-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V6gNqJ1UhYUOefJxJDi7knR9lO6scYkPwsa5Yjq9Sy2QFsqnLpOHtLOEN+WFH65N oqyNBXfVlpq6wxZWxyLB4g== 0000950135-99-004870.txt : 19991027 0000950135-99-004870.hdr.sgml : 19991027 ACCESSION NUMBER: 0000950135-99-004870 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZEMEX CORP CENTRAL INDEX KEY: 0000075644 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 135496920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00228 FILM NUMBER: 99733730 BUSINESS ADDRESS: STREET 1: CT TOWER, BCE PLACE STREET 2: 161 BAY ST, STE 3750 P O BOX 703 CITY: TORONTO ONTARIO M5J STATE: A6 BUSINESS PHONE: 4163658080 MAIL ADDRESS: STREET 1: CANADA TRUST TOWER STREET 2: BCE PLACE 161 BAY ST,# 3750 PO BOX 703 CITY: TORONTO ONTARIO M5J STATE: A6 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC TIN CONSOLIDATED CORP DATE OF NAME CHANGE: 19860720 10-Q 1 ZEMEX CORPORATION 1 CONFORMED UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission file number 1-228 ZEMEX CORPORATION (Exact name of registrant as specified in its charter) CANADA NONE (State or other jurisdiction (I.R.S. Employer identification Number) of incorporation or organization) CANADA TRUST TOWER, BCE PLACE 161 BAY STREET, SUITE 3750 TORONTO, ONTARIO, CANADA, M5J 2S1 (Address of principal executive offices) (416) 365-8080 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act TORONTO STOCK EXCHANGE/NEW YORK STOCK EXCHANGE CAPITAL STOCK, NO PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ---------- -------- ------- -------- YES X NO ---------- -------- ------- -------- As of September 30, 1999, there were 8,847,105 shares of capital stock outstanding. 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ZEMEX CORPORATION CONSOLIDATED BALANCE SHEETS (US$)
- ---------------------------------------------------------------- -------------------------- -------------------------- SEPTEMBER 30, 1999 DECEMBER 31, 1998 - ---------------------------------------------------------------- ----------------------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 708,000 $ 1,062,000 Accounts receivable 21,344,000 17,642,000 Inventories 18,823,000 18,036,000 Prepaid expenses and other 1,505,000 946,000 Future tax benefits 657,000 657,000 - ---------------------------------------------------------------------------------------------------------------------- 43,037,000 38,343,000 Property, plant and equipment 95,603,000 89,058,000 Other assets 20,377,000 21,374,000 Future tax benefits (non-current) 538,000 91,000 - ---------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $159,555,000 $148,866,000 - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES CURRENT LIABILITIES Bank indebtedness $ 3,000,000 $10,000,000 Accounts payable 7,944,000 6,324,000 Accrued liabilities 5,067,000 4,433,000 Accrued income taxes 967,000 644,000 Current portion of long term debt 675,000 2,132,000 - ---------------------------------------------------------------------------------------------------------------------- 17,653,000 23,533,000 LONG TERM DEBT 50,614,000 39,354,000 OTHER NON-CURRENT LIABILITIES 589,000 1,006,000 - ---------------------------------------------------------------------------------------------------------------------- 68,856,000 63,893,000 - ---------------------------------------------------------------------------------------------------------------------- NON-CONTROLLING INTEREST 3,035,000 3,075,000 - ---------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock 8,847,000 8,708,000 Paid-in capital 49,234,000 48,691,000 Retained earnings 33,101,000 28,418,000 Note receivable from shareholder (1,749,000) (1,749,000) Cumulative translation adjustment (1,769,000) (2,170,000) - ---------------------------------------------------------------------------------------------------------------------- 87,664,000 81,898,000 - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $159,555,000 $148,866,000 - ----------------------------------------------------------------------------------------------------------------------
-1- 3 ZEMEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (US$)
- -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (unaudited) NET SALES Industrial minerals $12,824,000 $10,336,000 $38,116,000 $33,384,000 Metal powders 9,659,000 8,782,000 28,732,000 27,120,000 Aluminum recycling 7,291,000 6,559,000 20,337,000 17,552,000 - -------------------------------------------------------------------------------------------------------------------------- 29,774,000 25,677,000 87,185,000 78,056,000 - -------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of goods sold 20,474,000 18,130,000 60,115,000 55,594,000 Selling, general and administrative 3,566,000 2,881,000 10,877,000 9,742,000 Depreciation, depletion and amortization 2,226,000 1,562,000 6,521,000 4,824,000 - -------------------------------------------------------------------------------------------------------------------------- 26,266,000 22,573,000 77,513,000 70,160,000 - -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 3,508,000 3,104,000 9,672,000 7,896,000 - -------------------------------------------------------------------------------------------------------------------------- Interest income 32,000 65,000 122,000 147,000 Interest expense (1,187,000) (434,000) (3,209,000) (1,552,000) Other expense (52,000) (852,000) (134,000) (979,000) - -------------------------------------------------------------------------------------------------------------------------- (1,207,000) (1,221,000) (3,221,000) (2,384,000) - -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 2,301,000 1,883,000 6,451,000 5,512,000 PROVISION FOR INCOME TAXES 644,000 565,000 1,808,000 1,654,000 NON-CONTROLLING INTEREST IN LOSS OF SUBSIDIARY (23,000) (40,000) (40,000) (1,000) - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,680,000 $ 1,358,000 $ 4,683,000 $ 3,859,000 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE - basic $0.20 $0.16 $0.56 $0.47 - diluted 0.18 0.15 0.50 0.43 - -------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,456,727 8,287,262 8,404,070 8,275,858 - --------------------------------------------------------------------------------------------------------------------------
-2- 4 ZEMEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30 (US$)
- --------------------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,683,000 $ 3,859,000 Adjustments to reconcile income from operations to net cash flows from operating activities Depreciation, depletion and amortization 6,521,000 4,824,000 Amortization of deferred financing costs 173,000 125,000 Increase in future tax benefits (447,000) (234,000) Non-controlling interest in subsidiary earnings (40,000) (1,000) Loss (gain) on sale of property, plant and equipment 96,000 3,000 Decrease (increase) in other assets 13,000 (611,000) (Decrease) increase in other non-current liabilities (417,000) 92,000 Changes in non-cash working capital items (2,545,000) (2,286,000) - ----------------------------------------------------------------------------------------------------------- ---------------- Net cash provided by operating activities 8,037,000 5,771,000 - ----------------------------------------------------------------------------------------------------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (11,965,000) (13,979,000) Acquisitions, net of cash acquired -- (7,440,000) Acquisitions of securities -- (14,175,000) Proceeds from sale of assets 1,000 3,120,000 Proceeds from sale of securities -- 9,772,000 - ----------------------------------------------------------------------------------------------------------- ---------------- Net cash used in investing activities (11,964,000) (22,702,000) - ----------------------------------------------------------------------------------------------------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in long term debt 9,803,000 17,119,000 Net (decrease) increase bank indebtedness (7,000,000) 7,000,000 Issuance of common stock 789,000 765,000 Purchase of common stock and options for treasury (107,000) (417,000) - ----------------------------------------------------------------------------------------------------------- ---------------- Net cash provided by financing activities 3,485,000 24,467,000 - ----------------------------------------------------------------------------------------------------------- ---------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 88,000 (67,000) - ----------------------------------------------------------------------------------------------------------- ---------------- NET (DECREASE) INCREASE IN CASH (354,000) 7,469,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,062,000 2,189,000 - ----------------------------------------------------------------------------------------------------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 708,000 $ 9,658,000 - ---------------------------------------------------------------------------------------------------------------------------
-3- 5 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements include the accounts of Zemex Corporation and its wholly-owned subsidiaries (the "Corporation"). The financial data for the three months ended September 30, 1999 and 1998 and for the nine months ended September 30, 1999 and 1998 are unaudited but, in the opinion of the management of the Corporation, reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of financial position and results of operations. All material intercompany transactions have been eliminated. See the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998 for a complete list of accounting policies. All dollar amounts shown herein are in U.S. dollars unless noted otherwise. 1. LONG TERM DEBT In May 1999, the Corporation entered into note purchase agreements with private investors whereby the Corporation issued $35 million, 7.54% Senior Secured Notes, Series A, due May 21, 2009 and $15 million, 7.76% Senior Secured Notes, Series B, due May 21, 2014. The proceeds of the note issues were used to retire the Corporation's existing bank debt. The Corporation also entered into a credit agreement, which provides a 364-day $20 million operating line of credit. The notes and the credit facility rank pari passu with respect to security. The obligations are secured by a pledge of subsidiary shares, a general security interest and a negative pledge. The Corporation drew down $3 million on its credit facility and retired its outstanding industrial development revenue bond as of September 1, 1999. 2. SEGMENT INFORMATION The Corporation has three principal lines of business and is organized into three operating units based on its product lines: (i) industrial minerals, (ii) metal powders, and (iii) aluminum recycling. Information pertaining to sales and earnings from operations and assets by business segment appears below:
