agreement in principle, Renco will purchase $20 million of the Company's preferred stock and Regiment, a significant holder of the Notes, will commit to lend the Company $35 million and will offer other holders of Notes the opportunity to participate in making such loan.
Under the proposed restructuring transaction, the Company would make a cash tender offer for a portion of the Notes and an exchange offer for the balance of the Notes. The $55 million in proceeds of the Renco investment and the loan, together with borrowings under its revolving credit facility would be used to finance the cash tender offer, to pay the accrued interest as of March 15, 2002 on the Notes exchanged in the exchange offer and to pay certain costs of the transactions. If successful, the cash tender offer and the exchange offer would significantly reduce the Company's future debt service and provide sufficient liquidity to continue to operate all its facilities at present levels and will not adversely affect the Company's trade creditors.
The non-binding agreement in principle is subject to agreement on the terms of definitive documentation and the successful completion of the transactions is subject to several conditions, including, among others, the participation by holders of 90% of the aggregate principal amount of each class of Notes in the cash tender offer and/or the exchange offer and the satisfactory modification of Doe Run's United States and Peruvian revolving credit facilities.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(18) GUARANTOR SUBSIDIARIES
The Guarantor Subsidiaries (Fabricated Products, Inc. (FPI) and DR Land Holdings, LLC (the Domestic Guarantors) Doe Run Cayman Ltd. (Doe Run Cayman) and its subsidiary Doe Run Peru have jointly and severally, fully, unconditionally and irrevocably guaranteed the Unsecured Notes and Secured Notes of the Company. Doe Run Cayman has no operations separate from those of Doe Run Peru. Separate financial statements and other disclosures concerning certain Guarantor Subsidiaries and disclosures concerning non-Guarantor Subsidiaries have not been presented because management has determined that such information is not material to investors. Intercompany transactions eliminated in consolidation consist of various service and agency fees between The Doe Run Resources Corporation and Doe Run Peru and sales of metal to The Doe Run Resources Corporation by Doe Run Peru and to FPI by The Doe Run Resources Corporation.
Doe Run Peru was merged with its parent, Doe Run Mining S.R.L. effective June 1, 2001. The following consolidating statements reflect the historical cost basis of assets and liabilities and the results of operations assuming the merger had occurred on October 23, 1997, the date at which common control was established. The consolidating statements have been restated accordingly.
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2001
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF OCTOBER 31, 2000
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2001
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2000
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 1999
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2001
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2000
THE DOE RUN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
(18) Guarantor Subsidiaries (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 1999
INDEPENDENT AUDITORS' REPORT
To the Shareholders Doe Run Peru S.R.L.:
We have audited the accompanying combined balance sheets of Doe Run Peru S.R.L. (a Peruvian Company) as of October 31, 2001 and 2000, and the related combined statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended October 31, 2001. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Doe Run Peru S.R.L. as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 4 to the combined financial statements, the Company adopted FAS 133 beginning November 1, 2000. The adoption of FAS 133 resulted in a net transition loss of $1,125, net of income tax benefit of $480.
The accompanying combined financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 20 to the combined financial statements, the Company faces liquidity issues that raise substantial doubt about its ability to continue as going concern. Management's plans in regards to these matters are also described in Note 20. The combined financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Lima, Peru
December 5, 2001 except as to Note 20 which is as of April 15, 2002
Countersigned by:
- ---------------------------- Juan Jose Cordova (Partner) Peruvian Public Accountant Registration No 18869
DOE RUN PERU S.R.L. COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these combined financial statements.
DOE RUN PERU S.R.L. COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these combined financial statements.
DOE RUN PERU S.R.L. COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these combined financial statements.
DOE RUN PERU S.R.L. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these combined financial statements.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS
Doe Run Peru S.R.L. (Doe Run Peru or the Company) is a Peruvian company incorporated on September 8, 1997 and, since June 1, 2001, 99.9% owned by Doe Run Cayman Ltd. (Doe Run Cayman). Prior to May 31, 2001 Doe Run Peru was 99.9% owned by Doe Run Mining S.R.L. (Doe Run Mining), a subsidiary of Doe Run Cayman. See Note 2.
Doe Run Peru is engaged in the smelting and refining of polymetallic concentrates, mainly copper, lead and zinc, which are sold primarily to customers located outside of Peru as refined metals.
2. BUSINESS ACQUISITIONS
Effective March 1, 1999, Doe Run Peru was merged with Empresa Minera Cobriza S.A. (Cobriza), an entity previously controlled by Doe Run Mining since the acquisition of substantially all of Cobriza's outstanding shares on August 31, 1998. The accompanying combined financial statements of the Company reflect the historical cost basis of assets and liabilities and the results of operations of Cobriza for the periods before the merger, during which Doe Run Peru and Cobriza were under common control. These financial statements have been prepared as if the merger occurred October 31, 1998.
At the General Shareholders' Meetings held on May 14, 2001 by Doe Run Peru and Doe Run Mining, respectively, the merger by absorption of these two companies was approved, with Doe Run Peru the absorbing company and Doe Run Mining the absorbed company. This merger was effective as of June 1, 2001.
On the day before the effective date of the merger Doe Run Mining's shareholders' equity transferred to Doe Run Peru, the absorbing company. As a result of the transfer of the shareholders' equity of Doe Run Mining to Doe Run Peru after the merger, and taking into account that Doe Run Mining was the majority shareholder of Doe Run Peru, several accounts were consolidated, such as the capital stock of Doe Run Peru and the investment account of Doe Run Mining, resulting in a decrease in the capital stock of Doe Run Peru from $271,435 to $2,005. The capital stock of Doe Run Peru is comprised of 15,912,083,739 shares with a par value of $ 0.01 each, less an adjustment of $157,115 resulting from a write up of fixed assets which is allowed for Peruvian GAAP but not under U.S. GAAP.
For comparability purposes, the merger of Doe Run Mining and Doe Run Peru resulted in the following adjustments to amounts previously reported for Doe Run Peru:
(a) Adjustment is primarily the result of additional interest expense of $14,666 and $14,835 in 2000 and 1999, respectively that was previously reported as an expense of Doe Run Mining. (b) Adjustment is primarily due to the elimination of an intercompany receivable balance with Doe Run Mining of $34,667. (c) Adjustment is primarily due to the addition of the $125,000 bank loan that was previously maintained on the books of Doe Run Mining, an increase of $3,887 in the balance due to related parties, and an increase of $2,055 in accrued liabilities reflecting the addition of accrued interest expense on the $125,000 bank loan previously maintained on the books of Doe Run Mining. (d) Adjustment is comprised of reductions of $269,430 in common stock and $42,047 in retained earning partially offset by the elimination of the deficit balances in additional paid in capital, due to parent, and accumulated other comprehensive income of $16,234, $104,090 and $20,910, respectively, reflecting the elimination of Doe Run Mining's investment in Doe Run Peru.
