10-K 1 e14419_10k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K (Mark one) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _________ Commission File Number: 0-15661 AMCOL INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-0724340 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One North Arlington, 60004-7803 1500 West Shure Drive, Suite 500 (Zip Code) Arlington Heights, Illinois (Address of principal executive offices) Registrant's telephone number, including area code: (847) 394-8730 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: $.01 par value Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act). Yes x No . ----- ----- The aggregate market value of the registrant's $.01 par value Common Stock held by non-affiliates of the registrant (based upon the per share closing price of $6.85 per share on June 28, 2002, and, for the purpose of this calculation only, the assumption that all of the registrant's directors and executive officers are affiliates) was approximately $143.4 million. Registrant had 28,052,120 shares of $.01 par value Common Stock outstanding as of February 28, 2003. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be dated on or before April 1, 2003 are incorporated by reference into Part III hereof. ================================================================================ PART I Item 1. Business INTRODUCTION AMCOL International Corporation was originally incorporated in South Dakota in 1924 as the Bentonite Mining & Manufacturing Company. Its name was changed to American Colloid Company in 1927, and in 1959, the Company was reincorporated in Delaware. In 1995, its name was changed to AMCOL International Corporation. Except as otherwise noted, or indicated by context, the term "Company" refers to AMCOL International Corporation and its subsidiaries. The Company operates in two major industry segments: minerals and environmental. The Company also operates a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to both the Company's plants and outside customers. The following table sets forth the percentage contributions to net sales of the Company attributable to its minerals, environmental and transportation segments for the last three calendar years. The percentages include intersegment shipping revenues. -------------------------------------------------------------------------------- Percentage of Sales ---------------------------------- 2002 2001 2000 ---- ---- ---- Minerals 55% 52% 55% Environmental 34% 36% 33% Transportation 11% 12% 12% ---- ---- ---- 100% 100% 100% ==== ==== ==== -------------------------------------------------------------------------------- Net revenues, operating profit, assets, depreciation, depletion and amortization, capital expenditures and research and development expenditures attributable to each of the Company's business segments are set forth in Note 3 of the Company's Notes to Consolidated Financial Statements included elsewhere herein. DISCONTINUED OPERATIONS In 2001, the Company sold its U.K. metalcasting business to a group comprised in part of former management of the business. Included in the sale were machinery and equipment. The acquirer entered into a license agreement for the right to use trademarks for a period of ten years, and will lease land and buildings from the Company. The Company did not receive any proceeds from the sale. The U.K. metalcasting business was a component entity of the Company's minerals segment. In 2000, the Company closed its U.K. cat litter business. Certain assets were sold to various outside parties for $.7 million. The closure was completed in 2001. In 2000, the Company sold its absorbent polymers business to BASF Aktiengesellschaft ("BASF") under the terms of an Asset and Stock Purchase Agreement dated November 22, 1999 (the "Purchase Agreement"), as amended. The Purchase Agreement provided for the transfer to BASF of the following: (i) all of the shares of capital stock of the Company's indirect subsidiaries: Chemdal Corporation and Chemdal Asia Ltd.; and (ii) all other assets of the Company and its designated subsidiaries related primarily to the absorbent polymers business. The total consideration paid to the Company by BASF was $656.5 million. The sale was approved by the Company's shareholders in May 2000 and the transaction closed on June 1, 2000. 2 The Company adopted a plan of partial liquidation in connection with the sale of the absorbent polymers business pursuant to which the Company distributed $14.00 per share to its shareholders, which represented a significant portion of the net proceeds from the sale, on June 30, 2000. MINERALS The Company's minerals business is principally conducted through its wholly owned subsidiaries, American Colloid Company in the United States and Canada, Colin Stewart Minchem Limited in the United Kingdom, Volclay Siam Ltd. in Thailand, Volclay Korea Ltd. in South Korea, Volclay Pty., Ltd. in Australia, and through its joint venture companies, Volclay de Mexico in Mexico, Ashapura Volclay Ltd. in India, Egypt Mining & Drilling Chemicals Co. in Egypt, Volclay DongMing Industrial Minerals Co. in China and a 19% equity interest in Nissho Iwai Bentonite Company in Japan. The Company also has a 20% equity interest in Ashapura Minechem Ltd., a publicly traded Indian bentonite producer. Commercially produced bentonite is a type of montmorillonite clay found in beds ranging in thickness from two to 50 feet under overburden of up to 60 feet. There are two basic types of bentonite, each having different chemical and physical properties. These are commonly known as sodium bentonite and calcium bentonite. Sodium bentonite is generally referred to as western bentonite because it predominately occurs in the Western United States. Sodium bentonites of lesser purity occur outside the United States. Calcium bentonite is generally referred to as southern bentonite in the United States and as fuller's earth outside the United States. Calcium bentonites mined outside the United States are commonly activated with sodium carbonate to produce properties similar to natural sodium bentonite. The Company's principal bentonite products are marketed under various internationally registered trade names, including VOLCLAY(R), PANTHER CREEK(R), PREMIUM GEL(R) and ADDITROL(R). The Company's cat litter is sold under various trade names and private labels. Trade names include NATURAL SELECT(R), CAREFREE KITTY(R), PREMIUM CHOICE(R), CAT TAILS(R), CATS PAW(R) and PAMPER CAT(R). Principal Products and Markets Durable Goods Metalcasting. In the formation of sand molds for metal castings, sand is bonded with bentonite and various other additives to yield desired casting form and surface finish. The Company produces blended mineral binders containing sodium and calcium bentonite, sold under the trade name ADDITROL(R). In addition, several high-performance specialty products are sold to foundries and companies that service foundries. Iron Ore Pelletizing. The Company supplies sodium bentonite for use as a pelletizing aid in the production of taconite pellets in North America. Well Drilling. Sodium bentonite and leonardite, a form of oxidized lignite mined and processed by the Company in North Dakota, are components of drilling fluids used in oil and gas well drilling. Bentonite imparts thickening and suspension properties, which facilitate the transport of rock cuttings to the surface during the drilling process. Drilling fluids lubricate the drilling bit and coat the underground formations to prevent hole collapse and drill bit seizing. The Company's primary trademark for this application is PREMIUM GEL(R). Other Industrial. The Company produces bentonite and bentonite blends for the construction industry, which are used as a plasticizing agent in cement, plaster and bricks, and as an emulsifier in asphalt. Consumable Goods Cat Litter. The Company produces and markets a sodium bentonite-based, scoopable (clumping) cat litter. The Company markets a traditional cat litter to complement its line of scoopable cat litter products to the pet trade sector of the 3 market. The Company's scoopable products' clump-forming capability traps urine, allowing for easy removal of the odor-producing elements from the litter box. The scoopable cat litter products are sold primarily to private label grocery and mass merchandisers, though the Company also sells its own brands to the grocery, pet store and mass markets. The Company's products are marketed under various trade names. Specialty Minerals. The Company supplies high-grade agglomerated bentonite to the detergent industry. Purified grades of sodium bentonite are marketed to the pharmaceutical and cosmetics industries. Small amounts of purified bentonite act as a binding agent for pharmaceutical tablets, and bentonite's swelling property aids in tablet disintegration. Bentonite also acts as a thickening and suspension agent in lotions. Specialized uses of bentonite and other clays include flow control additives, beverage clarification and desiccants. Agricultural. Sodium bentonite and calcium bentonites are sold as pelletizing aids in livestock feed and as anticaking agents for livestock feed in storage or during transit. Sales and Distribution In 2002, the top five customers of the minerals segment were located in North America and accounted for approximately 31% of the segment sales worldwide. The Company has established industry-specialized sales groups staffed with technically oriented salespersons serving each of the Company's major markets. Certain groups have networks of distributors and representatives, including companies that warehouse products at strategic locations. Most customers in the metalcasting industry are served on a direct basis by teams of Company sales, technical and manufacturing personnel. The Company also provides training courses and laboratory testing for customers who use the Company's products in the metalcasting process. Sales to the oil and gas well drilling industry are primarily made directly to oil and gas well drilling fluid service companies, both under the Company's trade name and under private label. Because bentonite is a major component of drilling fluids, two service companies have captive bentonite operations. The Company's potential market, therefore, generally is limited to those service organizations that are not vertically integrated, or do not have long-term supply arrangements with other bentonite producers. Sales to the cat litter market are made on a direct basis and through industry brokers. All sales to the iron ore pelletizing industry are made directly to the end user. Sales to the Company's remaining markets are made primarily through independent distributors and representatives. Competition The Company is one of the largest producers of bentonite products globally. There are at least four other major North American producers of sodium bentonite and at least one other major domestic producer of calcium bentonite. Two of the North American producers are companies primarily in other lines of business with substantially greater financial resources than the Company. There is also substantial global competition. The Company's bentonite operations outside North America compete with more than ten other bentonite producers. Competition, in both the Company's domestic and international markets, is essentially a matter of product quality, price, logistics, service and technical support. Seasonality Although business activities in certain of the industries in which the Company's mineral products are sold, e.g. oil and gas well drilling and construction, are subject to factors such as weather, the Company does not consider its minerals business, as a whole, to be seasonal. 4 ENVIRONMENTAL Principal Products and Markets Through its wholly owned subsidiaries, Colloid Environmental Technologies Company (CETCO) in the United States and Canada, CETCO Korea Ltd., CETCO Poland Sp. z o.o. and CETCO (Europe) Ltd. in the United Kingdom, the Company sells sodium bentonite, products containing sodium bentonite, and other products, services, and equipment for use in environmental and construction applications. CETCO sells bentonite and its geosynthetic clay liner products under the BENTOMAT(R) and CLAYMAX(R) trade names for lining and capping landfills and for containment in tank farms, leach pads, waste stabilization lagoons, slurry walls and wetlands reclamation applications. The Company's VOLCLAY(R) Waterproofing System is sold to the non-residential construction industry. This line includes VOLTEX(R), a waterproofing composite comprised of two polypropylene geotextiles filled with sodium bentonite. VOLTEX(R) is installed to prevent leakage through underground foundation walls and slabs. The following products round out the principal components of the product line: VOLCLAY PANELS(R), also used for below-grade waterproofing of walls and slabs; WATERSTOP-RX(R), a joint sealant product; and VOLCLAY SWELLTITE(R), a waterproofing membrane for concrete split slabs and plaza areas. Bentonite-based flocculants and customized equipment are used to remove emulsified oils and heavy metals from wastewater. Bentonite-based products are formulated to solidify liquid waste for proper disposal in landfills. These products are sold primarily under the SYSTEM-AC(R), RM-10(R) and SORBOND(R) trade names. CETCO's environmental offshore services group employs CRUDESORB(R) and CRUDESEP(R) filtration technology, used primarily on offshore oil production platforms. CETCO employs several technologies to allow platform operators to maintain compliance with regulatory requirements governing discharge of waste generated during oil production. CETCO's filtration technology is marketed with all necessary equipment, proprietary filter media and trained professional service personnel. The Company is also actively involved in providing wastewater treatment solutions to pipeline operators to enable them to meet wastewater discharge requirements. CETCO's drilling products are used in environmental and geotechnical drilling applications, horizontal directional drilling and mineral exploration. The products are used to install monitoring wells, facilitate horizontal drilling and water wells, rehabilitate existing water wells and seal abandoned exploration drill holes. VOLCLAY(R) GROUT, HYDRAUL-EZ(R), BENTOGROUT(R) and VOLCLAY(R) TABLETS are among the trade names for products used in these applications. Geothermal grouting applications utilizing GEOTHERMAL GROUT(TM) represent a new market area for CETCO drilling products. Competition CETCO has three principal competitors in the geosynthetic clay liner market. The construction and wastewater treatment product lines are specialized businesses that compete primarily with alternative technologies. The groundwater monitoring, well drilling and sealants products compete with the Company's traditional rivals in the sodium bentonite business. The environmental offshore services group competes with several larger oil services companies using different technology. Competition is based on product quality, service, price, technical support and availability of product. Historically, the competition has been vigorous. Sales and Distribution CETCO products are sold domestically and internationally. CETCO sells most of its products through independent distributors and commissioned representatives. CETCO employs technically oriented marketing personnel to support its network of distributors and representatives. Offshore customers are primarily major oil companies to which products are sold on a direct basis. 5 Seasonality Much of the business in the environmental sector is impacted by weather and soil conditions. Many of the products cannot be applied in harsh weather conditions and, as such, sales and profits tend to be stronger during the period from April through October. As a result, the Company considers this segment to be seasonal. MINERALS/ENVIRONMENTAL COMMON OPERATIONAL FUNCTIONS Mineral Reserves The Company has reserves of sodium and calcium bentonite at various locations throughout North America including Wyoming, South Dakota, Montana and Alabama. The Company, indirectly through its joint venture companies, has access to bentonite deposits in China, Egypt, India and Mexico. At 2002 consumption rates and product mix, the Company estimates its proven reserves of commercially usable sodium bentonite at approximately 25 years. The Company estimates its proven reserves of calcium bentonite at 18 years. While the Company, based upon its experience, believes that its reserve estimates are reasonable and its title and mining rights to its reserves are valid, the Company has not obtained any independent verification of such reserve estimates or such title or mining rights. The Company owns or controls the properties on which its reserves are located through long-term leases, royalty agreements and patented and unpatented mining claims. A majority of the Company's bentonite reserves are owned. All of the properties on which the Company's reserves are located are either physically accessible for the purposes of mining and hauling, or the cost of obtaining physical access would not be material. To retain possessory rights in unpatented mining claims, a fee of $100 per year for each unpatented mining claim is required. The validity of title to unpatented mining claims is dependent upon numerous factual matters. The Company believes that the unpatented mining claims that it owns have been located in compliance with all applicable federal, state and local mining laws, rules and regulations. The Company is not aware of any material conflicts with other parties concerning its claims. From time to time, members of Congress and members of the executive branch of the federal government have proposed amendments to existing federal mining laws. The various amendments would have had a prospective effect on mining operations on federal lands and include, among other things, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of the Company's unpatented claims may become uneconomic, and royalty rates for privately leased lands may be affected. The Company cannot predict the form that any amendments might ultimately take or whether or when any such amendments might be adopted. The Company maintains a continuous program of worldwide exploration for additional reserves and attempts to acquire reserves sufficient to replenish its consumption each year, but it cannot assure that additional reserves will continue to become available. The Company oversees all of its mining operations, including its exploration activity and securing the necessary state and federal mining permits. 6 The following table shows a summary of minerals sold by the Company from active mining areas for the last three years in short tons, as well as mineral reserves by major mineral category:
Tons Sold Mining Claims ------------------------- ---------------------------- All amounts are in Wet Tons Assigned Unassigned Conversion Unpatented thousands of tons 2002 2001 2000 of Reserves Reserves Reserves Factor Owned ** Leased ----------------------------------------------------------------------------------------------------------------------------------- Sodium Bentonite Assigned ----------------------------------------------------------------------------------------------------------------------------------- Belle/Colony, SD 941 876 1,003 20,824 20,824 -- 77.31% 660 374 19,790 ----------------------------------------------------------------------------------------------------------------------------------- Lovell, WY 379 382 226 25,506 25,506 -- 77.31% 15,182 9,882 442 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSIGNED 1,320 1,258 1,229 46,330 46,330 -- 15,842 10,256 20,232 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Other / Unassigned (SD, WY, MT, NV) 62 152 144 66,068 38 66,030 77.31% 55,450 4,154 6,464 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER / UNASSIGNED 62 152 144 66,068 38 66,030 55,450 4,154 6,464 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SODIUM BENTONITE 1,381 1,410 1,373 112,398 46,368 66,030 71,292 14,410 26,696 41% 59% 63% 13% 24% ----------------------------------------------------------------------------------------------------------------------------------- Calcium Bentonite Assigned ----------------------------------------------------------------------------------------------------------------------------------- Sandy Ridge, AL 138 145 193 3,475 3,475 -- 72.70% 1,583 -- 1,892 ----------------------------------------------------------------------------------------------------------------------------------- Chao Yang, Liaoning, China 31 -- -- 741 741 -- 71.00% -- -- 741 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSIGNED 169 145 193 4,216 4,216 -- 1,583 -- 2,633 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Other / Unassigned -- -- -- 115 -- 115 77.31% -- -- 115 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER / UNASSIGNED -- -- -- 115 -- 115 -- -- 115 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CALCIUM BENTONITE 169 145 193 4,331 4,216 115 1,583 -- 2,748 97% 3% 37% 63% ----------------------------------------------------------------------------------------------------------------------------------- Leonardite ----------------------------------------------------------------------------------------------------------------------------------- Gascoyne, SD 25 25 26 643 643 -- 62.57% -- -- 643 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LEONARDITE 25 25 26 643 643 -- -- -- 643 100% 100% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- GRAND TOTALS 1,575 1,580 1,592 117,372 51,227 66,145 72,875 14,410 30,087 44% 56% 62% 12% 26% -----------------------------------------------------------------------------------------------------------------------------------