- ------------------------------------------------------------------------------------------------------------------- Three Months Ended Industrial Metal Aluminum September 30, 1999 Consolidated Minerals Powders Recycling Corporate - ------------------------------------------------------------------------------------------------------------------- Net sales $29,774,000 $12,824,000 $ 9,659,000 $ 7,291,000 $ -- Operating income (loss) 3,508,000 1,921,000 1,609,000 807,000 (829,000) Interest expense (1,187,000) (58,000) (40,000) (8,000) (1,081,000) Net income 1,680,000 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Three Months Ended Industrial Metal Aluminum September 30, 1998 Consolidated Minerals Powders Recycling Corporate - ------------------------------------------------------------------------------------------------------------------- Net sales $25,677,000 $10,336,000 $ 8,782,000 $ 6,559,000 $ -- Operating income (loss) 3,104,000 1,951,000 1,040,000 555,000 (442,000) Interest (expense) income (434,000) 48,000 (37,000) (13,000) (432,000) Net income 1,358,000 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------
-4- 6
- ------------------------------------------------------------------------------------------------------------------- Nine Months Ended Industrial Metal Aluminum September 30, 1999 Consolidated Minerals Powders Recycling Corporate - ------------------------------------------------------------------------------------------------------------------- Net sales $87,185,000 $38,116,000 $28,732,000 $20,337,000 $ -- Operating income (loss) 9,672,000 6,023,000 3,913,000 2,091,000 (2,355,000) Interest expense (3,209,000) (138,000) (134,000) (54,000) (2,883,000) Net income 4,683,000 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Nine Months Ended Industrial Metal Aluminum September 30, 1998 Consolidated Minerals Powders Recycling Corporate - ------------------------------------------------------------------------------------------------------------------- Net sales $78,056,000 $33,384,000 $27,120,000 $17,552,000 $ -- Operating income (loss) 7,896,000 5,146,000 3,118,000 1,574,000 (1,942,000) Interest (expense) income (1,552,000) 83,000 (147,000) (24,000) (1,464,000) Net income 3,859,000 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Industrial Metal Aluminum September 30, 1999 Consolidated Minerals Powders Recycling Corporate - ------------------------------------------------------------------------------------------------------------------- Current assets $43,037,000 $26,402,000 $ 9,998,000 $ 5,341,000 $ 1,296,000 Total assets 159,555,000 79,993,000 25,601,000 37,168,000 16,793,000 Total current liabilities 17,653,000 5,850,000 3,792,000 3,289,000 4,722,000 Total shareholders' equity 87,664,000 -- -- -- 87,664,000 - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Industrial Metal Aluminum December 31, 1998 Consolidated Minerals Powders Recycling Corporate - ------------------------------------------------------------------------------------------------------------------- Current assets $ 38,343,000 $22,770,000 $10,035,000 $ 3,513,000 $ 2,025,000 Total assets 148,866,000 74,104,000 24,969,000 33,464,000 16,329,000 Total current liabilities 23,533,000 5,029,000 3,210,000 3,777,000 11,517,000 Total shareholders' equity 81,898,000 -- -- -- 81,898,000 - -------------------------------------------------------------------------------------------------------------------
-5- 7 3. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). The differences between Canadian and U.S. generally accepted accounting principles ("U.S. GAAP") do not have a material effect on the Corporation's reported financial position, net income or cash flows except as follows: a. Statements of Income The implementation of the American Institute of Certified Public Accountants Statement of Position 98-5 ("SOP 98-5") requires costs of start-up activities and organization costs to be expensed as incurred. Canadian GAAP permits the deferral of such costs. For purposes of reporting in accordance with U.S. GAAP, certain equity securities that are not held principally for the purpose of sale in the near term are classified as available-for-sale securities, are reported at fair value and are translated at the current exchange rate which can give rise to an exchange gain or loss. For Canadian GAAP purposes, such securities are to be reported at cost and at the historical exchange rate.