The accompanying combined financial statements of the Company reflect the historical cost basis of assets and liabilities and the results of operations of Doe Run Mining for the periods before the merger, during which Doe Run Peru and Doe Run Mining were under common control of Doe Run Cayman. These financial statements have been prepared as if the merger occurred October 31, 1998. Prior to the merger Doe Run Mining's principal asset was its investment in Doe Run Peru and its principal liabilities were the bank loan, see Note 11, and intercompany loan due to Doe Run Peru.
3. BASIS OF PRESENTATION
The combined financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
The combined financial statements include all the accounts of the Company and its subsidiaries, after eliminating intercompany balances and transactions, including gains and losses resulting from such transactions. The minority interest is not significant.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain balances have been reclassified from their previous presentation in order to conform to their current presentation.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of refined metals for sale, as well as metals and concentrates in process are determined under the last-in, first-out method (LIFO). Materials, supplies and spare parts are principally stated at average cost.
Inventory costs include concentrates purchased, labor, depreciation and other production costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at the lower of cost or fair value. Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of the assets may not be recoverable. The impairment loss on such assets, as well as long-lived assets and certain identifiable intangibles to be disposed of, is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets.
Depreciation is calculated on a straight-line basis at the rates indicated in Note 9. Major additions and improvements to property, plant and equipment are capitalized, at cost, when they significantly increase the productive capacity or the life of the assets. Routine or unanticipated repair and maintenance expenditures, which do not extend the useful life or increase the productive capacity of the asset, are charged to operations as incurred. Major expenditures required to maintain the originally anticipated productive capacity and life of the assets are deferred and charged to operations over the period through the next anticipated maintenance date.
DEFERRED FINANCING FEES
Deferred financing fees represent fees paid in conjunction with the acquisition of revolving loans and are amortized using the interest method over the term of the respective line of credit.
EXPLORATION AND DEVELOPMENT COSTS
Exploration costs are charged to operations as incurred. Development costs incurred to maintain production at operating mines are charged to operations as incurred. Development expenditures for mining properties that are considered to be commercially feasible, but are not yet producing, and major development expenditures at operating mines that are expected to benefit future production are capitalized and amortized using the units of production method over the estimated proven ore reserves to be benefited.
COMMITMENTS AND CONTINGENCIES
The Company accrues for loss contingencies, including costs associated with environmental remediation obligations, when such costs are probable and reasonably estimable. Accruals are reviewed and adjusted as circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUE RECOGNITION
Sales are recorded when title passes to the customer, which typically occurs at the time of shipment. Sales are recorded based on estimated weights, assays and prices using applicable customer agreements and hedge contracts. Revenues with respect to such sales are adjusted to reflect settlement when final weights, metal contents and prices are determined.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the Financial Accounting Standards Board in June 1998, and amended by Statement No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133, issued in June 2000 (collectively, FAS 133). Under FAS 133, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e. gains and losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and if so, whether the derivative instrument is designated as a hedge of exposures to changes in fair values, cash flows or foreign currencies. If the hedged exposure is changes in fair values, the gain (loss) is recognized in earnings in the period of change, with an equal and offsetting (loss) gain recognized on the change in value of the hedged item. If the hedged exposure is changes in cash flows, the effective portion of the gain (loss) is reported as a component of other comprehensive income (outside earnings) until the forecasted hedged transaction affects earnings, when it is reclassified into earnings.
The Company adopted FAS 133 beginning November 1, 2000, in the first quarter in which it was required by the standard, as amended. The adoption of FAS 133 resulted in a net transition loss of $1,125, net of income tax benefit of $ 480.
DEFERRED INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
DEFERRED WORKERS' PROFIT SHARING
In accordance with government regulations in Peru, employees are entitled to receive 8% of the Doe Run Peru's taxable income, 50% of which is distributed to employees based on number of days worked, and the remaining distributed in proportion to their salaries. Such profit sharing, which is tax deductible, is limited to 18 times the annual salary for each worker. Any excess is to be reserved and used for training of the workers.
Because workers' profit sharing is calculated on taxable income, the Company recognizes the effect of temporary differences between financial reporting and tax bases of assets and liabilities related to workers' profit sharing on a basis consistent with that used for income taxes.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of Statement No. 143 for the quarter ending January 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report.
In August 2001, the Financial Accounting Standards Board issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes both FASB Statements No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business.
The Company is required and plans to adopt the provisions of Statement No. 144 for the quarter ending January 31, 2003. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements.
5. REMEASUREMENT INTO U.S. DOLLARS
The functional currency of Doe Run Peru is the U.S. dollar. Until December 31, 1999 the accounting records of Doe Run Peru and its subsidiary were kept in Peruvian nuevos soles and remeasured into
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
U.S. dollars. Since January 1, 2000 the accounting records of Doe Run Peru have been kept in U.S. dollars due to a modification of the Contract of Guarantees and Measurement to Promote Investments described in Note 13 (b). This change did not have an effect on the financial position or results of operations of Doe Run Peru.
The methodology utilized for the re-measurement of nuevos soles into U.S. dollars, as established by SFAS 52, is as follows:
(a) Non-monetary accounts have been re-measured at historical exchange rates.
(b) Monetary accounts in Peruvian currency have been re-measured at free market average exchange rates in effect at the respective year-end, see Note 6.
(c) Income and expenses have been re-measured at the average monthly exchange rates. Cost of sales was determined from its components once re-measured. The net effect of foreign exchange differences has been reflected in the accompanying combined statements of operations.
6. FOREIGN CURRENCY TRANSACTION AND EXCHANGE RISK EXPOSURE
Under current law, foreign currency transactions are made through the Peruvian financial banking system at free market exchange rates. The exchange rates in effect were S/3.439, S/3.515 and S/3.489 per each $1 for assets at October 31, 2001, 2000 and 1999, respectively, and S/3.443, S/3.510 and S/3.493 per each $1 for liabilities at October 31, 2001, 2000 and 1999, respectively.
