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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission file number 1-228
ZEMEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-5496920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
CANADA TRUST TOWER, BCE PLACE, 161 BAY STREET, SUITE 3750
TORONTO, ONTARIO, CANADA M5J 2S1
(416) 365-8080
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
New York Stock Exchange Common Stock, $1.00 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock (Common Stock,
$1.00 par value) held by non-affiliates as of March 23, 1998 (based on the
closing sale price of $9.3125 on the New York Stock Exchange) was $36,947,269.
As of March 23, 1998, 8,803,606 shares of the registrant's Common Stock, $1.00
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the Year Ended December 31, 1997 Part II
Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A with respect to the
1998 Annual Meeting of Shareholders Part III
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FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
AND
CROSS-REFERENCE SHEET
PART I
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PAGE
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Item 1. Business ............................................. 1
Item 2. Properties ........................................... 8
Item 3. Legal Proceedings .................................... 9
Item 4. Submission of Matters to a Vote of Security Holders .. 9
Item 10. Executive and Other Officers of the Registrant(A) .... 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters(B) .................... 9
Item 6. Selected Financial Data (Unaudited)(C) ................ 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation(D) ................. 9
Item 8. Financial Statements and Supplementary Data(E)......... 10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 10
PART III
Item 10. Directors and Executive Officers of the Registrant(F) .. *
Item 11. Executive Compensation(F) .............................. *
Item 12. Security Ownership of Certain Beneficial
Owners and Management(F) ............................... *
Item 13. Certain Relationships and Related Transactions(F) ...... *
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .......................... 11
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__________________________
(A) Included in Part I, Item I, pursuant to Instruction 3 of Item 401(b) of
Regulation S-K.
(B) Information responsive to this Item is set forth on page 26 of the
registrant's Annual Report to Shareholders for the year ended December 31,
1997 (the "Annual Report to Shareholders") and is incorporated herein by
reference. The Annual Report to Shareholders is included as Exhibit 13 to
this Form 10-K Annual Report. The Annual Report to Shareholders, except
for those portions thereof which are expressly incorporated by reference
herein, is furnished for the information of the Commission and is not to
be deemed "filed" as part of this Form 10-K report.
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(C) Information responsive to this Item is set forth on page 51 of the Annual
Report to Shareholders and is incorporated herein by reference.
(D) Information responsive to this Item is set forth on pages 19 through 26
of the Annual Report to Shareholders and is incorporated herein by
reference.
(E) Financial statements responsive to this Item are set forth on pages 27
through 50 of the Annual Report to Shareholders and are incorporated
herein by reference. The Supplementary Schedule required by this Item is
set forth on page S-1 of this Form 10-K Annual Report.
(F) Information responsive to these Items is set forth in the registrant's
definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A and in the Annual Report to Shareholders on page 48 (Note
15) and is incorporated herein by reference.
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PART I
ITEM 1. BUSINESS
GENERAL
Zemex Corporation (the "Corporation" or "Zemex"), a Delaware corporation, was
incorporated in 1985 as the successor to Pacific Tin Corporation. Zemex is a
niche producer of industrial minerals and metal products. Its principal
businesses are industrial minerals, metal powders, and aluminum waste
recycling. Its major products include feldspar, feldspathic minerals, kaolin,
sand, mica, talc, ferrous and non ferrous powders, and aluminum dross
derivatives.
INDUSTRIAL MINERALS
The Corporation's industrial minerals segment consists of five wholly-owned
subsidiaries: The Feldspar Corporation ("TFC"), Suzorite Mica Products Inc.
("Suzorite") Suzorite Mineral Products, Inc. ("SMP"), Zemex Industrial
Minerals, Inc. and Zemex Mica Corporation. The group is collectively referred
to as Zemex Industrial Minerals or "ZIM".
TFC has mining and processing facilities in Edgar, Florida; Monticello,
Georgia; and Spruce Pine, North Carolina. Using traditional methods, TFC mines
sodium feldspar from two different ore deposits in the Spruce Pine area;
potassium feldspar is mined from two deposits close to the Monticello plant.
TFC's kaolin and sand products are produced by dredging and wet separation at
the Edgar property.
TFC produces numerous products, including sodium and potassium feldspar,
silica, low iron sand, muscovite mica and kaolin clay, at its operating plants.
Feldspathic materials and kaolin are major raw materials for the ceramic
industry, and are incorporated into the production of ceramic floor and wall
tiles, dinnerware, plumbing fixtures, glazes and electrical insulators. TFC
supplies its products primarily to the glass and ceramics industries. Feldspar
and certain grades of industrial sand are also used to manufacture bottles,
jars, and other glass containers, fiberglass, paints and plastics, and
television picture tubes. Industrial sand is used for filter, filler, beach,
blasting and concrete applications. TFC also produces a low iron sand product
for use in specialized glass applications.
Suzorite mines phlogopite mica in an open pit mining operation in Suzor
Township, Quebec, Canada, approximately 200 miles north of Montreal, Quebec.
The ore is mined by standard open pit methods and delivered to a siding for
transportation by rail to the processing plant, which is located in
Boucherville, Quebec, a suburb of Montreal. Because of its distinct thermal
stability advantage over competitive materials, phlogopite mica is used in
technological and high temperature plastic applications; Suzorite's phlogopite
mica is used as a partial or complete substitute for asbestos in fire
retardation, friction materials, oil well drilling needs, caulking and molding
compounds, coatings, plasters and plastics. The principal markets served by
Suzorite are the automobile, construction and oil drilling industries. These
products are marketed under the trade names Suzorite Mica and Suzorex.
SMP has talc operations in Natural Bridge, New York; Murphy, North Carolina;
Van Horn, Texas; and Benwood, West Virginia. SMP purchases raw materials for
conversion and processing at its plant in Natural Bridge; these products are
directed primarily into the cosmetic and pharmaceutical industries. The
production facility in Van Horn processes ores mined on-site for sale to the
coatings, plastics and ceramics industries. The Benwood operation imports raw
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materials, and processes a variety of calcium carbonate as well as a wide range
of talc products for ultimate use in the plastics industry.
In late 1996, SMP substantially completed the construction of a new mill at its
facility in West Virginia. This new fine grind milling capacity is part of
SMP's strategy to develop a niche in the talc marketplace by offering very
finely divided high purity talc products to industrial markets. SMP believes
that it is one of the few talc producers in North America to produce products
of this purity and fineness. The products, which will see application in
performance plastics, high end coatings and other markets, are currently being
tested and appraised by a select group of customers. With the addition of
these new fine grind products, Benwood has the ability to produce a broad
spectrum of high purity talc products.