---------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 Net income, as reported $1,680,000 $1,358,000 $4,683,000 $3,859,000 Less: Start-up activities (552,000) (1,363,000) (1,844,000) (1,363,000) Add: Exchange (loss) gain on available-for-sale securities (13,000) -- 115,000 -- Tax effect related thereto 158,000 409,000 484,000 409,000 ---------------------------------------------------------------------------------------------------------------- Net income (U.S. GAAP) $1,273,000 $404,000 $3,438,000 $2,905,000 ---------------------------------------------------------------------------------------------------------------- Net income per share (U.S. GAAP) - basic $0.15 $0.05 $0.41 $0.35 - fully diluted $0.15 $0.05 $0.41 $0.34 ----------------------------------------------------------------------------------------------------------------
b. Balance Sheets The following summarizes the balance sheet amounts in accordance with U.S. GAAP where different from the amounts reported under Canadian GAAP. For purposes of reporting in accordance with U.S. GAAP, certain equity securities that are not held principally for the purpose of sale in the near term are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. For Canadian GAAP purposes, such securities are to be reported at cost and included in other assets unless there is deemed to have been a permanent impairment in their value. U.S. GAAP, SOP 98-5, requires that the costs of start-up activities be expensed in the period incurred rather than be deferred. SOP 98-5 is effective for periods beginning after December 15, 1998. Initial implementation is reported as a cumulative effect of a change in accounting principle without retroactive application. -6- 8
--------------------------------------------------------------------------------------------------------------- September 30, 1999 December 31, 1998 Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP --------------------------------------------------------------------------------------------------------------- Property, plant and equipment $95,603,000 $92,866,000 $89,058,000 $89,058,000 Other assets 20,377,000 18,501,000 21,374,000 20,440,000 Accrued income taxes 967,000 483,000 644,000 644,000 Retained earnings 33,101,000 30,679,000 28,418,000 28,418,000 Unrealized loss on available-for-sale securities -- (1,707,000) -- (934,000) ---------------------------------------------------------------------------------------------------------------
c. Statements of Comprehensive Income U.S. GAAP requires a statement of comprehensive income as follows:
- ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, - ---------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 Net income (U.S. GAAP) $1,273,000 $404,000 $3,438,000 $2,905,000 Change in foreign currency translation adjustment, net of tax (1999, ($7,000); $112,000; 1998, ($106,000); ($172,000)) (18,000) (248,000) 289,000 (402,000) Change in unrealized holding gains (losses) on available-for-sale securities 3,000 (413,000) (772,000) (413,000) - ---------------------------------------------------------------------------------------------------------------------- Comprehensive income $1,258,000 $(257,000) $2,955,000 $2,090,000 - ----------------------------------------------------------------------------------------------------------------------
Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which established accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. Management has not yet evaluated the effects of this statement on its results of operations. As required, the Corporation will adopt SFAS No. 133 for years ending on or after June 15, 2000, for U.S. GAAP purposes. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE CORPORATION The following is a discussion and analysis of the financial condition and results of operations of the Corporation for the three months ended September 30, 1999 and the three months ended September 30, 1998, and for the nine months ended September 30, 1999 and the nine months ended September 30, 1998, and certain factors that may affect the Corporation's prospective financial condition and results of operations. The following should be read in conjunction with the consolidated financial statements and related notes thereto. -7- 9 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Net Sales The Corporation's net sales for the three months ended September 30, 1999 rose 16.0% to $29.8 million from $25.7 million for the three months ended September 30, 1998 as a result of increased sales in each of the Corporation's three business segments. The Corporation's industrial minerals segment reported