-----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, NpSnxmcH5Ij5LvHBRArZN7NomId9IN69e8CzxELX+b7NVVbJhVwJFEMOXbjmLD+s Ia1yg3ClZAKo7ZWviPkapQ== 0000950150-99-000343.txt : 19990330 0000950150-99-000343.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950150-99-000343 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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-K405 SEC ACT: SEC FILE NUMBER: 001-00228 FILM NUMBER: 99575834 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-K405 1 FORM 10-K FOR THE PERIOD ENDED 12/31/98 1 CONFORMED SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-228 ZEMEX CORPORATION (Exact name of registrant as specified in its charter) CANADA NONE (State or other (I.R.S. employer jurisdiction of identification number) incorporation or organization) CANADA TRUST TOWER, BCE PLACE, 161 BAY STREET, SUITE 3750 TORONTO, ONTARIO, CANADA M5J 2S1 (416) 365-8080 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT Toronto Stock Exchange and New York Stock Exchange Common 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the registrant's voting stock (common shares, no par value) held by non-affiliates as of March 18, 1999 (based on the closing sale price of $5.125 on the New York Stock Exchange) was $23,812,749. As of March 18, 1999, 8,707,796 shares of the registrant's common shares, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Shareholders for the Year Ended December 31, 1998 Part II Definitive Proxy Statement filed with the Commission pursuant to Regulation 14A with respect to the 1999 Annual Meeting of Shareholders Part III 2 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS AND CROSS-REFERENCE SHEET PART I PAGE Item 1. Business............................................................ 1 Item 2. Properties.......................................................... 8 Item 3. Legal Proceedings................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders................. 9 Item 10. Executive and Other Officers of the Registrant(A)................... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters(B).............................................. 9 Item 6. Selected Financial Data(C).......................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation(D)............................................. 9 Item 8. Financial Statements and Supplementary Data(E) .................... 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................... 10 PART III Item 10. Directors and Executive Officers of the Registrant(F)............... * Item 11. Executive Compensation(F)........................................... * Item 12. Security Ownership of Certain Beneficial Owners and Management(F)... * Item 13. Certain Relationships and Related Transactions(F)................... * PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 11 3 - -------------------------- (A) Included in Part I, Item 1, pursuant to Instruction 3 of Item 401(b) of Regulation S-K. (B) Information responsive to this Item is set forth on page 31 of the registrant's Annual Report to Shareholders for the year ended December 31, 1998 (the "Annual Report to Shareholders") and is incorporated herein by reference. The Annual Report to Shareholders is included as Exhibit 13 to this Form 10-K Annual Report. The Annual Report to Shareholders, except for those portions thereof which are expressly incorporated by reference herein, is furnished for the information of the Commission and is not to be deemed "filed" as part of this Form 10-K report. (C) Information responsive to this Item is set forth on page 62 of the Annual Report to Shareholders and is incorporated herein by reference. (D) Information responsive to this Item is set forth on pages 23 through 31 of the Annual Report to Shareholders and is incorporated herein by reference. (E) Financial statements responsive to this Item are set forth on pages 32 through 61 of the Annual Report to Shareholders and are incorporated herein by reference. The Supplementary Schedule required by this Item is set forth on page S-1 of this Form 10-K Annual Report. (F) Information responsive to these Items is set forth in the registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A and in the Annual Report to Shareholders on page 52 (Note 14) and is incorporated herein by reference. 4 PART I ITEM 1. BUSINESS GENERAL Zemex Corporation (the "Corporation" or "Zemex"), a company subject to the laws of the Canada Business Corporations Act, is a niche producer of specialty materials and products for use in a variety of industrial applications. Zemex operates through three major divisions: (i) industrial minerals, (ii) metal powders, and (iii) aluminum recycling. Its major products include feldspar, feldspathic minerals, kaolin, sand, mica, talc, ferrous and non ferrous powders, and aluminum dross derivatives. Zemex currently operates eighteen plants throughout Canada and the United States. Originally, Zemex was incorporated under the laws of the State of Maine in 1907 and was known as Yukon Gold Corporation. At its annual meeting of shareholders on May 20, 1938, a resolution was passed to change its name to Yukon-Pacific Mining Corporation. On November 8, 1939, Zemex reorganized, incorporated under the laws of the State of Delaware, and changed its name to Pacific Tin Consolidated Corporation. Also in 1939, Zemex listed on the New York Stock Exchange. In 1985, Zemex changed its name to its current form and reincorporated under the laws of the State of Delaware as the successor to Pacific Tin Corporation. Effective January 21, 1999 Zemex completed a reincorporation merger and reincorporated under the Canada Business Corporations Act. INDUSTRIAL MINERALS The Corporation's industrial minerals is comprised of The Feldspar Corporation ("TFC"), Suzorite Mica Products Inc. ("Suzorite"), Suzorite Mineral Products, Inc. ("SMP"), Zemex Fabi-Benwood, LLC, Zemex Industrial Minerals, Inc. and Zemex Mica Corporation (collectively, "Zemex Industrial Minerals" or "ZIM"). Each of these companies is a wholly-owned subsidiary of Zemex except for Zemex Fabi-Benwood, LLC of which Zemex owns 60%. TFC has mining and processing facilities in Edgar, Florida; Monticello, Georgia; and Spruce Pine, North Carolina. Using traditional methods, TFC mines sodium feldspar from two different ore deposits in the Spruce Pine area; potassium feldspar is mined from two deposits close to the Monticello plant. TFC's kaolin and sand products are recovered by dredging and wet separation at the Edgar property. All mined and recovered products are subjected to standard and proprietary milling and drying techniques. TFC produces numerous products at its operating plants, including sodium and potassium feldspar, silica, low iron sand, muscovite mica and kaolin clay. Feldspathic materials are key ingredients for the ceramic industry, and are incorporated into the production of ceramic floor and wall tiles, dinnerware, plumbing fixtures, glazes and electrical insulators. TFC supplies its products primarily to the glass and ceramics industries. Feldspar and certain grades of industrial sand are also used to manufacture bottles, jars, and other glass containers, fibreglass, paints and plastics, and television picture tubes. Industrial sand is used for filter, filler, beach sand, blasting and concrete applications. TFC also produces a low iron sand product for use in highly specialized glass applications. Suzorite mines phlogopite mica in an open pit mining operation in Suzor Township, Quebec, Canada, approximately 300 kilometres north of Montreal, Quebec. The ore is mined by standard open pit methods and delivered to a siding for transportation by rail to the processing plant, which is located in Boucherville, 1 5 Quebec, a suburb of Montreal. Because of its distinct thermal stability advantage over competitive materials, phlogopite mica is used to impart rigidity in technological and high temperature plastic applications. Suzorite's phlogopite mica is used as a partial or complete substitute for asbestos in fire retardation. It is also used in friction materials, oil well drilling needs, caulking and molding compounds, coatings, plasters and plastics. The principal markets served by Suzorite are the automobile, construction and oil drilling industries. These products are marketed under the trade names Suzorite Mica and Suzorex. SMP produces talc and other minerals at Natural Bridge, New York; Murphy, North Carolina; Van Horn, Texas; and Benwood, West Virginia. SMP purchases raw materials for conversion and processing at its plant in Natural Bridge and processes products directed primarily to the cosmetic and pharmaceutical industries. The production facility in Van Horn processes ores mined in proximity to the plant for the coatings, plastics and ceramics industries. The Benwood operation processes a wide range of talc products from imported raw materials for ultimate use in the plastics industry. The Murphy plant produces, from purchased sources, baryte products, primarily for the oil drilling and coatings industries. In late 1996, SMP completed the installation of a new mill at its facility in Benwood, West Virginia. This new fine grind milling capacity is part of SMP's strategy to develop a niche in the talc marketplace by offering very finely divided high purity talc products to industrial markets. SMP believes that it is one of the few talc producers in North America to produce products of this purity and fineness. The products find application in performance plastics, high end coatings and other markets. With the addition of these new fine grind products, Benwood has the ability to produce a broad spectrum of high purity talc products. In January 1998, the Corporation acquired a muscovite mica producer in the Spruce Pine, North Carolina area. The facilities acquired in the purchase operate under the name Zemex Mica Corporation ("ZMC") and are located close to TFC's feldspar plant where by-product muscovite mica is produced. This acquisition enhances the Corporation's position as a major mica supplier. In February 1998, Industria Mineraria Fabi S.r.l. ("Fabi"), a leading European talc producer, became an investor in the Corporation's talc facility located in Benwood, West Virginia by acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3.1 million and is providing access to its technology and premium talc deposit in Australia. SMP manages the new entity pursuant to an operating agreement. Demand for Zemex's industrial minerals is related to the pace of the general economy and, particularly, the residential and commercial construction industries. The Corporation's industrial minerals sales were $44.8 million in 1998, compared with $43.4 million in 1997 and $40.5 million in 1996. This business segment reported operating income of $5.8 million in 1998, $6.5 million in 1997 and $2.8 million in 1996. During 1998, considerable efforts were directed to product development, marketing, capital expansion projects and product quality improvement. The Corporation expects these efforts will bear fruit in the future. Capital expenditures were $8.3 million in 1998 compared to $9.9 million in 1997 and $11.9 million in 1996. Major capital spending in 1998 included the retrofitting of the recently acquired muscovite mica operation in Spruce Pine, North Carolina. 2 6 METAL POWDERS The metal powders division consists of two wholly-owned subsidiaries, Pyron Corporation and Pyron Metal Powders, Inc. (together, "Pyron"). Pyron operates plants located in Niagara Falls, New York; St. Marys, Pennsylvania; and Greenback and Maryville, Tennessee. Pyron's major products include iron, steel, copper, copper alloy powders and manganese sulfide. The primary applications of metal powders are in the fabrication of precision metal parts using powder metallurgy and in the friction industry. Powder metallurgy is an efficient, economical process for the production of complex components used in the automotive, farm, garden and lawn equipment, and business machine industries. Key features of powder metallurgy technology are low scrap ratios and lower production costs when compared to other conventional metal working processes. In recent years, metal powder use in the friction industry and, particularly, in automotive and rail braking systems has grown rapidly as a replacement for asbestos, achieving better performance and improved environmental and health conditions. Metal powders are also used in the production of welding rods, for cutting and scarfing of steel ingots and billets, for the inspection of oil field pipe and tubing, and in food supplements. In 1995, Pyron completed construction of a blending plant in St. Marys, Pennsylvania. Through its blending facility, Pyron is able to provide custom pre-packaged powders and just-in-time service to its customers. In late 1996, Pyron completed construction of a facility for the production of manganese sulfide at its Greenback, Tennessee location. Pyron's new product, Manganese Sulfide Plus (MnS+TM), was developed in Pyron's laboratory and is used as an additive by the powder metallurgical industry to enhance tool life and aid in machinability. Customer demand for MnS+TM has been strong and, as a result, the capacity of the facility was doubled in 1997 to satisfy orders. Manganese sulfide is a natural complement to Pyron's core ferrous and non-ferrous businesses as it further broadens Pyron's expansive product line. Sales for the metal powders group increased to $35.6 million in 1998 from $33.9 million in 1997. Sales were $31.7 million in 1996. The increase from 1997 to 1998 was due to higher volumes of ferrous and non ferrous metal powders. During the same interval, operating income increased from $2.4 million in 1997 to $4.0 million in 1998. Operating income was $2.4 million in 1996. Management anticipates improved margins in this segment in 1999 as a result of new products, higher metal powder production, continuing cost reductions, and efficiency improvement programs. Capital expenditures for the metal powders group were $2.1 million in 1998 as compared to $1.3 million in 1997 and $2.2 million in 1996. The 1998 expenditures were primarily directed towards retrofitting a furnace and general sustaining capital requirements. In 1999, capital expenditures are anticipated to be $3.7 million. ALUMINUM RECYCLING Zemex's aluminum recycling group is composed of Alumitech, Inc., Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc., ETS Schaefer Corporation and AWT Properties, Inc. (collectively, "Alumitech"), all of which are direct or indirect wholly-owned subsidiaries. Zemex acquired its initial interest in Alumitech in 1994 and increased its ownership to 100% in 1995. Alumitech now has three facilities: aluminum dross reprocessing plants in Cleveland, Ohio and Wabash, 3 7 Indiana, and a heat containment fabrication plant in Macedonia, Ohio. Its administrative office is in Streetsboro, Ohio. Alumitech is an aluminum dross processor that has developed and patented proprietary technology to recycle secondary aluminum drosses into industrial feedstock components, eliminating the necessity for landfill. Aluminum dross is the waste by-product produced by primary and secondary aluminum smelters. Secondary dross, which has a high salt content, forms the primary feedstock for Alumitech's process. Conventional dross processors simply recover aluminum metal and some oxides and send the residue to landfill. Using its patented process, Alumitech has the ability to separate the dross into its basic components: aluminum metal, alumina and metal fines, salts and non-metallic product ("NMP") and further refine the NMP for use as a feedstock for the production of calcium aluminate, refractory ceramic fibre and other commercially acceptable products. Currently, competitive processes landfill anywhere from 40%-75% of the volume of dross received, whereas Alumitech's recycling process has the ability to virtually eliminate the need for landfill. Alumitech is considered the industry leader in the development of alternative uses for NMP. Alumitech's patents on its technology to process NMP have a remaining life of approximately 12 years. In February 1997, Alumitech, through its wholly-owned subsidiary, Engineered Thermal Systems, Inc., acquired the assets of Schaefer Brothers, Inc., a small regional manufacturer of ceramic fibre-based heat containment systems located in Medina, Ohio. The Schaefer Brothers business was merged with Engineered Thermal Systems, Inc., also a manufacturer of ceramic fibre-based heat containment systems, to form ETS Schaefer Corporation. In June 1998, Alumitech acquired 100% of the issued and outstanding shares of Alumitech of Wabash, Inc. (previously known as S&R Enterprises, Inc.), a Wabash, Indiana based aluminum dross processor. This acquisition provides Alumitech with additional metal melting capacity and the opportunity to expand its NMP processing capability. Sales for the aluminum recycling group increased to $23.5 million in 1998 from $19.9 million in 1997. Sales were $14.2 million in 1996. The increase from 1997 to 1998 was due to higher volumes and the acquisition of Alumitech of Wabash, Inc. During the same interval, operating income increased from $1.9 million in 1997 to $2.9 million in 1998. Operating income was $0.2 million in 1996. Management anticipates improved margins in this segment in 1999 as a result of new products, continuing cost reductions, and efficiency improvement programs. Capital expenditures for the metal products group were $10.1 million in 1998 as compared to $5.3 million in 1997 and $2.3 million in 1996. The 1998 expenditures were primarily directed to the construction and commercialization of a new NMP processing facility at the Cleveland plant and the acquisition of the aluminum dross recycling operation in Wabash, Indiana. In 1999, capital expenditures are anticipated to be $3.9 million. RAW MATERIALS AND OTHER REQUIREMENTS In recent years, the Corporation has not experienced any substantial difficulty in satisfying the raw materials requirements for its metal products operations, which is the segment that consumes, rather than supplies, raw materials. However, no assurance can be given that any shortages of these or other necessary materials or equipment will not develop or that increased prices will not adversely affect the Corporation's business in the future. 4 8 SEASONALITY The efficiency and productivity of the Corporation's operations can be affected by unusually severe weather conditions. During the winter of 1998, there were minor production outages at the Corporation's operating facilities in North Carolina, New York, Ohio and Quebec due to inclement weather, but they were not significant enough to materially affect 1998 operating results. COMPETITION All of the Corporation's products are sold in highly competitive markets which are influenced by price, performance, customer location, service, competition, material substitution and general economic conditions. The Corporation competes with other companies active in industrial minerals and metal products. No material part of the Corporation's business is dependent upon any single customer, or upon very few customers, the loss of any one of which could have a material adverse impact on the Corporation. Industrial mineral prices generally are not subject to the price fluctuations typical of commodity metals. Demand for industrial minerals is primarily related to general economic conditions, particularly in the automotive, housing and construction industries. Markets for industrial mineral products are sensitive not only to service, product performance, and price, but also to competitive pressures and transportation costs. In the United States, there are three major feldspathic mineral producers, including the Corporation. The Corporation is the only North American producer of phlogopite mica and one of many talc producers. The Corporation is one of five North American producers of metal powders. The market for metal powders is affected primarily by product performance, consistency of quality and price. To some extent, competition in the metal powder industry is affected by imports of finished metal powder parts. Product prices over the last several years have been strongly influenced by available capacity. Demand for metal powders is a function of general economic conditions, particularly in the automotive market. There are numerous aluminum dross processors in the United States, however, only Alumitech has patented technology which enables it to process aluminum dross without the necessity for landfill. While the Corporation competes for the supply of aluminum dross with a number of other dross processors, the major factor affecting the supply of dross is the level of activity of the aluminum smelting industry. In addition, as aluminum is one of the products of aluminum dross reprocessing, commodity price fluctuations of aluminum may have an impact on the earnings of the Corporation. RESEARCH AND DEVELOPMENT The Corporation carries on an active program of product development and improvement. Research and development expense was $0.6 million in 1998, $1.0 million in 1997 and $0.6 million in 1996. Financial information about industry segments is set forth on pages 53 to 55 of the Annual Report to Shareholders and is incorporated herein by reference. ENVIRONMENTAL CONSIDERATIONS Laws and regulations currently in force which do or may affect the Corporation's domestic operations include the Federal Clean Air Act of 1970, the National Environmental Policy Act of 1969, the Solid Waste Disposal Act (including the Resource Conservation and Recovery Act of 1976), the Toxic Substances Control Act, CERCLA (superfund) and regulations under these Acts, the environmental 5 9 protection regulations of various governmental agencies (e.g. the Bureau of Land Management Surface Management Regulations, Forest Service Regulations, and Department of Transportation Regulations), laws and regulations with respect to permitting of land use, various state and local laws and regulations concerned with zoning, mining techniques, reclamation of mined lands, air and water pollution and solid waste disposal. Currently, the Corporation is not aware of any materially adverse environmental problems or issues. EMPLOYEES The approximate number of employees in the Corporation as of December 31, 1998 is set forth below: Industrial Minerals 325 Metal Powders 172 Aluminum Recycling 187 Corporate 7 ------- Total 691 =======