Assets and liabilities denominated in Peruvian nuevos soles are as follows (in thousands):
Net foreign currency transaction losses relating to transactions denominated in Peruvian nuevos soles were $412, $281 and $2,529 for the years ended October 31, 2001, 2000 and 1999, respectively, which have been reflected in the combined statements of operations in other income (expense), net.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. INVENTORIES
Inventories consist of the following:
Materials, supplies and spare parts are stated net of reserves for obsolescence of $826, $250 and $0 at October 31, 2001, 2000 and 1999, respectively.
The FIFO cost of inventories valued under the LIFO cost method were approximately $42,575 and $48,972 at October 31, 2001 and 2000, respectively. If the FIFO cost method had been used to determine cost, inventories would have been $4,415 lower and $1,185 higher at October 31, 2001 and 2000, respectively.
As a result of reducing certain inventory quantities valued on the LIFO basis, lower (higher) inventory costs prevailing in previous years were charged to cost of sales in 2001, 2000 and 1999. The Company calculates the effect of LIFO liquidations on net income based on the current cost method. The effect was an increase (decrease) in net income of $(35), $27 and $400 in 2001, 2000 and 1999, respectively.
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
The value added tax (VAT) paid on purchases can be offset against the VAT resulting from local sales, Peruvian income tax and other taxes collected by the Peruvian Public Treasury. In addition, the Company may apply for a refund in the form of cash or negotiable credit Notes from the tax authorities.
The credits on Peruvian value added tax outstanding as of October 31, 2001 and 2000 were collected subsequent to year-end.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company received a refund of income tax prepayments from the Peruvian Government of approximately $ 12,700 on June 4, 2001. At the same time, the Company paid $ 2,700 for certain tax liabilities.
9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. DEBT
Long-term debt consists of the following:
The revolving credit facility with a Peruvian bank allows Doe Run Peru to borrow up to $40,000 and expires June 19, 2002. This revolving credit facility provides for advances by the lender to a maximum of $40,000 less outstanding letters of credit, guarantee letters and customs bonds and is based upon specific percentages of eligible receivables and inventories. In addition the lender provides a separate line of $ 12,000 for the issuance of certain classes of guarantee letters. The sum of the advances on both of these lines is limited to $42,000. The Company is currently in negotiations with its lender to extend the facility, but has not yet received any commitment.
The facility bears interest at LIBOR (1-month, 3-month or 6-month rate, depending on the term of the loan) plus 2.0% per annum. The facility is secured by accounts receivable and inventories. The average effective rate was 6.59% at October 31, 2001. An unused line fee of 0.375% per annum on the average unused portion of the line is payable quarterly, in arrears. Individual loans must be greater than $1,000. Actual availability was $9,692 at October 31, 2001.
The bank loan with a commercial bank matures in a single installment on March 12, 2005. Interest on the principal amount of the loan is payable semi-annually on each March 12 and September 12, commencing on September 12, 1998. Interest on the outstanding principal amount of the loan accrues at a rate of 11.50% per annum through September 11, 2004 and at a rate of 11.25% from September 12, 2004 to March 11, 2005.
The deferred purchase price obligation was payable to Empresa Minera del Centro del Peru S.A. (Centromin) for the assets of the Cobriza mine purchased in 1998. The last payment of three in the amount of $1,495 was paid August 31, 2001.
In January 1999, Doe Run Peru finalized an agreement for the sale and leaseback of its oxygen plant at the La Oroya facility for $17,162. Doe Run Peru has an option to repurchase the oxygen plant at the end of the five-year lease term for $200. In April 1999, Doe Run Peru entered into a three-year sale and leaseback of computer equipment for $761. In January 2001 Doe Run Peru entered into a three-year leasing of an additional computer equipment and equipment maintenance for $ 746. These transactions have been accounted for as financing arrangements. The interest rates applicable under the oxygen plant, computer equipment and additional computer equipment leases are 12.35%, 8.50% and 6.81%, respectively.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The aggregate estimated amounts of long-term debt maturing after October 31, 2001 are as follows:
The Doe Run Peru revolving credit facility contains certain covenants that set a net worth requirement, limit indebtedness and investments and restrict the payment of dividends in the event of default. An event of default could result in the termination of the revolving credit facility and/or the acceleration of all amounts due thereunder. The Company was in compliance with the covenants as of October 31, 2001.
12. OTHER LONG-TERM LIABILITIES
Other long-term liabilities are principally comprised of estimated closure cost of a zinc ferrite site of $7,200, as explained in Note 15.
13. TAXATION
(a) Doe Run Peru and its subsidiary are subject to Peruvian taxation. The statutory income tax rate of 30% is applied separately to the taxable income of each company and not to the consolidated taxable income.
(b) Doe Run Peru is a party to a Tax Stabilization Agreement and a Contract of Guarantees and Measures to Promote Investments with the Peruvian Government as follows:
TAX STABILIZATION AGREEMENT
The Tax Stabilization Agreement expires as of December 31, 2006. Under this agreement, Doe Run Peru will utilize tax statutes prevailing as of November 6, 1997. The principal provisions of the agreement are as follows:
- Utilization of the tax statutes prevailing as of April 25, 1994. In exercise of the regulation permitted in the tenth clause of the Tax Stabilization Agreement, Doe Run Peru adopted the tax statutes prevailing as of November 6, 1997.
- Custom duties will be calculated at rates ranging from 15% to 25%.
- Free trade of its products.
- No restrictions on the use of proceeds from export sales.
- Free conversion of foreign currency generated by local sales.
- No discrimination in foreign currency transactions.
CONTRACT OF GUARANTEES AND MEASURES TO PROMOTE INVESTMENTS
On December 30, 1997, Doe Run Peru signed a Contract of Guarantees and Measures to Promote Investments. This agreement is effective beginning in the calendar year ended December 31, 2007, provided that Doe Run Peru complies with the committed investments
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
related to the improvements of the facilities [see Note 15(b)], and provides tax stability through December 31, 2022. The principal provisions are similar to those established in the Tax Stabilization Agreement, except that Doe Run Peru will utilize the tax statutes prevailing as of December 23, 1997.
The provision for Peruvian income tax is comprised of the following for the years ended October 31, 2001, 2000 and 1999:
Peruvian income tax expense (benefit) differed from the amount computed by applying the statutory income tax rate of 30% to income before income tax expense (benefit) as a result of the following:
Current tax expense decreased as a result of the merger between Doe Run Mining and Doe Run Peru, offsetting taxable income of Doe Run Mining with losses of Doe Run Peru.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
The tax loss carryforwards in Peru are available for use for four years beginning with the first year the Company obtains taxable income against which it can take a credit.