sales of $12.8 million for the three month period ended September 30, 1999, an increase of $2.5 million, or 24.1%, from the third quarter of 1998, reflecting increased sales volume of feldspar, mica, talc and clay. In the metal powders division, an increase in sales of both sponge iron and atomized products contributed to a $0.9 million increase in total net sales to $9.7 million for the three months ended September 30, 1999. The increased sales is mainly due to the success the Corporation has had in focusing on being a supplier of specialty atomized products. Higher aluminum prices, an increase in tolling and tipping revenues and an increase in sales of flameshield products helped improve net sales in the aluminum recycling segment to $7.3 million for the three month period ended September 30, 1999, an increase of $0.7 million, or 11.2%, over the same period in 1998. This increase was partially offset by a decrease in the number of pounds of aluminum sold due to tight capacity in the world aluminum market and the resultant lower grade of available feedstock. Cost of Goods Sold Cost of goods sold for the three months ended September 30, 1999 was $20.5 million compared to $18.1 million for the third quarter of 1998. As a percentage of net sales, gross margin increased from 29.4% for the three months ended September 30, 1998 to 31.2% for the corresponding period in 1999. The increase in gross margin is attributable to higher volumes and a focus on cost control and improved operating efficiencies. Selling, General and Administrative Expense Selling, general, and administrative ("SG&A") expense for the three months ended September 30, 1999 increased by 23.8% to $3.6 million from $2.9 million in the comparable period of 1998; however, as a percentage of net sales, SG&A expense was 12.0% in the third quarter of 1999, virtually unchanged from the same period in 1998. Depreciation, Depletion and Amortization Depreciation, depletion and amortization ("DD&A") for the three months ended September 30, 1999 was $2.2 million, an increase of $0.7 million, or 42.5%, over the corresponding period in 1998. This increase is due to capital expenditures made and placed in service during the last twelve months. Operating Income As a result of the foregoing, operating income for the three month period ended September 30, 1999 was $3.5 million, an increase of $0.4 million, or 13.0%, from the comparable period in 1998. -8- 10 Interest Income Interest income for the three months ended September 30, 1999 was slightly lower than the $0.1 million recognized in the same quarter of 1998. Interest Expense Interest expense for the three months ended September 30, 1999 was $1.2 million, compared to $0.4 million in the corresponding period in 1998. Part of the increase is due to a $2.4 million increase in total indebtedness to $54.3 million at September 30, 1999 from $51.9 million at September 30, 1998. The balance is due to the interest expense associated with certain capital projects and investments that was previously being capitalized and is now being expensed. Other Expense Other expense for the three months ended September 30, 1999 was $0.1 million, compared to $0.9 million for the corresponding period of 1998. During the third quarter of 1998, the Corporation recognized a one-time foreign exchange loss of $0.7 million in connection with its investment in Inmet Mining Corporation ("Inmet"). During 1998, the Corporation initiated an attempted acquisition of control of Inmet and approximately 4 million shares of Inmet were acquired and financed by the Corporation's credit facilities as a result. Subsequently, the acquisition was abandoned and the Corporation sold approximately 2.6 million common shares of Inmet for proceeds of approximately C$14.7 million. As at September 30, 1998, the Corporation booked a provision of $413,000 as a reduction to shareholders' equity to mark to market the residual investment in the available-for-sale securities. The Corporation also booked a foreign exchange loss of $0.7 million in other income as a result of a decline in the value of its Canadian dollar investment in Inmet. Provision for Income Taxes As a result of a 22.2% increase in pre-tax income, the Corporation's provision for income taxes for the three months ended September 30, 1999 increased slightly to $0.6 million compared to the same period in 1998. Net Income As a result of the factors discussed above, net income for the three months ended September 30, 1999 was $1.7 million, an increase of $0.3 million, or 23.8%, from the comparable period in 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Net Sales On a