Approximately 60 employees at the Corporation's metal powder operations in Niagara Falls, New York, are covered by a three-year collective bargaining agreement, which expires April 15, 2001. At the ferrous metal powder facilities in Tennessee, approximately 41 employees are covered by a four-year agreement, which expires February 28, 2002. Approximately 20 employees at Suzorite are covered by a three-year collective bargaining agreement that expires December 13, 1999. At Alumitech, approximately 28 employees are covered by two collective bargaining agreements, one agreement expiring April 30, 1999 and one agreement expiring December 31, 1999. On March 26, 1998, the hourly employees at TFC's plant in Spruce Pine, North Carolina voted in favour of union certification. Contract negotiations have commenced. The Corporation considers its labour relations to be good. FOREIGN OPERATIONS Most of the Corporation's operations are located in the United States. One is located in Canada, a country whose institutions and governmental policies are generally similar to those of the United States. Although there can be no assurance as to future conditions, the Corporation has experienced no political activities, social upheavals, currency restrictions or similar factors which have had any material adverse effect to date on the results of its operations or financial condition. EXPORT SALES The Corporation's industrial minerals, metal powders and aluminum recycling operations sell their products internationally to a wide variety of customers including the ceramics, glass and powder metallurgy industries. Export sales in these three segments were less than 9% of total sales. 6 10 EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
SERVED IN OFFICER POSITION AGE POSITION SINCE Peter Lawson-Johnston Chairman of the Board of Directors 72 1975 Richard L. Lister President and Chief Executive Officer 60 1993 Allen J. Palmiere Vice President, Chief Financial Officer 46 1993 and Assistant Secretary Peter J. Goodwin President, Industrial Minerals 48 1994 Terrance J. Hogan President, Alumitech, Inc. 43 1995 George E. Gillespie President, Metal Powders 56 1997 Patricia K. Moran Corporate Secretary and 33 1997 Assistant Treasurer
There are no family relationships between the officers listed above. The term of office of each executive officer is until his/her respective successor is elected and has qualified, or until his/her death, resignation or removal. Officers are elected or appointed by the board of directors annually at its first meeting following the annual meeting of shareholders. The following are the current officers of the Corporation and a description of their business activities if less than five years in their present position. Mr. Goodwin joined the Corporation in August 1994 and became President of the Corporation's talc operations in December 1994. From May 1993 to August 1994, Mr. Goodwin was a self-employed consultant. Mr. Goodwin was President and Chief Executive Officer of Miller and Co. from August 1990 to May 1993. Mr. Hogan became President of Alumitech, Inc. in May 1995. Prior to becoming President, Mr. Hogan was Chief Operating Officer of Alumitech's subsidiary, Aluminum Waste Technology, Inc., from December 1992 to May 1995. Mr. Gillespie became President of the Metal Powders Group in April 1997. Prior to joining the Corporation, Mr. Gillespie was Chairman of the Operating Committee for three divisions of The Carborundum Company in 1996. Mr. Gillespie was Vice-President Refractories from 1993 to 1996 for The Carborundum Company. Ms. Moran assumed the duties of Corporate Secretary and Assistant Treasurer in May 1997. Prior to that time Ms. Moran served as Assistant Secretary-Treasurer since February 1995. Ms. Moran has been with the Corporation since 1993. 7 11 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. ITEM 2. PROPERTIES The industrial minerals segment has operations and mines in Edgar, Florida; Monticello, Georgia; Boucherville, Quebec; Suzor Township, Quebec; Natural Bridge, New York; Murphy, North Carolina; Spruce Pine, North Carolina; Van Horn, Texas; and Benwood, West Virginia. This segment owns approximately 391,500 square feet of office and plant floor space. As well, the 60% owned processing facility in Benwood, West Virginia has approximately twelve acres of land. In 1996, The Feldspar Corporation purchased 655 acres which contain, at minimum, 20 years additional ore resources for its Spruce Pine, North Carolina facility. The mineral deposits currently operated by the industrial minerals segment are estimated by the Corporation to be at least 25 years, except in the case of the mica mine in Suzor Township where resources are estimated to be in excess of 100 years. All of the Corporation's mining properties are either owned or leased, with the leases expiring from 1999 to 2018. The metal powders group has operations in Niagara Falls, New York; St. Marys, Pennsylvania; Greenback, and Maryville, Tennessee. At its facility in Niagara Falls, Pyron Corporation utilizes approximately 79,000 square feet of office and plant floor space which it leases from the Niagara County Industrial Development Agency as part of the Industrial Development Revenue Bond issued in November 1989 to finance the construction of an atomized steel powder plant. Lease payments are to be sufficient to pay the debt service on the Industrial Development Revenue Bond. The atomized plant utilizes approximately 16,000 square feet of floor space and is adjacent to the existing facility. The blending plant in St. Marys, Pennsylvania has 32,000 square feet of plant, office and storage space and is situated on 3.4 acres of land. The Greenback facility is situated on 27.5 acres of land of which 6 acres is actively used in the operations. The Maryville facility is a leased facility which utilizes approximately 23,000 square feet of office and plant floor space. The aluminum recycling group has operations in Cleveland, Ohio; Macedonia, Ohio; Streetsboro, Ohio and Wabash, Indiana. The aluminum dross processing plant in Cleveland, Ohio owns 6.1 acres and has buildings totaling 51,000 square feet. The Streetsboro, Ohio operation leases approximately 10% of a 36,000 square foot building, which it uses primarily for office space. The recently built Macedonia facility includes 72,210 square feet of plant of which 10,000 is designated office space and is situated on 8 acres of land. The aluminum recycling operation in Wabash, Indiana sits on approximately 25 acres of land and has 73,300 square feet of plant and office space. All facilities are maintained in good operating condition. 8 12 ITEM 3. LEGAL PROCEEDINGS During 1998, a civil action brought by Dryvit Systems, Inc. ("Dryvit") in the State of Rhode Island captioned Dryvit Systems, Inc. v. The Feldspar Corporation, Taggart Sand Products Corp., Surface Systems, Inc., The Morie Company, Inc., Eriez Magnetics, Inc., and Law Engineering, Inc., C.A. No. KC 93-108, State of Rhode Island, Kent was settled. Dryvit alleged that between approximately 1985 and 1990, that the sand it purchased from TFC and other suppliers and utilized to manufacture exterior insulation finishes for the exterior of buildings developed rust stains because the sand contained pyrite and magnetic materials. The Corporation's settlement costs were covered by its liability insurance. In February 1999, the Corporation received notice that it was party to an action captioned Marsha Fisher-Carrington Administratrix to the Estate of Larry Carrington v. Aluminum Waste Technology, Inc. and Alumitech, Inc., et al., Court of Common Pleas, Cuyahoga County, Ohio, Case Number 373502. The action arises from an accidental fatality that occurred at Alumitech of Cleveland, Inc. in January 1997. The plaintiff is seeking damages on the basis that the Corporation failed to provide a safe working area. The Corporation is of the opinion that the claim is without merit; however, should the plaintiff be successful, the Corporation believes its costs will be covered by primary and excess liability insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information responsive to this Item is set forth on page 31 of registrant's Annual Report to Shareholders and is incorporated herein by reference. The Annual Report to Shareholders is included as Exhibit 13 to this Form 10-K Annual Report. The Annual Report to Shareholders, except for those portions thereof which are expressly incorporated by reference herein, is furnished for the information of the Commission and is not to be deemed "filed" as part of this Form 10-K report. ITEM 6. SELECTED FINANCIAL DATA Information responsive to this item is set forth on page 62 of the Annual Report to Shareholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information responsive to this Item is set forth on pages 23 through 31 of the Annual Report to Shareholders and is incorporated herein by reference. 9 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements responsive to this Item are set forth on pages 32 through 61 of the Annual Report to Shareholders and are incorporated herein by reference. The Supplementary Schedule required by this Item is set forth on page S-1 of this Form 10-K Annual Report. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information about the directors of the Corporation required by this item is located in the Corporation's Proxy Statement for the 1999 Annual Meeting to be filed within 120 days after the end of the fiscal year. Information about the Executive Officers of the Corporation required by this item appears in Part I, Item 1, of this Annual Report on Form 10-K*. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the Corporation's Proxy Statement for the 1999 Annual Meeting to be filed within 120 days after the end of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the Corporation's Proxy Statement for the 1999 Annual Meeting to be filed within 120 days after the end of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears in the Corporation's Proxy Statement for the 1999 Annual Meeting to be filed within 120 days after the end of the fiscal year. [FN] - -------- * Reference in this Annual Report on Form 10-K to material contained in the Corporation's Proxy Statement for the 1999 Annual Meeting to be filed within 120 days after the fiscal year incorporate such material into this Report by reference. 10 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 1. Financial statements and independent auditors' report filed as part of this report: (a) Consolidated Balance Sheets at December 31, 1998 and 1997, which information is incorporated by reference under Item 8 of this report; (b) Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998, which information is incorporated by reference under Item 8 of this report; (c) Consolidated Statements of Income for the three years ended December 31, 1998, which information is incorporated by reference under Item 8 of this report; (d) Consolidated Statements of Cash Flows for the three years ended December 31, 1998, which information is incorporated by reference under item 8 of this report; (e) Notes to the Consolidated Financial Statements, which information is incorporated by reference under Item 8 of this report; (f) Independent Auditors' Report, which information is incorporated by reference under Item 8 of this report; (g) the Corporation's Current Report on Form 8-K dated January 15, 1999 and filed with the Commission on January 20, 1999; and (h) the Corporation's Current Report on Form 8-K dated January 21, 1999 and filed with the Commission on January 22, 1999. 2. Financial statement schedules and independent auditors' report filed as part of this report: SCHEDULE NUMBER DESCRIPTION -- Report of Independent Auditors Schedule IX Valuation and Qualifying Accounts and Reserves (page S-1) All other financial statements and schedules not listed have been omitted since the required information is included in the consolidated financial statements or the related notes thereto, or is not applicable or required. With the exception of the aforementioned financial statements and schedule, and the information incorporated in Items 1 and 2 and Items 5 through 8, the 1998 Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K. Schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements in the 1998 Annual Report or notes related thereto. 11 15 3. EXHIBITS (3)(a) Articles of Continuance (Incorporated by reference from Exhibit 3.1 of the Corporation's Registration Statement on Form S-4, Registration No. 333-65307, which was declared effective on December 10, 1998) (3)(b) Articles of Amendment to the Articles of Continuance (Incorporated by reference from Exhibit 3.2 of the Corporation's Registration Statement on Form S-4, Registration No. 333-65307, which was declared effective on December 10, 1998) (3)(c) By-Law No. 1 (Incorporated by reference from Exhibit 3.3 of the Corporation's Registration Statement on Form S-4, Registration No. 333-65307, which was declared effective on December 10, 1998) (4)(a) Indenture of Trust dated as of November 1, 1989 between Niagara County Industrial Development Agency and The Bank of New York as trustee for Pyron Corporation (Incorporated by reference from Exhibit (4)(a) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(b) Agency Mortgage and Security Agreement dated as of November 1, 1989 from Pyron Corporation and Niagara County Industrial Development Agency to The Bank of New York (Incorporated by reference from Exhibit (4)(b) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(c) Letter of Credit Reimbursement Agreement dated as of November 1, 1989 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(c) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(d) First Amendment to Letter of Credit Reimbursement Agreement dated as of November 1, 1989 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(d) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(e) Second Amendment to Letter of Credit Reimbursement Agreement dated as of March 15, 1995 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(e) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (4)(f) Bank Mortgage and Security Agreement dated as of November 1, 1989 from Pyron Corporation and Niagara County Industrial Development Agency to Chemical Bank (Incorporated by reference from Exhibit (4)(e) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(g) Building Loan Agreement dated as of November 1, 1989 between Chemical Bank and Pyron Corporation (Incorporated by reference from Exhibit (4)(f) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) 12 16 (4)(h) Security Agreement dated as of November 1, 1989 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(g) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(i) Corporate Guaranty dated as of November 1, 1989 from Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(h) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(j) First Amendment to Corporate Guaranty dated as of November 1, 1989 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(i) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(k) Second Amendment to Corporate Guaranty dated as of March 14, 1991 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(j) of the Corporation's Annual Report on Form 10-K filed March 31, 1991) (4)(l) Third Amendment to Corporate Guaranty dated as of February 25, 1992 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(m) of the Corporation's Annual Report on Form 10-K filed March 31, 1993) (4)(m) Fourth Amendment to Corporate Guaranty dated as of March 8, 1993 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(o) of the Corporation's Annual Report on Form 10-K filed March 31, 1993) (4)(n) Fifth Amendment to Corporate Guaranty dated as of March 15, 1995 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(n) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (4)(o) Loan and Security Agreement dated as of March 15, 1995 among Zemex Corporation and The Feldspar Corporation and NationsBank of Tennessee, N.A. and Chemical Bank and NationsBank of Tennessee, N.A., as Agent (Incorporated by reference from Exhibit (4)(p) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (4)(p) Amendment No. 1 dated as of March 12, 1997 to the Loan and Security Agreement dated as of March 15, 1995 among Zemex Corporation and The Feldspar Corporation and NationsBank of Tennessee, N.A. and Chemical Bank and NationsBank of Tennessee, N.A., as Agent *(10)(a) Key Executive Common Stock Purchase Plan (Incorporated by reference from Exhibit (10)(b) of the Corporation's Annual Report on Form 10-K filed March 31, 1991) (10)(b) Consent to Assignment of Lease and to Agreement Sublease, and permission to Make Payments dated November 7, 1978 each from Joberta Enterprises, Inc. to NL Industries, Inc. and The Feldspar Corporation (Incorporated by reference from Exhibit 10(pp) to the Corporation's Registration Statement on Form S-2, Registration No. 33-7774, filed on August 5, 1986) (10)(c) Additional Lease Agreement dated as of November 1, 1989 between Niagara County Industrial Development Agency and Pyron Corporation (Incorporated by reference from Exhibit (10)(ll) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) 13 17 *(10)(d) Subscription Agreement with Richard L. Lister dated November 26, 1991 (Incorporated by reference from Exhibit (5)(a) of the Corporation's Annual Report on Form 10-K filed March 31, 1992) (10)(e) 1995 Stock Option Plan (Incorporated by reference from Exhibit B of the Corporation's 1995 Definitive Proxy Statement, filed on March 29, 1995) (10)(f) Suzorite Mica Product Inc.'s Mining Lease dated August 25, 1975 between the Province of Quebec and Marietta Resources International Ltd. (Incorporated by reference from Exhibit 10(av) of the Corporation's Annual Report on Form 10-K filed March 31, 1994) (10)(g) Employee Stock Purchase Plan (Incorporated by reference as Exhibit A to the Corporation's Proxy Statement filed May 6, 1994) (10)(h) Asset Purchase Agreement dated December 7, 1994 between Whittaker, Clark & Daniels, Inc., Clark Minerals, Inc., Cherokee Minerals, Inc. and Pioneer Talc Company and Suzorite Mineral Products, Inc. and Zemex Corporation (Incorporated by reference from Exhibit 10(u) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (10)(i) 1999 Stock Option Plan (Incorporated by reference from Exhibit A of the Corporation's 1999 Definitive Proxy Statement, filed on March 25, 1999) (10)(j) 1999 Employee Stock Purchase Plan (Incorporated by reference as Exhibit B to the Corporation's Proxy Statement filed March 25, 1999) (13) 1998 Annual Report to Shareholders (21) Subsidiaries of the Registrant (23)(a) Consent of Deloitte & Touche LLP, Independent Auditors (27) Financial Data Schedule * Management contract or compensatory plan or arrangement. 