In January 1998, the Corporation acquired two muscovite plants in the Spruce
Pine, North Carolina area. The new facilities, which are operating under the
name Zemex Mica Corporation, are located within close proximity of TFC's
feldspar plant where by-product muscovite mica is produced. It is the
Corporation's intent to process TFC's excess mica by-product at the newly
acquired facilities. Muscovite mica is marketed to the paint and plastics
industries, the same markets the Corporation currently services with its talc
and barytes products.
In February 1998, SMP entered into a joint venture with Industria Mineraria
Fabi S.r.l. ("Fabi"), a leading producer of talc in Europe. Fabi paid $3.4
million to earn a 40% interest in the new joint venture company, Zemex
Fabi-Benwood, LLC, and SMP contributed its facility in Benwood, West Virginia.
This transaction provides SMP access to Fabi's talc processing technology and
premium ore reserves.
Demand for the Corporation's industrial minerals is somewhat related to the
pace of the general economy and, particularly, to the automotive industry and
the residential and commercial construction industries.
The Corporation's industrial minerals sales were $43.4 million in 1997,
compared with $40.5 million in 1996 and $37.1 million in 1995. This business
segment reported operating income of $5.2 million in 1997, $1.4 million in
1996 and $4.6 million in 1995.
During 1997, considerable efforts were directed to product development,
marketing, capital expansion projects and product quality improvement. The
Corporation expects these efforts will bear fruit in the future.
Capital expenditures were $9.9 million in 1997 compared to $11.9 million in
1996 and $9.7 million in 1995. Major capital spending in 1997 included the
completion of the sodium feldspar facility and the low iron sand plant at
Spruce Pine, North Carolina, and completion of a fine grind mill at SMP's plant
in Benwood, West Virginia.
METAL PRODUCTS
The metal products segment consists of Pyron Corporation and Pyron Metal
Powders, Inc. (together, "Pyron") and Alumitech, Inc., Aluminum Waste
Technology, Inc., ETS Schaefer Corporation, and AWT Properties, Inc.
(collectively, "Alumitech"), all of which are directly or indirectly
wholly-owned subsidiaries of Zemex.
Pyron operates plants located in Niagara Falls, New York; St. Marys,
Pennsylvania; and Greenback and Maryville, Tennessee. The Maryville operation,
which was temporarily closed in order to optimize production efficiencies and
lower operating costs, was re-opened in late 1997 due to
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increased demand. In addition, a new water atomized copper powder process was
successfully commissioned at the Greenback location in late 1996.
Pyron's major products include iron, steel, copper, copper alloy powders and
manganese sulfide. The primary applications of metal powders are in the
fabrication of precision metal parts using powder metallurgy and the friction
industry. Powder metallurgy is an efficient, economical process for the
production of complex components used in the automotive, farm, garden and lawn
equipment, and business machine industries. Key features of powder metallurgy
technology are low scrap ratios and lower production costs than other
conventional metal working processes such as machining, casting and forging.
In recent years, metal powder use in the friction industry and, particularly,
in automotive and rail braking systems has grown rapidly as a replacement for
asbestos, achieving better performance and improved environmental and health
conditions. Metal powders are also used in the production of welding rods, for
cutting and scarfing of steel ingots and billets, for the inspection of oil
field pipe and tubing, and in food supplements.
In 1995, Pyron completed construction of a blending plant in St. Marys,
Pennsylvania. Through its new blending plant, Pyron is able to provide custom
pre-packaged powders and just-in-time service to its customers.
In late 1996, Pyron completed construction of a facility designated for the
production of manganese sulfide at its Greenback, Tennessee location. Pyron's
new product, Manganese Sulfide Plus (MnS+(TM)), was developed in Pyron's
laboratory and is used as an additive by the powder metallurgical industry to
enhance tool life and aid in machinability. Customer demand for MnS+(TM) has
been strong and, as a result, the capacity of the facility was doubled in 1997
to satisfy orders. Manganese sulfide is a natural complement to Pyron's core
ferrous and non-ferrous businesses as it further broadens Pyron's product line.
The Corporation acquired its initial interest in Alumitech in 1994 and
increased its ownership to 100% in 1995. Alumitech has three processing
plants: an aluminum dross reprocessing plant in Cleveland, Ohio and two ceramic
fiber fabrication plants in Medina and Streetsboro, Ohio. In February 1997,
Alumitech, through its wholly-owned subsidiary, Engineered Thermal Systems,
Inc., acquired the assets of Schaefer Brothers, Inc., a small regional
manufacturer of ceramic fiber-based heat containment systems located in Medina,
Ohio. The Schaefer Brothers business was merged with Engineered Thermal
Systems to form ETS Schaefer Corporation.
Alumitech is an aluminum dross reprocessor that has developed and patented
proprietary technology to recycle secondary aluminum drosses into commercial
industrial feedstock components, eliminating the necessity for landfill.
Aluminum dross is the waste by-product produced by primary and secondary
aluminum smelters. Secondary dross, which has a high salt content, forms the
primary feedstock for Alumitech's process. Conventional dross processors
simply recover aluminum metal and send any remaining materials to landfill.
Using its patented process, Alumitech has the ability to separate the dross
into its basic components: aluminum metal, alumina and metal fines, salts and
non-metallic product ("NMP") and further refine the NMP for use in the
production of calcium aluminate, refractory ceramic fiber and other
commercially acceptable products. Currently, competitive processes landfill
anywhere from 40%-75% of the volume of dross received, whereas Alumitech's
recycling process will virtually eliminate the need for landfill. Alumitech is
considered the industry leader in the development of alternative uses for NMP.
Alumitech's patents on its technology to process NMP have a remaining life of
about thirteen years.
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Alumitech also operates two ceramic fiber fabrication plants in Medina and
Streetsboro, Ohio. At these facilities, refractory ceramic fiber components
are fabricated into products used in various high temperature applications.
Sales for the metal products group increased to $53.8 million in 1997 from
$46.0 million in 1996. Sales were $48.0 million in 1995. The increase from
1996 to 1997 was due to higher volumes of ferrous and non ferrous metal powders
and higher aluminum prices. During the same interval, operating income
increased from $1.9 million in 1996 to $3.2 million in 1997. Operating income
was $3.7 million in 1995. Management anticipates improved margins in this
segment in 1998 as a result of new products, higher metal powder production,
continuing cost reductions, and efficiency improvement programs.
Capital expenditures for the metal products group were $6.6 million in 1997 as
compared to $4.5 million in 1996 and $5.8 million in 1995. The expenditures
were primarily directed to the construction and commercialization of a new NMP
processing facility at the Cleveland plant. In 1998, capital expenditures are
anticipated to be $4.3 million.
RAW MATERIALS AND OTHER REQUIREMENTS
In recent years, the Corporation has not experienced any substantial difficulty
in satisfying the raw materials requirements for its metal products operations,
which is the segment that consumes, rather than supplies, raw materials.