year-to-date basis, the Corporation's net sales for the nine months ended September 30, 1999 rose $9.1 million, or 11.7%, to $87.2 million over the first three quarters of 1998 as a result of increased sales in each of the Corporation's three business segments. Net sales in the industrial minerals segment for the nine month period ended September 30, 1999 were up by $4.7 million to $38.1 million from $33.4 million in 1998. The increase is due to higher sales volume of most of the Corporation's major industrial mineral products. -9- 11 In the metal powders segment net sales for the nine months ended September 30, 1999 were $28.7 million, an increase of $1.6 million, or 5.9%, from the comparable period in 1998. The increase is primarily the result of sales of ferrous atomized products. The Corporation redirected its strategy to focus on supplying specialty niche atomized products about two years ago and is capitalizing on the success of this initiative. Net sales in the aluminum recycling segment for the nine month period ended September 30, 1999 rose $2.8 million or 15.9% to $20.3 million over the same period in 1998. Most of the difference year over year is due to the Corporation's acquisition of an aluminum dross processor in Wabash, Indiana, in June 1998; the 1999 period includes a full nine months contribution from this operation. Cost of Goods Sold Cost of goods sold for the nine months ended September 30, 1999 was $60.1 million, an increase of $4.5 million, or 8.1%, over the first three quarters of 1998. As a percentage of net sales, gross margin increased to 31.0% in 1999 from 28.8% in 1998. The increase is due to higher sales volumes and improved operating efficiencies. Selling, General and Administrative Expense SG&A expense for the nine months ended September 30, 1999 rose to $10.9 million from $9.7 million in 1998, an increase of $1.2 million, or 11.7% due to increased staffing; however, as a percentage of net sales, SG&A expense remained virtually unchanged at 12.5% from the corresponding period in 1998. Depreciation, Depletion and Amortization DD&A for the nine months ended September 30, 1999 was $6.5 million, an increase of $1.7 million, or 35.2%, over the comparable period in 1998 as a result of assets acquired and placed in service over the last twelve months. On a year-to-date basis the Corporation has spent $12.0 million on capital expenditures in 1999. Operating Income Operating income for the nine month period ended September 30, 1999 was $9.7 million, an increase of $1.8 million, or 22.5%, from the comparable period in 1998. As a percentage of sales, operating income increased to 11.1% in the first three quarters of 1999 from 10.1% in the corresponding period of 1998. Interest Income Interest income for the nine months ended September 30, 1999 was $0.1 million, slightly lower than the corresponding period in 1998. Interest Expense Interest expense for the nine months ended September 30, 1999 was $3.2 million, 106.9% or $1.7 million, higher than the same period in 1998. Part of the increase is due to an increase in total indebtedness and the balance is due to the interest expense associated with certain capital projects and investments that was previously being capitalized and that is now being expensed. -10- 12 Other Expense Other expense for the nine months ended September 30, 1999 was $0.1 million, compared to $1.0 million in the same period in 1998. As outlined above, the Corporation recognized a translation loss of $0.7 million in the third quarter of 1998 in connection with its acquisition of approximately 4 million common shares of Inmet. Provision for Income Taxes The Corporation's provision for income taxes for the nine month period September 30, 1999 increased to $1.8 million from $1.7 million in the comparable period of 1998. Net Income As a result of the factors discussed above, net income for the nine months ended September 30, 1999 was $4.7 million, a increase of $0.8 million, or 21.3%, from the comparable period in 1998. LIQUIDITY AND CAPITAL RESOURCES Cash Flow from Operations During the first nine months of 1999, the Corporation generated $8.0 million of cash from operations as compared to $5.8 million cash generated for the first nine months of 1998. The Corporation had $25.4 million of working capital at September 30, 1999, compared to $14.8 million at December 31, 1998. The working capital increase is mainly due to the new debt facilities entered into by the Corporation. On May 21, 1999 the Corporation issued $35 million of 7.54% Senior Secured Notes, Series A, due May 21, 2009 and $15 million of 7.76% Senior Secured Notes, Series B, due May 