14 18 INDEPENDENT AUDITORS' REPORT RE: ZEMEX CORPORATION - ANNUAL REPORT ON FORM 10-K We have examined the supporting schedule on page S-1 of this Annual Report of Form 10-K for the year ended December 31, 1998. In our opinion, this schedule presents fairly, when read in conjunction with the related consolidated financial statements, the financial data required to be set forth therein. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chartered Accountants Toronto, Canada February 5, 1999 15 19 SIGNATURES 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. ZEMEX CORPORATION By:/s/ RICHARD L. LISTER -------------------------------------- Dated: March 26, 1999 Richard L. Lister President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE /s/ PETER O. LAWSON-JOHNSTON Chairman of the Board March 26, 1999 - ----------------------------------- and Director Peter O. Lawson-Johnston /s/ RICHARD L. LISTER President and Chief Executive March 26, 1999 - ----------------------------------- Officer and Director Richard L. Lister (Principal Executive Officer) /s/ PAUL A. CARROLL Director March 26, 1999 - ----------------------------------- Paul A. Carroll /s/ MORTON A. COHEN Director March 26, 1999 - ----------------------------------- Morton A. Cohen /s/ JOHN M. DONOVAN Director March 26, 1999 - ----------------------------------- John M. Donovan /s/ R. PETER GILLIN Director March 26, 1999 - ----------------------------------- R. Peter Gillin
16 20
SIGNATURE TITLE DATE /s/ GARTH A.C. MACRAE Director March 26, 1999 - ----------------------------------- Garth A.C. MacRae /s/ WILLIAM J. VANDEN HEUVEL Director March 26, 1999 - ----------------------------------- William J. vanden Heuvel /s/ ALLEN J. PALMIERE Vice President, Chief Financial March 26, 1999 - ----------------------------------- Officer and Assistant Secretary Allen J. Palmiere (Principal Financial and Accounting Officer)
17 21 LIST OF EXHIBITS EXHIBIT 13 1998 Annual Report to Shareholders EXHIBIT 21 Subsidiaries of the Registrant EXHIBIT 23(A) Independent Auditors' Consent EXHIBIT 27 Financial Data Schedule EX-13 2 1998 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS
1998 1997 1996 ------------ ------------- ----------- summary of operations Net Sales $103,894,000 $ 97,226,000 $86,420,000 Operating Income 10,192,000 8,371,000 3,066,000 Other, net (expense) income (822,000) 1,635,000 455,000 Net Income 5,365,000 5,793,000 2,612,000 Capital Expenditures 20,728,000 16,584,000 16,426,000 financial position Working Capital $ 14,810,000 $ 18,975,000 $18,688,000 Shareholders' Equity 81,898,000 76,535,000 70,997,000 per common share Net Income $ 0.65 $ 0.70 $ 0.32 Shareholders' Equity 9.41 9.04 8.59 common shares Weighted Average Common Shares Outstanding 8,286,178 8,267,630 8,272,904 Common Shares Issued And Outstanding At Year End 8,707,796 8,463,491 8,269,099
Note: all dollar amounts shown herein are in U.S. dollars TABLE OF CONTENTS To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . .2 Industrial Minerals . . . . . . . . . . . . . . . . . . . . . . . .5 Metal Powders . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Alumitech . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Management's Discussion and Analysis . . . . . . . . . . . . . . .23 Independent Auditors' Report . . . . . . . . . . . . . . . . . . .32 Management's Report . . . . . . . . . . . . . . . . . . . . . . . 33 Audit Committee Report . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Financial Statements . . . . . . . . . . . . . . . . 34 Notes to Consolidated Financial Statements . . . . . . . . . . . 38 Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . .61 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 62 Zemex Corporation 1 2 TO OUR SHAREHOLDERS Despite the turmoil that affected world markets in 1998, Zemex reported a 22% increase in operating earnings on a 7% increase in sales. Each of our divisions executed its business strategy well in 1998, focusing on quality and service as well as cost reduction and production optimization. We also significantly increased margins, acquired and digested two acquisitions and developed several new value-added products during the year. These efforts should help make our customers more competitive and give Zemex a sustainable competitive advantage in the marketplace, enhancing our position and profitability going forward. We have experienced and knowledgeable teams in place at the divisional level and have developed leading positions in niche markets, earning a reputation among our customers and suppliers as a well-run, highly-competitive company. Our strength is found in both our sales and marketing teams and our eighteen operating facilities; they have positioned us as a major supplier of industrial minerals, metal powders, and specialty products. A hidden strength is our pre-eminent industrial mineral resource position, one of the strongest of any competitive North American supplier. In recent months, Zemex has had somewhat of a re-birth with its reincorporation in Canada. In view of this, we would like to answer some questions our shareholders have posed with respect to the past year and our strategy going forward, and address what we believe are currently the salient issues for shareholders. Reincorporation The change in domicile of the Corporation from Delaware to Canada resulted from our desire to foster greater access to Canadian capital markets and especially Canadian investors who appear to have a significant interest in industrial minerals and metal processing companies. This change in domicile did not result in any change to the business of Zemex or to the equity or voting interests of our shareholders. However, it did result in our common shares being listed on both the Toronto Stock Exchange and the New York Stock Exchange, which should result in greater exposure in the marketplace and ultimately benefit our shareholders. The basis for this change is straightforward. Zemex is a successful and profitable company, as witnessed by our growth over the past six years, yet this has not been reflected in our share price or in our trading volumes. One reason for this is that Zemex is considered to be a small company by U.S. standards and, as a result, is often overlooked by U.S. analysts and investors. In the Canadian marketplace, Zemex is considered a solid, mid-size company and as such should attract greater interest from the investment community. Acquisitions Zemex plans to grow its three divisions, both internally and through synergistic acquisitions. In 1998, we were fortunate enough to be able to acquire a mica operation, which will strengthen and augment our industrial mineral group, and an aluminum dross recycling facility, which will support our growth strategy in Alumitech. Although we Zemex Corporation 2 3 realized some benefit from these acquisitions in 1998, the retrofitting of these two acquisitions carried out during 1998 and early 1999 should make a significant contribution to earnings in 1999. One of the major frustrations of 1998 was our thwarted takeover of Inmet Mining Corporation, a major Canadian base and precious metals mining company. We began to look at Inmet a couple of years ago. Last spring we reviewed its assets and decided that they could be of greater value than the marketplace perceived. Originally, our interest in Inmet stemmed from their Austrian tungsten mine, concentrator and processing plant, a facility which would have been synergistic to the technology and target markets of our metal powder operations. Unfortunately, we were prevented from acquiring Inmet by that company's defensive measures. Day-To-Day Business Strategy Our focus is to substantially increase the inherent value of the Corporation on an ongoing basis by: o continuing to deliver superior quality and service to our customers in order to achieve leading market share positions; o continuing our focus on developing new value-added products and supporting them with aggressive marketing and sales programs; o continuing to pursue compelling, strategically important acquisitions which meet our demanding criteria and which will closely complement our existing activities; o continuing to utilize and improve our technology as an integral tool to increasing operating efficiency and maintaining our low-cost producer status; and o continuing to build a lean, effective, aggressive organization with the responsiveness necessary to seize emerging opportunities. In the future, we will continue to turn technology and markets to our advantage, invest for growth and seek new customers and niche markets. We enter the last year of this century proud of our accomplishments and confident in the future of the Corporation. Today's Zemex Corporation is a strong, growing company. Our strength comes from the energy, ingenuity and dedication of our employees and our supportive, knowledgeable board of directors. Their combined commitment to our success is a competitive advantage few companies can match. /s/ Richard L. Lister /s/ Peter O. Lawson-Johnston Richard L. Lister Peter O. Lawson-Johnston President and Chief Executive Officer Chairman of the Board Zemex Corporation 3 4 [ PICTURE ] Zemex Corporation 4 5 INDUSTRIAL MINERALS [PICTURE] Zemex's industrial minerals group ("ZIM") mines, processes and supplies industrial mineral products primarily for the ceramics, plastics and coatings industries. These materials include feldspar, kaolin, mica, talc, barytes and sand for use in a multitude of consumer and industrial products and applications. With eleven operating facilities and eight mines located in North America, ZIM provides strong, growing cash generation and made a solid contribution to the Corporation's financial results in 1998. ZIM's strategy is twofold: first, to be the largest or one of the largest suppliers to niche industries and, second, to ensure that it has the strongest resource base among its competitors. ZIM is a major supplier of sodium feldspar to the ceramics industry, where it is used in the production of ceramic plumbing fixtures and in floor and wall tiles, and potassium feldspar, which is used in frits, glazes and technical glass applications such as television picture tubes. ZIM produces appproximately 330,000 tons of sodium and potassium feldspar annually and demand remains strong. Zemex Corporation 5 6 [ PICTURE ] Zemex Corporation 6 7 BILL ROGERS [ PICTURE ] Zemex Corporation 7 8 [ PICTURE ] The company also produces a full range of mica products for use in the manufacture of paints, plastics, and fillers and supplies almost all of the high-end, domestic phlogopite mica market. ZIM also has about 30% of the muscovite mica market, supplying the needs of the paint, plastics and wallboard industries. In 1998, the performance of several product categories stood out: sodium and potassium feldspar sales volumes increased 11.2%, primarily as a result of continued strong demand from the company's traditional customer base in the ceramic tile, plumbing fixture, and glassware industries and inroads the company has made in other new market sectors. ZIM also recorded significant volume increases in industrial sand products as well as increased market penetration of its muscovite mica products. During the year, continued strides were made in margin improvements and operating efficiencies. At ZIM's feldspar facility in Spruce Pine, North Carolina, efforts were focused on refining the process and maximizing ore recovery. The result: a 10% increase in feldspar recovery. Similarly, the redesign of certain screening circuits has allowed the company to increase capacity by 30% at ZIM's phlogopite mica processing facility in Boucherville, Quebec. Internationally, ZIM continued to implement its talc strategy, forming a joint venture with Industria Mineraria Italiana Fabi S.r.l ("Fabi"), a highly regarded technological leader and a major talc supplier to the plastics industry in Europe. In early 1998, Fabi became a partner in ZIM's Benwood, West Virginia grinding facility through the acquisition of a 40% interest in a new entity, Zemex Fabi-Benwood, LLC. This joint venture gives ZIM exclusive access to Fabi's application technology and has enabled the company to develop and introduce Zemex Fabi-Benwood world talc products: high-quality talc products targeted to the more sophisticated North American plastics industry. Additionally, as part of the joint venture, ZIM has access to Fabi's Mount Seabrook talc deposit in Australia. This relationship with Fabi will allow ZIM to accelerate its penetration of the upper end of the finely ground talc business. The past year also saw the company introduce a variety of muscovite mica products to the marketplace following ZIM's acquisition of a muscovite mica operation in the Spruce Pine area of North Carolina. After completion of its retrofitting in early 1999, this acquisition will allow ZIM to process mined ore as well as up-grade the by-product Zemex Corporation 8 9 [ PICTURE ] mica produced at its nearby feldspar operation and convert that mica into high-quality value-added material. As a result of this strategic acquisition, ZIM will expand its offerings to the paint and plastics industries, markets it already serves with its phlogopite mica, talc and barytes products. The addition of muscovite mica to its already expansive product line will allow ZIM to penetrate the mid-range mica market and become a significant full-line supplier of mica products. ZIM is committed to continual improvement in its health and safety record. In 1998, ZIM employees worked 555,000 hours and recorded only one lost time accident, an improvement of 600% from the previous year. We consider this to be a very important milestone. ZIM's substantial growth in the industrial minerals market is being driven by a concentrated focus on establishing the industry standard for reliable, quality products with strong customer relationships. In the years ahead, industrial minerals will increase their importance as a vital part of everyday life, finding increased use in consumer products ranging from glassware and plumbing fixtures, to ceramic floor and wall tiles, to paints and plastics. ZIM will be instrumental in meeting the strong and growing demand for industrial minerals as a highly efficient producer offering a broad range of quality products backed by exceptional service and technology. Zemex Corporation 9 10 [ PICTURE ] Zemex Corporation 10 11 METAL POWDERS [PICTURE] Pyron, Zemex's metal powders group, is a leading supplier of ferrous and non-ferrous metal powders. In recent years, Pyron has redefined its business strategy to be a producer of specialty value-added products for the rapidly growing powder metallurgy (P/M) markets serving the automotive and appliance industries. It produces hydrogen reduced sponge iron powders primarily directed to the friction industry, both automotive and non-automotive, and it also produces copper and copper alloy powders for the small appliance, friction and automotive markets. Pyron has also made significant inroads into developing powder products for soft magnetics, oxygen removal, projectile components, and welding rods and wires, as well as a vast array of consumer related products that require the unique performance characteristics of Pyron's metal powders. Highly developed complex P/M parts are made by compacting powders into a mold and sintering the resultant shapes in a controlled-atmosphere. There is virtually no wastage of material using this process and often little or no need for secondary machining. Industry sources believe that future demand for P/M parts should continue to accelerate as metal powders are utilized in larger and more sophisticated applications. Zemex Corporation 11 12 [ PICTURE ] Zemex Corporation 12 13 WELKER FAMILY [ PICTURE ] Zemex Corporation 13 14 The reason for this growth is twofold. First, powder producers, such as Pyron, are now producing higher-quality, more consistent materials. Second, advances in die and furnace design and in the press equipment used to form powder parts have made it possible to produce larger and more intricate components. These compelling advantages are expected to foster future exponential growth for P/M parts at the expense of forged, machined, and cast components. Pyron had a successful year in 1998 despite the strike at General Motors, which resulted in overall industry shipments falling short of forecast. Fortunately, the disruption had limited effect on Pyron primarily because of concerted efforts to diversify its customer and market base. In fact, even in light of the strike, the company established records in sales volumes and made significant progress in product quality, consistency and service while successfully reducing manufacturing costs at each of its locations. Sales were up by approximately 5%, and, due to its focus on value-added products, maximizing production efficiencies and reducing costs, operating income was up by over 90% compared to 1997. Internally, the development of programs to provide safer working conditions and improve manufacturing efficiencies have met with outstanding results and the formation of an across-the-board team spirit. The improvements made in 1998, combined with those planned for 1999, should firmly establish Pyron as a high-quality, cost-competitive, niche producer of specialty metal powders. The metal powders industry is exacting in its demands for precision blends and quality products. Today's international standard is ISO-9002 certification, and in the fourth quarter of 1998 both Pyron's Niagara Falls and St. Marys facilities earned that certification. It is anticipated that the Tennessee facilities will receive ISO-9002 certification in 1999. During 1998, Pyron continued to establish itself as a top line producer of metal powders through product line extensions, new product development, and the introduction of valued-added services. Each component is a critical element of this group's business strategy and has contributed to strong sales growth. Some of Pyron's recent new product introductions include: Zemex Corporation 14 15 o Manganese Sulfide Plus ("MnS+"(TM)). Industry acceptance of Pyron's patented MnS+, a powder additive designed to improve the machining of P/M parts, grew nearly 63% in 1998 over the previous year. Additionally, a derivative of MnS+ is currently