However, no assurance can be given that any shortages of these or other
necessary materials or equipment will not develop or that increased prices will
not adversely affect the Corporation's business in the future.
SEASONALITY
The efficiency and productivity of the Corporation's operations can be affected
by unusually severe weather conditions. During the winter of 1997, there were
minor production outages at the Corporation's operating facilities in North
Carolina and New York States due to inclement weather, but they were not
significant enough to materially affect 1997 operating results.
COMPETITION
All of the Corporation's products are sold in highly competitive markets which
are influenced by price, performance, customer location, service, competition,
material substitution and general economic conditions. The Corporation
competes with other companies active in industrial minerals and metal products.
No material part of the Corporation's business is dependent upon any single
customer, or upon very few customers, the loss of any one of which could have a
material adverse impact on the Corporation.
Industrial mineral prices generally are not subject to the price fluctuations
typical of commodity metals. Demand for industrial minerals is primarily
related to general economic conditions, particularly in the automotive, housing
and construction industries. Markets for industrial mineral products are
sensitive not only to service, product performance, and price, but also to
competitive pressures and transportation costs. In the United States, there
are three major feldspathic mineral producers, including the Corporation. The
Corporation is the only North American producer of phlogopite mica and one of
many talc producers.
The Corporation is one of five North American producers of metal powders. The
market for metal powders is affected primarily by product performance,
consistency of quality and price. To some extent, competition in the metal
powders industry is affected by imports of finished metal powder parts.
Product prices over the last several years have been strongly influenced by
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costs of production and available capacity. Demand for metal powders is a
function of general economic conditions, particularly in the automotive market.
There are numerous aluminum dross processors in the United States, however,
only Alumitech has patented technology which enables it to process aluminum
dross without the necessity for landfill. While the Corporation competes for
the supply of aluminum dross with a number of other operations, the major
factor affecting the supply of dross is the level of activity of the secondary
aluminum smelting industry. In addition, as aluminum is one of the products of
aluminum dross reprocessing, commodity price fluctuations of aluminum may have
an impact on the earnings of the Corporation.
RESEARCH AND DEVELOPMENT
The Corporation carries on an active program of product development and
improvement. Research and development expense was $1.0 million in 1997, $0.6
million in 1996 and $0.3 million in 1995.
Financial information about industry segments is set forth on pages 39 and 40
of the Annual Report to Shareholders and is incorporated herein by reference.
ENVIRONMENTAL CONSIDERATIONS
Laws and regulations currently in force which do or may affect the
Corporation's domestic operations include the Federal Clean Air Act of 1970,
the National Environmental Policy Act of 1969, the Solid Waste Disposal Act
(including the Resource Conservation and Recovery Act of 1976), the Toxic
Substances Control Act, CERCLA (superfund) and regulations under these Acts,
the environmental protection regulations of various governmental agencies (e.g.
the Bureau of Land Management Surface Management Regulations, Forest Service
Regulations, and Department of Transportation Regulations), laws and
regulations with respect to permitting of land use, various state and local
laws and regulations concerned with zoning, mining techniques, reclamation of
mined lands, air and water pollution and solid waste disposal. Currently, the
Corporation is not aware of any materially adverse environmental problems or
issues.
EMPLOYEES
The approximate number of employees in the Corporation as of December 31, 1997
is set forth below:
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Industrial Minerals 282
Metal Products 285
Corporate 7
---
Total 574
===
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Approximately 58 employees at the Corporation's metal powder operations in
Niagara Falls, New York, are covered by a collective bargaining agreement.
Negotiations are currently underway for a new agreement to replace the current
three-year agreement, which expires April 15, 1998. At the ferrous metal powder
facilities in Tennessee, approximately 42 employees are covered by a four-year
agreement which expires February 28, 2002. Approximately 20 employees at
Suzorite are covered by a three-year collective bargaining agreement that
expires December 13, 1999. At Alumitech, approximately 28 employees are covered
by two collective bargaining agreements, one agreement expiring April 30, 1998
and one agreement expiring December 31, 1998. On March 26, 1998, the hourly
employees at TFC's plant in Spruce Pine, North Carolina voted in favour of union
certification. Contract negotiations will commence shortly. The Corporation
considers its labor relations to be good.
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three-year agreement, which expires April 15, 1998. At the ferrous metal powder
facilities in Tennessee, approximately 42 employees are covered by a four-year
agreement which expires February 28, 2002. Approximately 20 employees at
Suzorite are coverd by a three-year collective bargaining agreement that expires
December 13, 1999. At Alumitech, approximately 28 employees are covered by two
collective bargaining agreements, one agreement expiring April 30, 1998 and one
agreement expiring December 31, 1998. The Corporation considers its labor
relations to be good.
FOREIGN OPERATIONS
The Corporation's international operations are located in Canada whose
institutions and governmental policies are generally similar to those of the
United States. Although there can be no assurance as to future conditions, the
Corporation has experienced no political activities, social upheavals, currency
restrictions or similar factors which have had any material adverse effect to
date on the results of its operations or financial condition.
EXPORT SALES
The Corporation's industrial minerals and metal products operations sell their
products internationally to a wide variety of customers including the ceramics,
glass and powder metallurgy industries. Export sales in these two segments
were less than 8% of total sales.
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EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
SERVED IN
OFFICER POSITION AGE POSITION SINCE
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Peter Lawson-Johnston Chairman of the
Board of Directors 71 1975
Richard L. Lister President and
Chief Executive Officer 59 1993
Allen J. Palmiere Vice President,
Chief Financial Officer
and Assistant Secretary 45 1993
Peter J. Goodwin Vice President,
Zemex Corporation
President, Industrial Minerals 47 1994
Terrance J. Hogan President, Alumitech, Inc. 42 1995
George E. Gillespie President, Metal Powders 55 1997
Patricia K. Moran Corporate Secretary and
Assistant Treasurer 32 1995
</TABLE>
There are no family relationships between the officers listed above. The term
of office of each executive officer is until his/her respective successor is
elected and has qualified, or until his/her death, resignation or removal.
Officers are elected or appointed by the board of directors annually at its
first meeting following the annual meeting of shareholders. The following are
the current officers of the Corporation and a description of their business
activities if less than five years in their present position.
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Mr. Lister, who was elected to the board of directors on May 30, 1991, assumed
his duties as Vice Chairman of the Board of Directors on July 23, 1991 and as
President and Chief Executive Officer on June 1, 1993. Mr. Lister was Vice
Chairman of Dundee Bancorp Inc. from October 1991 to May 1993.
Mr. Palmiere assumed the duties of Chief Financial Officer in October 1993.
From April 1992 to October 1993 he was a self-employed consultant.