21, 2014. The proceeds were used to repay the Corporation's existing credit facilities. Concurrent with the bond issue the Corporation entered into a credit agreement, which provides a 364-day, $20 million revolving operating facility. The Corporation drew down $3.0 million under the operating facility and retired its outstanding industrial development revenue bond as of September 1, 1999. It is the opinion of management that there are sufficient sources of funds available to meet its anticipated cash requirements. YEAR 2000 The Corporation operates in basic industries that do not rely heavily on computerized systems. The major systems operated by the Corporation are those for financial reporting, all of which are year 2000 compliant. As a result, it is the opinion of management that any year 2000 issues that may arise will not have a material adverse impact on the financial condition or performance of the Corporation. The Corporation is continuing its review of key suppliers to determine their exposure to problems arising from Year 2000. The review is being conducted by management and additional resources are not believed to be required. Given the current status of the Corporation's activities, no contingency plans are currently in place. -11- 13 ITEM 3 - MARKET RISK Market risk represents the risk of loss that may impact the consolidated financial statements of the Corporation due to adverse changes in financial market prices and rates. The Corporation's market risk is primarily the result of fluctuations in interest rates and aluminum prices. Management monitors the movements in interest rates and performs sensitivity analysis on aluminum prices and, on that basis, decides on the appropriate measures to take. The Corporation believes that aluminum prices and interest rates in the current environment are such that no measures need be taken at this time. The Corporation does not hold or issue financial instruments for trading purposes. A discussion of the Corporation's financial instruments is included in the financial instruments note to the Consolidated Financial Statements in the Corporation's 1998 Annual Report, which are incorporated by reference in the Corporation's Form 10K for the year ended December 31, 1998. CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical matters, the matters discussed in this report are forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from targeted or projected results. Factors that could cause actual results to differ materially include, among others, fluctuations in aluminum prices, problems regarding unanticipated competition, processing, access and transportation of supplies, availability of materials and equipment, force majeure events, the failure of plant equipment or processes to operate in accordance with specifications or expectations, accidents, labor relations, delays in start-up dates, environmental costs and risks, the outcome of acquisition negotiations and general domestic and international economic and political conditions, as well as other factors described herein or in the Corporation's filings with the Commission. Many of these factors are beyond the Corporation's ability to predict or control. Readers are cautioned not to put undue reliance on forward looking statements. PART II ITEM 5 - OTHER INFORMATION In October 1999, the Corporation extended a loan to Richard L. Lister, President and Chief Executive Officer, in the amount of $1,749,000, representing amounts due from him pursuant to the Key Executive Common Stock Purchase Plan. The loan, which was used to acquire 357,000 common shares of the Corporation, is non-interest bearing and secured by a pledge of most of the shares acquired. The loan is renewed annually and is now due on the earlier of August 12, 2000 or 30 days after the termination of employment. Since the loan arose from the sale of treasury stock, it is classified as a reduction of shareholders' equity. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K Reports on Form 8-K None. -12- 14 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated this 22nd day of October, 1999. ZEMEX CORPORATION (Registrant) By: /s/ Allen J. Palmiere --------------------------------------------- Allen J. Palmiere Vice President and Chief Financial Officer -13- EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 708,000 0 21,683,000 (339,000) 18,823,000 43,037,000 142,507,000 (46,904,000) 159,555,000 17,653,000 50,000,000 0 0 8,847,000 78,817,000 159,555,000 87,185,000 87,185,000 60,115,000 77,513,000 134,000 0 3,087,000 6,451,000 1,808,000 4,683,000 0 0 0 4,683,000 0.56 0.50
-----END PRIVACY-ENHANCED MESSAGE-----