being evaluated by Pyron as a more environmentally friendly substitute for lead and antimony sulfide in the production of friction products. o Pyron Molybdenum Alloys ("PMAs"). The company recently introduced its line of PMAs, powders which produce harder parts with higher strength and ductility. Typical PMA applications, which include gears and sprockets, displace expensive machined parts thereby reducing costs. Customer product evaluations are underway and it is expected that these iron-based alloy powders may displace competing processes and products and be utilized in a number of new applications. o Ferro-Phosphorous ("Fe3P"). The introduction of Fe3P, an additive used to enhance the magnetic characteristics of P/M parts, also added to Pyron's line of new products in 1998. The 1998 market demand for Pyron Fe3P-based blends exceeded expectations and we see this usage accelerating in 1999. o Cu Alloy ("MV-0"). Efforts to energize the non-ferrous product line also proved successful. Market demand for Pyron non-ferrous products, such as unique air-atomized and lower priced water-atomized powders, necessitated bringing back on-line the Maryville, Tennessee production facility. The additional capacity of the Maryville facility will be used to meet the anticipated demand for our recently introduced diluted bronze product line utilizing MV-0. This material is particularly well suited for use in the production of bushings and bearings. Pyron is firmly positioned as a market-driven provider of specialty metal powders and technology-based services. As Pyron moves forward, the plan is to acquire additional business units and continue to channel assets and resources toward providing an ever-increasing value-added component for its products and services, a strategy that should allow Pyron to meet even higher levels of performance in 1999 and beyond. Zemex Corporation 15 16 [ PICTURE ] Zemex Corporation 16 17 A L U M I T E C H [PICTURE] Alumitech, Zemex's aluminum dross processor, has the potential to be a major contributor to the future of the Corporation. Zemex initiated its interest in Alumitech in 1994 and by mid-1995 assumed 100% ownership, believing at that time, and believing even more so today, that Alumitech's proprietary technology for recycling aluminum dross represents the way of the future. Unlike conventional aluminum dross processors, who simply recover aluminum metal values and send the remaining materials to landfill, Alumitech has a patented process that enables it to not only recover aluminum metal present in secondary dross and saltcake (both of which are waste by-products produced in the aluminum recycling process) but to convert the balance traditionally landfilled into profitable industrial products. Using its technology, Alumitech has become the industry leader in developing alternative uses for this residual waste, otherwise known as non-metallic product ("NMP"), by converting it into products used in refractory, steel and other metallurgical industries. Zemex Corporation 17 18 [PICTURE] Zemex Corporation 18 19 [PICTURE] Zemex Corporation 19 20 [PICTURE] Until Alumitech developed its unique "closed-loop" technology, much of the aluminum dross and saltcake materials generated from secondary aluminum processing were simply landfilled. The U.S. Department of Energy estimates that up to two billion pounds of aluminum dross and saltcake are landfilled annually in the United States, with volumes well in excess of that amount disposed of elsewhere in the world. This material has been banned from landfills in some areas of the world. The past year was one of both ups and downs for Alumitech. On the upside, Alumitech focused on the construction of its new NMP facility, growth through acquisition, the consolidation of current operations and the development of new markets and applications for its products. On the downside, aluminum prices, which continued to decline from an average of $0.65 per pound in 1997 to an average of $0.56 per pound in 1998, had a significant negative impact on Alumitech's financial results. However, the partial year earnings realized from the acquisition of S&R Enterprises, Inc., partially offset the negative impact of the reduction in aluminum prices. During the year, Alumitech completed the construction of the full-scale commercial NMP regeneration operation at its Cleveland facility, Alumitech of Cleveland, Inc. Although late, the new processing facility was brought on stream at the end of the third quarter, but mechanical problems in the start-up phase have slowed full-scale continuous commercial production. It has been a daunting process, accompanied by a series of setbacks from an engineering and construction point of view; however, Alumitech knows where the problems are, and the solutions, including the necessary retrofitting of some of the equipment, are being implemented. Despite the dislocation that occurred as a result of the construction of the NMP facility, the Cleveland operation managed to approximate the level of throughput achieved in 1997. In 1998, Alumitech also continued to refine the quality and consistency of its NMP product offerings: calcium aluminate and feedstock for the production of refractory ceramic fibre. Calcium aluminate is used to treat molten steel in the ladle during the final stages of steel refinement just prior to casting. Although produced only in small non-continuous batches, the calcium aluminate product has been of good consistant quality. In June, Alumitech acquired S&R Enterprises, Inc. (since renamed Alumitech of Wabash, Inc.), an aluminum dross processor located in Wabash, Indiana. This acquisition improves Alumitech's ability to serve the aluminum industry Zemex Corporation 20 21 [PICTURE] with broader geographic coverage and expanded processing capabilities. This acquisition is an integral part of Alumitech's business plan -- to grow and expand the business to better serve the aluminum industry and to optimize the use of its proprietary technology. Alumitech began a significant expansion project at this facility to increase this plant's processing capacity. This first phase of expansion is expected to be completed on schedule by the end of the first quarter of 1999, with start-up to commence immediately thereafter. Once Alumitech's newly constructed regeneration facility in Cleveland is up and running, we should see a positive impact on the company's profitability going forward. This will, in turn, allow us to shift our sights to the recently acquired aluminum dross processing facility in Indiana and consider other locations to build additional processing plants in North American and other parts of the world. Each of these will use our proprietary technology to turn aluminum waste into saleable industrial products. Alumitech's third wholly-owned subsidiary, ETS Schaefer Corporation, manufactures patented engineered heat-containment systems, refractory ceramic materials and fire protection materials for commercial structures for use in the steel making, aluminum, and other high temperature-related industries, as well as the commercial building industry. In 1998, ETS had record sales and profits as a result of improved production efficiencies and strong market growth. During the year it also built a new fabrication plant in Macedonia, Ohio. The on-time completion of this new production facility at year end has enabled the consolidation of four existing facilities into one as of the first quarter of 1999 and should foster further improved operating efficiencies in 1999. Aluminum continues to gain ground as the material of choice in everything from packaging to automobiles to electrical components. Much of the metal for this growth is, and will continue to be, produced by the secondary aluminum industry, Alumitech's customer base. With a greater emphasis on economically competitive, environmentally sound alternatives to landfilling, the outlook for Alumitech is extremely positive. Zemex Corporation 21 22 FINANCIAL REVIEW C O N T E N T S Management's Discussion and Analysis ........................................ 23 Independent Auditors' Report ................................................ 32 Management's Report ......................................................... 33 Audit Committee Report ...................................................... 33 Consolidated Statements of Income ........................................... 34 Consolidated Balance Sheets ................................................. 35 Consolidated Statements of Shareholders' Equity ............................. 36 Consolidated Statements of Cash Flows ....................................... 37 Notes to the Consolidated Financial Statements .............................. 38 1. Summary of Significant Accounting Policies ............................ 38 2. Acquisitions and Dispositions ......................................... 41 3. Inventories ........................................................... 42 4. Property, Plant and Equipment ......................................... 43 5. Other Assets .......................................................... 43 6. Income Taxes .......................................................... 44 7. Pension Plans and Other Postretirement Benefits ....................... 46 8. Long Term Debt ........................................................ 46 9. Common Shares and Stock Options ....................................... 48 10. Reorganization Charges and Unusual Item ............................... 50 11. Operating Leases and Other Commitments ................................ 51 12. Financial Instruments ................................................. 51 13. Changes in Non-Cash Working Capital .................................. 52 14. Related Party Transactions ............................................ 52 15. Segment Information ................................................... 53 16. Contingencies ......................................................... 56 17. Differences from United States Accounting Principles .................. 56 Financial Data (Unaudited) .................................................. 61 Selected Financial Data ..................................................... 62 Zemex Corporation 22 23 MANAGEMENT'S DISCUSSION AND ANALYSIS The following is a discussion and analysis of the results of operations and financial condition of the Corporation for the years ended December 31, 1998, 1997 and 1996, along with 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. overview The Corporation is a diversified producer of specialty materials and products for use in a variety of industrial applications. The Corporation operates in three principal business segments: (i) industrial minerals, which includes The Feldspar Corporation, Suzorite Mica Products Inc., Suzorite Mineral Products, Inc., Zemex Fabi-Benwood, LLC, Zemex Industrial Minerals, Inc. and Zemex Mica Corporation; (ii) metal powders, which includes Pyron Corporation and Pyron Metal Powders, Inc.; and (iii) aluminum recycling, which includes Alumitech, Inc., Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc. and ETS Schaefer Corporation. The operating performance of the Corporation was significantly better in 1998 than in 1997. Net sales were up 6.9% but, more importantly, gross margin improved from 27.2% in 1997 to 29.1% in 1998 and income from operations increased by 21.8%. This was partially as a result of the focus on operation efficiency and cost control. In January 1998, the Corporation, through its wholly-owned subsidiary Zemex Industrial Minerals, Inc., acquired a muscovite mica producer for approximately $2.0 million. The facilities acquired in the purchase are located in the Spruce Pine, North Carolina area and now operate under the name Zemex Mica Corporation. This acquisition enhances the Corporation's position as a major mica supplier. On February 24, 1998, Industria Mineraria Italiana Fabi S.r.l ("Fabi") became an investor in the Corporation's talc facility located in Benwood, West Virginia by acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3.1 million and is providing access to its technology. Suzorite Mineral Products, Inc., a wholly-owned subsidiary of the Corporation, will manage the new entity pursuant to an operatiing agreement. There was no gain or loss recognized by the Corporation on the transaction. Effective June 1, 1998, Alumitech, Inc. ("Alumitech"), a wholly-owned subsidiary of the Corporation, acquired all of the issued and outstanding shares of S&R Enterprises, Inc. ("S&R") for approximately $5.6 million. S&R is an aluminum dross processor located in Wabash, Indiana. The acquisition of S&R enhances the Corporation's position in the dross processing industry and provides a foundation for future expansion. Zemex Corporation 23 24 During the second quarter of 1998, the Corporation proposed a business combination with Inmet Mining Corporation ("Inmet"). Approximately 4.1 million shares of Inmet were acquired and financed by the Corporation's credit facilities, as amended (see Liquidity and Capital Resources). Subsequently, the transaction was abandoned and the Corporation sold approximately 2.6 million common shares of Inmet for proceeds of Cdn$14.9 million. The Corporation recorded a foreign exchange loss of $0.7 million in other income (expense) as a result of a decline in the value of its Canadian dollar investment in Inmet. The Corporation remains a significant shareholder of Inmet with approximately 5% of the issued and outstanding shares. In August 1997, the Corporation entered into an agreement with respect to Alumitech's fibre manufacturing operation located in Streetsboro, Ohio. Under the agreement, the fibre line was sold to a new corporation in which Alumitech retained a nominal non-voting equity participation. Alumitech and the purchaser entered into a joint research and development agreement in conjunction with the purchase and sale agreement. The one-time gain, when netted against certain other non-recurring items, resulted in other income of $1.8 million. During the first quarter of 1996, the Corporation recognized reorganization costs of $1.2 million in connection with the reorganization of its industrial minerals division and the recognition of a provision for anticipated costs. A write-down to market of inventory held in Brazil in the amount of $0.5 million was recorded as a charge against cost of goods sold. The Brazilian enterprise was unsuccessful primarily due to rapidly deteriorating market prices, which made market penetration extremely difficult. The Corporation's strategy going forward is to enhance its position as a leading supplier of specialty materials through investments in its core businesses, the introduction of new products, strategic acquisitions and investments in new technologies. results of operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net Sales
1998 1997 Change % Change ------------ ------------ ------------ -------- Industrial minerals $ 44,835,000 $ 43,396,000 $ 1,439,000 3.3% Metal powders 35,556,000 33,930,000 1,626,000 4.8% Aluminum recycling 23,503,000 19,900,000 3,603,000 18.1% ------------ ------------ ------------ ------ $103,894,000 $ 97,226,000 $ 6,668,000 6.9% ============ ============ ============ ======
The Corporation's net sales for 1998 were $103.9 million, an increase of $6.7 million, or 6.9%, from 1997. Zemex Corporation 24 25 The industrial minerals segment recorded a 3.3% increase in sales from $43.4 million in 1997 to $44.8 million in 1998. The increase was primarily due to a $0.7 million increase from the feldspar group generated by a favourable product mix and a $0.7 million increase due to increased volume of talc sales. Talc sales are expected to rise in 1999 as market share continues to increase. Feldspar sales to the plumbing fixtures industry should increase; however, uncertainty exists in the tile industry due to the devaluation of the Malaysian currency. Net sales of the metal powders division increased 4.8%, or $1.6 million, from $33.9 million in 1997 to $35.6 million in 1998. The increase was due to increased market penetration of new value-added products, improved product mix, and increased volume of ferrous and non-ferrous atomized powders. The ferrous business is expected to remain strong during 1999 as powdered metal parts become more widely used by the automotive sector. The aluminum recycling group recorded an increase of 18.1% in sales, or $3.6 million, from $19.9 million in 1997 to $23.5 million in 1998. This increase was due to the acquisition of S&R in June 1998. If the effect of the acquisition is removed, aluminum recycling revenues were static year over year. In the face of a 13.5% decline in aluminum prices realized, the constant revenue was achieved by an offsetting increase in volume. Cost of Goods Sold Cost of goods sold were $70.8 million in 1997 compared to $73.7 million in 1998. The corresponding gross margins were 27.2% for 1997 and 29.1% for 1998. The main increase came from the metal powders group as a result of production efficiencies and a 9.1% increase in volume sold. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased 10.7% from $12.2 million in 1997 to $13.5 million in 1998. As a percentage of sales, SG&A expense was 13.0% in 1998 as compared to 12.5% in 1997. The increase was primarily due to the incremental SG&A associated with acquisitions made in 1998, expenses associated with investigating potential acquisitions, and increased staffing in the metal powders group. Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased by $0.7 million, or 11.8%, from $5.9 million in 1997 to $6.6 million in 1998. This increase was driven by capital expenditures made by the Corporation over the past several years. Prospectively, depreciation will continue to increase as current capital programs are placed into service. Operating Income Operating income increased from $8.4 million for fiscal 1997 to $10.2 million in fiscal 1998, representing a 21.8% increase. Zemex Corporation 25 26 Interest Income Interest income for the year ended December 31, 1998 was $0.3 million, a slight increase of $0.1 million over the same period in 1997. Interest Expense Interest expense for the year ended December 31, 1998 was $2.6 million, an increase of $0.5 million over 1997. Total indebtedness increased from $25.5 million at December 31, 1997 to $51.5 million at December 31, 1998. Interest expense is expected to increase significantly in 1999. Other Income (Expense) Other income (expense) changed from income of $1.6 million in 1997 to an expense of $0.8 million in 1998. The net change year over year was $2.4 million. In 1997, the Corporation recognized other income of $1.6 million. The largest component of this revenue was generated by a one-time gain on the sale of Alumitech's fibre line. In 1998, the Corporation recognized a foreign exchange loss of approximately $0.7 million. This loss arose from a decline in the value of the Canadian dollar during the time that the Corporation had a significant investment in Inmet. Provision for Income Taxes The provision for income taxes for the fiscal year 1998 was $1.7 million as compared to $2.3 million in 1997. In 1999, the Corporation will use an effective tax rate of approximately 28% to calculate its income taxes, reflecting the permanent difference in the United States arising from the application of percent depletion to income derived from extractive industries. Non-Controlling Interest in Loss of Subsidiary As a result of its sale of a 40% interest in its talc facility located in Benwood, West Virginia, the Corporation recorded a loss of $41,000 as its proportionate share of the loss in the new limited liability company. Net Income and Earnings Per Share As a result of the factors discussed above, net income for the year ended December 31, 1998 was $5.4 million, a decrease of $0.4 million from 1997.