Mr. Goodwin became a Vice President of the Corporation in August 1994. From
May 1993 to August 1994, Mr. Goodwin was a self-employed consultant. Mr.
Goodwin was President and Chief Executive Officer of Miller and Co. from August
1990 to May 1993.
Mr. Hogan became President of Alumitech, Inc. in May 1995. Prior to becoming
President, Mr. Hogan was Chief Operating Officer of Alumitech's subsidiary,
Aluminum Waste Technology, Inc., from December 1992 to May 1995.
Mr. Gillespie became President of the Metal Powders Group in April 1997. Prior
to joining the Corporation, Mr. Gillespie was Chairman of the Operating
Committee for three divisions of The Carborundum Company in 1996. Mr.
Gillespie was Vice-President Refractories from 1993 to 1996 for The Carborundum
Company.
Ms. Moran assumed the duties of Corporate Secretary and Assistant Treasurer in
May 1997. Prior to that time Ms. Moran served as Assistant Secretary-Treasurer
since February 1995. Ms. Moran has been with the Corporation since 1993.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE
UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Factors that could cause actual results to differ materially include, among
others, fluctuations in aluminum prices, problems regarding unanticipated
competition, processing, access and transportation of supplies, availability of
materials and equipment, force majeure events, the failure of plant equipment
or processes to operate in accordance with specifications or expectations,
accidents, labor relations, delays in start-up dates, environmental costs and
risks, the outcome of acquisition negotiations and general domestic and
international economic and political conditions, as well as other factors
described herein or in the Corporation's filings with the Commission. Many of
these factors are beyond the Corporation's ability to predict or control.
Readers are cautioned not to put undue reliance on forward looking statements.
ITEM 2. PROPERTIES
The industrial minerals segment has operations and mines in Edgar, Florida;
Monticello, Georgia; Boucherville, Quebec; Suzor Township, Quebec; Natural
Bridge, New York; Murphy, North Carolina; Spruce Pine, North Carolina; Van
Horn, Texas; and Benwood, West Virginia. This segment owns approximately
391,500 square feet of office and plant floor space. As well, the 60% owned
processing facility in Benwood, West Virginia has approximately twelve acres of
land. In 1996, The Feldspar Corporation purchased 655 acres which contain, at
minimum, 20 years additional ore reserves for its Spruce Pine, North Carolina
facility. The mineral deposits at the mines currently operated by the
industrial minerals segment are estimated by the Corporation to be at least 25
years, except in the case of the mica mine in Suzor Township where reserves are
estimated to be in excess of 100 years. All of the Corporation's mining
properties are either owned or leased, with the leases expiring from 1999 to
2018.
The metal products group has operations in Niagara Falls, New York; St. Marys,
Pennsylvania; Greenback, and Maryville, Tennessee; Cleveland, Ohio; and Medina
and Streetsboro, Ohio. At its facility in Niagara Falls, Pyron
Corporation utilizes approximately 79,000 square feet of office and plant floor
space which it leases from the Niagara County Industrial Development Agency.
The lease was established as part of the Industrial Development Revenue Bond
issued in November 1989 to finance the construction of an atomized steel
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powder plant. Lease payments are to be sufficient to pay the debt service on
the Industrial Development Revenue Bond. The atomized plant utilizes
approximately 16,000 square feet of floor space and is adjacent to the existing
facility. The blending plant in St. Marys, Pennsylvania, which was built in
1995, has 32,000 square feet of plant, office and storage space and is situated
on 3.4 acres of land. The Greenback facility is situated on 27.5 acres of land
of which 6 acres is actively used in the operations. The Maryville facility is
a leased facility which utilizes approximately 23,000 square feet of office and
plant floor space. General office space comprises approximately 6,300 square
feet; there is approximately 87,000 square feet of production, storage and
shipping/receiving space. The aluminum dross processing plant in Cleveland,
Ohio owns 6.1 acres and has buildings totaling 51,000 square feet. The
Streetsboro, Ohio operation leases approximately 60% of a 36,000 square foot
building, which it uses for its plant and office space. The Medina facility is
leased and includes 19,000 square feet of plant and office space.
All facilities are maintained in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
On February 11, 1993, The Feldspar Corporation and other non-affiliated
companies were named as defendants in a civil action brought by Dryvit Systems,
Inc. ("Dryvit") in the State of Rhode Island captioned Dryvit Systems, Inc. v.
The Feldspar Corporation, Taggart Sand Products Corp., Surface Systems, Inc.,
The Morie Company, Inc., Eriez Magnetics, Inc., and Law Engineering, Inc., C.A.
No. KC 93-108, State of Rhode Island, Kent. Dryvit alleges that between
approximately 1985 and 1990, sand purchased from TFC and other suppliers
utilized by Dryvit to manufacture exterior insulation finishes for the exterior
of buildings developed rust stains because the sand contained pyrite and
magnetic materials. Dryvit seeks unspecified monetary damages and costs,
including the costs associated with the repair of the damaged structures.
TFC denies such allegations and claims, and the Corporation believes that it is
remote that this litigation will result in any material adverse effect to the
Corporation's financial condition or results of operations. The Corporation
strongly believes that this action is without merit; however, no assurance can
be made as to the outcome of this litigation. Although the Corporation's
primary insurer has attempted to limit its coverage, the Corporation believes
that its primary and excess liability insurance is sufficient to cover any
potentially unfavorable outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Information responsive to this Item is set forth on page 26 of registrant's
Annual Report to Shareholders for the year ended December 31, 1997 and is
incorporated herein by reference. The Annual Report to Shareholders is
included as Exhibit 13 to this Form 10-K Annual Report. The Annual Report to
Shareholders, except for those portions thereof which are expressly
incorporated by reference herein, is furnished for the information of the
Commission and is not to be deemed "filed" as part of this Form 10-K report.
ITEM 6. SELECTED FINANCIAL DATA
Information responsive to this item is set forth on page 51 of the Annual
Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Information responsive to this Item is set forth on pages 19 through 26 of the
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements responsive to this Item are set forth on pages 27 through
50 of the Annual Report to Shareholders and are incorporated herein by
reference. The Supplementary Schedule required by this Item is set forth on
page S-1 of this Form 10-K Annual Report. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-9-
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about the directors of the Corporation required by this item is
located in the Corporation's Proxy Statement for the 1998 Annual Meeting to be
filed within 120 days after the end of the fiscal year. Information about the
Executive Officers of the Corporation required by this item appears in Part I,
Item 1, of this Annual Report on Form 10-K*.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Corporation's Proxy
Statement for the 1998 Annual Meeting to be filed within 120 days after the end
of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this item appears in the Corporation's Proxy
Statement for the 1998 Annual Meeting to be filed within 120 days after the end
of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Corporation's Proxy
Statement for the 1998 Annual Meeting to be filed within 120 days after the end
of the fiscal year.