** Quantity of reserves that would be owned if patent was granted. Assigned reserves means reserves which could be reasonably expected to be processed in existing plants. Unassigned reserves means reserves which will require additional expenditures for processing facilities. Conversion factor means the percentage of reserves that will be available for sale after processing. The Company estimates that available supplies of other materials utilized in its minerals business are sufficient to meet its production requirements for the foreseeable future. Mining and Processing Bentonite is surface-mined, generally with large earthmoving scrapers, and then loaded into trucks and off-highway haul wagons for movement to processing plants. The mining and hauling of the Company's clay is done both by the Company and by independent contractors. Each of the Company's bentonite processing plants generally maintains stockpiles of unprocessed clay equaling approximately four to eight months' production requirements. At the processing plants, bentonite is dried, crushed and sent through grinding mills, where it is sized into shipping form, then chemically modified where needed and transferred to silos for automatic bagging or bulk shipment. Virtually all production is shipped as processed, rather than stored for inventory. 7 Product Development and Patents The Company works actively with customers in each of its major markets to develop commercial applications of specialized grades of bentonite. It maintains a bentonite research center and laboratory testing facility adjacent to its corporate headquarters. When a need for a product that will accomplish a particular goal is perceived, the Company works to develop the product, research its marketability and study the feasibility of its production. The Company also co-develops products with customers, or others, as needs arise. The Company's development efforts emphasize markets with which it is familiar and products for which it believes there is a viable market. The Company holds a number of U.S. and international patents covering the use of bentonite and products containing bentonite. The Company follows the practice of obtaining patents on new developments whenever feasible. The Company, however, does not consider that any one or more of such patents is material to its minerals and environmental businesses as a whole. Research and Development All Company business segments share research and laboratory facilities adjacent to the corporate headquarters. Technological developments are shared among the companies, subject to license agreements where appropriate. Regulation and Environmental The Company believes it is in material compliance with applicable regulations now in effect for surface mining. Since reclamation of exhausted mining sites has been a regular part of the Company's surface mining operations for the past 34 years, maintaining compliance with current regulations has not had a material effect on mining costs. Reclamation costs are reflected in the prices of the bentonite sold. The grinding and handling of dried clay is part of the production process and, because it generates dust, the Company's mineral processing plants are subject to applicable clean air standards (including Title V of the Clean Air Act). All of the Company's plants are equipped with dust collection systems. The Company has not had, and does not presently anticipate, any significant regulatory problems in connection with its dust emission, though it expects ongoing expenditures for the maintenance of its dust collection systems and required annual fees. The Company's mineral operations are also subject to other federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Certain of these laws and regulations provide for the imposition of substantial penalties for noncompliance. While the costs of compliance with, and penalties imposed under, these laws and regulations have not had a material adverse effect on the Company, future events, such as changes in, or modified interpretations of, existing laws and regulations, enforcement policies, and further investigation or evaluation of potential health hazards of certain products, may give rise to additional compliance and other costs that could have a material adverse effect on the Company. TRANSPORTATION The Company operates a long-haul trucking business and a freight brokerage business primarily for delivery of finished products throughout the continental United States. Through its transportation operation, the Company is better able to control costs, maintain delivery schedules and assure equipment availability for delivery of its products. The long-haul trucking subsidiary performs transportation services on outbound movements from the Company's production plants and attempts to haul third parties' products on return trips whenever possible. In 2002, approximately 34% of the revenues of this operation involve services provided to the Company's domestic minerals and environmental segments. 8 CORPORATE ACTIVITIES - NANOCOMPOSITE PRODUCT DEVELOPMENT The Company is always seeking to develop broader-based technologies that may use bentonite for new, value-added applications. One such technology is nanocomposites for the plastics industry. In 1995, the Company established its Nanocor subsidiary to develop surface-modified bentonites suitable for the emerging nanocomposite market. The primary raw material is bentonite. For some applications, material will be purchased from third party suppliers. Surface treatment chemicals, added in the production process, are readily available on the merchant market. The Company continues to focus its development on the use of bentonite as a functional additive for plastics. The technology consists of dispersing highly purified bentonite of nanometer size (one-billionth of a meter) in plastic resins. Nanocor has identified commercial applications for Nanomer(R) products in the consumer packaging, engineered products and performance coatings markets. Plastic nanocomposites provide improved physical properties in products used in these markets. Those improved physical properties include heat resistance, dimensional stability and strength for engineered materials and gas and moisture barrier for packaging materials. The Company has a nanocomposite production facility in Aberdeen, Mississippi. Sales to date have been insignificant. All costs, in excess of sales, associated with the development, production and sales of nanocomposites are included in corporate costs. During 2002 the Company reviewed its alternatives in improving the sales opportunities for its nanocomposite products. In connection with that review the Company determined its best interest was served by finding partners that had a strong presence in markets where nanocomposites could gain significant business. The result was the execution of two strategic alliance agreements. In January 2003, an agreement was reached with Mitsubishi Gas Chemical Company (MGC) which involves the manufacture and sale of high-barrier plastics that will combine the Company's patented nanocomposite technology and MXD6, which is a form of nylon. MGC is the world's largest producer of MXD6, which is an established product used in consumer and industrial packaging due to its inherent gas barrier properties. A MXD6-nanocomposite has significantly higher gas barrier properties which will greatly improve sales potential in the packaging market. MGC will lead sales and marketing of the product line with assistance from the Company's sales staff. Additionally, the companies will combine research and development resources to create new product variations. The Company will license to MGC its intellectual property that relates to MXD6. In addition to the sale of Nanomer products to MGC for use in the production of the MXD6-nanocomposite, the Company will earn revenue from the profit generated from sales of those nanocomposites by MGC. The Company also reached an agreement with PolyOne Corporation in January 2003 that involves the sales, marketing and development of polyolefin-nanocomposite concentrates and, in some cases, nanocomposite plastics. PolyOne is the world's largest polymer services company which includes the production of plastic compounds. The focus of the alliance will be on improving strength and fire-resistant properties of polyolefin plastics as well as their heat stability, gas barrier and electrostatic dissipation. Polyolefins include a wide variety of plastic resins that are used in a multitude of consumer and industrial products, including the electronics, telecommunications, automotives, household and packaging sectors. The companies believe that polyolefin-nanocomposite concentrates will be easy to process and allow production of lighter weight plastics. PolyOne will lead sales of the products with assistance from the Company's personnel, and the companies will combine research and development resources engaged in the creation of polyolefin-nanocomposite compounds. Similar to its alliance agreement with MGC, the Company will license its intellectual property that relates to polyolefin-nanocomposites to PolyOne. In addition to earning profits from the sale of Nanomer products to PolyOne for use in the production of polyolefin-nanocomposites, the Company will earn revenue from the profit generated from sales of those nanocomposites. Sales to date from these alliances have been insignificant. 9 FOREIGN OPERATIONS AND EXPORT SALES Approximately 30% of the Company's 2002 net sales were to customers in countries other than the United States. To enhance its overseas market penetration, the Company maintains mineral processing plants in the United Kingdom, Australia, Korea and Thailand, as well as a blending plant in Canada. Through joint ventures, the Company also has the capability to process minerals in Egypt, India, Mexico and China. Chartered vessels deliver large quantities of the Company's bulk, dried sodium bentonite to the plants in the United Kingdom, Australia, Thailand and Korea where it is processed and mixed with other clays and distributed throughout Europe, Australia and Southeast Asia. The Company's U.S. bentonite is also shipped in bulk to Japan, where it is sold by the Japanese joint venture. In addition, the Company also maintains a worldwide network of independent dealers, distributors and representatives. The Company manufactures geosynthetic clay liners in the United Kingdom, Poland and Korea, primarily for the European and Asian markets. The Company's international operations are subject to the usual risks of doing business abroad, such as currency fluctuations and devaluation, restrictions on the transfer of funds and import and export duties. See Note 3 of the Company's Notes to Consolidated Financial Statements included elsewhere herein. This Note is incorporated by reference for sales attributed to foreign operations and export sales from the United States. EMPLOYEES As of December 31, 2002, the Company employed 1,134 persons, 401 of whom were employed outside of the United States. At December 31, 2002, there were approximately 734, 319 and 26 persons employed in the Company's minerals, environmental and transportation segments, respectively, along with 55 corporate employees. The corporate employees include personnel engaged in the nanocomposite research and development effort. Operating plants are adequately staffed, and no significant labor shortages are presently foreseen. Approximately 62 of the Company's employees in the United States are represented by five labor unions, which have entered into separate collective bargaining agreements with the Company. Employee relations are considered good. AVAILABLE INFORMATION The Company files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The Company's filings are also available to the public at the web site maintained by the SEC, www.sec.gov. The Company's principal Internet address is www.amcol.com. The Company makes available free of charge on www.amcol.com its annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. 10 Item 2. Properties The Company and its subsidiaries operate the following plants, mines and other facilities, all of which are owned, except as noted: -------------------------------------------------------------------------------- LOCATION PRINCIPAL FUNCTION -------------------------------------------------------------------------------- MINERALS -------------------------------------------------------------------------------- Albion, MI (1) Blend ADDITROL(R) -------------------------------------------------------------------------------- Belle Fourche, SD Mine and process sodium bentonite -------------------------------------------------------------------------------- Butler, GA Blend ADDITROL(R) -------------------------------------------------------------------------------- Chattanooga, TN Blend ADDITROL(R) -------------------------------------------------------------------------------- Colony, WY (two plants) Mine and process sodium bentonite, package cat litter -------------------------------------------------------------------------------- Columbus, OH (1) Process chromite sand -------------------------------------------------------------------------------- Gascoyne, ND Mine and process leonardite -------------------------------------------------------------------------------- Granite City, IL (1) Package cat litter; process chromite sand -------------------------------------------------------------------------------- Letohatchee, AL Package and load calcium bentonite -------------------------------------------------------------------------------- Lovell, WY (3) Mine and process sodium bentonite -------------------------------------------------------------------------------- Lufkin, TX Blend ADDITROL(R) -------------------------------------------------------------------------------- Neenah, WI Blend ADDITROL(R)and fluxes -------------------------------------------------------------------------------- New Haven, WV Blend melt additives -------------------------------------------------------------------------------- Sandy Ridge, AL Mine and process calcium bentonite; blend ADDITROL(R) -------------------------------------------------------------------------------- Toronto, Ontario, Canada (3) Blend ADDITROL(R) -------------------------------------------------------------------------------- Troy, IN Blend ADDITROL(R) -------------------------------------------------------------------------------- Waterloo, IA Blend ADDITROL(R) -------------------------------------------------------------------------------- York, PA Blend ADDITROL(R); package cat litter -------------------------------------------------------------------------------- Beijing, China (2) Sales Office -------------------------------------------------------------------------------- Chao Yang, Liaoning, China (4) Mine and process calcium bentonite -------------------------------------------------------------------------------- Ellesmere Port, Wirral, U.K. (1) Process fluorspar -------------------------------------------------------------------------------- Geelong, Victoria, Australia (1)(3) Process bentonite; blend ADDITROL(R) -------------------------------------------------------------------------------- Kyung-Buk, South Korea Mine and process bentonite -------------------------------------------------------------------------------- Rayong, Thailand Process bentonite -------------------------------------------------------------------------------- Telford, Shropshire, U.K. (1) Package silica gel and desiccant clay -------------------------------------------------------------------------------- Winsford, Cheshire, U.K. Process calcium bentonite and other minerals -------------------------------------------------------------------------------- ENVIRONMENTAL -------------------------------------------------------------------------------- Broussard, LA Environmental Offshore operations and distribution -------------------------------------------------------------------------------- Fairmount, GA Manufacture Bentomat(R)and Claymax(R) geosynthetic clay liners -------------------------------------------------------------------------------- Houston, TX (1) Environmental Offshore sales -------------------------------------------------------------------------------- Lovell, WY (3) Manufacture Bentomat(R)and Claymax(R) geosynthetic clay liners -------------------------------------------------------------------------------- New Orleans, LA (1) Environmental Offshore sales -------------------------------------------------------------------------------- Villa Rica, GA Manufacture components for geosynthetic clay liners -------------------------------------------------------------------------------- Birkenhead, Merseyside, U.K. (2)(3) Manufacture Bentomat(R)geosynthetic clay liner; research laboratory; headquarters for CETCO (Europe) Ltd. -------------------------------------------------------------------------------- Copenhagen, Denmark (1) Sales and distribution for CETCO (Europe) Ltd. -------------------------------------------------------------------------------- Geelong, Victoria, Australia (1)(3) Sales and distribution for CETCO products -------------------------------------------------------------------------------- Paris, France (1) Sales and distribution for CETCO (Europe) Ltd. -------------------------------------------------------------------------------- Pyeongtaek, South Korea Manufacture Bentomat(R)geosynthetic clay liners -------------------------------------------------------------------------------- Seoul, South Korea (1) Sales and distribution for CETCO Korea Ltd. -------------------------------------------------------------------------------- Singapore (1) Sales and distribution for CETCO Environmental Technologies Pte Ltd. -------------------------------------------------------------------------------- Szczytno, Poland Manufacture Bentomat(R)and Claymax(R) geosynthetic clay liners -------------------------------------------------------------------------------- Tanager, Norway (1) Sales and distribution for CETCO (Europe) Ltd. -------------------------------------------------------------------------------- Toronto, Ontario, Canada (3) Sales and distribution for CETCO Canada Ltd. -------------------------------------------------------------------------------- TRANSPORTATION -------------------------------------------------------------------------------- Scottsbluff, NE Transportation headquarters and terminal -------------------------------------------------------------------------------- CORPORATE -------------------------------------------------------------------------------- Arlington Heights, IL (1) Corporate headquarters; CETCO headquarters; American Colloid Company headquarters; Nanocor, Inc. headquarters; research laboratory -------------------------------------------------------------------------------- Aberdeen, MS Process purified bentonite (Nanocor, Inc.) -------------------------------------------------------------------------------- (1) Leased. (2) Certain offices and facilities are leased. (3) Shared facilities between minerals and environmental segment. (4) 75% owned joint venture. 11 Item 3. Legal Proceedings The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position. The Company's processing operations require permits from various governmental authorities. From time to time, the Company has been contacted by government agencies with respect to required permits or compliance with existing permits. While the Company has been notified of certain situations of non-compliance, management does not expect the fines or the cost of compliance, if any, to be significant. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of Registrant
------------------------------------------------------------------------------------------------------------------------------------ NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ Gary L. Castagna 41 Senior Vice President and Chief Financial Officer of the Company since February 2001; prior thereto, a consultant to AMCOL since June 2000; prior thereto, Vice President of the Company and President of Chemdal International Corporation (this business, a former subsidiary of AMCOL, consisted of the absorbent polymers business that was sold to BASF AG in June 2000) since August 1997; prior thereto,Vice President of Finance for Chemdal International Corporation. Since January 2000, Director of M~Wave Incorporated, a manufacturer and distributor of printed circuit boards. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Lloyd F. Love 56 Vice President and Chief Information Officer of the Company since July 1999; prior thereto, Chief Information Officer of Baxter Credit Union since 1997; prior thereto, Vice President, Information Services of Caremark International since 1992 (acquired by MedPartners in mid-1996). ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Peter L. Maul 53 Vice President of the Company since 1993 and President of Nanocor, Inc. since 1995. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Ryan F. McKendrick 51 Vice President of the Company and President of Colloid Environmental Technologies Company since November 1998; prior thereto, Vice President of Colloid Environmental Technologies Company since 1994. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Gary Morrison 47 Vice President of the Company and President of American Colloid Company since February 2000; prior thereto, Executive Vice President of American Colloid Company since 1998; prior thereto, Vice President of American Colloid Company since 1994. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Clarence O. Redman 60 Secretary of the Company since 1982. Clarence O. Redman is of counsel to the law firm of Lord, Bissell & Brook, the law firm that serves as Corporate Counsel to the Company, since October 1997; prior thereto, an individual and corporate partner and Chief Executive Officer of the law firm of Keck, Mahin & Cate; a Director since 1989. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Lawrence E. Washow 49 Chief Executive Officer since May 2000; President of the Company since May 1998; Chief Operating Officer of the Company since 1997; prior thereto, Senior Vice President of the Company since 1994 and President of Chemdal International Corporation since 1992; a Director since February, 1998. ------------------------------------------------------------------------------------------------------------------------------------
All executive officers of the Company are elected annually by the Board of Directors for a term expiring at the annual meeting of directors following their election, or when their respective successors are elected and shall have qualified. 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock trades on The New York Stock Exchange under the symbol ACO. The following table sets forth, for the periods indicated, the high and low closing sale prices of the common stock, as reported by The New York Stock Exchange, and cash dividends declared per share.