1998 1997 ------------- ------------- Net income $ 5,365,000 $ 5,793,000 Earnings per share - basic $ 0.65 $ 0.70 - - fully diluted $ 0.60 $ 0.65 ============= =============
Zemex Corporation 26 27 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Net Sales
1997 1996 Change % Change ----------- ----------- ----------- -------- Industrial minerals $43,396,000 $40,469,000 $ 2,927,000 7.2% Metal powders 33,930,000 31,725,000 2,205,000 7.0% Aluminum recycling 19,900,000 14,226,000 5,674,000 39.9% ----------- ----------- ----------- ---- $97,226,000 $86,420,000 $10,806,000 12.5% =========== =========== =========== ====
The Corporation's net sales for 1997 were $97.2 million, an increase of $10.8 million, or 12.5%, from 1996. Sales in the industrial minerals segment, the metal powders group, and the aluminum recycling division increased $2.9 million, $2.2 million and $5.7 million, respectively. The industrial minerals segment recorded a 7.2% increase in sales from $40.5 million in 1996 to $43.4 million in 1997. The increase was primarily due to a $1.7 million increase from the feldspar group generated by a favourable product mix, resulting in slightly higher margins, and a $1.4 million increase due to increased volume of talc sales. Net sales in the metal powders group increased 7.0%, or $2.2 million, from $31.7 million in 1996 to $33.9 million in 1997. Of the increase, $1.7 million was due to increased sales of ferrous metal powders. The aluminum recycling group generated increased sales of $5.7 million for a total of $19.9 million in 1997. Of the increase, $1.3 million resulted from a positive movement in the price of aluminum, $1.6 million resulted from higher volumes and $2.6 million was due to increased sales of ceramic fibre products. Cost of Goods Sold Cost of goods sold were $70.8 million in 1997 compared to $67.0 million in 1996. The corresponding gross margins were 27.2% for 1997 and 22.5% for 1996. The main increase in 1997 came from the industrial minerals group as a result of production efficiencies, a favourable product mix and the 1996 write-down of inventory held in Brazil. Selling, General and Administrative Expenses SG&A expenses increased 15.9% from $10.5 million in 1996 to $12.2 million in 1997. As a percentage of sales, SG&A expense was 12.5% in 1997 as compared to 12.1% in 1996. The increase was due to increased staffing in the industrial minerals group, expenses associated with reviewing potential acquisitions, and bonuses paid pursuant to the Corporation's management incentive program. No management bonuses were paid in respect of the 1996 year. Zemex Corporation 27 28 Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased by $1.2 million, or 25.1%, from $4.7 million in 1996 to $5.9 million in 1997. This increase was driven by capital expenditures made by the Corporation over the past several years. Operating Income Before Reorganization Charges Operating income before reorganization charges was $8.4 million in 1997 compared to $4.3 million in 1996. A $1.2 million reorganization charge was recognized in the first quarter of 1996 in connection with the reorganization of the Corporation's industrial minerals division. Operating Income Operating income increased from $3.1 million for fiscal 1996 to $8.4 million in fiscal 1997, representing a 173.1% increase. Interest Income Interest income for the year ended December 31, 1997 was $0.2 million compared to $0.1 million in 1996. Interest Expense Interest expense for the year ended December 31, 1997 was $2.1 million, an increase of $1.1 million over 1996. During 1996, interest expense relating to the expansion of the Spruce Pine facility was capitalized. During 1997, the project was completed and, accordingly, the related interest was expensed. Total indebtedness declined to $25.5 million in 1997 from $26.6 million in 1996. Other Income (Expense) In 1997, the Corporation recognized other income of $1.6 million. The largest component of this revenue was generated by a one-time gain from the sale of Alumitech's fibre line. Provision for (Recovery of) Income Taxes The provision for income taxes for the fiscal year 1997 was $2.3 million as compared to a tax recovery of $0.9 million in 1996. The 1996 tax recovery reflected the recognition of the benefit of net operating losses available to the Corporation. Zemex Corporation 28 29 Net Income and Earnings Per Share As a result of the factors discussed above, net income for the year ended December 31, 1997 was $5.8 million, an increase of $3.2 million from 1996.
1997 1996 ------------- ------------- Net income $ 5,793,000 $ 2,612,000 Earnings per share - basic $ 0.70 $ 0.32 - - fully diluted $ 0.65 $ 0.30 ============= =============
liquidity and capital resources The Corporation has historically funded its activities through cash flow from operations, bank debt and sales of capital stock and warrants. During the most recent three-year period ended December 31, 1998, the Corporation funded all capital expenditures, acquisitions and debt reduction from a combination of additional debt, cash flow from operations, and proceeds from the sale of assets. Cash Flow from Operations The Corporation had $14.8 million of working capital at December 31, 1998 compared to $19.0 million at December 31, 1997. During 1998, the Corporation generated cash flow from operations of $4.6 million as compared to $13.5 million for 1997. The decrease of $8.9 million was primarily due to a large swing in non-cash working capital items and in particular a movement in accounts payable and accrued liabilities in the aggregate amount of $7.1 million. In 1998, non-cash working capital items consumed $5.5 million in cash as compared to generating $3.7 million in 1997. Financing Agreements In March 1997, the Corporation amended its credit facility to increase the total availability to $50,224,000. In 1998 the operating line was increased, on a temporary basis, to $15,000,000. As at December 31, 1998, the operating line was reduced to $10,000,000 with a further reduction to $5,000,000 to occur on February 28, 1999. The amended credit facility is further subdivided into four facilities: (i) a $30,000,000 revolving credit facility; (ii) a $10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby letter of credit; and (iv) a $5,000,000 operating line. These facilities are secured by specific assets and a floating charge over the Corporation's assets. The facilities bear interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon the financial position of the Corporation. As at December 31, 1998, there was $10,000,000 outstanding under the operating line, $6,945,000 outstanding under the multiple advance term loan facility, $30,000,000 outstanding under the revolving credit facility, and the standby letter of credit was issued to secure the Corporation's industrial development revenue bond. The operating line matures June 30, 1999 and is Zemex Corporation 29 30 reviewed annually for purposes of renewal. The multiple advance term loan facility requires quarterly payments of $278,000 with the balance outstanding, if any, due January 1, 2000. The revolving credit facility expires and must be repaid on January 1, 2000. Capital Expenditures The Corporation's primary capital activities in the past involved the acquisition of mineral and metal processing businesses, and capital investments to expand its facilities, increase operating efficiencies, and meet environmental, health and safety standards at its existing operations. During 1998, capital expenditures were $20.7 million compared to $16.6 million and $16.4 million for the years ended December 31, 1997 and 1996, respectively. During 1998, the Corporation spent approximately $7.6 million in cash and assumed approximately $2.3 million in long term debt to acquire S&R and Aspect Minerals, Inc. (Zemex Mica Corporation). The capital expenditures and acquisitions were funded by cash flow from operations and bank indebtedness. The Corporation is currently completing several major capital programs. These include retrofitting the aluminum dross plant in Cleveland, expanding capacity at S&R and retrofitting the mica facility in Spruce Pine, North Carolina. In aggregate, 1999 capital expenditures are anticipated to be approximately $15.5 million. The Corporation plans on funding these expenditures from a combination of cash flow from operations and credit facilities. Although the Corporation's capital budgets provide for certain reclamation and environmental compliance activities, management does not believe that the cost of the Corporation's environmental compliance will have a material adverse effect on the Corporation's results of operations or financial condition in 1999. seasonality and inflation Although the Corporation's results from extraction and processing operations are cyclical due to fluctuations in industrial minerals and metal powders demands, sales of the Corporation's products are generally not seasonal. Inflation in recent years has not adversely affected the Corporation's results of operations and is not expected to adversely affect the Corporation in the future unless it increases substantially. 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. It is the opinion of management that any year 2000 issues that may arise will not be significant and will not have a material adverse impact on the financial performance of the Corporation. The Corporation is reviewing its key suppliers to determine their exposure to problems arising from year 2000. The review is being conducted by management personnel and additional resources are not required. Zemex Corporation 30 31 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. Prices and interest rates 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. capital stock Zemex Corporation's common shares are traded on the New York Stock Exchange and, as of February 1, 1999, on the Toronto Stock Exchange under the symbol ZMX. The price range in which the shares have traded for the past two years is shown below: Common Shares
1998 Q1 Q2 Q3 Q4 Year - -------- -------- --------- -------- --------- --------- High $ 9.75 $ 10.44 $ 9.19 $ 6.94 $ 10.44 Low 7.81 8.75 6.00 6.00 6.00 Close 9.50 8.75 6.50 6.25 6.25
1997 Q1 Q2 Q3 Q4 Year - -------- -------- --------- -------- --------- --------- High $ 7.75 $ 8.00 $ 9.50 $ 10.94 $ 10.94 Low 6.75 6.75 7.88 7.94 6.75 Close 6.75 7.75 9.50 8.75 8.75
In the fourth quarter of each of 1998, 1997 and 1996, the Corporation declared a 2% stock dividend. As of December 31, 1998, there were approximately 1,669 holders of record of the Corporation's common shares. This number includes shares held in nominee name and, thus, does not reflect the number of holders of a beneficial interest in the shares. Zemex Corporation 31 32 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Zemex Corporation We have audited the consolidated balance sheets of Zemex Corporation as of December 31, 1998 and 1997 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Canada. Those standards require that we plan and perform the audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Zemex Corporation as of December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in accordance with accounting principles generally accepted in Canada. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Chartered Accountants Toronto, Ontario February 5, 1999 Zemex Corporation 32 33 MANAGEMENT'S REPORT The management of Zemex Corporation and its subsidiaries has the responsibility for preparing the consolidated financial statements presented in this annual report and for their accuracy and integrity. The statements have been prepared in conformity with accounting principles generally accepted in Canada, and include informed judgments and estimates as required. Other financial information in this annual report is consistent with the financial statements. Zemex Corporation's system of internal controls is designed to provide reasonable assurance, at a justifiable cost, as to the reliability of financial records and reporting and the protection of assets. This system includes organizational arrangements with clearly defined lines of responsibility. Deloitte & Touche LLP, independent auditors, have audited the consolidated financial statements of Zemex Corporation and their opinion is included on the preceding page. Zemex Corporation has formal standards of corporate conduct and policies regarding high standards of ethics and financial integrity. These policies have been disseminated to appropriate employees and internal control procedures provide reasonable assurance that violations of these policies, if any, are detected. /s/ Allen J. Palmiere /s/ Richard L. Lister Allen J. Palmiere Richard L. Lister Vice President and President and Chief Financial Officer Chief Executive Officer AUDIT COMMITTEE REPORT The Audit Committee of the Board of Directors is currently composed of two independent directors, John M. Donovan and Garth A.C. MacRae. The Committee held three meetings during 1998. The Audit Committee oversees the financial reporting process of the Corporation on behalf of the Board of Directors. In fulfilling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Corporation's independent auditors. The Audit Committee met with management and representatives of the auditors, Deloitte & Touche LLP, to review accounting, auditing and financial reporting matters. The Committee met with Deloitte & Touche LLP representatives without management present. /s/ John M. Donovan John M. Donovan Chairman, Audit Committee Zemex Corporation 33 34 CONSOLIDATED STATEMENTS OF INCOME (All amounts are in U.S. dollars)
Years ended December 31 1998 1997 1996 - ----------------------- ------------- ------------- ------------- Net sales $ 103,894,000 $ 97,226,000 $ 86,420,000 ------------- ------------- ------------- Costs and expenses Cost of goods sold (note 10) 73,678,000 70,826,000 66,952,000 Selling, general and administrative 13,463,000 12,158,000 10,492,000 Depreciation, depletion and amortization 6,561,000 5,871,000 4,694,000 ------------- ------------- ------------- 93,702,000 88,855,000 82,138,000 ------------- ------------- ------------- Operating income before reorganization charges 10,192,000 8,371,000 4,282,000 Reorganization charges (note 10) -- -- 1,216,000 ------------- ------------- ------------- Operating income 10,192,000 8,371,000 3,066,000 ------------- ------------- ------------- Other income (expense) Interest income 255,000 150,000 93,000 Interest expense (2,588,000) (2,094,000) (1,041,000) Other, net (notes 2 and 10) (822,000) 1,635,000 (455,000) ------------- ------------- ------------- (3,155,000) (309,000) (1,403,000) ------------- ------------- ------------- Income before income taxes and non-controlling interest 7,037,000 8,062,000 1,663,000 Provision for (recovery of) income taxes (note 6) 1,713,000 2,269,000 (949,000) Non-controlling interest in loss of subsidiary (note 2) (41,000) -- -- ------------- ------------- ------------- Net income $ 5,365,000 $ 5,793,000 $ 2,612,000 ------------- ------------- ------------- Net income per share - basic $ 0.65 $ 0.70 $ 0.32 - fully diluted $ 0.60 $ 0.65 $ 0.30 ------------- ------------- ------------- Weighted average number of common shares outstanding 8,286,178 8,267,630 8,272,904 ------------- ------------- -------------
See notes to the consolidated financial statements Zemex Corporation 34 35 CONSOLIDATED BALANCE SHEETS (All amounts are in U.S. dollars)
December 31 1998 1997 - ----------- ------------- ------------- ASSETS Current assets Cash and cash equivalents $ 1,062,000 $ 2,189,000 Accounts receivable (less allowance for doubtful accounts of $329,000 at December 31, 1998 and $328,000 at December 31, 1997) (note 14) 17,642,000 16,287,000 Inventories (note 3) 18,036,000 17,595,000 Prepaid expenses and other 946,000 786,000 Future tax benefits (note 6) 657,000 1,328,000 ------------- ------------- 38,343,000 38,185,000 Property, plant and equipment (notes 4 and 8) 89,058,000 70,812,000 Other assets (note 5) 21,374,000 9,777,000 Future tax benefits (non-current) (note 6) 91,000 -- ------------- ------------- $ 148,866,000 $ 118,774,000 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Bank indebtedness (note 8) $ 10,000,000 $ 3,000,000 Accounts payable 6,324,000 9,805,000 Accrued liabilities 4,433,000 3,151,000 Accrued income taxes 644,000 1,235,000 Current portion of long term debt (note 8) 2,132,000 2,019,000 ------------- ------------- 23,533,000 19,210,000 Long term debt (note 8) 39,354,000 20,527,000 Other non-current liabilities 1,006,000 1,014,000 Future tax obligations (note 6) -- 1,488,000 ------------- ------------- 63,893,000 42,239,000 ------------- ------------- Non-controlling interest in subsidiary company 3,075,000 -- ------------- ------------- Shareholders' equity Common stock (note 9) 8,708,000 9,204,000 Paid-in capital 48,691,000 53,298,000 Retained earnings 28,418,000 24,235,000 Note receivable from shareholder (note 9) (1,749,000) (1,749,000) Cumulative translation adjustment (2,170,000) (1,588,000) Treasury stock at cost (note 9) -- (6,865,000) ------------- ------------- 81,898,000 76,535,000 ------------- ------------- $ 148,866,000 $ 118,774,000 ============= =============
See notes to the consolidated financial statements /s/ John M. Donovan /s/ Garth A.C. MacRae Approved by the Board of Directors John M. Donovan Garth A.C. MacRae Director Director Zemex Corporation 35 36 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (All amounts are in U.S. dollars)