- - ------------------
* Reference in this Annual Report on Form 10-K to material contained in the
Corporation's Proxy Statement for the 1998 Annual Meeting to be filed within
120 days after the fiscal year incorporate such material into this Report by
reference.
-10-
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
1. Financial statements and independent auditor's report filed as part of this
report:
(a) Consolidated Balance Sheets at December 31, 1997 and 1996,
which information is incorporated by reference under Item 8 of this
report;
(b) Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1997, which information is incorporated by
reference under Item 8 of this report;
(c) Consolidated Statements of Income for the three years ended
December 31, 1997, which information is incorporated by reference
under Item 8 of this report;
(d) Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, which information is incorporated by reference
under item 8 of this report;
(e) Notes to the Consolidated Financial Statements, which
information is incorporated by reference under Item 8 of this report;
and
(f) Independent Auditors' Report, which information is incorporated
by reference under Item 8 of this report.
2. Financial statement schedules and independent auditors' report filed as
part of this report:
SCHEDULE
NUMBER DESCRIPTION
- Report of Independent Accountants
Schedule IX Valuation and Qualifying Accounts
and Reserves (page S-1)
All other financial statements and schedules not listed have been omitted since
the required information is included in the consolidated financial statements
or the related notes thereto, or is not applicable or required.
With the exception of the aforementioned financial statements and schedule, and
the information incorporated in Items 1 and 2 and Items 5 through 8, the 1997
Annual Report is not deemed to be filed as part of this Annual Report on Form
10-K. Schedules not included in this Form 10-K have been omitted because they
are not applicable or the required information is shown in the financial
statements in the 1997 Annual Report or notes related thereto.
-11-
<PAGE> 15
3. EXHIBITS
(3)(a) Certificate of Incorporation (Incorporated by reference from Exhibit 4(a)
of the Corporation's Registration Statement on Form S-2, Registration No.
33-7774, filed on August 5, 1986)
(3)(b) By-Laws (Incorporated by reference from Exhibit 3 of the Corporation's
Quarterly Report on Form 10-Q filed on May 13, 1988)
(3)(c) Amended and Restated Certificate of Incorporation (Incorporated by
reference from Exhibit A of the Corporation's Definitive Proxy Statement,
filed on March 29, 1995)
(4)(a) Indenture of Trust dated as of November 1, 1989 between Niagara County
Industrial Development Agency and The Bank of New York as trustee for
Pyron Corporation (Incorporated by reference from Exhibit (4)(a) of the
Corporation's Annual Report on Form 10-K filed March 31, 1990)
(4)(b) Agency Mortgage and Security Agreement dated as of November 1, 1989 from
Pyron Corporation and Niagara County Industrial Development Agency to The
Bank of New York (Incorporated by reference from Exhibit (4)(b) of the
Corporation's Annual Report on Form 10-K filed March 31, 1990)
(4)(c) Letter of Credit Reimbursement Agreement dated as of November 1, 1989
between Pyron Corporation and Chemical Bank (Incorporated by reference
from Exhibit (4)(c) of the Corporation's Annual Report on Form 10-K filed
March 31, 1990)
(4)(d) First Amendment to Letter of Credit Reimbursement Agreement dated as of
November 1, 1989 between Pyron Corporation and Chemical Bank
(Incorporated by reference from Exhibit (4)(d) of the Corporation's
Annual Report on Form 10-K filed March 31, 1990)
(4)(e) Second Amendment to Letter of Credit Reimbursement Agreement dated as of
March 15, 1995 between Pyron Corporation and Chemical Bank (Incorporated
by reference from Exhibit (4)(e) of the Corporation's Annual Report on
Form 10-K filed March 30, 1995)
(4)(f) Bank Mortgage and Security Agreement dated as of November 1, 1989 from
Pyron Corporation and Niagara County Industrial Development Agency to
Chemical Bank (Incorporated by reference from Exhibit (4)(e) of the
Corporation's Annual Report on Form 10-K filed March 31, 1990)
(4)(g) Building Loan Agreement dated as of November 1, 1989 between Chemical
Bank and Pyron Corporation (Incorporated by reference from Exhibit
(4)(f) of the Corporation's Annual Report on Form 10-K filed March 31,
1990)
(4)(h) Security Agreement dated as of November 1, 1989 between Pyron Corporation
and Chemical Bank (Incorporated by reference from Exhibit (4)(g) of the
Corporation's Annual Report on Form 10-K filed March 31, 1990)
(4)(i) Corporate Guaranty dated as of November 1, 1989 from Zemex Corporation to
Chemical Bank (Incorporated by reference from Exhibit (4)(h) of the
Corporation's Annual Report on Form 10-K filed March 31, 1990)
-12-
<PAGE> 16
(4)(j) First Amendment to Corporate Guaranty dated as of November 1, 1989 of
Zemex Corporation to Chemical Bank (Incorporated by reference from
Exhibit (4)(i) of the Corporation's Annual Report on Form 10-K filed
March 31, 1990)
(4)(k) Second Amendment to Corporate Guaranty dated as of March 14, 1991 of
Zemex Corporation to Chemical Bank (Incorporated by reference from
Exhibit (4)(j) of the Corporation's Annual Report on Form 10-K filed
March 31, 1991)
(4)(l) Third Amendment to Corporate Guaranty dated as of February 25, 1992 of
Zemex Corporation to Chemical Bank (Incorporated by reference from
Exhibit (4)(m) of the Corporation's Annual Report on Form 10-K filed
March 31, 1993)
(4)(m) Fourth Amendment to Corporate Guaranty dated as of March 8, 1993 of
Zemex Corporation to Chemical Bank (Incorporated by reference from
Exhibit (4)(o) of the Corporation's Annual Report on Form 10-K filed
March 31, 1993)
(4)(n) Fifth Amendment to Corporate Guaranty dated as of March 15, 1995 of
Zemex Corporation to Chemical Bank (Incorporated by reference from
Exhibit (4)(n) of the Corporation's Annual Report on Form 10-K filed
March 30, 1995)
(4)(o) Loan and Security Agreement dated as of March 15, 1995 among Zemex