Management believes that sufficient uncertainty exists regarding the realization of certain deferred tax assets and that a valuation allowance is required. Changes in the valuation allowance reflects a change in management's assessment regarding the future realization of deferred tax assets as a result of the current estimates of future earnings and liquidity.
14. EMPLOYEE BENEFITS
SEVERANCE INDEMNITIES
Doe Run Peru is required to make semiannual deposits into a bank account for severance indemnity benefits for Peruvian employees under Peruvian government regulations. The balance in the account represents the full benefit due to such employees upon termination. The Company accrues for the additional amount that would be contributed to the account since the last deposit date as if all such employees were to terminate as of the balance sheet date. The Company's expense related to severance indemnity benefits was $2,946, $2,951 and $2,786 for the years ended October 31, 2001, 2000 and 1999, respectively.
WORKERS' PROFIT SHARING
In accordance with government regulations in Peru, employees are entitled to receive 8% of the Doe Run Peru's taxable income, 50% of which is distributed to employees based on number of days worked, and the remaining distributed in proportion to their salaries. Such profit sharing, which is tax
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
deductible, is limited to 18 times the annual salary for each worker. Any excess is to be reserved and used for training of the workers. The Company had no expense relating to workers' profit sharing payments years ended October 31, 2001, 2000 and 1999, due to tax losses in those years.
In addition, the Company recorded the deferred workers' profit sharing asset of $0 and $2,094 at October 31, 2001 and 2000, respectively, representing the amount the Company expects to recover through future reduction of workers' profit sharing payments.
15. COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENTS
(a) According to the Contract described in Note 2, Doe Run Peru is obligated to expend $120,000 through October 23, 2002 to expand and modernize its operations, including certain expenditures to comply with environmental regulations within Peru, as discussed below. In the event that Doe Run Peru has not fulfilled its obligations under the investment commitment by the end of October 23, 2002, it will be obligated to pay a penalty to Centromin equal to 30% of any shortfall. Centromin has approved qualifying expenditures through October 31, 2001 totaling approximately $102,712. Although there can be no assurance, management anticipates that capital and other qualifying expenditures during 2002 will enable Doe Run Peru to meet its investment commitment. Management plans to fund these expenditures primarily from future operating cash flows.
(b) According to the Contract of Guarantees and Measures to Promote Investments mentioned in Note 13(b), (as modified in April, 2001) Doe Run Peru has committed to performing certain economic expansion projects by December 31, 2006, in order to provide tax stability from January 1, 2007 through December 31, 2022. Doe Run Peru expects to spend $105,587 to expand and modernize its facilities, including environmental expenditures. To the extent the related investments are made before October 23, 2002, they can also be considered as part of the $120,000 investment discussed in the above paragraph. Through October 31, 2001, Doe Run Peru has invested approximately $37,357.
ENVIRONMENTAL MATTERS
Doe Run Peru submitted to and received approval from the Peruvian government for an Environmental Adjustment and Management Program (PAMA) that consisted of an environmental impact analysis, monitoring plan and data, mitigation measures and closure plan. The PAMA also sets forth the actions and corresponding annual investments the concession holder agrees to undertake in order to achieve compliance with the maximum applicable limits prior to expiration of the PAMA (ten years for smelters, such as Doe Run Peru's operations in La Oroya, and five years for any other type of mining or metallurgical operation like Cobriza). The required amount of annual investment must not be less than one percent of annual sales. Once approved, the PAMA functions as the equivalent of an operating permit with which the operator must comply. After expiration of the PAMA, the operator must comply with all applicable standards and requirements. Future changes in legal rules and maximum permissible levels would not be applicable to Doe Run Peru for the remaining period of the PAMA.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Doe Run Peru has committed under its PAMA to implement the following projects at its La Oroya smelter through December 31, 2006:
o New sulfuric acid plants o Treatment plant for the copper refinery effluent o Industrial waste water treatment plant for the smelter and refinery o Improve Huanchan lead and copper slag deposits o Build an arsenic trioxide deposit o Management and disposal of lead and copper slag wastes o Domestic waste water treatment and domestic waste disposal o Monitoring station
Through October 31, 2001, the Company had spent approximately $25,000 on projects under the La Oroya PAMA.
Annual spending on a calendar year basis approved in the La Oroya PAMA as amended, most recently on January 25, 2002 are as follows:
The current estimate for the total to be expended on environmental projects under the PAMA and on additional related process changes for Doe Run Peru is approximately $174,000 for this period.
Doe Run Peru's operations historically and currently exceed some of the applicable Ministry of Energy and Mines (MEM) maximum permissible limits pertaining to air emissions, ambient air quality and waste water effluent quality. The PAMA projects, which are more fully discussed below, have been designed to achieve compliance with such requirements prior to the expiration of the PAMA on January 13, 2007. No assurance can be given that implementation of the PAMA projects is feasible or that their implementation will achieve compliance with the applicable legal requirements by the end of the PAMA period. Further, there can be no assurance that the Peruvian government will not in the future require compliance with additional or different environmental obligations that could adversely affect Doe Run Peru's business, financial condition or results of operations. Under the purchase agreement related to the acquisition of the La Oroya assets in October 1997, Empresa Minera del Centro del Peru S.A. (Centromin), the previous owner of the La Oroya assets, agreed to indemnify Doe Run Peru against environmental liability arising out of its prior operations, and performance of the indemnity has been guaranteed by the Peruvian government through the enactment of the Supreme Decree No. 042-97-PCM. However, there can be no assurance that Centromin will satisfy its environmental obligations and investment requirements, including those in its PAMA, or that the
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
guarantee will be honored. Any failure by Centromin to satisfy its environmental obligations could adversely affect Doe Run Peru's business, financial condition or results of operations.
The Cobriza mine has a separate PAMA in which the Company has committed to complete projects to manage tailings, mine drainage, sewage and garbage by mid-2002. The Company has spent approximately $8,800 under the PAMA as of October 31, 2001. After beginning construction on the largest of the projects, the tailings backfill project, revisions to the cost estimate increased substantially. As a result, the Company has requested a revision of its PAMA from the MEM, which would allow it to operate for a time without completing the backfill project. Future economic and operating conditions could affect the Company's ability to complete the backfill project. The Company is currently in compliance with its requirement to reduce emissions from the mine under the PAMA through a decrease in production. In April 2002, the MEM proposed a pending regulation extending the PAMA for all companies for an additional 18 months for work remaining under the PAMA. For companies still not in compliance at the end of this 18-month extension period, each company would have an additional six months to close the operation. In light of this pending regulation, Doe Run will be re-evaluating its options with the expectation that a decision will be made within the next six to twelve months regarding the future course of action to be taken.