Note Receivable Cumulative Common Paid-In Retained From Translation Treasury Stock Capital Earnings Shareholder Adjustment Stock Total ----------- ----------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 1995 $ 8,695,000 $49,692,000 $18,683,000 $ (1,749,000) $(1,218,000) $(3,203,000) $70,900,000 Stock issued under ESPP(a)(b) 73,000 535,000 -- -- -- -- 608,000 Stock dividend(a) 161,000 1,089,000 (1,255,000) -- -- -- (5,000) Stock options exercised(a) 21,000 84,000 -- -- -- -- 105,000 Stock purchased for treasury(a) -- -- -- -- -- (3,170,000) (3,170,000) Stock options repurchased -- (96,000) -- -- -- -- (96,000) Net income for the year -- -- 2,612,000 -- -- -- 2,612,000 Translation adjustment -- -- -- -- 43,000 -- 43,000 ----------- ----------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 1996 8,950,000 51,304,000 20,040,000 (1,749,000) (1,175,000) (6,373,000) 70,997,000 Stock issued under ESPP(a)(b) 75,000 528,000 -- -- -- -- 603,000 Stock dividend(a) 165,000 1,428,000 (1,598,000) -- -- -- (5,000) Stock options exercised(a) 14,000 205,000 -- -- -- -- 219,000 Stock purchased for treasury(a) -- -- -- -- -- (492,000) (492,000) Stock options repurchased -- (167,000) -- -- -- -- (167,000) Net income for the year -- -- 5,793,000 -- -- -- 5,793,000 Translation adjustment -- -- -- -- (413,000) -- (413,000) ----------- ----------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 1997 9,204,000 53,298,000 24,235,000 (1,749,000) (1,588,000) (6,865,000) 76,535,000 Stock issued under ESPP(a)(b) 112,000 776,000 -- -- -- -- 888,000 Stock dividend(a) 170,000 1,008,000 (1,182,000) -- -- -- (4,000) Stock options exercised(a) 27,000 186,000 -- -- -- -- 213,000 Stock purchased for treasury(a) -- -- -- -- -- (499,000) (499,000) Stock options repurchased -- (18,000) -- -- -- -- (18,000) Cancellation of treasury stock (805,000) (6,559,000) -- -- -- 7,364,000 -- Net income for the year -- -- 5,365,000 -- -- -- 5,365,000 Translation adjustment -- -- -- -- (582,000) -- (582,000) ----------- ----------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 1998 $ 8,708,000 $48,691,000 $28,418,000 $ (1,749,000) $(2,170,000) $ -- $ 81,898,000 =========== =========== =========== ============ =========== =========== ============
See notes to the consolidated financial statements (a) See note 9 (b) employee stock purchase plan ("ESPP") Zemex Corporation 36 37 CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts are in U.S. dollars)
Years ended December 31 1998 1997 1996 - ----------------------- ------------ ------------ ------------ Cash flows from operating activities Net income $ 5,365,000 $ 5,793,000 $ 2,612,000 Adjustments to reconcile net income from operations to net cash flows from operating activities Depreciation, depletion and amortization 6,561,000 5,871,000 4,694,000 Amortization of deferred financing costs 168,000 147,000 101,000 (Decrease) increase in future tax obligations (909,000) 356,000 (1,761,000) Non-controlling interest in subsidiary earnings (41,000) -- -- Loss (gain) on sale of property, plant and equipment 19,000 (1,831,000) 255,000 (Increase) decrease in other assets (795,000) (957,000) 670,000 (Decrease) increase in non-current liabilities (191,000) 415,000 (6,000) Changes in non-cash working capital items(a) (5,536,000) 3,709,000 (533,000) ------------ ------------ ------------ Net cash provided by operating activities 4,641,000 13,503,000 6,032,000 ------------ ------------ ------------ Cash flows from investing activities Additions to property, plant and equipment (20,728,000) (16,584,000) (16,426,000) Assets acquired in connection with acquisitions, net of cash acquired(b) (7,468,000) -- -- Acquisitions of securities(b) (14,566,000) -- -- Proceeds on sales of securities 9,696,000 -- -- Proceeds from sale of assets(b) 3,126,000 3,939,000 86,000 ------------ ------------ ------------ Net cash used in investing activities (29,940,000) (12,645,000) (16,340,000) ------------ ------------ ------------ Cash flows from financing activities Proceeds (payments) net, on bank indebtedness 7,000,000 (3,590,000) 3,370,000 Proceeds from long term debt 21,572,000 5,717,000 12,882,000 Repayment of long term debt (4,921,000) (3,169,000) (2,747,000) Cash paid in lieu of fractional shares (4,000) (5,000) (5,000) Issuance of common stock(c) 1,101,000 679,000 713,000 Purchase of common stock and options for treasury(c) (516,000) (516,000) (3,266,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities 24,232,000 (884,000) 10,947,000 ------------ ------------ ------------ Effect of exchange rate changes on cash (60,000) (64,000) (13,000) ------------ ------------ ------------ Net (decrease) increase in cash (1,127,000) (90,000) 626,000 ------------ ------------ ------------ Cash and cash equivalents at beginning of year 2,189,000 2,279,000 1,653,000 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,062,000 $ 2,189,000 $ 2,279,000 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $ 2,658,000 $ 821,000 $ 393,000 Interest paid 2,957,000 2,412,000 937,000 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Notes received in connection with sale of assets held for resale(b) (d) $ -- $ 2,274,000 $ -- ============ ============ ============
See notes to the consolidated financial statements (a) See note 13 (b) See note 2 (c) See note 9 (d) See note 10 Zemex Corporation 37 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Basis of Preparation On January 21, 1999, a reincorporation merger was completed, the effect of which was to migrate Zemex Corporation from the United States to Canada. The predecessor Zemex Corporation became a wholly-owned subsidiary of Zemex Canada Corporation. Zemex Canada Corporation subsequently changed its name to Zemex Corporation. As the Canadian parent has as its sole asset the shares of the U.S. subsidiary, and this change in structure has no effect on the ultimate ownership of Zemex Corporation, these financial statements have been prepared in accordance with accounting principles generally accepted in Canada and reflect the results of operations, financial position and changes in cash flows of the Corporation as though the new structure had been in place for all periods presented. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with Canadian generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting policies of Zemex Corporation and its subsidiaries (the "Corporation") are as follows: A. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Zemex Corporation and its subsidiaries. All intercompany transactions have been eliminated. B. INVENTORIES Inventories are stated at the lower of cost or net realizable value and are computed using the average cost method. It is not practical to segregate finished products from ore and concentrates. Materials and supplies are stated at cost using the first-in, first-out or average cost method. C. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. When assets are sold or otherwise retired, the cost and accumulated depreciation or depletion are removed from the accounts and any gain or loss is included in results of operations. Provisions for depreciation are based upon estimated useful lives, using principally the straight-line method. Depreciation on newly constructed or purchased assets begins when the asset is placed into production. Depletion of mining properties and depreciation of other mining assets are computed using the unit-of-production method, except in the case of the Corporation's mica operation where the estimated reserves exceed the expected production during the Zemex Corporation 38 39 term of the mining lease. The mica mining lease rights and deferred costs, including all preproduction and set-up costs, are amortized using the straight-line method over the term of the mining lease. D. POSTRETIREMENT BENEFITS Pension Plans Generally, the funding policy of the Corporation is to contribute annually at a rate that is intended to provide for the cost of benefits earned during the year and which will amortize prior service costs and experience gains and losses over the average remaining service lives of the employee group. Healthcare and Other Postretirement Benefits Other Than Pensions The Corporation accounts for healthcare and other postretirement benefits other than pensions by accruing for all such amounts during the years in which employees render the necessary services to be entitled to receive such benefits. The 1998, 1997 and 1996 amounts include the current year expense and the transition liability which is being amortized over a twenty-year period which began in 1993. E. FOREIGN CURRENCY TRANSLATION The functional currency for the Corporation's operations is the U.S. dollar. The assets and liabilities of the Corporation's self-sustaining foreign operation are translated at the exchange rates in effect at the balance sheet date. The subsidiary's revenues and expenses are translated at average rates for the period. The resulting unrealized gains and losses are accumulated as part of the cumulative translation adjustment component of shareholders' equity. Foreign currency assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Results of operations and cash flows are translated using the average exchange rates during the year. Gains and losses from foreign currency transactions are included in net income for the year. F. REVENUE RECOGNITION Revenue is recognized when goods are shipped to customers. Consignment sales are recognized when a customer draws the goods from inventory. G. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses are charged to earnings in the periods in which they are incurred. Research and development expenses were $636,000, $961,000 and $622,000 for the years ended December 31, 1998, 1997 and 1996, respectively. H. PROVISION FOR FUTURE RECLAMATION COSTS Costs for future reclamation have been provided for based upon estimated future reclamation costs allocated over the expected productive lives of the Corporation's quarries and mines. Zemex Corporation 39 40 I. INCOME TAXES The Corporation has early adopted CICA Handbook Section 3465, "Income Taxes". Section 3465 substantially mirrors the U.S. pronouncement, SFAS No. 109, "Accounting for Income Taxes". These pronouncements require income taxes to be recognized during the year in which transactions enter into the determination of financial statement income, with future taxes being provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. J. EARNINGS PER SHARE The Corporation calculates basic earnings per share in accordance with Canadian accounting principles which are substantially in accordance with the U.S. pronouncement SFAS No. 128, "Earnings Per Share". Under this standard, earnings per share are calculated based upon the weighted average number of common shares outstanding. For the purpose of calculating earnings per share, stock dividends are considered to be issued at the beginning of all periods presented. K. DEFERRED FINANCING COSTS Costs associated with the issuance of long term debt are deferred, and are being amortized over the term of the debt on a straight-line basis. The unamortized balance is included in other assets. L. OTHER ASSETS Other assets includes assets held for sale which are carried at cost, unless there has been a decline in their value that is other than temporary in which case the value of such asset is written down accordingly. In determining the appropriate value, the Corporation deducts from the estimated selling price the projected costs to bring the assets into a saleable condition, to dispose of the assets or to hold the property to an expected date of sale. Other assets also includes patents which are stated at cost and are being amortized over their remaining life of 12 years on a straight-line basis. Patents are evaluated periodically and, if conditions warrant, an impairment charge is provided. M. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, highly liquid investments with original maturities of three months or less when purchased are considered as cash equivalents. N. GOODWILL Goodwill represents the excess of the costs of acquisitions over the fair values of the net identifiable assets acquired, and is amortized on a straight-line basis over its estimated useful life, up to a period of 15 years. The Corporation assesses the recoverability of goodwill at each balance sheet date by determining whether the amortization of the balance over its remaining useful life can be recovered through projected undiscounted future operating cash flows. Zemex Corporation 40 41 2. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS Acquisition of Aspect Minerals, Inc. In January 1998, the Corporation, through its wholly-owned subsidiary, Zemex Industrial Minerals, Inc., acquired all of the issued and outstanding shares of Aspect Minerals, Inc., a muscovite mica processor, for approximately $2.2 million, which included the assumption of debt. The two facilities acquired in the transaction are located in the Spruce Pine, North Carolina area and are operating under the name Zemex Mica Corporation ("ZMC"). The acquisition was financed through borrowings on the Corporation's credit facility. The acquisition of ZMC has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated first to the assets purchased and liabilities assumed and the excess purchase price has been allocated to goodwill. The purchase price was allocated as follows: Tangible assets acquired $ 614,000 Liabilities assumed (1,542,000) Goodwill 2,934,000 ----------- Cash consideration $ 2,006,000 ===========
Acquisition of S&R Enterprises, Inc. Effective June 1, 1998, Alumitech, Inc., a wholly-owned subsidiary of the Corporation, acquired all of the issued and outstanding shares of S&R Enterprises, Inc. ("S&R") for approximately $7.7 million, which included the assumption of debt. S&R is an aluminum dross processor located in Wabash, Indiana. The Corporation used its credit facility to finance the acquisition. The acquisition of S&R has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated first to the assets purchased and liabilities assumed and the excess purchase price has been allocated to goodwill. The purchase price was allocated as follows: Tangible assets acquired $ 4,845,000 Liabilities assumed (2,849,000) Goodwill 3,561,000 ----------- Cash consideration $ 5,557,000 ===========
Zemex Corporation 41 42 Investment in Inmet Mining Corporation During the second quarter of 1998, the Corporation proposed a business combination with Inmet Mining Corporation ("Inmet"). Approximately 4.1 million shares of Inmet were acquired. The purchase was financed by the Corporation's credit facilities, as amended. Subsequently, the transaction was abandoned and the Corporation sold, pursuant to an issuer bid, approximately 2.6 million common shares of Inmet for proceeds of approximately Cdn$14.9 million. No gain or loss was recognized on the transaction. The Corporation recorded a foreign exchange loss of $0.7 million in other income (expense) as a result of a decline in the value of the Canadian dollar. The Corporation's residual 5% interest in Inmet is included in other assets. DISPOSITIONS Sale of Interest in Benwood Facility On February 24, 1998, Industria Mineraria Italiana Fabi S.r.1. ("Fabi") became an investor in the Corporation's talc facility located in Benwood, West Virginia by acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3.1 million and is providing access to its technology. Suzorite Mineral Products, Inc., a wholly-owned subsidiary of the Corporation, manages the new entity pursuant to an operating agreement. There was no gain or loss on the transaction. Asset Sale During the third quarter of 1997, the Corporation sold certain assets utilized to manufacture refractory ceramic fibre. These assets were vended into a joint venture in which the Corporation retained a nominal interest. The sale resulted in a pre-tax gain of $1.8 million, which has been included in other income (expense). Total proceeds were $4.3 million, which included $2.1 million in cash and $2.3 million in notes receivable included in accounts receivable. 3. INVENTORIES
1998 1997 ------------------- ------------- Ore, raw materials, work in process and finished products Industrial minerals $ 9,221,000 $ 8,312,000 Metal powders 3,306,000 3,315,000 Aluminum recycling 321,000 686,000 ------------------- ------------- 12,848,000 12,313,000 =================== ============= Materials and supplies Industrial minerals 3,703,000 3,955,000 Metal powders 1,032,000 1,218,000 Aluminum recycling 453,000 109,000 ------------------- ------------- 5,188,000 5,282,000 ------------------- ------------- $ 18,036,000 $ 17,595,000 =================== =============
Zemex Corporation 42 43 4. PROPERTY, PLANT AND EQUIPMENT
Effective Life 1998 1997 -------------- ------------ ------------ Land $ 6,410,000 $ 5,344,000 Mining properties and deferred costs 8,261,000 8,125,000 Buildings 30 - 40 years 21,267,000 18,092,000 Machinery and equipment 3 - 20 years 77,054,000 64,952,000 Construction in progress 17,077,000 8,308,000 ------------ ------------ Total property, plant and equipment, at cost 130,069,000 104,821,000 Less: Accumulated depreciation and amortization (41,011,000) (34,009,000) ------------ ------------ Net property, plant and equipment $ 89,058,000 $ 70,812,000 ============ ============
As of December 31, 1998, the Corporation estimates that approximately $3,015,000 will be expended to complete its construction in progress (at December 31, 1997, $3,973,000). During 1998, the Corporation capitalized $394,000 in interest relating to capital projects (1997, nil). 5. OTHER ASSETS
1998 1997 ----------- ---------- Prepaid pension cost $ 1,318,000 $1,378,000 Assets held for resale (note 10) 300,000 300,000 Deferred financing costs 445,000 646,000 Deferred start-up costs 1,191,000 -- Long term note receivable 549,000 549,000 Other 774,000 547,000 Patents, net 5,688,000 6,357,000 Goodwill 6,238,000 -- Investments 4,871,000 -- ----------- ---------- $21,374,000 $9,777,000 =========== ==========
Zemex Corporation 43 44 6. INCOME TAXES The provision for income taxes consists of the following components:
1998 1997 1996 ------------- ------------ ------------- Total pre-tax income $ 7,037,000 $ 8,062,000 $ 1,663,000 ------------- ------------ ------------- Current income tax provision Canadian $ 557,000 $ 350,000 $ 76,000 Federal U.S. 1,461,000 1,277,000 478,000 State and local U.S. 352,000 211,000 123,000 ------------- ------------ ------------- Total 2,370,000 1,838,000 677,000 ------------- ------------ ------------- Future income tax provision Canadian -- -- -- Federal U.S. (584,000) 279,000 (1,369,000) State and local U.S. (73,000) 152,000 (257,000) ------------- ------------ ------------- Total (657,000) 431,000 (1,626,000) ------------- ------------ ------------- Provision for (recovery of) income taxes $ 1,713,000 $ 2,269,000 $ (949,000) ============= ============= =============
The following tabulation reconciles the Canadian statutory income tax rate to the effective income tax rate.