Corporation and The Feldspar Corporation and NationsBank of Tennessee,
N.A. and Chemical Bank and NationsBank of Tennessee, N.A., as Agent
(Incorporated by reference from Exhibit (4)(p) of the Corporation's
Annual Report on Form 10-K filed March 30, 1995)
(4)(p) Amendment No. 1 dated as of March 12, 1997 to the Loan and Security
Agreement dated as of March 15, 1995 among Zemex Corporation and The
Feldspar Corporation and NationsBank of Tennessee, N.A. and Chemical
Bank and NationsBank of Tennessee, N.A., as Agent
*(10)(a) Key Executive Common Stock Purchase Plan (Incorporated by reference
from Exhibit (10)(b) of the Corporation's Annual Report on Form 10-K
filed March 31, 1991)
(10)(b) Consent to Assignment of Lease and to Agreement Sublease, and
permission to Make Payments dated November 7, 1978 each from Joberta
Enterprises, Inc. to NL Industries, Inc. and The Feldspar Corporation
(Incorporated by reference from Exhibit 10(pp) to the Corporation's
Registration Statement on Form S-2, Registration No. 33-7774, filed on
August 5, 1986)
(10)(c) Additional Lease Agreement dated as of November 1, 1989 between Niagara
County Industrial Development Agency and Pyron Corporation
(Incorporated by reference from Exhibit (10)(ll) of the Corporation's
Annual Report on Form 10-K filed March 31, 1990)
*(10)(d) Subscription Agreement with Richard L. Lister dated November 26, 1991
(Incorporated by reference from Exhibit (5)(a) of the Corporation's
Annual Report on Form 10-K filed March 31, 1992)
(10)(e) Ligonier Purchase Agreement and Second Plan of Reorganization dated
March 2, 1992 among Pyron Metal Powders, Inc., a wholly-owned
subsidiary of Zemex Corporation, Purchaser, and Ligonier Powders, Inc.,
Seller (Incorporated by reference from Exhibit (5)(a) of the
Corporation's Annual Report on Form 10-K filed March 31, 1993)
13
<PAGE> 17
(10)(f) 1995 Stock Option Plan (Incorporated by reference from Exhibit B of the
Corporation's 1995 Definitive Proxy Statement, filed on March 29, 1995)
(10)(g) Stock Purchase Agreement dated August 10, 1993 between Zemex
Corporation, Zemex Canada Inc., an Ontario corporation and a direct
wholly-owned subsidiary of Zemex Corporation, Dundee Bancorp Inc., an
Ontario corporation, and Dundee Bancorp International Inc., a Delaware
corporation, and a direct wholly-owned subsidiary of Dundee Bancorp
Inc., with respect to the acquisition of Suzorite Mica Products Inc.
(Incorporated by reference from Exhibit 2 of the Corporation's Current
Report on Form 8-K filed September 7, 1993)
(10)(h) Capital Stock Purchase Warrant dated September 14, 1993 issued to
Dundee Bancorp International Inc. pursuant to the Stock Purchase
Agreement referred to in 10(m). (Incorporated by reference from
Exhibit 4(a) of the Corporation's Current Report on Form 8-K filed
September 7, 1993)
(10)(i) Registration Rights Agreement dated September 14, 1993 between Zemex
Corporation and Dundee Bancorp International Inc. (Incorporated by
reference from Exhibit 4(b) of the Corporation's Current Report on Form
8-K filed September 7, 1993)
(10)(j) Asset Purchase Agreement dated September 3, 1993 between U.S. Silica
Company, The Feldspar Corporation and Zemex Corporation with respect to
the sale of the Virginia aplite facility (Incorporated by reference
from Exhibit 10(at) of the Corporation's Annual Report on Form 10-K
filed March 31, 1994)
(10)(k) Stock Purchase Agreement dated November 15, 1993 between Americo Malay
Mineral Company and Zemex Corporation with respect to the sale of
2,500,002 common shares of Perangsang Pasifik Senderian Berhad, a
corporation organized and existing under the laws of the Federal
Republic of Malaysia (Incorporated by reference from Exhibit 10(au) of
the Corporation's Annual Report on Form 10-K filed March 31, 1994)
(10)(l) Suzorite Mica Product Inc.'s Mining Lease dated August 25, 1975 between
the Province of Quebec and Marietta Resources International Ltd.
(Incorporated by reference from Exhibit 10(av) of the Corporation's
Annual Report on Form 10-K filed March 31, 1994)
(10)(m) Employee Stock Purchase Plan (Incorporated by reference as Exhibit A to
the Corporation's Proxy Statement filed May 6, 1994)
(10)(n) Stockholders Agreement dated June 10, 1994 among Alumitech, Inc.,
Clarion Capital Corporation, DCC Equities Limited and Moshe Dan
Yerushalmi, John Hocevar and Terrance Hogan and Zemex Corporation
(Incorporated by reference as Exhibit 10(ax) to the Corporation's
Registration Statement on Form S-1, Registration No. 33-82638, filed on
August 22, 1994)
(10)(o) Asset Purchase Agreement dated December 7, 1994 between Whittaker,
Clark & Daniels, Inc., Clark Minerals, Inc., Cherokee Minerals, Inc.
and Pioneer Talc Company and Suzorite Mineral Products, Inc. and Zemex
Corporation (Incorporated by reference from Exhibit 10(u) of the
Corporation's Annual Report on Form 10-K filed March 30, 1995)
(13) 1997 Annual Report to Shareholders
14
<PAGE> 18
(22) Subsidiaries of the Registrant
(24)(a) Consent of Deloitte & Touche
(27) Financial Data Schedule
The Corporation will furnish copies of these documents to requesting
shareholders upon payment of $10.80 per document.
* Management contract or compensatory plan or arrangement.
15
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZEMEX CORPORATION
By:/s/ RICHARD L. LISTER
-------------------------------------
Dated: March 23, 1998 Richard L. Lister
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - --------- ----- ----
<S> <C> <C>
/s/ PETER LAWSON-JOHNSTON Chairman of the Board March 23, 1998
- - ----------------------------- and Director
Peter Lawson-Johnston
/s/ RICHARD L. LISTER President and March 23, 1998
- - ----------------------------- Chief Executive
Richard L. Lister Officer and Director
(Principal Executive Officer)
/s/ PAUL A. CARROLL Director March 23, 1998
- - -----------------------------
Paul A. Carroll
/s/ MORTON A. COHEN Director March 23, 1998
- - -----------------------------
Morton A. Cohen
/s/ JOHN M. DONOVAN Director March 23, 1998
- - -----------------------------
John M. Donovan
/s/ THOMAS B. EVANS, JR. Director March 23, 1998
- - -----------------------------
Thomas B. Evans, Jr.