ZINC FERRITE DISPOSAL
According to the Subscription Agreement governing the purchase of La Oroya, the Company was entitled to use the existing zinc ferrite disposal site until October 23, 2000. After this date, the Company could take ownership of this deposit or abandon it, create a new site, and remit to Centromin $7,200, the estimated cost of closure. On September 29, 2000, the Company decided to take ownership of this deposit. Therefore, it subscribed an agreement with Centromin for transferring to the Company the concessions (lands), including the zinc ferrite existing in the deposit. Pursuant to this contract, the transfer was effective as of October 22, 2000. The Company has accrued $7,200 for the closure costs and, although a plan for closure of the site has not been finalized, management believes that this reserve is adequate.
LITIGATION
All existing and pending litigation at the time of the acquisition of Metaloroya was retained by Centromin. The Company is from time to time, a party to litigation arising in normal course of its business. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company.
LETTERS OF CREDIT
At October 31, 2001 the Company had outstanding customs bonds of $4,441 relating to concentrate and other purchases.
SALES COMMITMENTS AND CONCENTRATION
The Company has commitments to sell approximately 54%, 74%, 75%, 38% and 100% of its anticipated 2002 lead, copper, zinc, silver and gold metal production, respectively under agreements, with terms of generally less than one year. Sales prices are generally based on the average quoted exchange prices for the month of shipment, plus a premium.
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Doe Run Peru derives its revenue from the sale of its refined metals and other products to numerous customers. Doe Run Peru's three largest customers accounted for: 9%, 8% and 8%, respectively, of net sales in the year ended October 31, 2001, 10%, 10% and 7%, respectively, of net sales in the year ended October 31, 2000 and 8%, 8%, and 6%, respectively for the year ended October 31, 1999. The customers have sales contracts, under which the Company will supply products at prices based on international market quotations.
16. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments primarily to enhance revenue by receiving premiums on option contracts. The Company sells futures contracts and options and combinations thereof that effectively establish contract prices for sales and purchases that are acceptable to the Company, should the options be exercised. The options generate premium income, which enhance revenues. Because these instruments do not meet the requirements for hedge accounting under FAS 133, the changes in fair market value related to these instruments (including the time value portion), which reflect market prices and volatility at the balance sheet date, are recorded in results of operations, and are expected to increase the volatility of reported results.
The unrealized gain reflected in the statement of operations relates to the change in fair market value of derivative financial instruments that are not designated as hedges. For derivative instruments designated as hedges (futures contracts), the Company assesses effectiveness based on changes in the forward rate, and as a result, does not expect hedge ineffectiveness.
The fair market value of the Company's derivative financial instruments reflected in the Company's balance sheet as of October 31, 2001 is the difference between quoted prices at the balance sheet date and the contract settlement value. The fair market value represents the estimated net cash the Company would receive (pay) if the contracts were canceled on the balance sheet date.
The Company's open hedging positions as of October 31, 2001 were: (numbers not in thousands)
SOLD/(PURCHASED) FUTURES CONTRACTS
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SOLD / (PURCHASED) CALL OPTION CONTRACTS
SOLD / (PURCHASED) PUT OPTION CONTRACTS
At October 31, 2001, the Company had recorded an asset and a liability of $520 and $1,345 related to the fair market values of these instruments. To affect this balance, the Company recorded the transition adjustment discussed in Note 4 and a gain of $1,198, net of the effect of balances of deferred option premiums and options at fair market value previously recorded on the balance sheet.
The Company's open hedging positions as of October 31, 2000 were: (numbers not in thousands)
SOLD/(PURCHASED) FUTURES CONTRACTS
SOLD / (PURCHASED) CALL OPTION CONTRACTS
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SOLD / (PURCHASED) PUT OPTION CONTRACTS
Sold put option contracts used by the Company to offset certain fixed price sales to customers did not meet the definition of a hedge, and the net mark to market adjustment prior to the adoption of FAS 133 related to these contracts was a loss of $242 for the year ended October 31, 2000. No net mark to market adjustments was required in the year ended October 31, 1999.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt were estimated using discounted cash flow analysis, based on the estimates of incremental borrowing rates for similar types of borrowing arrangements. At October 31, 2001 and 2000, the fair values of the Company's financial instruments, except for the hedge positions described in Note 16, were not materially different from their carrying amounts.
18. RELATED PARTY TRANSACTIONS
The Company through Doe Run Mining and Doe Run Peru, has signed the following agreements with Doe Run Resources Corporation:
(a) Doe Run Mining was a party to a Technical, Managerial and Professional Services Agreement, under which Doe Run Resources committed to provided the necessary resources for managerial, financial, communications, information technology and operating services. Doe Run Mining paid $5,512 in the years ended October 31, 2000 and 1999, respectively. The contract was terminated effective October 31, 2000.
Doe Run Mining was a party to a Technical Assistance Agreement, under which Doe Run Resources committed to provide technological assistance and technology transfer. Doe Run Mining paid $ 357 in the years ended October 31, 2000 and 1999, respectively. In conformity with the addendum to the original contract signed on November 1, 2000. The contract was terminated effective October 31, 2000.
(b) Doe Run Peru was a party to a Foreign Sales Agency and Hedging Services Agreement, under which Doe Run Resources agreed to perform marketing and selling of metallurgical products and trading and hedging services. The contract was terminated October 31, 2000 and replaced with an International Sales Agency Services Contract and a Hedging Services Contract. The commission was 3% of the foreign sales. The amounts expensed were $13,073 and $11,821 for the years ended October 31, 2000 and 1999, respectively.
Pursuant to the terms and conditions included in the International Sales Agency Services Contract, Doe Run Resources agreed to perform marketing and sales services for Doe Run Peru. The term of this agreement is for two years after which it is automatically renewed on an annual
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NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
basis unless either party gives notice of non-renewal. The commission is 2.25% of the sales revenue. Doe Run Peru paid $8,818 for the year ended October 31, 2001.