1998 1997 1996 ---- ---- ---- % % % Statutory rate 38.2 38.2 38.2 Mining taxes 2.4 0.4 0.6 Resource allowance (2.5) (1.5) -- Difference in U.S. tax rates (3.4) (3.9) (4.0) Benefit of operating loss carryforwards -- -- (43.8) U.S. percentage depletion (11.2) (7.7) (49.6) Other 0.8 2.6 1.5 ---- ---- ---- Effective income tax rate 24.3 28.1 (57.1) ==== ==== ====
Zemex Corporation 44 45 Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As at December 31, 1998 and December 31, 1997, the Corporation had unused tax benefits of $8,239,000 and $6,661,000, respectively, related to U.S. federal and state net operating loss and tax credit carryforwards. Significant components of the Corporation's future tax assets and obligations as of December 31 are as follows (dollars in thousands):
1998 1997 Canada U.S. Total Canada U.S. Total --------- ------- ------- -------- -------- -------- Future tax assets Net operating loss and tax credit carryforwards $ -- $ 8,239 $ 8,239 $ -- $ 6,661 $ 6,661 Accrued expenses and reserves -- 513 513 -- 958 958 Bad debt allowances -- 109 109 -- 110 110 Inventories -- 173 173 -- 280 280 Other -- 173 173 -- 167 167 --------- ------- ------- -------- -------- -------- Gross future tax assets -- 9,207 9,207 -- 8,176 8,176 Valuation allowance -- (1,014) (1,014) -- (523) (523) --------- ------- ------- -------- -------- -------- Net future tax assets -- 8,193 8,193 -- 7,653 7,653 ========= ======= ======= ======== ======== ======== Future tax obligations Property, plant and equipment 1,879 3,415 5,294 2,012 3,206 5,218 Patent -- 1,456 1,456 -- 1,658 1,658 Pension contributions -- 512 512 -- 580 580 Other -- 183 183 -- 357 357 --------- ------- ------- -------- -------- -------- Total 1,879 5,566 7,445 2,012 5,801 7,813 ========= ======= ======= ======== ======== ======== Net future tax (assets) obligations $ 1,879 $(2,627) $ (748) $ 2,012 $(1,852) $ 160 ========= ======= ======= ======== ======== ========
At December 31, 1998, the Corporation had approximately $12,300,000 of U.S. federal net operating loss carryforwards available to reduce future taxable income, which will expire between 2002 and 2011. Additionally, for U.S. tax purposes, the Corporation has unused general business tax credits, which expire between 1999 and 2011, and alternative minimum tax credits. The Corporation also has U.S. state net operating losses and investment credit carryforwards; however, a valuation allowance of $1,014,000 has been recognized to offset the related future tax asset due to the uncertainty of realizing the full benefit of the tax attribute carryforward. Zemex Corporation 45 46 7. pension plans and other postretirement benefits Pension Plans The Corporation has several non-contributory defined benefit pension plans covering the majority of all U.S. resident employees. The plans provide pension benefits that are based on the length of service and the compensation of the employee. The following table sets forth the financial position of the pension plans:
At December 31, 1998 1997 ------------ ------------ Plan assets at market value $ 16,872,000 $ 16,447,000 Actuarial present value of accrued pension benefits 14,522,000 13,686,000 ============ ============
Other Postretirement Benefits The Corporation provides healthcare and life insurance benefits for certain retired employees which are accrued as earned (note 1). The cost of such benefits was $110,000 in 1998, $66,000 in 1997 and $85,000 in 1996. 8. long term debt
1998 1997 ------------ ------------ Credit facility(a) $ 36,945,000 $ 18,056,000 Other term loan(b) 128,000 -- Industrial development revenue bonds(c) 3,060,000 3,570,000 Promissory notes -- 70,000 Capital leases(d) 857,000 654,000 Other 496,000 196,000 ------------ ------------ Total debt 41,486,000 22,546,000 Less: Current portion 2,132,000 2,019,000 ------------ ------------ Long term debt $ 39,354,000 $ 20,527,000 ============ ============
Zemex Corporation 46 47 (a) During 1995, the Corporation entered into a $30,224,000 credit facility with a syndicate of two banks. During 1997, the credit facility was amended to increase the total availability to $50,224,000. During 1998, the credit facility was further amended to provide for a short term increase of the operating line to $15,000,000. As at December 31, 1998, the operating line was reduced to $10,000,000 with a further reduction to $5,000,000 to occur February 28, 1999. The amended credit facility is further subdivided into four facilities: (i) a $30,000,000 revolving credit facility; (ii) a $10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby letter of credit; and (iv) a $5,000,000 operating line. These facilities are secured by specific assets and a floating charge over the Corporation's assets. The facilities bear interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon the financial position of the Corporation. As at December 31, 1998, and December 31, 1997, there was $10,000,000 and $3,000,000, respectively, outstanding under the operating line and $6,945,000, and $8,056,000, respectively, outstanding under the multiple advance term loan facility. Advances under the revolving credit facility as at December 31, 1998, and 1997 were $30,000,000 and $10,000,000, respectively, and the standby letter of credit was issued to secure Pyron's Industrial Development Bonds (see (c) below). The operating line matures June 30, 1999 and is reviewed annually for renewal. The multiple advance term loan facility requires quarterly payments of $278,000 which commenced April 1, 1996 with the balance outstanding, if any, due January 1, 2000. Advances under the revolving credit facility are, if any, due January 1, 2000. (b) The other term loan bears interest at 6.79%, requires annual payments of approximately $40,000 and will be retired in the year 2001. (c) Pyron Corporation ("Pyron") entered into a lease agreement on November 29, 1989 with the Niagara County Industrial Development Agency (the "Agency") to partially finance the construction of a manufacturing facility, acquire and install equipment and machinery, and renovate the existing Pyron facility for the purpose of manufacturing atomized steel powders. The agreement authorized the Agency to issue and sell industrial development revenue bonds in the aggregate principal amount of $7,650,000 to provide the funds for the project. While the bonds are not the obligation of Pyron, the agreement requires Pyron to make quarterly rental payments equal to the debt service under the sinking fund requirements and interest on the outstanding principal to the Agency. The amount outstanding at December 31, 1998 and 1997 was $3,060,000 and $3,570,000, respectively. Pyron's annual obligation under the agreement is $510,000 until paid. The bonds bear interest at a variable rate not to exceed 15% per annum. The rate at December 31, 1998 was 4.02% and at December 31, 1997 was 4.15%. Pyron has the option to convert the bonds to a fixed interest rate at any time during the term. Under the lease agreement, Pyron may purchase the facility at any time during the term, which expires November 1, 2004, by paying the outstanding principal amount of the bonds plus $1. Zemex Corporation 47 48 The bonds are collateralized by a mortgage on the land, the new facility and the existing facility, which have an aggregate net book value of approximately $10,134,000 at December 31, 1998. A bank has provided Pyron with a letter of credit which is available to support Pyron's obligations under the lease agreement. If the bondholders tender their bonds for repayment, the letter of credit will be utilized to pay the bondholders. The letter of credit is collateralized under the credit facility in (a) above. The letter of credit expires on October 1, 1999. (d) The Corporation has long term capital lease agreements at various rates and for various terms with maturities ranging from 1999 to 2002 for equipment used in its operations. The carrying value of the leased equipment as of December 31, 1998 was $875,000. The current obligation under the long term lease agreements is $359,000. Principal repayments on long term debt are as follows: 1999 $ 2,132,000 2000 36,771,000 2001 855,000 2002 645,000 2003 573,000 Thereafter 510,000 ------------------ $ 41,486,000 ==================
9. COMMON SHARES AND STOCK OPTIONS Shares Outstanding As at December 31, 1998, the Corporation's authorized capital stock was 25,000,000 par value one dollar per share, of which 20,000,000 were denominated common shares and 5,000,000 were denominated preferred shares. Pursuant to the reincorporation merger effective January 21, 1999, the authorized capital stock of the Corporation now consists of an unlimited number of first preference shares without par value and an unlimited number of common shares without par value. There were 8,707,796 common shares issued and outstanding as of December 31, 1998 and 8,463,491 common shares as of December 31, 1997. During 1998, 1997 and 1996, 131,000, 90,000 and 80,000 common shares, respectively, were purchased pursuant to the Corporation's employee stock purchase plan for an aggregate cost of $1,045,000, $729,000 and $672,000, respectively. As part of a stock repurchase program in 1998, the Corporation purchased 60,000 common shares on the open market for an aggregate cost of $499,000, 60,000 common shares in 1997 for an aggregate cost of $492,000, and 344,000 common shares in 1996 for an aggregate cost of $3,170,000. Zemex Corporation 48 49 Dividends On October 2, 1998, the Corporation declared a 2% stock dividend to shareholders of record on October 19, 1998, which was paid November 2, 1998. Retained earnings were charged $1,182,000 as a result of the issuance of 169,988 of the Corporation's common shares, and cash payments of $4,000 in lieu of fractional shares. On November 21, 1997, the Corporation declared a 2% stock dividend to shareholders of record on December 1, 1997, which was paid December 15, 1997. Retained earnings were charged $1,598,000 as a result of the issuance of 165,537 of the Corporation's common shares, and cash payments of $5,000 in lieu of fractional shares. On October 18, 1996, the Corporation declared a 2% stock dividend to shareholders of record on November 4, 1996, which was paid November 18, 1996. Retained earnings were charged $1,255,000 as the result of the issuance of 161,398 of the Corporation's common shares, and cash payments of $5,000 in lieu of fractional shares. Stock Options The Corporation provides stock option incentive plans and has, with shareholder approval, issued options to certain directors outside of the plans. The plans are intended to provide long term incentives and reward to executive officers, directors and other key employees contingent upon an increase in the market value of the Corporation's common shares. Options for 10% of the Corporation's outstanding common shares are issuable under the plans. The following is a summary of option transactions under the Corporation's stock option plans:
1998 1997 1996 ----------- ---------- ---------- Options outstanding at beginning of year 942,750 845,550 852,550 Options granted during year 357,000 198,000 61,000 Options exercised during the year (26,600) (13,800) (45,000) Options cancelled during the year (25,500) (87,000) (23,000) ----------- ---------- ---------- Options outstanding at end of year 1,247,650 942,750 845,550 Options exercisable at end of year 746,650 628,250 631,550 ----------- ---------- ---------- Price range of options granted during the year $6.50-10.19 $7.00-8.63 $7.75-9.75 =========== ========== ==========
The options expire from 1999 to 2004. Zemex Corporation 49 50 Note Receivable from Shareholder The note receivable from shareholder of $1,749,000 represents amounts due from the Corporation's President and Chief Executive Officer pursuant to the Key Executive Common Stock Purchase Plan. The loan, which was used to acquire 357,000 shares of common stock of the Corporation, is non-interest bearing and secured by a pledge of most of the shares acquired. The terms were amended in 1998 and the loan is now due on the earlier of August 12, 1999 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. 10. REORGANIZATION CHARGES AND UNUSUAL ITEM Reorganization Charges During the first quarter of 1996, the Corporation recognized reorganization costs of $1,216,000 in connection with the reorganization of its industrial minerals division and the recognition of a provision for costs. A write-down to market of inventory held in Brazil in the amount of $536,000 was also recorded as a charge against cost of goods sold. The Brazilian enterprise was unsuccessful primarily due to rapidly deteriorating market prices which made market penetration extremely difficult. Unusual Item In December 1991, the Corporation closed its industrial minerals plant located in Connecticut. The assets of this operation were reclassified to assets held for resale and written down in 1991 by $430,000 to their estimated net realizable value. These assets were written down by a further $300,000 in 1993. In 1995, a portion of the property was sold for approximately net book value. In 1996, the purchaser defaulted on the payment obligations. Accordingly, the Corporation instituted legal action to repossess the property. A provision of $723,000 was recorded in 1996 to provide for reclamation costs, legal costs and to write-down the property to current market value. Zemex Corporation 50 51 11. OPERATING LEASES AND OTHER COMMITMENTS Operating Leases The Corporation has a number of operating lease agreements primarily involving equipment, office space, warehouse facilities and rail sidings. The operating lease for equipment provides that the Corporation may, after the initial lease term, renew the lease for successive yearly periods or may purchase the equipment at the fair market value. An operating lease for office facilities contains escalation clauses for increases in operating costs and property taxes. The majority of the leases are cancellable and are renewable on a yearly basis. Future minimum rental payments required by operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of December 31, 1998 are as follows:
Years Minimum Lease Payments ----- ---------------------- 1999 $ 770,000 2000 709,000 2001 631,000 2002 524,000 2003 432,000 Thereafter 2,704,000 ----------- Total minimum lease payments $ 5,770,000 ===========
Rent expense was $569,000, $492,000 and $668,000 in 1998, 1997 and 1996, respectively. 12. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Corporation to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Corporation's customer base and their dispersion across a number of different industries, principally construction, glass, electrical and automotive. Financial instruments comprise cash and cash equivalents, accounts receivable, short term bank borrowings, accounts payable, accrued liabilities, and long term debt. The fair value of these financial instruments approximates their carrying value reflecting: (i) the proximity to market rates of the interest obligations on the debt instruments; and (ii) the limited durations of all of the other instruments. Zemex Corporation 51 52 13. CHANGES IN NON-CASH WORKING CAPITAL The changes in non-cash working capital items are as follows:
1998 1997 1996 ----------- ----------- ----------- (Increase) in accounts receivable $ (476,000) $(1,285,000) $(1,838,000) (Increase) decrease in inventories (173,000) 576,000 2,005,000 (Increase) decrease in prepaid expenses and other (120,000) 602,000 (547,000) (Decrease) increase in accounts payable and accrued liabilities (4,177,000) 2,882,000 (185,000) (Decrease) increase in accrued income taxes (590,000) 934,000 32,000 ----------- ----------- ----------- $(5,536,000) $ 3,709,000 $ (533,000) =========== =========== ===========
14. RELATED PARTY TRANSACTIONS As at December 31, 1998 and 1997, accounts receivable included amounts due from directors and one officer of $100,000 and $115,000, respectively. These amounts are non-interest bearing, with no fixed terms of repayment. During 1997, the Corporation agreed to guarantee a personal loan in the amount of $600,000 drawn down by the President and Chief Executive Officer. The proceeds of the loan were used to acquire common shares of the Corporation on the open market. The shares acquired are held by the Corporation as security for the guarantee. During 1998, the Corporation extended a short term loan to the President and Chief Executive Officer. The maximum amount outstanding was $200,000 and it bore interest at the Corporation's cost of borrowing. The loan was repaid in full by December 31, 1998. During 1998, a director became indebted to the Corporation in the amount of $124,000. At December 31, 1998, $116,000 remained outstanding. This obligation is collateralized and bears interest at the Corporation's cost of borrowing (7.4% at December 31, 1998). Zemex Corporation 52 53 15. 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. Industrial mineral products include feldspar, kaolin, mica, talc, baryte, feldspathic sand and industrial sand. These products are marketed principally to the automotive, housing, and ceramics industries in North America. They are produced from mines and processing plants located near Edgar, Florida; Monticello, Georgia; Murphy, North Carolina; Spruce Pine, North Carolina; Natural Bridge, New York; Van Horn, Texas; Benwood, West Virginia; Boucherville, Quebec; and Suzor Township, Quebec. Metal powders are processed in Niagara Falls, New York; St. Marys, Pennsylvania; and Greenback and Maryville, Tennessee. The Corporation's ferrous and non-ferrous metal powders are marketed primarily in North America to manufacturers of powder metallurgy parts used in the automotive and transportation industries. Aluminum dross is recycled at plants in Cleveland, Ohio and Wabash, Indiana and ceramic fibre products are fabricated at a plant in Macedonia, Ohio. Corporate assets principally include cash, term deposits and furniture and fixtures. The accounting policies of the segments are the same as those described in note 1. Information pertaining to sales and earnings from operations and assets by business segment appears below:
Industrial Metal Aluminum Year Ended December 31, 1998 Consolidated Minerals Powders Recycling Corporate ------------- ------------- ------------- ------------- ----------- Net sales $ 103,894,000 $ 44,835,000 $ 35,556,000 $ 23,503,000 $ -- Depreciation, depletion and amortization 6,561,000 3,536,000 1,208,000 1,384,000 433,000 Operating income (loss) 10,192,000 5,840,000 3,990,000 2,881,000 (2,519,000) Interest income 255,000 -- 53,000 49,000 153,000 Interest (expense) (2,588,000) (60,000) (204,000) (34,000) (2,290,000) Income (loss) before income taxes and non-controlling interest 7,037,000 5,674,000 3,857,000 2,933,000 (5,427,000) Provision for income taxes 1,713,000 556,000 -- -- 1,157,000 Non-controlling interest in loss of subsidiary (41,000) (41,000) -- -- -- Net income (loss) 5,365,000 5,159,000 3,857,000 2,933,000 (6,584,000) ------------- ------------- ------------- ------------- -----------
Zemex Corporation 53 54
Industrial Metal Aluminum Year Ended December 31, 1997 Consolidated Minerals Powders Recycling Corporate - ---------------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ 97,226,000 $ 43,396,000 $ 33,930,000 $ 19,900,000 $ -- Depreciation, depletion and amortization 5,871,000 3,228,000 1,107,000 1,134,000 402,000 Operating income (loss) 8,371,000 6,497,000 2,376,000 1,925,000 (2,427,000) Interest income 150,000 -- 50,000 73,000 27,000 Interest (expense) (2,094,000) (9,000) (245,000) (84,000) (1,756,000) Income before income taxes 8,062,000 6,659,000 2,200,000 3,726,000 (4,523,000) Provision for income taxes 2,269,000 350,000 -- -- 1,919,000 Net income (loss) 5,793,000 6,309,000 2,200,000 3,726,000 (6,442,000) ------------ ------------ ------------ ------------ ------------
Industrial Metal Aluminum Year Ended December 31, 1996 Consolidated Minerals Powders Recycling Corporate - ---------------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ 86,420,000 $ 40,469,000 $ 31,725,000 $ 14,226,000 $ -- Depreciation, depletion and amortization 4,694,000 2,352,000 1,032,000 915,000 395,000 Operating income (loss) 3,066,000 2,764,000 2,377,000 213,000 (2,288,000) Interest income 93,000 -- 32,000 -- 61,000 Interest (expense) (1,041,000) (89,000) (176,000) (263,000) (513,000) Income before income taxes 1,663,000 1,843,000 2,288,000 6,000 (2,474,000) (Recovery of) provision for income taxes (949,000) 75,000 -- -- (1,024,000) Net income (loss) 2,612,000 1,768,000 2,288,000 6,000 (1,450,000) ------------ ------------ ------------ ------------ ------------
Industrial Metal Aluminum December 31, 1998 Consolidated Minerals Powders Recycling Corporate - ----------------- ------------ ------------ ------------ ------------ ------------ 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 long term liabilities 40,360,000 1,035,000 2,603,000 678,000 36,044,000 Total shareholders' equity 81,898,000 -- -- -- 81,898,000 ------------ ------------ ------------ ------------ ------------
Zemex Corporation 54 55
Industrial Metal Aluminum December 31, 1997 Consolidated Minerals Powders Recycling Corporate - ----------------- ------------ ------------ ------------ ------------ ------------ Total assets $118,774,000 $ 65,750,000 $ 24,547,000 $ 17,853,000 $ 10,624,000 Total current liabilities 19,210,000 5,437,000 4,317,000 4,047,000 5,409,000 Total long term liabilities 23,029,000 3,065,000 3,107,000 279,000 16,578,000 Total shareholders' equity 76,535,000 -- -- -- 76,535,000 ------------ ------------ ------------ ------------ ------------
Industrial Metal Aluminum December 31, 1996 Consolidated Minerals Powders Recycling Corporate - ----------------- ------------ ------------ ------------ ------------ ------------ Total assets $109,376,000 $ 60,914,000 $ 24,152,000 $ 12,993,000 $ 11,317,000 Total current liabilities 19,166,000 4,752,000 3,494,000 3,783,000 7,137,000 Total long term liabilities 19,213,000 2,706,000 3,706,000 898,000 11,903,000 Total shareholders' equity 70,997,000 -- -- -- 70,997,000 ------------ ------------ ------------ ------------ ------------
Industrial Metal Aluminum Consolidated Minerals Powders Recycling Corporate ------------ ----------- ----------- ----------- ----------- 1998 Capital expenditures $20,728,000 $ 8,283,000 $ 2,113,000 $10,124,000 $ 208,000 Goodwill acquired 6,495,000 2,934,000 -- 3,561,000 -- ----------- ----------- ----------- ----------- ----------- 1997 Capital expenditures $16,584,000 $ 9,945,000 $ 1,319,000 $ 5,314,000 $ 6,000 Goodwill acquired -- -- -- -- -- ----------- ----------- ----------- ----------- -----------
Canada U.S. ------------------------------------------- ------------------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- Capital expenditures $ 605,000 $ 734,000 $ 816,000 $20,123,000 $15,850,000 $15,610,000 Goodwill acquired -- -- -- 6,495,000 -- -- ----------- ----------- ----------- ----------- ----------- ----------- The Corporation determines its geographic allocation based upon the location of its sales offices which are all domiciled in the United States.