---------------------------------------------------------------------------------------------------- Stock Price --------------------- Cash Dividends High Low Declared Per Share ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 2002: 1st Quarter $ 7.35 $ 6.04 $0.015 ---------------------------------------------------------------------------------------------------- 2nd Quarter $ 6.60 $ 5.57 0.020 ---------------------------------------------------------------------------------------------------- 3rd Quarter $ 6.65 $ 4.75 0.030 ---------------------------------------------------------------------------------------------------- 4th Quarter $ 6.09 $ 4.81 0.030 ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 2001: 1st Quarter $ 5.00 $ 3.55 $0.010 ---------------------------------------------------------------------------------------------------- 2nd Quarter $ 6.24 $ 3.84 0.015 ---------------------------------------------------------------------------------------------------- 3rd Quarter $ 6.70 $ 5.55 0.015 ---------------------------------------------------------------------------------------------------- 4th Quarter $ 7.20 $ 5.60 0.015 ----------------------------------------------------------------------------------------------------
The Company has paid cash dividends every year for 65 years. In addition, the Company distributed $14.00 per share to its shareholders on June 30, 2000 in connection with a plan of partial liquidation related to the sale of the absorbent polymers business. As of February 28, 2003, there were 2,875 holders of record of the common stock, excluding shares held in street name. Item 6. Selected Financial Data The following is selected financial data for the Company and its subsidiaries for the five years ended December 31, 2002. Per share amounts have been adjusted to reflect a three-for-two stock split in December 1997, effected in the form of a stock dividend. 13 SUMMARY OF OPERATIONS (In thousands, except ratios and share and per share amounts)
------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Operations Data ------------------------------------------------------------------------------------------------------------------- Net sales $ 298,873 $ 275,288 $ 284,142 $ 296,118 $ 292,783 ------------------------------------------------------------------------------------------------------------------- Gross profit 71,868 66,305 68,398 67,313 64,218 ------------------------------------------------------------------------------------------------------------------- General, selling and administrative expenses 52,210 47,740 48,071 56,925 50,416 ------------------------------------------------------------------------------------------------------------------- Business realignment and other charges -- -- 2,357 11,575 -- ------------------------------------------------------------------------------------------------------------------- Operating profit (loss) 19,658 18,565 17,970 (1,187) 13,802 ------------------------------------------------------------------------------------------------------------------- Investment income -- 3,015 9,816 -- -- ------------------------------------------------------------------------------------------------------------------- Change in value of interest rate swap -- (401) -- -- -- ------------------------------------------------------------------------------------------------------------------- Net interest expense (512) (2,196) (3,160) (3,440) (2,121) ------------------------------------------------------------------------------------------------------------------- Net other income (expense) 43 223 594 (1,069) 694 ------------------------------------------------------------------------------------------------------------------- Pretax income (loss) 19,189 19,206 25,220 (5,696) 12,375 ------------------------------------------------------------------------------------------------------------------- Income taxes (benefit) 6,916 6,155 7,155 (1,815) 3,524 ------------------------------------------------------------------------------------------------------------------- Income from joint ventures 531 28 470 448 8 ------------------------------------------------------------------------------------------------------------------- Minority interest in net loss of subsidiary 164 59 -- -- -- ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 12,968 13,138 18,535 (3,433) 8,859 ------------------------------------------------------------------------------------------------------------------- Income (loss) from discontinued operations -- (879) (8,185) 25,667 13,226 ------------------------------------------------------------------------------------------------------------------- Gain on disposal of discontinued operations -- 1,154 316,330 -- -- ------------------------------------------------------------------------------------------------------------------- Extraordinary loss on early extinguishment of debt -- -- (443) -- -- ------------------------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting principle (net of tax) -- (182) -- -- -- ------------------------------------------------------------------------------------------------------------------- Net income 12,968 13,231 326,237 22,234 22,085 ------------------------------------------------------------------------------------------------------------------- Per Share Data ------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share (2) ------------------------------------------------------------------------------------------------------------------- Continuing operations 0.46 0.47 0.67 (0.13) 0.32 ------------------------------------------------------------------------------------------------------------------- Discontinued operations -- 0.01 11.20 0.96 0.47 ------------------------------------------------------------------------------------------------------------------- Extraordinary loss -- -- (0.02) -- -- ------------------------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting principle (net of tax) -- (0.01) -- -- -- ------------------------------------------------------------------------------------------------------------------- Net income 0.46 0.47 11.85 0.83 0.79 ------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share (3) ------------------------------------------------------------------------------------------------------------------- Continuing operations 0.43 0.43 0.62 (0.12) 0.31 ------------------------------------------------------------------------------------------------------------------- Discontinued operations -- 0.01 10.29 0.94 0.46 ------------------------------------------------------------------------------------------------------------------- Extraordinary loss -- -- (0.01) -- -- ------------------------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting principle (net of tax) -- (0.01) -- -- -- ------------------------------------------------------------------------------------------------------------------- Net income 0.43 0.43 10.90 0.82 0.78 ------------------------------------------------------------------------------------------------------------------- Stockholders' equity (1) 5.43 4.98 4.69 6.94 6.44 ------------------------------------------------------------------------------------------------------------------- Dividends 0.10 0.06 0.16 0.27 0.23 ------------------------------------------------------------------------------------------------------------------- Partial liquidation distribution -- -- 14.00 -- -- -------------------------------------------------------------------------------------------------------------------
Continued... (1) Based on the number of common shares outstanding at the end of the year. (2) Based on the weighted average common shares outstanding for the year. (3) Based on the weighted average common shares outstanding, including common stock equivalents, for the year. 14 SUMMARY OF OPERATIONS (continued) (In thousands, except ratios and share and per share amounts)
------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Shares Outstanding Data ------------------------------------------------------------------------------------------------------------------------------------ End of period 27,881,903 28,256,389 28,781,304 26,852,056 26,869,372 ------------------------------------------------------------------------------------------------------------------------------------ Weighted average for the period-basic 28,133,795 28,193,234 27,523,157 26,772,569 27,918,391 ------------------------------------------------------------------------------------------------------------------------------------ Incremental impact of stock options 2,014,725 2,412,826 2,433,533 426,694 467,469 ------------------------------------------------------------------------------------------------------------------------------------ Weighted average for the period-diluted 30,148,520 30,606,060 29,956,690 27,199,263 28,385,860 ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data ------------------------------------------------------------------------------------------------------------------------------------ Current assets $ 111,133 $ 101,177 $ 259,980 $ 138,614 $ 141,442 ------------------------------------------------------------------------------------------------------------------------------------ Cash equivalents included in current assets -- -- 168,549 -- -- ------------------------------------------------------------------------------------------------------------------------------------ Net current assets of discontinued operations included in current assets -- 798 -- 47,668 41,859 ------------------------------------------------------------------------------------------------------------------------------------ Net property and equipment 81,847 72,348 74,665 78,911 80,158 ------------------------------------------------------------------------------------------------------------------------------------ Other long-term assets 28,848 22,805 31,122 102,164 105,190 ------------------------------------------------------------------------------------------------------------------------------------ Net long-term assets of discontinued operations included in long-term assets -- 311 6,932 87,554 82,958 ------------------------------------------------------------------------------------------------------------------------------------ Total assets 221,828 196,330 365,767 319,689 316,874 ------------------------------------------------------------------------------------------------------------------------------------ Current liabilities 52,639 31,083 169,584 33,557 51,448 ------------------------------------------------------------------------------------------------------------------------------------ Net current liabilities of discontinued operations included in current liabilities -- -- 1,484 -- -- ------------------------------------------------------------------------------------------------------------------------------------ Accrued income taxes related to sale of discontinued operations included in current liabilities -- -- 135,095 -- -- ------------------------------------------------------------------------------------------------------------------------------------ Long-term debt 5,573 13,245 51,334 91,067 93,359 ------------------------------------------------------------------------------------------------------------------------------------ Other long-term liabilities 12,233 11,275 9,942 7,692 8,869 ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity 151,383 140,727 134,907 186,448 172,914 ------------------------------------------------------------------------------------------------------------------------------------ Other Statistics for Continuing Operations ------------------------------------------------------------------------------------------------------------------------------------ Depreciation, depletion and amortization $ 20,009 $ 17,427 $ 17,000 $ 19,093 $ 17,195 ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures 16,223 14,730 14,975 15,796 23,976 ------------------------------------------------------------------------------------------------------------------------------------ Gross profit margin 24.0% 24.1% 24.1% 22.7% 21.9% ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) margin 6.6% 6.7% 6.3% (0.4%) 4.7% ------------------------------------------------------------------------------------------------------------------------------------ Operating profit margin before business realignment and other charges 6.6% 6.7% 7.2% 3.7% 4.7% ------------------------------------------------------------------------------------------------------------------------------------ Pretax profit (loss) margin 6.4% 7.0% 8.9% (1.9%) 4.2% ------------------------------------------------------------------------------------------------------------------------------------ Effective tax (benefit) rate 36.0% 32.0% 28.4% (31.9%) 28.5% ------------------------------------------------------------------------------------------------------------------------------------ Net profit (loss) from continuing operations margin 4.3% 4.8% 6.5% (1.2%) 3.0% ------------------------------------------------------------------------------------------------------------------------------------ Return on ending equity 8.6% 9.3% 13.7% (1.8%) 5.1% ------------------------------------------------------------------------------------------------------------------------------------
15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations describes relevant aspects of the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to select accounting policies that are appropriate for the Company's business, and to make certain estimates, judgments and assumptions about matters that are inherently uncertain in applying those policies. On an ongoing basis, the Company re-evaluates these estimates, judgments and assumptions for reasonableness because of the critical impact that these factors have on the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates. The Company's management has identified the most critical accounting policies upon which the financial statements are based and that involve the most complex and subjective decisions and assessments. These policies relate to the valuation of accounts receivable and inventories, the recognition of depreciation and impairment in the carrying value of property, plant and equipment, and accounting for pension benefits. Senior management of the Company has discussed the development, selection and disclosure of these policies with the members of the Audit Committee of our Board of Directors. These accounting policies are disclosed in the notes to the consolidated financial statements. The discussion which follows should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Described here are the critical accounting policies of the Company: Valuation of Accounts Receivable The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. The Company's customer base is diverse and includes customers located throughout the world. Payment terms in certain of the foreign countries in which the Company does business are longer than those that are customary in the United States, and as a result, may give rise to additional credit risk related to outstanding accounts receivable from these non-U.S. customers. Likewise, a change in the financial position, liquidity or prospects of any of the Company's customers could have an impact on the Company's ability to collect amounts due. While concentrations of credit risk related to trade receivables are somewhat limited by the Company's large customer base, the Company does extend significant credit to some of its customers. The Company makes estimates of the amounts of its gross accounts receivable that will not be collectible, and records an allowance for doubtful accounts to reduce the carrying value of accounts receivable to the amount that is expected to be realized. The allowance for doubtful accounts is established based upon the Company's historical bad debt experience, a review of the overall aging of the accounts, and an analysis of specific customer accounts, particularly those with past-due balances. The recorded allowance for doubtful accounts is intended to cover specific customer collection issues identified by management at the balance sheet date, and to provide for potential losses from other accounts based on the Company's historical experience. Increases in the allowance for doubtful accounts are recorded as an expense and included in general, selling and administrative expenses in the period identified. The Company's estimate of the required allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future collectibility of customer accounts. Inventory Valuation Inventories are recorded at the lower of actual manufactured or purchased cost, or estimated net realizable value. In order to determine net realizable value, management regularly reviews inventory quantities on hand and evaluates significant items to determine whether they are excess or obsolete. The Company records the value of estimated excess or obsolete inventory as a reduction of inventory and as an expense which is included in cost of sales in the period it is 16 identified. The Company's estimate of excess and obsolete inventory is a critical accounting estimate because it is susceptible to change from period to period. In addition, it requires management to make judgments about the future demand for inventory. In order to quantify excess or obsolete inventory, management prepares lists of inventory quantities on hand and determines the amount of such inventories that, based on projected demand, are not anticipated to be sold within the next 12 to 24 months or, based on our current product offerings, are excess or obsolete. This list is then reviewed with sales and production management personnel to determine whether this list of potential excess or obsolete inventory is complete. Factors which impact this evaluation include, for example, whether there has been a change in the market or packaging for particular products, and whether there are components of inventory that incorporate obsolete technology. In certain businesses in which the Company is engaged, such as the domestic cat litter business, product and packaging changes can occur rapidly and expose the Company to excess and obsolete inventories. Goodwill and Long-lived Assets The Company has made substantial investments in property, plant and equipment and has a moderate investment in goodwill. For property, plant and equipment, the Company evaluates the recoverability of these assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. For goodwill, the Company performs an annual impairment assessment (or more frequently if impairment indicators arise) as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. In analyzing the fair value of goodwill and assessing the recoverability of the carrying value of property, plant and equipment, management uses models which are based on estimates of future operating performance and related cash flows. In preparing these models, management must make estimates in projecting future cash flows attributable to the reporting unit or assets being tested, in selecting a discount rate that reflects the related business risks, and in determining the appropriate perpetuity or disposal value. In developing these projections of future cash flows, the Company makes a variety of important assumptions and estimates that have a significant impact on management's assessments of whether the carrying values of goodwill and property, plant and equipment should be adjusted to reflect impairment. Among these are assumptions and estimates about the future growth and profitability of the related business unit or asset, and assumptions about anticipated future economic, regulatory and political conditions in the relevant market. The Company's estimates related to the carrying values of goodwill and property, plant and equipment are considered to be critical accounting estimates because they are susceptible to change from period to period based on a variety of factors. For example, judgment is required to determine whether events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In addition, in performing assessments of the carrying values of these assets, management is required to make judgments about the future business, economic, regulatory, and political conditions affecting these assets, as well as to select the appropriate risk-related rates for discounting estimated future cash flows, and to develop reasonable estimates of disposal values. Retirement Benefits The Company sponsors a defined-benefit pension plan for substantially all of its domestic employees. In order to measure the expense and obligations associated with these retirement benefits, management must make a variety of estimates including discount rates used to value certain liabilities, expected return on plan assets set aside to fund these liabilities, rate of compensation increase, employee turnover rates, retirement rates, mortality rates and other factors. The Company's benefit plan committee determines the key assumptions related to the discount rate, expected investment rate of return and compensation increases after consulting with the actuarial firm that performs the calculations. Other assumptions are also set based on consultation with the Company's actuaries. The Company bases its estimates on its historical experience as well as current facts and circumstances. The discount rate reflects the market rate for high-quality fixed income debt instruments on the measurement date. The rate is used to discount the future cash flows of benefit obligations back to the measurement date. An increase in the discount rate reduces 17 pension expense and liabilities. The expected long-term rate of return on plan assets is determined using historic market return trends combined with current market conditions. An increase in the expected long-term rate of return on plan assets reduces pension expense and liabilities. The expected rate of compensation increase is determined based on the Company's near-term outlook and assumed inflation. Higher compensation rate increases increase pension expense and liabilities. Retirement rates are based primarily on actual plan experience. Mortality rates are based on tables published by the insurance industry. Different estimates used by management could result in the Company recognizing different amounts of expense over different periods of time. Liquidity and Financial Resources At December 31, 2002, the Company had outstanding debt of $18.2 million and cash and of $15.6 million, compared with $13.2 million of outstanding debt and $10.3 million of cash at December 31, 2001. Long-term debt (including current maturities) represented 10.7% of total capitalization at December 31, 2002, compared with 8.6% at December 31, 2001. The Company had a current ratio of 2.11-to-1 at December 31, 2002 and working capital of approximately $58.5 million, compared with 3.25-to-1 and $70.1 million, respectively, at December 31, 2001. The current ratio and working capital at December 31, 2002, were influenced by the reclassification of $12.6 million of long-term debt to short-term debt due to the maturity of the Company's revolving credit facility in October, 2003. The following schedule sets forth details of the Company's contractual obligations at December 31, 2002: -------------------------------------------------------------------------------- Payments due by period ------------------------------------------- Less than 1 1-3 4-5 After 5 Total Year Years Years Years -------------------------------------------------------------------------------- (in millions) -------------------------------------------------------------------------------- Bank debt $18.2 $12.6 $ -- $ -- $5.6 -------------------------------------------------------------------------------- Operating leases 11.3 2.7 4.3 3.1 1.2 ----- ----- ---- ---- ---- -------------------------------------------------------------------------------- Total contractual cash obligations $29.5 $15.3 $4.3 $3.1 $6.8 ===== ===== ==== ==== ==== -------------------------------------------------------------------------------- Bank debt includes $12.6 million due under a revolving credit agreement, which provides for a commitment of $125 million in borrowing capacity and matures on October 31, 2003. Borrowing rates on the facility can range from 0.25% to 0.75% above the 3-month LIBOR depending upon the Company's capitalization ratios and the amount of the credit line used. The facility requires certain covenants to be met including specific amounts of working capital and tangible net worth, and also limits the Company's ability to make additional borrowings and guarantees. The Company was in compliance with these covenants at December 31, 2002. The Company borrowed $5.0 million under an industrial revenue bond in 2000 to construct a new minerals processing facility in Butler, Georgia. The bond matures in 2015 and is secured by the facility's assets. Operating leases relate to noncancelable obligations for railroad cars, truck trailers, computer software, office equipment, certain automobiles, and office and plant facilities. Investing and financing activities were funded by cash flow from operations which was $36.6 million and net borrowings of $5.6 million from the Company's revolving credit facility. The Company completed two acquisitions in 2002 which totaled $17.0 million. Capital expenditures for the year were $16.2 million while dividends paid to common shareholders totaled $2.7 million. The Company repurchased $6.9 million of its common stock in 2002 and received $2.6 million in proceeds from the exercise of stock options. Approximately $5.3 million remains available for repurchases of common stock under an authorization approved by the Company's Board of Directors in May, 2002. Management believes that the Company has adequate resources to fund the planned capital expenditures, dividend 18 payments and anticipated working capital requirements of the Company through its existing committed credit lines, cash on hand and future operating cash flow. Management expects to be able to either extend or replace the Company's current revolving credit facility when it expires in October, 2003. Since the mid 1980's, the Company and/or its subsidiaries have been named as one of a number of defendants in product liability lawsuits relating to the minor free-silica content within the Company's bentonite products used in the metalcasting industry. The plaintiffs in these lawsuits are primarily employees of the Company's foundry customers. To date, the Company has not incurred significant costs in defending these matters. The Company believes it has adequate insurance coverage and does not believe the litigation will have a material adverse impact on the financial condition, liquidity or results of the operation of the Company. Results of Operations for the Three Years Ended December 31, 2002 Net sales increased by $23.5 million, or 8.6%, from 2001 to 2002 and declined by $8.9 million, or 3.1% from 2000 to 2001. Approximately 87% of the increase in net sales in 2002 as compared to 2001 was attributed to the acquisition of Colin Stewart Minchem Limited (CSM) which was completed on May 1, 2002. CSM is a reporting unit within the minerals segment. The 2000 to 2001 sales decrease was primarily attributed to lower volume and pricing in certain domestic minerals businesses. Gross profit increased $5.6 million, or 8.4%, from 2001 to 2002 and declined by $2.1 million, or 3.1%, from 2000 to 2001. CSM contributed approximately 71% of the increase in gross profit in 2002 as compared to 2001, while increased gross profits and margins from the environmental segment contributed approximately 25% of the increase in 2002. The 2000 to 2001 decrease was commensurate with the sales decrease for the period. Operating profit increased by $1.1 million, or 5.9%, from 2001 to 2002. The increase was attributed to the increase in sales and gross profits. Operating profit increased by $0.6 million, or 3.3%, from 2000 to 2001. The 2000 period included business realignment charges of $2.4 million which consisted of fees paid to professional firms that were hired to assist the Company in exploring means of improving shareholder value. Income from joint ventures was $0.5 million in 2002, an increase of $0.5 million from 2001. In 2001, the Company recorded a write-down of $0.4 million related to an investment in a Chinese joint venture. The Company's interest in the joint venture was sold during 2002. The decrease in income from joint ventures from 2000 to 2001 was also caused by the write-down in the Chinese joint venture investment. A review of sales, gross profit, general, selling and administrative expenses and operating profit by segment follows:
----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------------------------- Minerals 2002 2001 2000 2002 vs. 2001 2001 vs. 2000 ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) ----------------------------------------------------------------------------------------------------------------------------- Product sales $156,174 91.0% $133,903 89.3% $146,017 89.3% Shipping revenue 15,369 9.0% 16,042 10.7% 17,457 10.7% -------- ----- -------- ----- -------- ----- Net sales 171,543 100.0% 149,945 100.0% 163,474 100.0% $21,598 14.4% $(13,529) -8.3% -------- ----- -------- ----- -------- ----- Cost of sales - product 124,267 72.4% 106,314 70.9% 112,141 68.6% Cost of sales - shipping 15,369 9.0% 16,042 10.7% 17,457 10.7% -------- ----- -------- ----- -------- ----- Cost of sales 139,636 81.4% 122,356 81.6% 129,598 79.3% -------- ----- -------- ----- -------- ----- Gross profit 31,907 18.6% 27,589 18.4% 33,876 20.7% 4,318 15.7% (6,287) -18.6% General, selling and administrative expenses 16,037 9.3% 12,892 8.6% 12,580 7.7% 3,145 24.4% 312 2.5% -------- ----- -------- ----- -------- ----- Operating profit $ 15,870 9.3% $ 14,697 9.8% $ 21,296 13.0% $ 1,173 8.0% $ (6,599) -31.0% -----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001 CSM contributed sales of $20.5 million since its acquisition, which was effective from May 1, 2002. Increased sales from the international subsidiaries accounted for the remainder of the increase. Within the domestic minerals business, sales 19 to the metalcasting market increased, but that was offset by declines in the pet products and export units. Overall, sales from the domestic minerals business were flat compared to 2001. Approximately $4.0 million of the improvement in gross profit was attributed to CSM. Gross profit from the domestic minerals business was flat compared to 2001. CSM accounted for approximately $2.0 million of the increase in general, selling and administrative expenses. Higher personnel and benefit expenses in the domestic minerals business accounted for the remaining increase. 2001 vs. 2000 In the first quarter of 2001 the Company completed its planned exit from the U.K. cat litter business and the sale of its European cat litter business. On December 31, 2001, the Company completed the sale of its U.K. metalcasting business. The discussion of the mineral segment results for the years ended 2001 and 2000 excludes the U.K. cat litter and metalcasting businesses as they have been classified as discontinued operations for all periods reported. Sales declined 8.3% from 2000 to 2001 primarily due to lower sales and volume levels in the domestic metalcasting and cat litter businesses. The cat litter business also experienced lower pricing in the second half of 2001. Lower volume levels in the domestic metalcasting and cat litter businesses caused the 2001 gross margin and operating margin to drop by 230 and 320 basis points, respectively, from 2000 results.
--------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------------------------------- Environmental 2002 2001 2000 2002 vs. 2001 2001 vs. 2000 --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) --------------------------------------------------------------------------------------------------------------------------------- Product sales $ 98,208 92.7% $ 96,046 92.6% $ 89,315 91.1% Shipping revenue 7,718 7.3% 7,720 7.4% 8,695 8.9% -------- ----- -------- ----- -------- ----- Net sales 105,926 100.0% 103,766 100.0% 98,010 100.0% $ 2,160 2.1% $5,756 5.9% -------- ----- -------- ----- -------- ----- Cost of sales - product 61,615 58.2% 60,850 58.6% 58,385 59.6% Cost of sales - shipping 7,718 7.3% 7,720 7.4% 8,695 8.8% -------- ----- -------- ----- -------- ----- Cost of sales 69,333 65.5% 68,570 66.1% 67,080 68.4% Gross profit 36,593 34.5% 35,196 33.9% 30,930 31.6% 1,397 4.0% 4,266 13.8% General, selling and administrative expenses 22,220 20.9% 20,042 19.3% 19,336 19.8% 2,178 10.9% 706 3.7% -------- ----- -------- ----- -------- ----- Operating profit $ 14,373 13.6% $ 15,154 14.6% $ 11,594 11.8% $ (781) (5.2%) 3,560 30.7% ---------------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001 International sales accounted for all of the increase in sales over 2001. The segment's European offshore drilling service and building materials businesses contributed to the increase in international sales. Exports from the domestic business increased over 2001 but that was offset by a decrease in the domestic offshore business. Improved production costs in the segment's domestic lining technology business contributed all of the increase in gross profit from 2001. Gross profits from the international business declined even with the increase in sales. Higher production costs at the segment's European operations caused the decline. Improved production costs at the domestic lining technology operations increased gross profit to offset the decline in the European operations. General, selling and administrative expenses increased due to higher compensation and benefit expenses, information technology costs, marketing and promotion costs, and research and development spending. 20 2001 vs. 2000 Sales increased 5.9% in 2001 over 2000 primarily due to growth in the offshore services and European business units. Gross margins expanded by 230 basis points in 2001 from 2000 due to increased sales of more profitable products in the European business as well as lower production costs at that operation.
----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------------------ Transportation 2002 2001 2000 2002 vs. 2001 2001 vs. 2000 ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) ----------------------------------------------------------------------------------------------------------------------------- Net sales $32,509 100.0% $33,133 100.0% $34,036 100.0% $(624) (1.9%) $(903) (2.7%) Cost of sales 29,141 89.6% 29,613 89.4% 30,444 89.4% ------ ----- ------ ----- ------ ----- Gross profit 3,368 10.4% 3,520 10.6% 3,592 10.6% (152) (4.3%) (72) (2.0%) General, selling and administrative expenses 2,401 7.4% 2,157 6.5% 2,115 6.2% 244 11.3% 42 2.0% ------ ----- ------ ----- ------ ----- Operating profit $ 967 3.0% $ 1,363 4.1% $ 1,477 4.4% $(396) (29.1%) $(114) (7.7%) -----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001 Approximately 34% of the segment's sales involve the domestic minerals and environmental segments. Net sales declined due to lower third-party customer and intersegment shipments. Fuel costs remained flat with 2001 levels. Increased general, selling and administrative expenses were associated with higher information technology and compensation costs. 2001 vs. 2000 Approximately 34% of the segment's sales involve the domestic minerals and environmental segments. Lower sales in 2001 were primarily due to reduced business levels with third party customers. Gross margins for 2001 equaled 2000 as the mix of broker and trucking business was the same in both years. Fuel costs remained flat with 2000 levels.
---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------ Corporate 2002 2001 2000 2002 vs. 2001 2001 vs. 2000 ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) ---------------------------------------------------------------------------------------------------------------- Intersegment shipping sales $(11,105) $(11,556) $(11,378) Intersegment shipping costs (11,105) (11,556) (11,378) -------- -------- -------- Gross profit -- -- -- Corporate general, selling and administrative expenses 7,108 8,020 8,010 $ (912) (11.4%) $ 10 0.1% Nanocomposite business development expenses 4,444 4,629 6,030 (185) (4.0%) (1,401) (23.2%) Business realignment and other charges -- -- 2,357 -- 0.0% (2,357) (100.0%) -------- -------- -------- Operating loss $(11,552) $(12,649) $(16,397) $ 1,097 8.7% $ 3,748 (22.9%) -------
2002 vs. 2001 Intersegment shipping revenues and costs were related to services provided by the transportation segment for certain domestic minerals and environmental segment businesses. The services were provided at arms length rates, and billed by the transportation segment to the minerals and environmental segments, who in turn billed their customers. The intersegment shipping sales and costs in the table above reflect the elimination of these intersegment transactions. Corporate costs include management information systems, human resources, investor relations, corporate communications and finance. Additionally, marketing, research and operating costs related to the development of the 21 nanocomposite business are included in this segment. Management continues to believe its nanocomposite technology has strong commercial potential. Approximately 60% of the lower corporate administrative expenses in the current year period were associated with increased allocation of certain costs to the mineral, environmental and transportation segments. The remaining decrease was attributed to lower personnel and legal costs. The decline in nanocomposite expenses is associated with a restructuring of the business that was implemented in the second quarter of 2001. 2001 vs. 2000 Corporate administrative expenses were flat in 2001 compared with 2000. The nanocomposite business was restructured in the second quarter of 2001 which resulted in lower research costs in comparison to 2000. During 2000, the Company engaged an investment banking firm to help management evaluate various strategic options to enhance shareholder value. The Company engaged in significant discussions involving the disposition of its business, including the sale of certain parts and the potential spin-off of the Nanocor business. In the process, the Company incurred approximately $2.4 million in professional fees. These expenses have been included as a component of business realignment expenses. Investment Income Investment income was earned in 2001 and 2000 as a result of the temporary investment of proceeds received on the sale of the absorbent polymers segment. In 2001, investment income dropped to $0.06 per diluted share compared with $0.20 per diluted share in 2000 as a result of lower average invested funds. The Company paid approximately $130 million in 2001 for income taxes associated with the sale. The remaining invested funds were liquidated in the third quarter of 2001 and used to pay down long-term debt. Net Interest Expense Net interest expense was $0.5 million, $2.2 million and $3.2 million in 2002, 2001, and 2000, respectively. As discussed above, the Company reduced debt by approximately $40 million in the third quarter of 2001 by liquidating funds previously invested in cash equivalent securities. Consequently, the decrease in 2002 and 2001 was primarily due to lower average debt levels. Additionally, 2002 expense benefited from lower interest rates. Other Income (Expense) Other income in 2002 was less than $0.1 million. In 2001 and 2000, other income was $0.2 million and $0.6 million, respectively. This item reflects a number of miscellaneous transactions including gains and losses related to foreign exchange transactions and disposals of fixed assets. Income Taxes The effective income tax rate for 2002 was 36.0% compared to 32.0% in 2001 and 28.4% in 2000. The increased tax rate in 2002 was attributed to a greater portion of earnings generated in foreign jurisdictions with higher corporate income tax rates. The rate increased in 2001 from 2000 primarily from lower tax benefits associated with export incentives and higher state income taxes. 22 Discontinued Operations Discontinued operations reflect the operating results of the U.K. metalcasting and cat litter businesses, which were sold or closed in 2001, and the absorbent polymers segment, which was sold in 2000, for all periods presented. Income from discontinued operations was $0.3 million in 2001, or $0.01 per diluted share and $308.1 million in 2000, or $10.29 per diluted share. No proceeds were received in connection with the sale of the U.K metalcasting business. The acquirer will lease certain land and buildings from the Company and pay a royalty related to a license for use of certain trademarks of the Company. The license agreement has a ten year term and the royalty is based on sales by the acquiring entity. In connection with the sale of the U.K. metalcasting business the Company realized a loss on the disposal of assets of $4.8 million and tax benefit of $6.0 million. The tax benefit is associated with the write-off of the Company's investment in its U.K. minerals subsidiary. Other Items A charge of $0.01 per diluted share was recorded in 2001 related to the cumulative effect of a change in accounting principle. The charge relates to the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." An extraordinary charge of $0.01 per diluted share was recorded in 2000 to reflect costs associated with the early extinguishment of certain debt. Net Income Net income for 2002 was $13.0 million, a slight decrease from 2001. Lower investment income was the primary reason for the decline. Net income for 2001 was $13.2 million compared with $326.2 million in 2000. Income from discontinued operations in 2000 of $308.1 million was the primary reason for the difference. Earnings Per Share Diluted earnings per share was calculated using the weighted average number of shares of common stock, including common share equivalents, outstanding during the year. Stock options issued to key employees and directors are considered common share equivalents. As a result of the equity restructuring following the sale of the absorbent polymers segment, all outstanding unexercised options at June 30, 2000 were adjusted. The value of the options remained the same as before the payment of the partial liquidation dividend, however the number of options increased and the exercise prices were reduced. This resulted in a greater number of common share equivalents during the second half of 2000. The weighted average number of shares of common stock and common stock equivalent shares outstanding was approximately 30.1 million in 2002, 30.6 million in 2001 and 30.0 million in 2000. There were 27.9 million shares outstanding, excluding common share equivalents, at December 31, 2002 compared to 28.2 million at December 31, 2001. The 0.3 million share decrease was related to the exercise of stock options net of the purchase of treasury shares. Income from continuing operations in 2002 was $13.0 million, or $0.43 per diluted share, compared to $13.1 million, or $0.43 per diluted share, in 2001 and $18.5 million, or $0.62 per diluted share, in 2000. As previously discussed, investment income and business realignment charges impacted the reported earnings in 2001 and 2000. An analysis detailing the effects of these items on diluted earnings per share from continuing operations appears below: -------------------------------------------------------------------------------- Year Ended December 31, -------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Business realignment and other charges $ -- $ -- $(0.05) Investment income -- 0.06 0.20 Income from operations excluding the above 0.43 0.37 0.47 ----- ----- ------ Diluted earnings from continuing operations $0.43 $0.43 $ 0.62 -------------------------------------------------------------------------------- 23 In 2001, the Company sold its U.K. metalcasting business and closed its U.K. cat litter business. The operating results for these U.K. operations were reclassified to discontinued operations for all periods presented. Diluted income (loss) per share from discontinued operations for 2001 amounted to $0.01 per share, including $0.04 from the gain on the sale of these businesses, compared to ($0.51) for 2000. The absorbent polymers segment was sold to BASF AG on June 1, 2000. The operating results for the absorbent polymers segment were reclassified to discontinued operations for all periods presented. Diluted income from the segment for 2000 amounted to $10.80 per share, including $10.56 from the gain on the sale of the segment. The income from discontinued operations in 2000 was for the five months ended May 31, 2000. An extraordinary loss of $.01 per share related to the early extinguishment of long-term debt was recorded in 2000. Forward Looking Statements Certain statements made from time to time by the Company, including statements in the Management's Discussion and Analysis of Financial Condition and Results of Operation section above, constitute "forward-looking statements" made in reliance upon the safe harbor contained in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements relating to the Company or its operations that are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions, and statements relating to anticipated growth, levels of capital expenditures, future dividends, expansion into global markets and the development of new products. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The Company's actual results, performance or achievements could differ materially from the results, performance or achievements expressed in, or implied by, these forward-looking statements as a result of various factors, including without limitation the following: Competition Minerals. The minerals market is very competitive. We believe competition is essentially a matter of product quality, price, delivery, service and technical support. Several of our competitors in the U.S. market are larger and have substantially greater financial resources. If we fail to compete successfully based on these or other factors, we may lose customers or fail to recruit new customers and our business and future financial results could be materially and adversely affected. Reliance on Metalcasting and Construction Industries Approximately 48% of our minerals segment's sales and 30% of our environmental segment's sales in 2002 were to the metalcasting and construction markets, respectively. The metalcasting and construction markets depend heavily upon the strength of the domestic and international economies. If these economies weaken, demand for products by the metalcasting and construction markets may decline and our business or future financial results in the minerals and environmental segments may be adversely affected. Regulatory and Legal Matters Our operations are subject to various federal, state, local and foreign laws and regulations relating to the environment and to health and safety matters. Substantial penalties may be imposed if we violate certain of these laws and regulations even if the violation was inadvertent or unintentional. If these laws or regulations are changed or interpreted differently in the future, it may become more difficult or expensive for us to comply. In addition, investigations or evaluations of our products by government agencies may require us to adopt additional safety measures or precautions. If our costs to comply with such laws and regulations in the future materially increase, our business and future financial results could be materially and adversely affected. The Company may also be subject to adverse litigation results in 24 addition to increased compliance costs arising from future changes in laws and regulations that may negatively impact its operations and profits. Risks of International Expansion An important part of our business strategy is to expand internationally. We intend to seek acquisitions, joint ventures and strategic alliances globally. Currently, our business outside the United States represents approximately 30% of our consolidated sales. The approximate breakdown of the sales outside of the United States for 2002 was as follows: Europe 64%; Latin America (including Mexico) 5%; Asia 29%; and Africa along with the Middle East 2%. As we expand internationally, we will be subject to increased risks, which may include the following: o currency exchange or price control laws; o currency translation adjustments; o political and economic instability; o unexpected changes in regulatory requirements; o tariffs and other trade barriers; o longer accounts receivable collection cycles; and o adverse tax consequences. The above listed events could result in sudden, and potentially prolonged, changes in demand for the Company's products. Also, we may have difficulty enforcing agreements and collecting accounts receivable through a foreign country's legal system. At December 31, 2002, approximately 48% of the gross accounts receivable were due from customers outside of the United States and Canada. The breakdown of the overseas balance was as follows: Europe 66%; Latin America (including Mexico) 12%; Asia 20%; and Africa and the Middle East 2%. Volatility of Stock Price The stock market has been extremely volatile in recent years. These broad market fluctuations may adversely affect the market price of our common stock. In addition, factors such as the following may have a significant effect on the market price of our common stock: o fluctuations in our financial results; o our introduction of new services or products; o announcements of acquisitions, strategic alliances or joint ventures by us, our customers or our competitors; o changes in analysts' recommendations regarding our common stock; and o general economic conditions. There can be no assurance that the price of our common stock will increase in the future or be maintained at its recent levels. New Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 stipulates that goodwill should no longer be amortized and instead should be subject to an annual impairment assessment. The Company adopted the provisions of SFAS 142 effective January 1, 2002. Adoption of SFAS 142 did not have a material effect on the consolidated financial statements. 25 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. Management is currently evaluating the impact of the adoption of SFAS 143 on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 is required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a significant effect on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), which addresses financial accounting and reporting for obligations under certain guarantees. FIN 45 requires, among other things, that a guarantor recognize a liability for the fair value of an obligation undertaken in issuing a guarantee, under certain circumstances. The recognition and measurement provisions of FIN 45 are required to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a significant effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosure in both interim and annual financial statements. Certain disclosure modifications are required for fiscal years ending after December 15, 2002, and are included in the notes to the consolidated financial statements included elsewhere in this report. The Company is required to comply with the remaining additional disclosure requirements in its quarterly reports for interim periods beginning in the first quarter of 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which addresses the consolidation of variable interest entities as defined in the Interpretation. FIN 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of FIN 46 is not expected to have a material effect on the Company's consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a multinational corporation that manufactures and markets products in countries throughout the world, the Company is subject to certain market risks, including those related to foreign currency, interest rates and government actions. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. Exchange Rate Sensitivity The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposures are to changes in exchange rates for 26 the U.S. dollar versus the euro, the British pound, the Canadian dollar, the Australian dollar, the Mexican peso, the Thai baht, the Chinese renmimbi and the Korean won. The Company also has significant exposure to changes in exchange rates between the British pound and the euro. The Company's various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases, royalty payments, etc.) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2002, the Company had no material outstanding foreign currency contracts. Interest Rate Sensitivity The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency. The instruments' actual cash flows are denominated in U.S. dollars (US), Chinese renmimbi (RMB) and Thai baht (THB) as indicated in parentheses.