Pursuant to the terms and conditions included in the Hedging Services Contract, Doe Run Resources agreed to perform trading and hedging services. The term of this agreement is for two years after which it is automatically renewed on an annual
basis unless either party gives notice of non-renewal. The commission is $42 per month. Doe Run Peru paid $504 for the year ended October 31, 2001.
In addition to the above described, the following balances relating to intercompany transactions were outstanding as of October 31, 2001 and 2000:
(a) As a result of these transactions, the Company had a due to related parties of $ 8,873 and $10,917 at October 31, 2001 and 2000, respectively.
(b) Sales of refined metals to Doe Run Resources were $0, $1,573 and $2,898 for the years ended October 31, 2001, 2000 and 1999, respectively. There were no balances outstanding relating to these sales as of October 31, 2001 and 2000, respectively.
Doe Run Cayman and its wholly-owned subsidiary, Doe Run Peru have jointly and severally, fully, unconditionally guaranteed $200,000 11.25% senior Notes due 2005 and $55,000 floating interest rate senior Notes due 2003, issued by Doe Run Resources (collectively, the Unsecured Notes). Additionally, the above-referred companies together with their subsidiaries have jointly and severally, fully, unconditionally guaranteed $50,000 aggregate principal amount of 11.25% senior Secured Notes due 2005, issued by Doe Run Resources (the Secured Notes).
The guarantee of Doe Run Peru is contractually subordinated to the indebtedness of Doe Run Peru under the Revolving Credit Facility described in Note 11.
The Secured Notes and the Unsecured Notes contain certain covenants that limit the ability of Doe Run Peru and its subsidiary to, among other things, incur additional indebtedness, make certain restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur lines, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to Doe Run Resources and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets. The Company is in compliance with these covenants as of October 31, 2001.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. GEOGRAPHIC DATA
The following is an analysis of net sales by country of destination:
20. LIQUIDITY
Deteriorating market conditions over the past four years, coupled with the Company's substantial debt service requirements, have severely reduced the Company's liquidity. In fiscal 2001, cash from operating activities was sufficient to meet the Company's capital and debt service requirements only because of a significant reduction in working capital. In addition to a $23,720 reduction of tax receivables, the Company reduced inventories by $6,212.
On March 12, 2002, Doe Run Peru, with the consent of its parent company, The Doe Run Resources Corporation, (Doe Run) did not pay $7,031 of interest due to Banco de Credito Overseas Limited (the Bank) under a Contract for a Loan in Foreign Currency. Failure to pay such interest was cured by instructing the Bank to offset the amount of such payment against the amount otherwise payable by the Bank to Doe Run under a Special Term Deposit Contract.
Due to the non-payment of interest due March 15, 2002 on the 11 1/4% Senior Notes due 2005, Floating Interest Rate Senior Notes due 2003 and 11 1/4% Senior Secured Notes due 2005 (collectively, the Notes), and the expiration of the grace period during which Doe Run could cure the non-payment, the Company, as a guarantor is in default of its covenants under the Notes indentures and its revolving credit facilities. No actions have been taken by the lenders to accelerate the payment of outstanding debt balances. Doe Run is in restructuring negotiations as described below and in negotiations with the lenders of its revolving credit facilities to execute amended revolving credit facilities.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On April 15, 2002, Doe Run announced that it had reached an agreement in principle with Renco and Regiment Capital Advisors, LLC (Regiment) for Renco and Regiment to provide Doe Run with significant capital for the purpose of restructuring its existing debt. Pursuant to the agreement in principle, Renco will purchase $20 million of Doe Run's preferred stock and Regiment, a significant holder of the Notes, will commit to lend Doe Run $35 million and will offer other holders of Notes the opportunity to participate in making such loan.
Under the proposed restructuring transaction, Doe Run would make a cash tender offer for a portion of the Notes and an exchange offer for the balance of the Notes. The $55 million in proceeds of the Renco investment and the loan, together with borrowings under its revolving credit facility would be used to finance the cash tender offer, to pay the accrued interest as of March 15, 2002 on the Notes exchanged in the exchange offer and to pay certain costs of the transactions. If successful, the cash tender offer and the exchange offer would significantly reduce Doe Run's future debt service and provide sufficient liquidity to continue to operate all its facilities at present levels and will not adversely affect Doe Run's trade creditors.
The non-binding agreement in principle is subject to agreement on the terms of definitive documentation and the successful completion of the transactions is subject to several conditions, including, among others, the participation by holders of at least 90% of the aggregate principal amount of each class of Notes in the cash tender offer and/or the exchange offer and the satisfactory modification of Doe Run's United States and Peruvian revolving credit facilities.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and executive officers of the Company:
Ira Leon Rennert has been Chairman, Chief Executive Officer and deemed beneficial shareholder of the parent company, Renco (including predecessors), since Renco's first acquisition in 1975, Chairman and Director of the Company since April 1994, Chairman and Director of Doe Run Cayman since October 1997 and Chairman and Director of FPI since August 1996. Renco holds controlling interests in a number of mining and manufacturing concerns operating in businesses not competing with the Company including Renco Steel Holdings, Inc., WCI Steel, Inc., Renco Metals, Inc., AM General Corporation, for all of which he serves as Chairman of the Board of Directors. Mr. Rennert also serves as Chairman of the Board of Directors of Lodestar Holdings, Inc. in which he holds a controlling interest. Renco Metals, Inc. (effective August 2, 2001) and Lodestar Holdings, Inc. (effective April 27, 2001) and their respective subsidiaries are curently operating under Chapter 11 of the U.S. Bankruptcy Code.
Jeffrey L. Zelms has served as Vice Chairman of the Company since December 1998 and as President and Chief Executive Officer of the Company and its predecessor since August 1984 and President of Doe Run Cayman since October 1997. Mr. Zelms has over 30 years of experience in the mining industry. Mr. Zelms serves on the boards of directors of Homestake Mining Company and Phoenix Textiles.
Marvin K. Kaiser has served as Executive Vice President and Chief Financial and Administrative Officer since September 2001, as Vice President and Chief Financial Officer of the Company and its predecessor since January 1994 and of FPI since April 1998, Vice President of Doe Run Cayman since October 1997 and Finance Manager of Doe Run Peru since October 1997. From June 1989 to December 1993, Mr. Kaiser was the Chief Financial Officer of AMAX Gold, Inc., a gold producing company. Mr. Kaiser is a Certified Public Accountant.