Zemex Corporation 55 56 16. CONTINGENCIES The Corporation is involved in various legal actions in the normal course of business. In the opinion of management, the aggregate amount of any potential liability, for which provision has not already been made, is not expected to have a material adverse effect on the Corporation's financial position or its results. Uncertainty Due to the Year 2000 Issue The year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the year 2000 issue may be experienced before, on, or after January 1, 2000, and if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the year 2000 issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 17. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. The differences between Canadian and U.S. GAAP do not have a material effect on the Corporation's reported financial position or net income except as follows: a. Income Statements For the purposes of calculating fully diluted earnings per share, U.S. GAAP requires the application of the treasury stock method.
Fully diluted earnings per share 1998 1997 1996 ------- ------- ------- Canadian GAAP, as reported $ 0.60 $ 0.65 $ 0.30 U.S. GAAP 0.63 0.69 0.31 ======= ======= =======
Zemex Corporation 56 57 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, unless there is deemed to have been a permanent impairment in their value.
1998 1997 Canadian GAAP U.S. GAAP ------------- ----------- ------------- Other assets $21,374,000 $20,440,000 No difference Unrealized loss on available-for-sale securities -- (934,000) -- ------------- ----------- -------------
c. Statements of Comprehensive Income U.S. GAAP requires a statement of comprehensive income as follows:
1998 1997 1996 ------------ ----------- ------------- Net income $ 5,365,000 $ 5,793,000 $ 2,612,000 Change in foreign currency translation adjustment, net of tax (1998, $217,000; 1997, $154,000; 1996, ($16,000)) (365,000) (259,000) 27,000 Change in unrealized holding losses on available-for-sale securities (934,000) -- -- ------------ ----------- ------------- Comprehensive income $ 4,066,000 $ 5,534,000 $ 2,639,000 ============ =========== =============
Zemex Corporation 57 58 d. Pension Plans Under U.S. GAAP, the Corporation must adopt SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The following data is based upon reports from independent consulting actuaries as at December 31:
Change in benefit obligation 1998 1997 ------------ ------------ Benefit obligation, beginning of year $ 15,126,000 $ 15,925,000 Service cost 532,000 466,000 Interest cost 1,015,000 978,000 Plan amendments 146,000 -- Actuarial loss (gain) 778,000 (1,605,000) Benefits paid (721,000) (638,000) ------------ ------------ Benefit obligation, end of year $ 16,876,000 $ 15,126,000 ============ ============
Change in fair value of plan assets 1998 1997 ------------ ------------ Fair value, beginning of year $ 17,177,000 $ 16,432,000 Actual return on plan assets 916,000 1,383,000 Employer contribution 219,000 -- Benefits paid (721,000) (638,000) ------------ ------------ Fair value, end of year $ 17,591,000 $ 17,177,000 ============ ============
Net periodic pension expense (income) included the following components:
1998 1997 1996 ------------ ------------ ------------ Current service costs $ 532,000 $ 466,000 $ 528,000 Interest cost on projected benefit obligations 1,015,000 978,000 1,028,000 Expected return on assets (1,175,000) (1,236,000) (1,309,000) Net amortization (93,000) (98,000) (103,000) ------------ ------------ ------------ Net pension expense $ 279,000 $ 110,000 $ 144,000 ============ ============ ============
Zemex Corporation 58 59 Assumptions:
1998 1997 1996 ---- ---- ---- % % % Weighted average discount rate 6.5 7.0 7.0 Expected long term rate of return 8.75 8.75 8.75 Increase in level of compensation 4.0 4.0 4.0 Weighted average health care cost trend rate 8.5 9.0 9.5 Weighted average ultimate health care cost trend rate 5.0 5.0 5.0 ---- ---- ---- Year in which ultimate health care cost trend rate will be achieved 2005 2005 2005 ---- ---- ----
The status of the plans and the amounts recognized in the consolidated balance sheets of the Corporation for its pension plans as of December 31, 1998 and 1997 are tabulated below:
1998 1997 ------------- ------------- Projected benefit obligation $ (16,876,000) $ (15,126,000) Plan assets at fair value 17,591,000 17,147,000 ------------- ------------- Plan assets in excess of projected benefit obligation 715,000 2,021,000 Unrecognized net loss (gain) 331,000 (662,000) Prior service cost not yet recognized in net periodic pension expense 297,000 196,000 Unrecognized net assets at year end (25,000) (177,000) ------------- ------------- Prepaid pension cost included in consolidated balance sheets $ 1,318,000 $ 1,378,000 ============= =============
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- Effect on accumulated postretirement benefit obligation $ 42,271 $ (38,272) Effect on aggregate of the service and interest cost-components of net postretirement benefit cost 4,176 (3,699) =========== ===========
Zemex Corporation 59 60 e. Stock Based Compensation The Corporation does not recognize compensation expense for its stock-based compensation plans. Had compensation expense for the stock option plans been determined based upon fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Corporation's net income and earnings per share would have been reduced by approximately $1,267,000 or $0.15 per share in 1998, $589,000 or $0.07 per share in 1997, $227,000 or $0.03 per share in 1996. The fair value of the options granted during 1998, 1997, and 1996 is estimated to be $1,267,000, $589,000 and $227,000, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0 percent; expected volatility of 32%, 32% and 38%, respectively; risk-free interest rates varying from 4.3% to 6.7%; and an expected life of 5 years. f. Recent Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reports on the Costs of Start-up Activities", which is effective for periods beginning after December 15, 1998. This Statement requires costs of start-up activities and organization costs to be expensed as incurred. Initial application of this Statement will, for U.S. GAAP purposes, be reported as the cumulative effect of a change in accounting principle, without retroactive application. In 1999, the Corporation will adopt this treatment when reporting under U.S. GAAP and, as a result, all of the Corporation's pre-production and set-up costs will be removed from property, plant and equipment in effecting this change in accounting principle. These costs were $2,303,000 and $1,105,000 at December 31, 1998 and December 31, 1997, respectively. 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 in the first quarter of 2000. Zemex Corporation 60 61 FINANCIAL DATA (UNAUDITED) The following is a summary of certain unaudited quarterly financial data.
1998 1997 --------------- ------------- Net Sales First quarter $ 26,446,000 $ 23,700,000 Second quarter 25,933,000 25,199,000 Third quarter 25,677,000 24,773,000 Fourth quarter 25,838,000 23,554,000 --------------- ------------- $ 103,894,000 $ 97,226,000 =============== ============= Operating Income First quarter $ 2,373,000 $ 1,766,000 Second quarter 2,418,000 2,255,000 Third quarter 3,104,000 2,372,000 Fourth quarter 2,297,000 1,978,000 --------------- ------------- $ 10,192,000 $ 8,371,000 =============== ============= Net Income First quarter $ 1,228,000 $ 862,000 Second quarter 1,274,000 1,064,000 Third quarter 1,358,000 2,095,000 Fourth quarter 1,505,000 1,772,000 --------------- ------------- $ 5,365,000 $ 5,793,000 =============== ============= Net Income Per Share - Basic First quarter $ 0.15 $ 0.10 Second quarter 0.15 0.13 Third quarter 0.16 0.25 Fourth quarter 0.18 0.22 =============== =============
Zemex Corporation 61 62 SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ SUMMARY OF OPERATIONS Net sales $103,894,000 $ 97,226,000 $ 86,420,000 $85,056,000 $55,306,000 Reorganization charges -- -- 1,216,000 -- -- Operating income 10,192,000 8,371,000 3,066,000 8,342,000 5,841,000 Other, net (expense) income (822,000) 1,635,000 (455,000) 80,000 163,000 Net income 5,365,000 5,793,000 2,612,000 8,418,000 6,250,000 ------------ ------------ ------------ ----------- ----------- FINANCIAL POSITION Working capital $ 14,810,000 $ 18,975,000 $ 18,688,000 $19,709,000 $26,046,000 Total assets 148,866,000 118,774,000 109,376,000 96,681,000 70,864,000 Long term debt (non-current portion) 39,354,000 20,527,000 17,797,000 7,485,000 5,461,000 ------------ ------------ ------------ ----------- ----------- COMMON SHARES Weighted average common shares outstanding 8,286,178 8,267,630 8,272,904 8,342,276 5,813,473 Actual common shares issued and outstanding at year end 8,707,796 8,463,491 8,269,099 8,355,722 7,168,153 ------------ ------------ ------------ ------------ ----------- PER COMMON SHARE Basic earnings per share $ 0.65 $ 0.70 $ 0.32 $ 1.01 $ 1.08 Fully diluted earnings per share 0.60 0.65 0.30 0.92 0.91 ------------ ----------- ----------- ----------- ----------- COMMON SHARE PRICES High $ 10.44 $ 10.94 $ 10.00 $ 10.88 $ 12.25 Low 6.00 6.75 6.88 8.25 6.13 Year end 6.25 8.75 7.00 10.00 8.63 ============ ========== =========== ========== ===========
Zemex Corporation 62 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The subsidiaries listed below are, directly or indirectly, wholly-owned and all are consolidated in the financial statements. STATE OR COUNTRY IN WHICH SUBSIDIARY NAME INCORPORATED OR ORGANIZED Alumitech, Inc. Delaware Alumitech of Cleveland, Inc. Delaware Alumitech of Wabash, Inc. Indiana AWT Properties, Inc. Ohio ETS Schaefer Corporation Ohio The Feldspar Corporation North Carolina Pyron Corporation New York Pyron Metal Powders, Inc. Delaware Suzorite Mica Products Inc. Ontario, Canada Suzorite Mineral Products, Inc. Delaware Zemex Fabi-Benwood, LLC North Carolina Zemex Industrial Minerals, Inc. Delaware Zemex Mica Corporation Delaware Zemex U.S. Corporation Delaware EX-23.(A) 4 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23(A) INDEPENDENT AUDITORS' CONSENT To the Shareholders and Board of Directors of Zemex Corporation We hereby consent to the incorporation in the Zemex Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1998 of our Independent Auditors' Reports, each dated February 5, 1999, which appear on page 32 of the Annual Report to Shareholders and page 15 of the Form 10-K, respectively. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Toronto, Ontario February 5, 1999 2 ZEMEX CORPORATION AND SUBSIDIARIES SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31,
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - -------- -------- -------- -------- -------- -------- ADDITIONS BALANCE AT CHARGED TO OTHER BALANCE BEGINNING COSTS AND ADDITIONS AT END DESCRIPTION OF PERIOD EXPENSES (DEDUCTIONS) DEDUCTIONS OF PERIOD - ----------- --------- -------- ------------ ---------- --------- 1998 RESERVES - OTHER $1,014,000 $64,000 $(72,000) -- $1,006,000 ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS 328,000 5,000 -- $4,000 329,000 1997 RESERVES - OTHER $599,000 $165,000 $250,000 -- $1,014,000 ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS 452,000 84,000 (76,000) $132,000 328,000 1996 RESERVES - OTHER $605,000 $100,000 -- $106,000 $599,000 ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS 386,000 148,000 $5,000 87,000 452,000
S-1 EX-27 5 FINANCIAL DATA SCHEDULE
5 US 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 1,062,000 0 17,971,000 (329,000) 18,036,000 38,343,000 130,069,000 (41,011,000) 148,866,000 23,533,000 0 0 0 8,708,000 73,190,000 148,866,000 103,894,000 103,894,000 73,678,000 93,702,000 822,000 0 2,333,000 7,037,000 1,713,000 5,365,000 0 0 0 5,365,000 0.65 0.60
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