--------------------------------------------------------------------------------------------------------------- Expected Maturity Date ----------------------------------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total Value --------------------------------------------------------------------------------------------------------------- (US$ equivalent in thousands) Short-term debt: Variable rate (US) $12,600 $-- $-- $-- $-- $ -- $12,600 $12,600 Average interest rate 2.2% -- -- -- -- -- -- -- Long-term debt: Variable rate (US) -- -- -- -- -- 5,000 5,000 5,000 Average interest rate -- -- -- -- -- 1.5% -- -- Variable rate (RMB) -- -- -- -- -- 144 144 144 Average interest rate -- -- -- -- -- 5.8% -- -- Variable rate (THB) -- -- -- -- -- 429 429 429 Average interest rate -- -- -- -- -- 4.5% -- -- ------- --- --- --- --- ------- ------- ------- Total $12,600 $-- $-- $-- $-- $ 5,573 $18,173 $18,173 ======= === === === === ======= ======= ======= ---------------------------------------------------------------------------------------------------------------
The Company periodically uses interest rate swaps to manage interest rate risk on debt securities. These instruments allow the Company to exchange variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials are paid or received on these arrangements over the life of the agreements. At the end of 2002 and 2001, there were no interest rate swaps outstanding. The Company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks. The Company's accounts receivable financial instruments are carried at amounts that approximate fair value. 27 Item 8. Financial Statements and Supplementary Data See the Index to Financial Statements and Financial Statement Schedule on Page F-1. Such financial statements and schedule are incorporated herein by reference. 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 following is a list of the names and ages of all directors and all positions each person holds with the Company or other organizations. Board of Directors of the Registrant Arthur Brown, 62(1,2) Chairman, President and Chief Executive Officer of Hecla Mining Company, a miner and processor of silver and gold. Director since 1990. Daniel P. Casey, 60 Retired Chief Financial Officer and Vice Chairman of the Board of Gaylord Container Corp., a manufacturer and distributor of brown paper and packaging products. Director since 2002. Robert E. Driscoll, III, 64(1,2) Retired Dean and Professor of Law, University of South Dakota. Director since 1985. John Hughes, 60(3,4) Chairman of the Board of Directors since May 1998; Chief Executive Officer of the Company since 1985. Mr. Hughes retired as Chief Executive Officer in May 2000. Director since 1984. Jay D. Proops, 61(1,3,4) Private investor and former Vice Chairman and co-founder of The Vigoro Corporation. Also a Director of Great Lakes Chemical Corporation. Director since 1995. C. Eugene Ray, 70(1,2,3,4) Retired Executive Vice President - Finance of Signode Industries, Inc., a manufacturer of industrial strapping products. Director since 1981. Clarence O. Redman, 60(2,3) Secretary of AMCOL International Corporation. Since 1982, Counsel to the law firm of Lord, Bissell & Brook, the law firm that serves as Corporate Counsel to the Company. Previously, Mr. Redman was an individual and corporate partner of the law firm of Keck, Mahin & Cate as the sole shareholder and President of Clarence Owen Redman Ltd. Mr. Redman and his professional corporation also served as Chief Executive Officer of Keck, Mahin & Cate until September 1997. Director since 1989. Dale E. Stahl, 55(2,3,4) President and Chief Executive Officer of Inland Paperboard and Packaging, Inc., a subsidiary of Temple-Inland, Inc. which manufactures containerboard and corrugated boxes, since June 2000; prior thereto, President and Chief Operating Officer of Gaylord Container Corporation, a manufacturer and distributor of brown paper and packaging products. Director since 1995. 28 Lawrence E. Washow, 49(3) Chief Executive Officer of the Company since May 2000, President of the Company since May 1998; Chief Operating Officer of the Company since 1997; prior thereto, Senior Vice President of the Company since 1994 and President of Chemdal International Corporation until August 1997. Director since 1998. Audrey L. Weaver, 48(2) Private investor. Director since 1997. Paul C. Weaver, 40(3,4) Vice president of Information Resources, Inc. since 2002, prior thereto, Managing Partner of Consumer Aptitudes, Inc., both companies engage in marketing research. Director since 1995. (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Executive Committee (4) Member of Nominating Committee Additional information regarding the directors of the Company is included under the captions "Information Concerning Nominees," "Information Concerning Continuing Members of the Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's proxy statement to be dated on or before April 1, 2003, and is incorporated herein by reference. Information regarding executive officers of the Company is included under a separate caption in Part I hereof, and is incorporated herein by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. Item 11. Executive Compensation Information regarding the above is included under the captions "Named Officers' Compensation" and "Stock Perfromance" in the Company's proxy statement to be dated on or before April 1, 2003, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is included under the caption "Security Ownership" in the Company's proxy statement to be dated on or before April 1, 2003, and is incorporated herein by reference. Information regarding the Company's securities authorized for issuance under equity compensation plans is included under the caption "Equity Compensation Plan Information" in the Company's proxy statement to be dated on or before April 1, 2003, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information regarding the above is included under the caption "Certain Relationships and Transactions" in the Company's proxy statement to be dated on or before April 1, 2003, and is incorporated herein by reference. Item 14. Controls and Procedures Within the 90-day period prior to the filing of this Annual Report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act are recorded, processed, summarized and reported as and when required. There were no significant changes in the Company's internal controls or in other factors that could significantly affect such internal controls subsequent to the date of the evaluation described in the paragraph above, including any corrective actions with regard to significant deficiencies and material weaknesses. 29 PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K -------------------------------------------------------------------------------- (a) 1. See Index to Financial Statements and Financial Statement Schedule on Page F-1. -------------------------------------------------------------------------------- 2. See Financial Statements and Index to Financial Statement Schedule on Page F-1. Such Financial Statements and Schedule are incorporated herein by reference. -------------------------------------------------------------------------------- 3. See Index to Exhibits immediately following the signature page. -------------------------------------------------------------------------------- (b) None. -------------------------------------------------------------------------------- (c) See Index to Exhibits immediately following the signature page. -------------------------------------------------------------------------------- (d) See Index to Financial Statements and Financial Statement Schedule on Page F-1. -------------------------------------------------------------------------------- Item 15(a) Index to Financial Statements and Financial Statement Schedule -------------------------------------------------------------------------------- Page -------------------------------------------------------------------------------- (1) Financial Statements: -------------------------------------------------------------------------------- Independent Auditors' Report F-2 -------------------------------------------------------------------------------- Consolidated Balance Sheets, December 31, 2002 and 2001 F-3 -------------------------------------------------------------------------------- Consolidated Statements of Operations, -------------------------------------------------------------------------------- Years ended December 31, 2002, 2001 and 2000 F-4 -------------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income, -------------------------------------------------------------------------------- Years ended December 31, 2002, 2001 and 2000 F-5 -------------------------------------------------------------------------------- Consolidated Statements of Stockholders' Equity, -------------------------------------------------------------------------------- Years ended December 31, 2002, 2001 and 2000 F-6 -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows, -------------------------------------------------------------------------------- Years ended December 31, 2002, 2001 and 2000 F-7 -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements F-8 -------------------------------------------------------------------------------- (2) Financial Statement Schedule: -------------------------------------------------------------------------------- Schedule II - Valuation and Qualifying Accounts F-26 -------------------------------------------------------------------------------- All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required, or because the required information is not material. F-1 Independent Auditors' Report The Board of Directors and Stockholders AMCOL International Corporation: We have audited the consolidated financial statements of AMCOL International Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMCOL International Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As described in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", as of January 1, 2002. KPMG LLP Chicago, Illinois February 28, 2003 F-2 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share amounts) ASSETS -------------------------------------------------------------------------------- December 31, ------------------------- 2002 2001 -------------------------------------------------------------------------------- Current assets: Cash $ 15,597 $ 10,320 Accounts receivable: Trade, less allowance for doubtful accounts of $2,642 and $2,127 in 2002 and 2001, respectively 45,675 41,331 Other 3,195 2,310 Inventories 38,854 34,593 Prepaid expenses 4,270 4,419 Net current assets of discontinued operations -- 798 Current deferred tax assets 2,825 4,286 Income taxes receivable 717 3,120 -------- -------- Total current assets 111,133 101,177 -------- -------- Investment in and advances to joint ventures 12,419 13,219 -------- -------- Property, plant, equipment, and mineral rights and reserves: Land and mineral rights and reserves 9,543 9,293 Depreciable assets 203,334 181,120 -------- -------- 212,877 190,413 Less: accumulated depreciation 131,030 118,065 -------- -------- 81,847 72,348 -------- -------- Other assets: Goodwill and other intangible assets, less accumulated amortization of $453 and $314 5,202 403 Net non-current assets of discontinued operations -- 311 Deferred tax assets 2,669 4,462 Other assets 8,558 4,410 -------- -------- 16,429 9,586 -------- -------- $221,828 $196,330 ======== ======== -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY -------------------------------------------------------------------------------- December 31, ------------------------- 2002 2001 -------------------------------------------------------------------------------- Current liabilities: Current maturities of long-term debt $ 12,600 $ -- Accounts payable 17,918 9,239 Accrued liabilities 22,121 21,844 -------- -------- Total current liabilities 52,639 31,083 -------- -------- Long-term debt 5,573 13,245 -------- -------- Minority interests in subsidiaries 615 523 Other liabilities 11,618 10,752 -------- -------- 12,233 11,275 -------- -------- Stockholders' equity: Common stock, par value $.01 per share Authorized 100,000,000 shares; issued 32,015,771 shares in 2002 and 2001 320 320 Additional paid in capital 69,850 71,905 Retained earnings 101,322 91,018 Accumulated other comprehensive income (loss) 2,005 (2,688) -------- -------- 173,497 160,555 Less: Treasury stock (4,133,868 and 3,759,382 shares in 2002 and 2001, respectively) 22,114 19,828 -------- -------- 151,383 140,727 -------- -------- $221,828 $196,330 ======== ======== -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-3 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share amounts)
-------------------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------------------- Continuing Operations Net sales $ 298,873 $ 275,288 $ 284,142 Cost of sales 227,005 208,983 215,744 --------- --------- --------- Gross profit 71,868 66,305 68,398 General, selling and administrative expenses 52,210 47,740 48,071 Business realignment and other charges -- -- 2,357 --------- --------- --------- Operating profit 19,658 18,565 17,970 --------- --------- --------- Other income (expense): Investment income -- 3,015 9,816 Change in value of interest rate swap -- (401) -- Interest expense, net (512) (2,196) (3,160) Other, net 43 223 594 --------- --------- --------- (469) 641 7,250 --------- --------- --------- Income before income taxes, equity in income of joint ventures, and minority interest 19,189 19,206 25,220 Income tax expense 6,916 6,155 7,155 --------- --------- --------- Income before equity in income of 12,273 13,051 18,065 joint ventures and minority interest Income from joint ventures 531 28 470 Minority interest in net loss of subsidiary 164 59 -- --------- --------- --------- Income from continuing operations 12,968 13,138 18,535 --------- --------- --------- Discontinued Operations Loss from operations (net of income taxes) -- (879) (8,185) Gain on sale (net of income tax benefit of $6,000 in 2001 and expense of $208,964 in 2000) -- 1,154 316,330 --------- --------- --------- Income from discontinued operations -- 275 308,145 --------- --------- --------- Extraordinary Loss on early extinguishment of debt (net of income tax benefit of $238) -- -- (443) --------- --------- --------- Cummulative effect of change in accounting principle (net of taxes) -- (182) -- --------- --------- --------- Net income $ 12,968 $ 13,231 $ 326,237 ========= ========= ========= --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Continued... F-4 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share amounts) -------------------------------------------------------------------------------- Year Ended December 31, ----------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Earnings per share Basic earnings per share: Continuing operations $0.46 $ 0.47 $ 0.67 ----- ------ ------ Discontinued operations: Loss from operations -- (0.03) (0.30) Gain on sale -- 0.04 11.50 ----- ------ ------ -- 0.01 11.20 ----- ------ ------ Extraordinary item -- -- (0.02) ----- ------ ------ Cummulative effect of change in accounting principle -- (0.01) -- ----- ------ ------ Net income $0.46 $ 0.47 $11.85 ===== ====== ====== Diluted earnings per share: Continuing operations $0.43 $ 0.43 $ 0.62 ----- ------ ------ Discontinued operations: Loss from operations -- (0.03) (0.27) Gain on sale -- 0.04 10.56 ----- ------ ------ -- 0.01 10.29 ----- ------ ------ Extraordinary item -- -- (0.01) ----- ------ ------ Cummulative effect of change in accounting principle -- (0.01) -- ----- ------ ------ Net income $0.43 $ 0.43 $10.90 ===== ====== ====== -------------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income (In thousands) -------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Net income $12,968 $13,231 $326,237 Other comprehensive income (loss): Foreign currency translation adjustment 4,693 (1,193) (4,034) Reclassification adjustment for foreign currency losses included in net income -- -- 5,146 ------- ------- -------- Comprehensive income $17,661 $12,038 $327,349 ======= ======= ======== -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-5 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In thousands, except share and per share amounts)
--------------------------------------------------------------------------------------------------------------------- Common Stock Accumulated ----------------- Other Number Additional Comprehensive of Paid-in Retained Income Treasury Shares Amount Capital Earnings (Loss) Stock Total --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 32,015,771 $ 320 $ 76,440 $ 142,270 $(2,607) $(29,983) $ 186,440 Net income -- -- -- 326,237 -- -- 326,237 Partial liquidation distribution -- -- -- (384,829) -- -- (384,829) Cash dividends ($.16 per share) -- -- -- (4,342) -- -- (4,342) Translation adjustment -- -- -- -- (4,034) -- (4,034) Reclassification adjustment for foreign currency losses included in net income -- -- -- -- 5,146 -- 5,146 Sales of 1,929,248 treasury shares pursuant to options -- -- (904) -- -- 11,193 10,289 ---------- --- ------ ------- ----- ------- ------- Balance at December 31, 2000 32,015,771 320 75,536 79,336 (1,495) (18,790) 134,907 Net income -- -- -- 13,231 -- -- 13,231 Cash dividends ($0.055 per share) -- -- -- (1,549) -- -- (1,549) Translation adjustment -- -- -- -- (1,193) -- (1,193) Purchase of 1,788,800 treasury shares -- -- -- -- -- (7,776) (7,776) Sales of 1,263,885 treasury shares pursuant to options -- -- (3,631) -- -- 6,738 3,107 ---------- --- ------ ------- ----- ------- ------- Balance at December 31, 2001 32,015,771 320 71,905 91,018 (2,688) (19,828) 140,727 Net income -- -- -- 12,968 -- -- 12,968 Cash dividends ($0.095 per share) -- -- -- (2,663) -- -- (2,663) Translation adjustment -- -- -- -- 4,693 -- 4,693 Purchase of 1,248,407 treasury shares -- -- -- -- -- (6,933) (6,933) Sales of 873,921 treasury shares pursuant to options -- -- (2,055) -- -- 4,647 2,591 ---------- --- ------ ------- ----- ------- ------- Balance at December 31, 2002 32,015,771 320 69,850 101,323 2,005 (22,114) 151,383 ========== === ====== ======= ===== ======= ======= ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands, except share and per share amounts)