Richard L. Amistadi has served as Vice President of Sales and Marketing of the Company and its predecessor since November 1986. Mr. Amistadi has over 30 years of experience in sales, marketing and product development of lead metal, lead alloys, zinc metal, lead, zinc and copper concentrates and associated by-products.
Kenneth R. Buckley has served as Vice President of the Company since September 1996, General Manager of Doe Run Peru since October 1997 and General Manager of Cobriza since August 31, 1998. From January 1996 until September 1996, Mr. Buckley was Vice President of Smelting for the Company. Mr. Buckley served as General Manager of the Resource Recycling Division for the Company and its predecessor from September 1988 until January 1996. Mr. Buckley has over 35 years of experience in managing metal milling and smelting operations in five countries.
DOE RUN PERU S.R.L.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Jerry L. Pyatt has served as Vice President and Chief Operating Officer Of the Company's U.S. operations since September 2001. Prior to that time Mr. Pyatt served as Vice President Secondary Smelting of the Company, General Manager of the Company's Resource recycling Division and he has been President of FPI since October 1, 1998. Mr. Pyatt joined the Company in 1991 as a Metallurgical Engineer.
Juan Carlos Huyhua, Ph. D., has been Operations Manager of Doe Run Peru since October 1997. From January 1995 to June 1997, Dr. Huyhua was Chief Operating Officer of Centromin. Dr. Huyhua has served in various capacities for Centromin since 1978, including as Assistant General Manager--Metallurgical Operations, General Superintendent--Smelting and Refining Department and Manager--Metallurgical Operations. Dr. Huyhua received his doctorate in Extractive Metallurgy from the New Mexico Institute of Mining and Technology in 1989.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation of the named executive officers by the Company for services rendered to it in all capacities:
SUMMARY COMPENSATION TABLE
(a) Value of perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of total salary and bonus for any named executive officer.
(b) The amounts shown as "All Other Compensation" in the table for fiscal 2001 for each named executive officer, except Mr. Rennert, represent payments to Messrs. Zelms, Kaiser, Amistadi, Buckley and and Pyatt under the gainsharing and profit sharing plans of $42,715, $20,544, $18,196, $12,728 and $22,641, respectively, auto allowance of $11,236 for Mr. Zelms and $4,800 of for Messrs. Kaiser, Amistadi and Pyatt, $21,206 of life insurance premiums, tax services and medical expenses for Mr. Zelms and $137,493 of expatriate compensation for Mr. Buckley.
(c) Mr. Rennert receives no compensation directly from the Company. He is Chairman of the Board and the deemed beneficial shareholder of Renco which receives a management fee from the Company pursuant to the Management Consultant Agreement (as defined). The amount shown as all other compensation to Mr. Rennert are the management fees paid by the Company to Renco. See "Item 13. Certain Relationships and Related Transactions."
NET WORTH APPRECIATION AGREEMENTS
Certain of the named executive officers (not including Mr. Rennert) and five other current and former employees of the Company are each parties to net worth appreciation agreements with the Company, pursuant to which, upon termination of each person's employment with the Company, he is entitled to receive a fixed percentage of the increase in the net worth of the Company, as defined, from a base date until the end of the fiscal quarter preceding the date of his termination. Such amount is payable without interest in 40 equal quarterly installments, commencing three months after the termination of each person's employment, and at three month intervals thereafter. In addition, Mr. Buckley's agreement provides for a "Peru Credit" under which he is entitled to receive a fixed percentage of the cumulative net income of Doe Run Peru S.R.L. with provisions similar to those described above. Four other employees are parties to net worth appreciation agreements providing for a Peru Credit.
The following table summarizes the net worth appreciation agreements now held by the named executive officers and the amounts earned thereunder.
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(a) Represents the gross aggregate amount that each participant is entitled to receive as of October 31, 2001 subject to the vesting terms of the applicable agreement.
The net worth appreciation agreements also provide that, in the event of payment of a dividend or a sale of the Company, the active participants will be entitled to receive a percentage of the dividend or the net proceeds of the sale equal to their maximum percentages under the agreements.
RETIREMENT PLANS
The following table shows the estimated amount of annual retirement income (calculated as a straight life annuity benefit) payable to employees under The Doe Run Resources Corporation Retirement Plan for Salaried Employees(the Plan), supplemented by the Doe Run Resources Corporation Supplemental Employee Retirement Plan (SERP). The SERP is a non-qualified plan under which any benefits not payable from Plan assets by reason of the limitations imposed by the Internal Revenue Code of 1986, as amended (the Code) are paid by the Company. The benefits paid are not subject to any deduction for Social Security or other offset amount.
Retirement benefits are based on a Member's monthly "Compensation" for the highest 36 consecutive months out of the final 120 months. "Compensation" covered by the Plan includes basic salary, overtime pay, cash bonuses, amounts contributed through a salary reduction arrangement to a qualified plan which meets the requirements of Section 401(k) of the Internal Revenue Code or to a cafeteria plan which meets the requirements of Section 125 of the Internal Revenue Code. "Compensation" covered by the plan does not include commissions, income from the exercise of stock options or income from shadow stock, other special pay or allowances, severance pay, payments in the nature of royalties, and the cost to the Company of any public or private employee benefit plan.
As of December 31, 2001, the following officers had completed the number of years of service indicated opposite their names: Jeffrey L. Zelms, 33 years; Marvin K. Kaiser, 8 years; Richard L. Amistadi, 33 years; Kenneth R. Buckley, 24 years. Covered compensation under the Plan for the year ended October 31, 2001 did not differ by more than 10% from the compensation disclosed in the Summary Compensation Table.
EMPLOYMENT AGREEMENTS
The named executive officers are parties to employment agreements with the Company which expire October 31, 2002, except for Mr. Buckley's, which expires December 31, 2002. The agreements are automatically renewable for additional one-year terms, unless either party gives written notice at least three months of the respective renewal dates. Pursuant to the terms of these agreements compensation is composed of: 1) a base annual salary, 2) certain year-end bonuses and 3) such additional amounts, if any, as the sole Director may determine from time to time in his discretion.
The agreements require that, during the term of their employment, the officers shall not directly or indirectly, engage in any aspect of the business of lead mining, milling, recycling or sale within the continental United States as an officer, director, partner, proprietor, investor, associate, employee or consultant except with the Company. In addition, each of the above executive officers has agreed to maintain the confidentiality of information obtained during employment with the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date hereof with respect to beneficial ownership of the Company's common stock by each beneficial owner of 5% or more of the common stock, each director and each named executive officer of the Company during the last fiscal year, and by all directors and executive officers of the Company as a group. Except as otherwise noted, the persons named in the table below have sole voting and investment power with respect to all shares or interests, as applicable, shown as beneficially owned by them.