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - --------- ----- ----
<S> <C> <C>
/s/ NED GOODMAN Director March 23, 1998
- - ----------------------------------------
Ned Goodman
/s/ PATRICK H. O'NEILL Director March 23, 1998
- - ----------------------------------------
Patrick H. O'Neill
/s/ WILLIAM J. VANDEN HEUVEL Director March 23, 1998
- - ----------------------------------------
William J. vanden Heuvel
/s/ ALLEN J. PALMIERE Vice President, March 23, 1998
- - ---------------------------------------- Chief Financial
Allen Palmiere Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
</TABLE>
17
<PAGE> 21
LIST OF EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT 13 1997 Annual Report to Shareholders
EXHIBIT 22 Subsidiaries of the Registrant
EXHIBIT 24(A) Report of Independent Accountants
EXHIBIT 27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 13
ZEMEX CORPORATION
1997 ANNUAL REPORT
Page 1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years ended December 31 1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Net Sales $97,226,000 $86,420,000 $85,056,000
Earnings Before Interest,
Tax, Depreciation
& Amortization 15,877,000 7,305,000 12,111,000
Net Income 5,793,000 2,612,000 8,418,000
Capital Expenditures 16,584,000 16,426,000 15,451,000
----------- ----------- ------------
FINANCIAL POSITION
Working Capital $18,975,000 $18,688,000 $19,709,000
Shareholders' Equity 76,535,000 70,997,000 70,900,000
----------- ----------- -----------
PER COMMON SHARE
Net Income - Basic $0.72 $0.33 $1.07
Net Income - Diluted 0.70 0.32 1.03
Earnings Before Interest,
Tax, Depreciation
& Amortization 1.96 0.92 1.54
Shareholders' Equity 9.04 8.59 8.49
---------- ----------- -----------
COMMON SHARES
Average Common Shares
Outstanding 8,097,642 7,937,379 7,843,992
Common Shares Issued and
Outstanding at Year End 8,463,491 8,269,099 8,355,722
---------- ------------ -----------
</TABLE>
Note: all dollar amounts shown herein are in U.S. dollars
TABLE OF CONTENTS
<TABLE>
<S> <C>
To Our Shareholders 2
Industrial Minerals 6
Metal Powders 10
Alumitech 14
Management's Discussion and Analysis 19
Independent Auditors' Report 27
Management's Report 28
Audit Committee Report 28
Financial Statements 29
Notes to Financial Statements 33
Selected Financial Data 51
</TABLE>
<PAGE> 2
PAGE 2
- - -------------------------------------------------------------------------------
TO OUR SHAREHOLDERS
- - -------------------------------------------------------------------------------
The year 1997 was a good year for Zemex; not only did the Corporation return to
accelerated levels of profitability but, equally important, we accomplished the
task of strategically positioning each of our operating divisions for the
future.
Additionally, we refined our focus to be a quality supplier of first line
products to the North American industrial base. During the year, we improved the
efficiencies of our production units and expect that further gains will be
evident in 1998 and beyond. We continue to make solid progress in the area of
research and development to ensure that our products and processes keep us at
the forefront of the markets we serve. We believe that the implementation of
process innovations and the introduction of new products should make significant
contributions to the future profitability of the Corporation.
INDUSTRIAL MINERALS
Overall, the industrial minerals group had a solid year. The continued
improvement of this group was due in large part to the strategic initiatives put
in place as part of the 1996 reorganization, namely combining the feldspar, talc
and mica operations into one division, and restructuring and augmenting the
management and marketing teams. We believe that this reorganization, when
combined with our new marketing approach that focuses on market segments rather
than product lines, will successfully take the minerals group into the new
millennium.
Our mica operations closed off 1997 with a very strong year, successfully
maintaining their margins in spite of price pressures in the marketplace. This
was accomplished by the implementation of a well laid out plan for efficiency
improvements, both in the mining area and in the processing facility. The
results of this plan have been exceptional.
At our Spruce Pine feldspar operation, the additional capacity, which was
installed over the past few years, has aided in meeting increased market demand.
At the same time, the efficiency of that operation has improved considerably,
although not yet to the degree anticipated.
Our Monticello, Georgia plant saw significant volume growth in potassium
feldspar due to a concerted sales effort initiated two years ago and a
<PAGE> 3
Page 3
revised approach to this market. The Georgia group also made great strides to
reduce production costs and, as a result, had a very successful year.
Additionally, sales of clay from our operation in Edgar, Florida also
increased; this increase, when combined with a reduction of costs, served to
improve the Florida plant's overall contribution margin.
Over the past three years, the industrial minerals group has directed
considerable time and resources to improving the performance of its talc
operations and is now starting to see the benefits. Our Benwood, West Virginia
operations improved substantially in 1997, particularly towards the end of the
year, due in large part to the acceptance of its recently introduced ultra-fine
talc products.
To further accelerate the growth of our talc business, in March 1998, our
industrial minerals group entered into a joint venture with Industria Mineraria
Fabi S.r.l. ("Fabi"), a leading talc supplier based in Milan, Italy. This joint
venture is the first in a series of steps towards globalization of our talc
business and will result in the worldwide introduction of new products
employing Fabi's technology.
Earlier in 1998, our industrial minerals group announced the acquisition of
Aspect Minerals, Inc., a muscovite mica producer with two facilities located
very close to our Spruce Pine, North Carolina feldspar plant. Some of the
by-product mica currently produced by our feldspar operations in Spruce Pine
will be further processed and upgraded using these newly acquired facilities.
Muscovite mica serves markets complementary to those currently served by our
phlogopite mica.
The industrial mineral group's revenue growth has come primarily from increased
volumes, as opposed to increased prices, reflecting diligent efforts to improve
the efficiency of the operations. By the close of the year, the industrial
mineral group had shown cost improvements in most of the grades produced.
We believe our minerals facilities are now poised to meet the expanded needs of
the marketplace and to benefit from the efficiencies that have resulted from
the capital infused over the past few years.
ALUMITECH
Alumitech's operating performance in 1997 showed significant improvement over
1996, due primarily to increased throughput, better aluminum recovery, and
higher aluminum pricing. The results from Alumitech are even more gratifying
given the periodic dislocation in day-to-day operations that occurred as a
result of the construction of its new non-metallic product ("NMP") processing
facility.
The 60% growth in the sales of ceramic fiber components is due in part to the
acquisition of the assets of Schaefer Brothers, Inc., a regional manufacturer
of ceramic fiber heat containment systems. This acquisition has enabled
Alumitech to further penetrate the ceramic fiber market, and will serve to
strengthen its understanding of the end use markets. Schaefer Brothers and
Engineered Thermal Systems, Inc. have been combined into ETS Schaefer
Corporation, a wholly-owned division of Alumitech.
<PAGE> 4
PAGE 4
In August 1997, Alumitech entered into a joint venture agreement with Thermal
Ceramics, Inc. with respect to the fiber manufacturing operation located in
Streetsboro, Ohio belonging to ETS Schaefer. The joint venture includes a
development agreement between Thermal Ceramics and Alumitech that will allow
Alumitech to gain more insight into the use of NMP in products directed to the
refractory ceramic fiber industry. The fiber manufacturing facility, originally
purchased in 1994 as part of our acquisition of Engineered Thermal Systems,
Inc., was acquired so that we could develop the ability to utilize the NMP
produced from our proprietary dross recycling process and optimize its use as
feedstock in refractory ceramic fiber products. This new joint venture offers
the best of all worlds in that it gives us further knowledge of the refractory
ceramic fiber industry and allows us to focus our endeavors on the production
of feedstock for that industry.