------------------------------------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------ 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------ Cash flow from operating activities: Income from continuing operations $ 12,968 $ 13,138 $ 18,535 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation, depletion, and amortization 20,009 17,427 17,000 Equity in income of joint ventures (531) (28) (470) Minority interest in net loss of subsidiary (164) (59) -- Increase (decrease) in allowance for doubtful accounts 515 (105) (183) Increase in deferred income taxes 2,882 988 124 Gain on sale of depreciable assets (11) (368) (212) (Increase) decrease in current assets, net of effects of acquisitions: Accounts receivable (2,133) (601) 4,918 Income taxes receivable 2,403 (120) -- Inventories (585) (4,265) (3,303) Prepaid expenses 149 1,727 245 Increase (decrease) in current liabilities, net of effects of acquisitions: Accounts payable 5,051 (627) 527 Accrued income taxes -- (5,546) (1,745) Accrued liabilities (1,805) 564 127 Increase in other noncurrent assets (3,026) -- -- Increase in other noncurrent liabilities 866 809 2,252 --------- --------- --------- Net cash provided by operating activities of continuing operations 36,588 22,934 37,815 --------- --------- --------- Net cash provided by (used in) discontinued operations -- 1,614 (6,236) --------- --------- --------- Cash flow from investing activities: Proceeds from sale of depreciable assets 187 530 1,460 Net proceeds from sale of absorbent polymers segment before taxes -- -- 654,581 Tax payments related to the absorbent polymers segment sale -- (130,365) (75,587) Acquisition of land, mineral reserves, and depreciable assets (16,223) (14,730) (14,975) (Increase) decrease in investments in and advances to joint ventures 1,331 (547) (3,095) Acquisitions (16,982) -- -- Increase in other assets (16) (53) (4,524) --------- --------- --------- Net cash provided by (used in) investing activities (31,703) (145,165) 557,860 --------- --------- --------- Cash flow from financing activities: Proceeds from issuance of debt 28,100 -- 7,604 Principal payments of debt (23,172) (39,131) (46,804) Proceeds from sales of treasury stock 2,591 3,107 10,289 Purchases of treasury stock (6,933) (7,776) -- Partial liquidation distribution -- -- (384,829) Premium paid for early extinguishment of debt -- -- (443) Cumulative effect of change in accounting principle -- (182) -- Change in minority interest 256 608 -- Dividends paid (2,663) (1,549) (4,342) --------- --------- --------- Net cash used in financing activities (1,821) (44,923) (418,525) --------- --------- --------- Effect of foreign currency rate changes on cash 2,213 (890) 2,325 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 5,277 (166,430) 173,239 --------- --------- --------- Cash and cash equivalents at beginning of year 10,320 176,750 3,511 --------- --------- --------- Cash and cash equivalents at end of year $ 15,597 $ 10,320 $ 176,750 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 671 $ 2,540 $ 5,163 ========= ========= ========= Income taxes (net of refunds) $ 1,632 $ 134,151 $ 88,762 ========= ========= ========= ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (1) Summary of Significant Accounting Policies Company Operations AMCOL International Corporation (the Company) operates in two principal areas of activity: minerals and environmental. The Company also operates a transportation business which includes for delivery of its own products. In 2002, the Company's revenues were derived 55% from minerals, 34% from environmental and 11% from transportation operations. The Company's sales in 2002 were approximately 70% domestic and 30% outside of the United States. Further descriptions of the Company's products, its principal markets and the relative significance of its operations are included in Note 3, "Business Segment and Geographic Area Information." During 2001, the Company disposed of its U.K. metalcasting business and completed the sale and closure of its U.K. cat litter operations. During 2000, the Company sold its absorbent polymers business. The Company has reclassified the net assets and results of these operations as discontinued operations. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its foreign and domestic subsidiaries. All subsidiaries greater than 50% owned by the Company are consolidated. The Company's ownership interests in the U.K., Mexican, Indian, and Egyptian ventures range between 20% and 50%. Accordingly, these investments are accounted for using the equity method. The Company's ownership interest in the Japanese investment is less than 20% and is recorded at cost. All material intercompany balances and transactions between wholly owned subsidiaries, including profits on inventories, have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Translation of Foreign Currencies The assets and liabilities of subsidiaries located outside of the United States are translated into U.S. dollars at the rates of exchange at the balance sheet dates. The statements of operations are translated at the weighted average rates during the periods. Foreign exchange translation adjustments are accumulated as a separate component of stockholders' equity, while foreign currency transaction gains or losses are included in income. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) or moving average methods. Exploration costs are expensed as incurred. Costs incurred in removing overburden and mining bentonite are capitalized as advance mining costs until the bentonite from such mining area is transported to the plant site, at which point the costs are included in crude bentonite stockpile inventory. Property, Plant, Equipment, and Mineral Rights and Reserves Property, plant, equipment, and mineral rights and reserves are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method for substantially all of the assets. Certain other assets, primarily field equipment, are depreciated on the units-of-production method. Mineral rights and reserves are depleted using the units-of-production method. F-8 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (1) Summary of Significant Accounting Policies (Continued) Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Prior to 2002, goodwill was amortized on the straight-line method over periods of five to 10 years. The Compnay adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002. Pursuant to SFAS 142, goodwill is not subject to amortization, but is tested annually (or more frequently if impairment indicators arise), for impairment. Other intangibles, including trademarks and noncompete agreements, are amortized on the straight-line method over the expected periods to be benefited, which extend up to 10 years. At the date of adoption of SFAS 142, the goodwill balance included in the Company's consolidated balance sheet was not significant. The adoption of SFAS 142's provisions relating to goodwill amortization resulted in the Company discontinuing the amortization of goodwill effective January 1, 2002. Goodwill amortization expense was not significant in 2001 and 2000. Impairment of Long-Lived Assets Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs of disposal. Income Taxes The Company and its U.S. subsidiaries file a consolidated tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue Recognition Product revenue is recognized when products are shipped to customers. Allowances for discounts, rebates, and estimated returns are recorded at the time of sale and are reported as a reduction in revenue. Land Reclamation The Company mines various minerals using a surface-mining process which requires the removal of overburden. The Company is obligated to restore the land comprising each mining site to its original condition at the completion of mining activity. The Company employs a continuous reclamation process and recognizes the cost of ongoing site restoration activities as incurred. The estimated cost of final reclamation is accrued as minerals are mined. The Company has undiscounted reserves for future reclamation costs totaling $5,936 and $6,175 at December 31, 2002 and 2001, respectively (included in other long-term liabilities in the consolidated balance sheets). The Company believes the reserves being recorded, as determined by Company and consulting engineers, are adequate to reclaim existing sites. F-9 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (1) Summary of Significant Accounting Policies (Continued) Shipping Revenues and Costs The Company reports shipping and handling costs that are passed on to customers as sales revenue and cost of sales in the consolidated statements of operations. Research and Development Research and development costs are included in general, selling and administrative expenses and amounted to approximately $5,953, $5,039 and $4,675 for the years ended December 31, 2002, 2001 and 2000, respectively. Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding after consideration of the dilutive effect of stock options. A reconciliation between the number of shares used to compute basic and diluted earnings per share follows: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Weighted average of common shares outstanding for the year 28,133,795 28,193,234 27,523,157 Dilutive impact of stock options 2,014,725 2,412,826 2,433,533 ---------- ---------- ---------- Weighted average of common and common equivalent shares for the year 30,148,520 30,606,060 29,956,690 ========== ========== ========== Common shares outstanding at December 31 27,881,903 28,256,389 28,781,304 ========== ========== ========== -------------------------------------------------------------------------------- Stock Option Plans The Company has adopted the disclosure only provisions of SFAS 123, "Accounting for Stock-Based Compensation," but applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its fixed plan stock options. As such, compensation expense is recorded on the grant date only if the market price of the underlying stock exceeds the exercise price. Under the Company's option plans, stock options are granted at exercise prices that equal the market value of the underlying common stock on the date of grant. Therefore, no compensation expense related to stock options is recorded in the consolidated statements of operations. SFAS 123 established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123. F-10 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (1) Summary of Significant Accounting Policies (Continued) The following table illustrates the effect on net income and earnings per share if the fair-value-based recognition provisions of SFAS 123 had been applied to all outstanding and unvested awards in each period: -------------------------------------------------------------------------------- Year Ended December 31, ---------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Net income, as reported $12,968 $13,231 $326,237 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 781 652 680 ------- ------- -------- Pro forma net income $12,187 $12,579 $325,557 ======= ======= ======== Earnings per share: Basic - as reported $ 0.46 $ 0.47 $ 11.85 Basic - pro forma $ 0.43 $ 0.45 $ 11.83 Diluted - as reported $ 0.43 $ 0.43 $ 10.90 Diluted - pro forma $ 0.40 $ 0.41 $ 10.87 -------------------------------------------------------------------------------- Derivative Instruments and Hedging Activities The Company occasionally uses derivative financial instruments (principally interest rate swaps or options) to manage its exposure to changes in interest rates. The Company does not use derivative instruments for trading or other speculative purposes. The Company had no derivative financial instruments outstanding at December 31, 2002. Following the adoption of SFAS 133 on January 1, 2001, all derivatives are recognized as assets or liabilities on the consolidated balance sheet at their fair value. Changes in the fair value of derivative instruments are reported in earnings or in other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Gains and losses resulting from changes in the fair value of a derivative that is designated as a hedge and is highly effective in achieving offsetting changes in the fair value or cash flows of the hedged item are included in operations in the same period as the hedged item affects earnings. Gains and losses resulting from changes in the fair value of a derivative that does not qualify for hedge accounting are included in operations in the period they occur. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge and other transactions involving derivative instruments. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. For the year ended December 31, 2000, prior to the adoption of SFAS No, 133, the Company had entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates. Prior to the adoption of SFAS No, 133, the differential to be paid or received under the terms of the interest rate swap was accrued and recognized in interest expense. Reclassifications Certain items in the 2001 and 2000 consolidated financial statements have been reclassified to conform with the consolidated financial statement presentation for 2002. F-11 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (2) Discontinued Operations In 2001, the Company sold its U.K. metalcasting business to a group comprised in part of former management of the business. The Company did not receive any proceeds from the sale. Included in the sale were certain machinery and equipment. The acquirer entered into a license agreement for the right to use certain trademarks for a period of ten years, and will lease certain land and buildings from the Company. The U.K. metalcasting business was a component entity of the Company's minerals segment. The Company recognized a gain related to the disposal of discontinued operations of $1,154 (including a tax benefit of $6,000) in 2001. The tax benefit recognized in 2001 included a reduction of previously recognized tax reserves. In 2000 the Company announced its intention to close its U.K. cat litter business. Certain assets used in the business were sold to various outside parties for cash proceeds of $720. The closure was completed in 2001. The U.K. cat litter business was a component of the Company's minerals segment. In 2000, the Company sold its absorbent polymers segment to BASF AG. The transaction closed on June 1, 2000, at which time the Company received gross proceeds of approximately $656,500. The sale resulted in a pretax gain of approximately $525,300 ($316,300 after income taxes of approximately $209,000), net of costs incurred in connection with the sale. The net proceeds from the sale transaction were used to fund a partial liquidation distribution to the Company's shareholders on June 30, 2000. The consolidated financial statements have been reclassified to report separately the net assets and operating results of the U.K. metalcasting and cat litter business and the absorbent polymers segment for all periods presented. Summary operating results for 2001 and 2000 for the operations that were discontinued were as follows: -------------------------------------------------------------------------------- U.K. metalcasting and cat litter businesses 2001 2000 -------------------------------------------------------------------------------- Net sales $ 8,760 $ 18,550 Operating loss (1,174) (14,490) Income tax expense (benefit) (384) 378 Net loss (879) (15,232) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Absorbent polymers segment 2001 2000* -------------------------------------------------------------------------------- Net sales $ -- $86,000 Operating profit -- 12,436 Income tax expense -- 4,639 Net income -- 7,047 -------------------------------------------------------------------------------- *The 2000 information is for five months. In 2000, the Company accrued $6,500 for the settlement of litigation in the U.K. In 2001, the suit was settled for approximately that amount. A portion of the Company's interest expense has been allocated to discontinued operations based upon the debt balances attributable to these operations. Net interest expense allocated to discontinued operations was $199 and $1,261 in 2001 and 2000, respectively. F-12 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (3) Business Segment and Geographic Area Information The Company operates in two principal business segments: minerals and environmental. The Company also operates a transportation business. The minerals segment mines, processes and distributes clays and products with similar applications to various industrial and consumer markets. The environmental segment processes and distributes clays and products with similar applications for use as a moisture barrier in commercial construction, landfill liners and in a variety of other industrial and commercial applications. The transportation segment includes a long-haul trucking business and a freight brokerage business, which provide services to both the Company's plants and outside customers. The Company identifies segments based on management responsibility and the nature of the business activities of each component of the Company. Intersegment sales are insignificant, other than intersegment shipping, which is disclosed in the following table. The Company measures segment profit based on operating profit. Operating profit is defined as sales less cost of sales and general, selling and administrative expenses related to a segment's operations. The costs deducted to arrive at operating profit do not include interest or income taxes. Segment assets are those assets used in the Company's operations in that segment. Corporate assets include cash and cash equivalents, corporate leasehold improvements, the nanocomposite plant investment and other miscellaneous equipment. F-13 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The following summaries set forth certain financial information by business segment and geographic area as of and for the years ended December 31, 2002, 2001 and 2000. -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Business Segment: Revenues: Minerals $ 171,543 $ 149,945 $ 163,474 Environmental 105,926 103,766 98,010 Transportation 32,509 33,133 34,036 Intersegment shipping (11,105) (11,556) (11,378) --------- --------- --------- Total $ 298,873 $ 275,288 $ 284,142 ========= ========= ========= Operating profit (loss): Minerals $ 15,870 $ 14,697 $ 21,296 Environmental 14,373 15,154 11,594 Transportation 967 1,363 1,477 Corporate (11,552) (12,649) (16,397) --------- --------- --------- Total $ 19,658 $ 18,565 $ 17,970 ========= ========= ========= Assets: Minerals $ 128,566 $ 106,391 $ 109,681 Environmental 65,783 65,216 57,691 Transportation 1,895 1,282 1,791 Corporate 25,584 22,332 200,516 Discontinued operations (net liabilities) -- 1,109 (3,912) --------- --------- --------- Total $ 221,828 $ 196,330 $ 365,767 ========= ========= ========= Depreciation, depletion and amortization: Minerals $ 10,840 $ 9,984 $ 10,046 Environmental 6,615 4,820 4,153 Transportation 58 37 45 Corporate 2,496 2,586 2,756 --------- --------- --------- Total $ 20,009 $ 17,427 $ 17,000 ========= ========= ========= Capital expenditures: Minerals $ 8,263 $ 8,431 $ 7,935 Environmental 6,174 5,691 5,014 Transportation 145 41 56 Corporate 1,641 567 1,970 --------- --------- --------- Total $ 16,223 $ 14,730 $ 14,975 ========= ========= ========= Research and development expenses: Minerals $ 2,632 $ 1,677 $ 1,234 Environmental 2,051 1,777 1,453 Corporate 1,270 1,585 1,988 --------- --------- --------- Total $ 5,953 $ 5,039 $ 4,675 ========= ========= ========= -------------------------------------------------------------------------------- Continued... F-14 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (3) Business Segment and Geographic Area Information (Continued) -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Geographic area: Sales to unaffiliated customers shipped from: North America $234,013 $237,767 $247,539 Europe 52,715 27,435 25,160 Asia 10,158 8,116 8,746 Australia 1,987 1,970 2,697 -------- -------- -------- Total $298,873 $275,288 $284,142 ======== ======== ======== Operating profit from: North America $ 13,457 $ 13,598 $ 16,029 Europe 5,345 4,482 658 Asia 417 199 917 Australia 439 286 366 -------- -------- -------- Total $ 19,658 $ 18,565 $ 17,970 ======== ======== ======== Identifiable assets in: North America $144,068 $149,370 $333,062 Europe 57,579 28,651 22,006 Asia 18,175 15,507 12,211 Australia 2,006 1,693 2,400 Discontinued operations -- 1,109 (3,912) -------- -------- -------- Total $221,828 $196,330 $365,767 ======== ======== ======== -------------------------------------------------------------------------------- (4) Inventories Inventories at December 31 consisted of: -------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- Advance mining $ 2,836 $ 1,872 Crude stockpile inventories 11,330 11,524 In-process inventories 15,142 12,863 Other raw material, container, and supplies inventories 9,546 8,334 ------- ------- $38,854 $34,593 ======= ======= -------------------------------------------------------------------------------- (5) Property, Plant, Equipment, and Mineral Rights and Reserves Property, plant, equipment and mineral rights and reserves consisted of the following: -------------------------------------------------------------------------------- December 31, Depreciation/ ---------------------- Amortization 2002 2001 Annual Rates -------------------------------------------------------------------------------- Mineral rights and reserves $ 4,269 $ 4,970 Other land 4,609 4,323 Buildings and improvements 47,059 40,995 4.9% to 25.0% Machinery and equipment 156,940 140,125 10.0% to 50.0% -------- -------- $212,877 $190,413 ======== ======== -------------------------------------------------------------------------------- Depreciation and depletion were charged to income as follows: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Depreciation expense $19,064 $16,247 $16,256 Depletion expense 806 1,085 610 ------- ------- ------- $19,870 $17,332 $16,866 ======= ======= ======= -------------------------------------------------------------------------------- F-15 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (6) Income Taxes Total income tax expense (benefit) for the years ended December 31, 2002, 2001 and 2000 was allocated as follows: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Income from continuing operations $ 6,916 $ 6,155 $ 7,155 Discontinued operations -- (6,294) 213,980 Extraordinary item -- -- (238) Cumulative effect of change in accounting principle -- (113) -- --------- --------- --------- $ 6,916 $ (252) $ 220,897 ========= ========= ========= -------------------------------------------------------------------------------- Domestic and foreign components of income from continuing operations before income taxes, equity in income of joint ventures and minority interest are shown below: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Income from continuing operations before income taxes, equity in income of joint ventures and minority interest Domestic $12,266 $14,377 $23,032 Foreign 6,923 4,829 2,188 ------- ------- ------- $19,189 $19,206 $25,220 ======= ======= ======= -------------------------------------------------------------------------------- The components of the provision (benefit) for income taxes attributable to income from continuing operations before income taxes, equity in income of joint ventures and minority interest for the years ended December 31, 2002, 2001 and 2000 consisted of: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Provision (benefit) for income taxes: Federal: Current $ 647 $ 2,379 $ 4,622 Deferred 2,641 722 512 State: Current 741 697 712 Deferred 264 72 51 Foreign: Current 2,647 2,091 1,697 Deferred (24) 194 (439) ------- ------- ------- $ 6,916 $ 6,155 $ 7,155 ======= ======= ======= -------------------------------------------------------------------------------- The Company's federal income tax returns have been audited through 1998. F-16 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (6) Income Taxes (Continued) The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 31, 2002 and 2001 were as follows: -------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- Deferred tax assets attributable to: Accounts receivable, due to allowance for doubtful accounts $ 436 $ 576 Inventories 1,013 973 Accrued pension liability 3,593 2,710 Intangible assets, due to differences in amortization 1,815 2,046 Capital losses carried forward -- 546 Other 2,296 4,818 ------- ------- Total deferred tax assets 9,153 11,669 Deferred tax liabilities attributable to: Plant and equipment, due to differences in depreciation (2,132) (865) Land and mineral reserves, due to differences in depletion (1,527) (2,056) ------- ------- Total deferred tax liabilities (3,659) (2,921) ------- ------- Net deferred tax assets $ 5,494 $ 8,748 ======= ======= -------------------------------------------------------------------------------- The following analysis reconciles the statutory Federal income tax rate to the effective tax rates related to income from continuing operations before income taxes, equity in income of joint ventures and minority interest:
-------------------------------------------------------------------------------------------------------- 2002 2001 2000 ----------------- ----------------- -------------------- Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income -------------------------------------------------------------------------------------------------------- Provision for income taxes at U.S. statutory rates $6,716 35.0% $6,722 35.0% $ 8,827 35.0% Increase (decrease) in taxes resulting from: Percentage depletion (742) (3.9%) (875) (4.6%) (1,190) (4.7%) State taxes 482 2.5% 453 2.4% 463 1.8% Export incentives (126) (0.8%) (155) (0.8%) (632) (2.5%) Other 586 3.2% 10 0.1% (313) (1.2%) ------ ----- ------ ----- ------- ----- $6,916 36.0% $6,155 32.1% $ 7,155 28.4% ====== ===== ====== ===== ======= ===== --------------------------------------------------------------------------------------------------------
(7) Long-term Debt Long-term debt consisted of the following: -------------------------------------------------------------------------------- December 31, ----------------- 2002 2001 -------------------------------------------------------------------------------- Short-term debt supported by revolving credit agreement $12,600 $ 7,000 Industrial revenue bond 5,000 5,000 Other notes payable 573 1,245 18,173 13,245 Less: current portion 12,600 -- ------- ------- $ 5,573 $13,245 ======= ======= -------------------------------------------------------------------------------- The Company has a committed $125,000 revolving credit agreement, which matures October 31, 2003. As of December 31, 2002, there was $112,400 in borrowing capacity available under the line of credit. The revolving credit agreement is a multi-currency arrangement, which allows the Company to borrow at an adjusted LIBOR rate plus .25% to F-17 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (7) Long-term Debt (Continued) .75%, depending upon debt to capitalization ratios and the amount of the credit line used. The interest rate at December 31, 2002 was 1.69%. At December 31, 2002 and 2001, the Company had outstanding standby letters of credit of $13.4 million and $11.7 million, respectively. These letters of credit typically serve to guarantee the Company's performance of its obligations related to land reclamation and workers' compensation claims. The Company has recognized the estimated costs of its obligations related to land reclamation and workers' compensation claims in the accompanying consolidated balance sheets as of December 31, 2002 and 2001. During 2000, the Company borrowed $5,000 using an industrial revenue bond to finance the construction of a plant in Butler, Georgia. The note, which matures in 2015, has a variable interest rate and is secured by the plant assets. At December 31, 2002, the interest rate was 1.65%. Maturities of long-term debt outstanding at December 31, 2002, were as follows: -------------------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter -------------------------------------------------------------------------------- Short-term debt supported by revolving credit agreement $12,600 $ -- $ -- $ -- $ -- $ -- Industrial revenue bond and other notes payable -- -- -- -- -- 5,573 ------- ---- ---- ---- ---- ------ $12,600 $ -- $ -- $ -- $ -- $5,573 ======= ==== ==== ==== ==== ====== -------------------------------------------------------------------------------- The estimated fair value of the above notes at December 31, 2002, was approximately equal to their carrying amounts based on discounting future cash payments using current market interest rates for loans with similar terms and maturities. All loan agreements include covenants that require the maintenance of specific minimum amounts of working capital, tangible net worth and various financial ratios, and limit additional borrowings and guarantees. The Company was in compliance with these financial covenants at December 31, 2002. The Company is not required to maintain compensating balances. During 2000, the Company renegotiated its debt covenants to reflect the sale of the absorbent polymers segment. As a result of this transaction, the payment of $25,000 in term notes was accelerated resulting in an extraordinary loss from the early extinguishment of debt amounting to $443, net of income taxes. (8) Acquisitions On May 1, 2002, the Company acquired all of the outstanding stock of Colin Stewart Minchem Limited. (CSM), a specialty minerals and chemical company located in the United Kingdom, in exchange for cash. The aggregate purchase price was $15,507. The purchase was financed utilizing the Company's revolving credit facility. CSM supplies intermediate products, industrial minerals, inorganic chemicals, and additives to customers operating in the laundry detergent, packaging, oil exploration and water treatment markets. The acquisition of CSM provides an additional platform for the Company to expand its global operations and presence. The results of CSM's operations have been included in the consolidated financial statements from the acquisition date. F-18 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The following tables summarize the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition and unaudited pro forma results of continuing operations as if the acquisition of CSM had occurred at the beginning of each year presented. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor is it necessarily indicative of future results. -------------------------------------------------------------------------------- At April 30, 2002 -------------------------------------------------------------------------------- Current assets $ 6,263 Fixed assets 10,520 Goodwill 4,172 ------- Total assets acquired $20,955 ------- Current liabilities $ 3,023 Other liabilities 2,425 ------- Total liabilities assumed $ 5,448 ------- Net assets acquired $15,507 ======= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Pro Forma Pro Forma Twelve Months Ended Twelve Months Ended December 31, December 31, ------------------- ------------------- 2002 2001 -------------------------------------------------------------------------------- Net sales $309,532 $307,265 Income from continuing operations 13,683 15,283 Net income 13,683 15,376 Basic earnings per share 0.49 0.55 Diluted earnings per share 0.45 0.50 -------------------------------------------------------------------------------- The Company also completed another less significant acquisition during 2002. Had this acquisition been completed on January 1, 2000, the Company's operating results would not have been materially different than those reported. (9) Market Risks and Financial Instruments As a multinational corporation that manufactures and markets products in countries throughout the world, the Company is subject to certain market risks, including those related to foreign currency, interest rates and government actions. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. Exchange Rate Sensitivity The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposures are to changes in exchange rates for the U.S. dollar versus the euro, the British pound, the Canadian dollar, the Australian dollar, the Mexican peso, the Thai baht, the Chinese renmimbi and the Korean won. The Company also has significant exposure to changes in exchange rates between the British pound and the Euro. F-19 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The Company's various currency exposures often offset each other, providing natural hedges against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases, royalty payments, etc.) are hedged with forward contracts to reduce the foreign currency risk. As of December 31, 2002, the Company did not have any material outstanding foreign currency contracts. (9) Market Risks and Financial Instruments (continued) Interest Rate Sensitivity The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates for debt obligations. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency. The instruments' actual cash flows are denominated in U.S. dollars (US), Chinese renminbi (RMB) and Thai baht (THB) as indicated in parentheses.
--------------------------------------------------------------------------------------------------- Expected Maturity Date ----------------------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total Value --------------------------------------------------------------------------------------------------- (US$ equivalent in thousands) Short-term debt: Variable rate (US) $12,600 $ -- $ -- $ -- $ -- $ -- $12,600 $12,600 Average interest rate 2.2% -- -- -- -- -- -- -- Long-term debt: Variable rate (US) -- -- -- -- -- 5,000 5,000 5,000 Average interest rate -- -- -- -- -- 1.5% -- -- Variable rate (RMB) -- -- -- -- -- 144 144 144 Average interest rate -- -- -- -- -- 5.8% -- -- Variable rate (THB) -- -- -- -- -- 429 429 429 Average interest rate -- -- -- -- -- 4.5% -- -- ------- ---- ---- ---- ---- ------ ------- ------- Total $12,600 $ -- $ -- $ -- $ -- $5,573 $18,173 $18,173 ======= ==== ==== ==== ==== ====== ======= ======= ---------------------------------------------------------------------------------------------------
The Company periodically uses interest rate swaps to manage interest rate risk on debt securities. These instruments allow the Company to change variable rate debt into fixed rate or fixed rate debt into variable rate. The Company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks. The Company's accounts receivable financial instruments are carried at amounts that approximate fair value. (10) Leases The Company has several noncancelable leases for railroad cars, trailers, computer software, office equipment, certain automobiles, and office and plant facilities. Total rent expense under operating lease agreements was approximately $4,099, $3,672 and $2,928 in 2002, 2001 and 2000, respectively. Additionally, the Company has two domestic facilities that are being subleased. F-20 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (10) Leases (Continued) The following is a schedule of future minimum lease payments for operating leases (with initial terms in excess of one year) and related sublease income as of December 31, 2002: -------------------------------------------------------------------------------- Minimum Lease Payments Sublease --------------------------------- Rental Domestic Foreign Total Income -------------------------------------------------------------------------------- Year ending December 31: 2003 $ 2,600 $ 76 $ 2,676 $ 502 2004 2,238 60 2,298 289 2005 2,007 35 2,042 298 2006 1,550 14 1,564 306 2007 1,487 5 1,492 316 Thereafter 848 390 1,238 187 ------- ----- ------- ------ Total $10,730 $ 580 $11,310 $1,898 ======= ===== ======= ====== -------------------------------------------------------------------------------- (11) Employee Benefit Plans The Company has noncontributory pension plans covering substantially all of its domestic employees. The benefits are based upon years of service and qualifying compensation. The Company's funding policy is to contribute annually the maximum amount, calculated using the actuarially determined entry age normal method, that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. The following tables set forth pension obligations included in the Company's balance sheet at December 31, 2002 and 2001: -------------------------------------------------------------------------------- Pension Benefits --------------------- 2002 2001 -------------------------------------------------------------------------------- Change in benefit obligations: Beginning benefit obligation $ 22,974 $ 21,215 Service cost 1,157 1,053 Interest cost 1,634 1,556 Effect of plan amendments -- 43 Actuarial loss 1,570 156 Benefits paid (943) (1,049) -------- -------- Ending benefit obligation $ 26,392 $ 22,974 ======== ======== Change in plan assets: Beginning fair value $ 20,169 $ 24,573 Actual return (1,314) (3,355) Company contribution -- -- Benefits paid (943) (1,049) -------- -------- Ending fair value $ 17,912 $ 20,169 ======== ======== Funded status of the plan $ (8,480) $ (2,805) Unrecognized actuarial and investment (gain) loss, net 3,772 (888) Prior service cost 441 471 Transition asset (361) (498) -------- -------- Accrued pension cost liability $ (4,628) $ (3,720) ======== ======== -------------------------------------------------------------------------------- F-21 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (11) Employee Benefit Plans (Continued) Pension cost was comprised of: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 1,157 $ 1,053 $ 1,311 Interest cost on accumulated benefit obligation 1,634 1,556 1,593 Expected return on plan assets (1,777) (2,170) (1,994) Net amortization and deferral (106) (377) (218) ------- ------- ------- Net periodic pension cost $ 908 $ 62 $ 692 Curtailment gain -- -- (1,104) ------- ------- ------- Net periodic pension cost (income) after curtailment $ 908 $ 62 $ (412) ======= ======= ======= -------------------------------------------------------------------------------- The curtailment in 2000 was related to the sale of the absorbent polymers segment. All of the domestic absorbent polymers' employees were given full vesting and paid their accrued pension benefit. The valuations of the Company's pension benefit plans were performed as of October 1, 2002 and 2001. The plan assets are invested in common stocks, corporate bonds and notes, and guaranteed income contracts purchased from insurance companies. The key actuarial assumptions used to measure benefit obligations in the Company's pension plans were as follows: the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.75% in 2002 and 7.25% in 2001; the rate of increase in future compensation levels was 5.75% in both years; and the expected long-term rate of return on plan assets was 9.0% for both years. For 2003, the Company intends to revise the rate of return on plan assets assumption to 8.75%. In addition to the qualified plans outlined above, the Company sponsors a supplementary pension plan that provides benefits in excess of qualified plan limitations for certain employees. The unfunded accrued liability for this plan was $1,948 and $1,741 at December 31, 2002 and 2001, respectively. The Company also has a savings plan for its U.S. personnel. The Company makes annual contributions in an amount equal to an employee's contributions up to a maximum of 4% of the employee's annual earnings. Company contributions are made using Company stock purchased on the open market. Company contributions under the savings plan were $1,251 in 2002, $1,223 in 2001 and $1,349 in 2000. The Company also has a deferred compensation plan and a 401(k) restoration plan for its executives. The foreign pension plans, which are not subject to United States pension funding laws, are funded using individual annuity contracts and, therefore, are