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(a) The address of this beneficial owner is c/o The Renco Group, Inc., 30 Rockefeller Plaza, Suite 4225, New York, New York 10112.
(b) Renco is deemed to beneficially own the shares owned by DRA due to Renco's ownership of all of the outstanding capital stock of DR Acquisition Corp.
(c) Mr. Rennert is deemed to beneficially own the interests and shares owned by Renco due to the ownership by trusts established by him for himself and members of his family of all of the outstanding common stock of Renco.
By virtue of Renco's indirect ownership of all of the outstanding common stock of the Company, and Mr. Rennert's ownership of the stock of Renco, Mr. Rennert is in position to control actions that require the consent of a majority of the holders of equity interests in the Company and its subsidiaries.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under a management consultant agreement, dated as of April 7, 1994, as amended (Management Consultant Agreement), between Renco and the Company, the Company pays an annual fee of $2.4 million to Renco. The Management Consultant Agreement provides that the Company shall not make any payment thereunder which would violate any of its agreements with respect to any of its outstanding indebtedness. The Management Consultant Agreement extends to October 31, 2003 and thereafter shall continue for additional terms of three years each unless sooner terminated by either party by giving six months prior written notice. Management believes that the agreement will continue beyond October 31, 2003. In the year ended October 31, 2001, the Company recorded expense of $2.4 million pursuant to the management consultant agreement and paid $0.8 million to Renco.. The Company believes that the cost of obtaining the type and quality of services rendered by Renco under the Management Consultant Agreement was, and continues to be, no less favorable than that at which the Company could obtain such services from unaffiliated entities.
To obtain the advantages of volume, Renco purchases certain insurance coverages for its subsidiaries, including the Company, and the cost of such insurance, without markup, is reimbursed by the covered subsidiaries. Currently, the major areas of insurance coverage obtained under the Renco programs for the Company's U.S. operations are property, business interruption and fidelity and for its Peruvian operations foreign general liability and fidelity. The premiums for property, business interruption, fidelity and foreign general liability (as applicable) are allocated by Renco to its covered subsidiaries, substantially as indicated in the underlying policies. Renco also purchases and administers certain insurance policies exclusively for the Company's U.S. operations, including fiduciary, general and product liability, workers' compensation, political risk, automobile liability, and casualty umbrella, and for its Peruvian operations, including property, business interruption, general and product liability, automobile liability, hospital liability and casualty umbrella. The cost of such insurance, without markup, is reimbursed by the Company as incurred. The total insurance cost
reimbursed under the Renco insurance programs in fiscal 2001 was approximately $5.3 million, of which Doe Run financed $.9 million directly with insurance premium finance companies.
Pursuant to a tax sharing agreement between the Company and Renco, the Company pays to Renco an amount equal to the amount the Company would have been required to pay for taxes on a stand-alone basis to the Internal Revenue Service and the applicable state taxing authority, as the case may be, except that the Company will not have the benefit of any of its tax loss carryforwards unless such tax losses were a result of timing differences between the Company's accounting for tax and financial reporting purposes. This agreement also provides that transactions between the Company and Renco and its other subsidiaries are accounted for on a cash basis and not on an accrual basis.
Effective with the beginning of fiscal 1999, Renco, formerly a C corporation, elected to be treated as an S corporation pursuant to a change in the Federal tax laws allowing corporations with subsidiaries to elect such Subchapter S status. In connection with that election, Renco is permitted to designate its subsidiaries as qualified S corporation subsidiaries, and the Company has been so designated. As a result, the Company's taxable income will be included in Renco's shareholders' income tax returns. Generally, no provision for federal income taxes will be included in the Company's statements of income for periods beginning after October 31, 1998. The Company will continue to provide for foreign, state and local income taxes for those taxing jurisdictions that do not recognize qualified S corporation subsidiary status. However, under the "build-in gains" provisions of the tax law, federal and state taxes may become payable and will be charged to the Company's statement of income. Such taxes are measured by the excess of the fair market value of assets over their tax bases on the effective date of the S corporation election if the appreciated assets are disposed of within the ten-year post-conversion period. It is not management's present intent to trigger any taxes under the built-in gains provisions of the tax laws. Deferred tax assets of $8.0 million and deferred tax liabilities of $1.8 million were reflected as a charge and credit to income, respectively, in the first quarter of the Company's consolidated statement of income in fiscal 1999.
The Company may from time to time in the future sell zinc and other alloys to WCI Steel, Inc., an indirect subsidiary of Renco. The Company believes that such sales are on an arm's length basis at a price no less favorable than that at which the Company could sell to unaffiliated entities.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Documents filed as part of this Form 10-K:
1. FINANCIAL STATEMENTS (included in Part II, Item 8):
SCHEDULE II
THE DOE RUN RESOURCES CORPORATION
Valuation and Qualifying Accounts
Years ended October 31, 2001, 2000 and 1999
(dollars in thousands)
(b) REPORTS ON FORM 8-K.
None
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE DOE RUN RESOURCES CORPORATION (Registrant)
By: /s/ Jeffrey L. Zelms ------------------------------------- Jeffrey L. Zelms Vice Chairman, President and Chief Executive Officer
May 16, 2002 ------------------------------------- (Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report to security holders covering the registrant's last fiscal year and no proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders has been or will be sent to security holders.
EXHIBIT INDEX
- ---------------------------- (1) Incorporated by reference to the same numbered exhibit filed with the Registration Statement on Form S-4, as amended, (File No. 333-52285) originally filed May 11, 1998
(2) Incorporated by reference to Form 8-K (File No. 333-52285) filed September 16, 1998.
(3) Incorporated by reference to the same numbered exhibit filed with the Registration Statement on Form S-4, as amended, (File No. 333-66291), originally filed October 29, 1998.
(4) Incorporated by reference to the exhibit number in Form 10Q filed June 11, 1999.
(5) Incorporated by reference to the exhibit number in Form 10Q filed September 13, 1999.
(6) Incorporated by reference to the exhibit number in Form 10K filed January 26, 2000.
(7) Incorporated by reference to the exhibit number in Form 10Q filed June 8, 2000.
(8) Incorporated by reference to the exhibit number in Form 10K filed January 29, 2001.
(9) Filed with this Form 10K.