not included in the information reflected above. (12) Stock Option Plans The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's stock option plans been determined using the fair value method of accounting described in SFAS 123, the Company's net income would have been changed to the pro forma amounts indicated in note 1 of notes to consolidated financial statements. F-22 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (12) Stock Option Plans (Continued) For purposes of calculating the compensation cost consistent with SFAS 123, 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 2002, 2001 and 2000: -------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------------------------------------------------------- Risk-free interest rate 4.5% 5.1% 6.4% Expected life of option 6 yrs. 6 yrs. 7 yrs. Expected dividend yield of stock 0.9% 1.1% 1.0% Expected volatility of stock 45% 52% 50% -------------------------------------------------------------------------------- In connection with the sale of the Company's absorbent polymers business to BASF AG, and the payment of a partial liquidation distribution to the Company's shareholders (See Note 2, "Discontinued Operations"), the number of shares underlying outstanding options was increased and the option price per share was reduced in order to reflect the effects of the Company's equity restructuring on outstanding option awards. As a result, immediately following the equity restructuring, the aggregate intrinsic value of each option equaled the aggregate intrinsic value before the equity restructuring. Further, vesting provisions and the option period of each original grant remained the same. These adjustments to the number of shares and the option price per share were made effective June 30, 2000, and the tables which follow separately display option activity before and after the equity restructuring. The 1983, 1987 and 1993 Plans The Company has reserved shares of its common stock for issuance of incentive and nonqualified stock options to its directors, officers and key employees under its 1983 Incentive Stock Option Plan, 1993 Stock Plan and 1987 Nonqualified Stock Option Plan. Options awarded under these plans, which entitle the optionee to one share of common stock, may be exercised at a price equal to the fair market value of the underlying common stock at the time of grant. Options awarded under these plans generally vest 40% after two years and continue to vest at the rate of 20% per year for each year thereafter, until they are fully vested, unless a different vesting schedule is established by the Compensation Committee of the Board of Directors on the date of grant. Options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee, or a change in control of the Company. These plans are expired as of December 31, 2000, though options that were granted prior to expiration of the plans continue to be valid until the individual option grants expire. Changes in options outstanding are summarized as follows:
-------------------------------------------------------------------------------------------------------------- December 31, 2002 December 31, 2001 December 31, 2000 ---------------------- ------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Expired Stock Option Plans Shares Price Shares Price Shares Price -------------------------------------------------------------------------------------------------------------- Options outstanding at January 1 2,531,037 $ 2.09 3,680,717 $ 1.94 1,478,256 $9.91 Adjustment due to equity restructuring -- -- -- -- 4,100,584 -- Exercised (640,958) 1.92 (1,107,934) 1.74 (1,835,392) 3.88 Cancelled (5,658) 2.23 (41,746) 1.78 (62,731) 5.81 --------- --------- --------- Options outstanding at December 31 1,884,421 2.07 2,531,037 2.03 3,680,717 1.94 ========= ========= ========= Options exercisable at December 31 1,725,105 1,981,388 2,558,277 ========= ========= ========= Shares available for future grant at December 31 -- -- -- ========= ========= ========= --------------------------------------------------------------------------------------------------------------
F-23 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (12) Stock Option Plans (Continued) 1998 Long-Term Incentive Plan The Company reserved 2,900,000 shares of its common stock (after adjustment for the equity restructuring related to the sale of the absorbent polymers segment) for issuance to its officers, directors and key employees. This plan provides for the award of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and phantom stock. Different terms and conditions apply to each form of award made under the plan. To date, only nonqualified stock options have been awarded. Options awarded under this plan, which entitle the optionee to one share of common stock, may be exercised at a price equal to the fair market value of the underlying common stock at the time of grant. Options awarded under the plan generally vest 40% after two years and continue to vest at the rate of 20% per year for each year thereafter, until they are fully vested, unless a different vesting schedule is established by the Compensation Committee of the Board of Directors on the date of grant. Options are exercisable as they vest and expire 10 years after the date of grant, except in the event of termination, retirement or death of the optionee or a change in control of the Company. Changes in options outstanding are summarized as follows:
---------------------------------------------------------------------------------------------------------- December 31, 2002 December 31, 2001 December 31, 2000 ------------------- ------------------- --------------------- Weighted Weighted Weighted Average Average Average 1998 Long-Term Incentive Plan Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------------------------------------------- Options outstanding at January 1 1,693,162 $2.66 1,574,447 $ 2.10 312,845 $9.64 Adjustment due to equity restructuring -- -- -- -- 1,117,187 Granted 307,450 6.63 326,050 4.95 288,500 3.88 Exercised (232,027) 1.84 (156,852) 1.75 (93,844) 5.51 Cancelled (37,391) 3.72 (50,483) 2.85 (50,241) 6.02 --------- --------- --------- Options outstanding at December 31 1,731,194 3.46 1,693,162 2.66 1,574,447 2.10 ========= ========= ========= Options exercisable at December 31 551,527 394,273 48,214 ========= ========= ========= Shares available for future grant at December 31 686,083 956,142 231,709 ========= ========= ========= ----------------------------------------------------------------------------------------------------------
All Stock Option Plans The following table summarizes information about stock options outstanding and exercisable at December 31, 2002:
------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ------------------- --------------------- Weighted Average Number Remaining Range of exercisse prices of Contractual Shares Life (Yrs). ------------------------------------------------------------------------------------------ $1.350 -- $1.786 990,417 5.03 $1.572 629,794 $1.574 1.830 -- 2.287 1,466,154 4.42 2.151 1,270,118 2.131 2.374 -- 6.000 866,694 6.09 3.729 376,720 2.762 6.650 -- 6.650 292,350 9.10 6.650 -- -- --------- --------- Total 3,615,615 5.37 2.735 2,276,632 2.081 ========= ======== ------------------------------------------------------------------------------------------
F-24 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (13) Accrued Liabilities Accrued liabilities at December 31 consisted of: -------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- Accrued severance taxes $ 1,886 $ 2,329 Accrued employee costs 1,416 1,006 Accrued vacation pay 1,617 1,438 Accrued pension 4,628 3,720 Accrued bonus 2,842 3,655 Accrued product liability 1,256 1,157 Accrued commissions 1,193 1,738 Other 7,283 6,801 ------- ------- $22,121 $21,844 ======= ======= -------------------------------------------------------------------------------- (14) Contingencies The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position. (15) Quarterly Results (Unaudited) Unaudited summarized results for each quarter in 2002 and 2001 are as follows: -------------------------------------------------------------------------------- 2002 Quarter --------------------------------------------- First Second Third Fourth -------------------------------------------------------------------------------- Minerals $33,690 $45,138 $46,502 $46,213 Environmental 18,493 28,026 33,216 26,191 Transportation 7,384 8,078 8,591 8,456 Intersegment shipping (2,226) (2,707) (3,113) (3,059) ------- ------- ------- ------- Net sales $57,341 $78,535 $85,196 $77,801 ======= ======= ======= ======= Minerals $ 5,569 $ 8,427 $ 8,747 $ 9,164 Environmental 6,301 10,022 11,686 8,584 Transportation 783 819 881 885 ======= ======= ======= ======= Gross profit $12,653 $19,268 $21,314 $18,633 ======= ======= ======= ======= Minerals $ 2,217 $ 4,304 $ 4,386 $ 4,963 Environmental 939 4,582 5,950 2,902 Transportation 226 229 242 270 Corporate (2,759) (2,960) (2,979) (2,854) ======= ======= ======= ======= Operating profit $ 623 $ 6,155 $ 7,599 $ 5,281 ======= ======= ======= ======= Net income $ 532 $ 4,062 $ 4,858 $ 3,516 ======= ======= ======= ======= Basic earnings per share $ 0.02 $ 0.14 $ 0.17 $ 0.13 ======= ======= ======= ======= Diluted earnings per share $ 0.02 $ 0.13 $ 0.16 $ 0.12 ======= ======= ======= ======= ------------------------------------------------------------------------------- F-25 AMCOL INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) -------------------------------------------------------------------------------- 2001 Quarter ----------------------------------------- First Second Third Fourth -------------------------------------------------------------------------------- Minerals $38,837 $36,437 $38,205 $36,466 Environmental 20,113 27,576 30,549 25,528 Transportation 7,562 8,513 8,832 8,226 Intersegment shipping (2,134) (2,855) (3,468) (3,099) ------- ------- ------- ------- Net sales $64,378 $69,671 $74,118 $67,121 ======= ======= ======= ======= Minerals $ 6,821 $ 7,021 $ 6,890 $ 6,857 Environmental 7,436 8,764 10,268 8,728 Transportation 803 904 954 859 ======= ======= ======= ======= Gross profit $15,060 $16,689 $18,112 $16,444 ======= ======= ======= ======= Minerals $ 3,677 $ 3,653 $ 3,528 $ 3,839 Environmental 2,680 4,052 5,374 3,048 Transportation 307 362 405 289 Corporate (3,530) (3,170) (2,949) (3,000) ======= ======= ======= ======= Operating profit $ 3,134 $ 4,897 $ 6,358 $ 4,176 ======= ======= ======= ======= Income from continuing operations $ 3,054 $ 2,963 $ 4,345 $ 2,776 ======= ======= ======= ======= Discontinued operations and extraordinary loss $ (324) $ 44 $ (257) $ 630 ======= ======= ======= ======= Net income $ 2,730 $ 3,007 $ 4,088 $ 3,406 ======= ======= ======= ======= Basic earnings per share $ 0.09 $ 0.11 $ 0.15 $ 0.12 ======= ======= ======= ======= Diluted earnings per share $ 0.08 $ 0.10 $ 0.14 $ 0.11 ======= ======= ======= ======= -------------------------------------------------------------------------------- (16) Business Realignment Charges During 2000, the Company engaged an investment banking firm to help management evaluate various strategic options to enhance shareholder value. The Company engaged in significant discussions regarding the disposition of its businesses, including the sale of certain parts and the potential spin-off of the Nanocor, Inc. subsidiary. In the process, the Company incurred approximately $2,400 in professional fees. These expenses have been included as a component of business realignment and other charges. The business realignment charges included the following: -------------------------------------------------------------------------------- 2000 -------------------------------------------------------------------------------- Expenses associated with business realignment activities $2,357 Income tax benefit associated with the above 907 ------ Impact on income from continuing operations $1,450 ====== Diluted earnings per share impact $(0.05) ====== -------------------------------------------------------------------------------- Schedule II Valuation and Qualifying Accounts (Dollars in thousands)
---------------------------------------------------------------------------------------------------------- Additions ---------------------- Charged Balance Balance at Charged to (credited) at end beginning costs and to other Other charges of Year Description of year expenses account (2) add (deduct) (1) year ---------------------------------------------------------------------------------------------------------- 2002 Allowance for doubtful accounts $2,127 $1,287 $ -- $ (772) $ 2,642 ====== ====== === ======= ======= 2001 Allowance for doubtful accounts $2,232 $ 929 $ -- $(1,034) $ 2,127 ====== ====== === ======= ======= 2000 Allowance for doubtful accounts $2,415 $ 946 $(353) $ (776) $ 2,232 ====== ====== === ======= ======= ----------------------------------------------------------------------------------------------------------
(1) Bad debts written off. (2) Disposition of business units. F-26 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 14, 2003 AMCOL INTERNATIONAL CORPORATION By: /s/ Lawrence E. Washow -------------------------------------- Lawrence E. Washow President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John Hughes March 14, 2003 ----------------------------------------------------- John Hughes Chairman of the Board and Director /s/ Lawrence E. Washow March 14, 2003 ----------------------------------------------------- Lawrence E. Washow President and Chief Executive Officer and Director /s/ Gary L. Castagna March 14, 2003 ----------------------------------------------------- Gary L. Castagna Senior Vice President and Chief Financial Officer; Treasurer and Chief Accounting Officer /s/ Arthur Brown March 14, 2003 ----------------------------------------------------- Arthur Brown Director /s/ Daniel P. Casey March 14, 2003 ----------------------------------------------------- Daniel P. Casey Director /s/ Robert E. Driscoll, III March 14, 2003 ----------------------------------------------------- Robert E. Driscoll, III Director /s/ Jay D. Proops March 14, 2003 ----------------------------------------------------- Jay D. Proops Director /s/ C. Eugene Ray March 14, 2003 ----------------------------------------------------- C. Eugene Ray Director /s/ Clarence O. Redman March 14, 2003 ----------------------------------------------------- Clarence O. Redman Director /s/ Dale E. Stahl March 14, 2003 ----------------------------------------------------- Dale E. Stahl Director /s/ Audrey L. Weaver March 14, 2003 ----------------------------------------------------- Audrey L. Weaver Director /s/ Paul C. Weaver March 14, 2003 ----------------------------------------------------- Paul C. Weaver Director 56 CERTIFICATION I, Lawrence E. Washow, certify that: 1. I have reviewed this annual report on Form 10-K of AMCOL International Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report March 14, 2003; and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 14, 2003 ------------------------------------ Lawrence E. Washow Chief Executive Officer 57 CERTIFICATION I, Gary Castagna, certify that: 1. I have reviewed this annual report on Form 10-K of AMCOL International Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report March 14, 2003; and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 14, 2003 ---------------------------------- Gary Castagna Chief Financial Officer 58 INDEX TO EXHIBITS Exhibit Number ------ 3.1 Restated Certificate of Incorporation of the Company (5), as amended (10), as amended (16) 3.2 Bylaws of the Company (10) 4 Article Four of the Company's Restated Certificate of Incorporation (5), as amended (16) 10.1 AMCOL International Corporation 1983 Incentive Stock Option Plan (1); as amended (3) 10.3 Lease Agreement for office space dated September 29, 1986, between the Company and American National Bank and Trust Company of Chicago; (1) First Amendment dated June 2, 1994 (8); Second Amendment dated June 2, 1997 (13) 10.4 AMCOL International Corporation 1987 Non-Qualified Stock Option Plan (2); as amended (6) 10.9 AMCOL International Corporation Dividend Reinvestment and Stock Purchase Plan (4); as amended (6) 10.10 AMCOL International Corporation 1993 Stock Plan, as amended and restated (10) 10.11 Credit Agreement by and among AMCOL International Corporation and Harris Trust and Savings Bank, individually and as agent, NBD Bank, LaSalle National Bank and the Northern Trust Company dated October 4, 1994 (7); First Amendment to Credit Agreement dated September 25, 1995 (9), Second Amendment to Credit Agreement dated March 28, 1996 (-), Third Amendment to Credit Agreement dated September 12, 1996 (11), Fourth Amendment to Credit Agreement dated December 15, 1998 (18) and Fifth Amendment to Credit Agreement dated May 26, 2000 (20) 10.15 AMCOL International Corporation 1998 Long-Term Incentive Plan (15), as amended (21) 10.17 Asset and Stock Purchase Agreement dated November 22, 1999 by and between the Registrant and BASF Aktiengesellschaft (19)** 10.26 Employment Agreement dated March 15, 2002 by and between Registrant and Gary D. Morrison (22) 10.27 Employment Agreement dated March 15, 2002 by and between Registrant and Peter M. Maul (22) 10.28 Employment Agreement dated March 15, 2002 by and between Registrant and Gary Castagna (22) 10.29 Employment Agreement dated March 15, 2002 by and between Registrant and Ryan F. McKendrick (22) 10.30 Employment Agreement dated March 15, 2002 by and between Registrant and Lawrence E. Washow (22) 21 AMCOL International Corporation Subsidiary Listing 23 KPMG, LLP consent 99.10 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350, dated November 1, 2002 ** Portions of these exhibits have been omitted pursuant to a request for confidential treatment. ---------------- (1) Exhibit is incorporated by reference to the Registrant's Form 10 filed with the Securities and Exchange Commission on July 27, 1987. (2) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1988. (3) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1993. (4) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1992. (5) Exhibit is incorporated by reference to the Registrant's Form S-3 filed with the Securities and Exchange Commission on September 15, 1993. (6) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1993. (7) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 1994. (8) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1994. (9) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 1995. (10) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1995. (11) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1996. 59 (13) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1997. (15) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-56017) filed with the Securities and Exchange Commission on June 4, 1998. (16) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 1998. (18) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 1999. (19) Exhibit is incorporated by reference to the Registrant's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1999. (20) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 2000. (21) Exhibit is incorporated by reference to the Registrant's Form S-8 (File 333-68664) filed with the Securities and Exchange Commission on August 30, 2001. (22) Exhibit is incorporated by reference to the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended March 31, 2002. 60