Alumitech has made significant progress towards reaching its longer term
objective of building several large-scale facilities for the reprocessing of
dross materials into commercially utilizable products. In the past year,
Alumitech refined its process and initiated construction of an NMP conversion
facility at its Cleveland location. Upon completion of this new facility,
Alumitech will have the ability to convert up to 90% of its available NMP into
calcium aluminate, which can be used as feedstock for ceramic fiber and other
industrial products. Alumitech remains a bright star in the Corporation's
future despite the fact that it is behind schedule with respect to these plans.
Pilot tonnages of calcium aluminate were made during the year and shipped to a
number of customers for evaluation; the initial feedback was very positive.
Completion of the project has been delayed due to equipment design, testing,
and availability. Small commercial volumes of calcium aluminate should be
available in the first half of 1998 and it is anticipated that the new facility
will be ready for full-scale operation by mid-1998.
We expect that the start-up period for this facility may see lower than
scheduled production as the process is fine-tuned. However, given the accolades
our calcium aluminate product has received from customers during initial
testing, we believe that the new product should contribute good margins for the
Corporation and become the way of the future for dross processing.
METAL POWDERS
Our metal powders group has undergone a significant reorganization with the
retirement of its past president, G. Russell Lewis, and the appointment of his
successor, George E. Gillespie. Mr. Lewis was connected with the metal powders
operation for many years and is owed a great debt of gratitude for his past
leadership.
In 1997, our metal powders group began to reap the rewards of a new strategy,
which was initiated in 1996, to reposition the group as a producer of higher
value-added products. The success of this program was evidenced by the
successful development and introduction of manganese sulfide and molybdenum
alloy materials. These new products, and our continuing focus on developing
other specialty metal powder products, are expected to enhance the future
growth and profitability of our powdered metals group.
<PAGE> 5
PAGE 5
Our metal powders blending facility, which opened for business in 1996 in St.
Marys, Pennsylvania, has firmly established itself as a provider of value-added
goods and services. In addition to custom blending our own metal powders, this
facility also acts as a custom blender of ancillary products and offers
blending services for powder metallurgy users in the area.
Despite the progress made at the Niagara Falls, New York facility and the
blending plant in St. Marys, our powder metals group is still faced with the
ongoing challenge of its non-ferrous operations. The plants in Maryville and
Greenback, Tennessee continue to be plagued by the volatility of copper
pricing, |high costs, and lower than acceptable margins. Plans were initiated
in 1997 to improve the efficiency of the non-ferrous operations by
concentrating on the most profitable product lines and removing others based on
cost effectiveness; the implementation of this program has seen some
improvement in the non-ferrous group's margins.
OUTLOOK
In 1998, we will continue to focus on providing value and quality to our
customers and introducing new and innovative products while, at the same time,
maintaining price competitiveness. We will continue to invest in research and
development in order to ensure that our products keep us one step ahead of our
competition. In addition, we will continue to look for acquisitions and pursue
opportunities for growth where we can be a market leader or a niche producer.
It is through these means that we believe we can make significant contributions
to the future profitability of the Corporation and enhance shareholder value.
Over the past four years we have upgraded and expanded our facilities, procured
premium ore reserves, and put together a team of highly capable individuals.
With these facets in place, we believe that the Corporation is ready to meet
the challenges of the future.
As always, we are most grateful for the continued contribution of our board of
directors, the support of our shareholders, and most particularly the
outstanding endeavors of our employees.
Richard L. Lister
President and Chief Executive Officer
Peter O. Lawson-Johnston
Chairman
<PAGE> 6
PAGE 6
-----------------------------------------------------------------
INDUSTRIAL MINERALS
-----------------------------------------------------------------
In 1996, the Corporation's feldspar, talc and mica operations were combined
under a centralized management team to form Zemex Industrial Minerals ("ZIM").
The reorganization also saw changes made to ZIM's marketing strategy, focusing
its approach on market segments rather than product lines, which enables it to
better serve the needs of its customers. As part of this reorganization,
several new individuals were hired to fill key management, operating, and sales
and marketing positions thus giving ZIM a stronger foundation from which to
build and focus on its future growth and profitability.
With its reorganization completed, ZIM's objectives for 1997 were twofold: to
return to improved levels of profitability and to solidify its market position
as the major supplier of quality industrial mineral products to niche markets.
To achieve these goals, ZIM's sales and marketing team focused on increasing
sales and improving customer satisfaction, while ZIM's production and
engineering team implemented more rigorous quality and cost control programs at
the operating level. Adhering to the philosophy "not a penny more", all of
ZIM's employees were keenly aware that cost consciousness and operating
efficiencies were at the forefront of the industrial mineral group's agenda in
1997. As a result of these efforts, ZIM raised its already high product
performance and quality standards and significantly improved its volumes and
operating margins. The industrial minerals group is dedicated to seeking
further opportunities to improve margins in 1998 while continuing to enhance
the quality of its products and services.
As part of its original strategy to be a niche supplier of industrial mineral
products, a grinding facility was acquired in Benwood, West Virginia in 1995 to
augment the talc operations acquired in late 1994. In February 1998, Industria
Mineraria Fabi S.r.l. ("Fabi"), a major talc supplier to the plastics industry
in Europe and a highly regarded technological leader, became a partner in
Benwood by acquiring a 40% interest in a new entity, Zemex Fabi-Benwood, LLC.
As part of the transaction, ZIM contributed its Benwood facility and Fabi paid
ZIM $3.4 million. This joint venture relationship will also allow ZIM exclusive
access to Fabi's applications technology and the European polypropylene market
to which Fabi is a leading supplier.
The joint venture is the first step towards the globalization of ZIM's talc
business and the introduction of a family of standardized worldwide talc
products to serve the growing international plastics compounding market. As
part of the joint venture, ZIM will have access to Fabi's Mount Seabroek talc
deposit in Australia, an ore that exhibits very high purity and brightness. As
a result of the joint
<PAGE> 7
PAGE 7
PHOTOGRAPH
<PAGE> 8
PAGE 8
PHOTOGRAPH
<PAGE> 9
PAGE 9
venture, ZIM's talc product line will expand with the introduction of the Zemex
Fabi-Benwood world products, enabling ZIM to provide additional high quality
talc products to the North American plastics industry. This is a key step to
the company's strategy of being a leading supplier of specialty talcs in North
America.
ZIM also produces low iron sand materials pursuant to a long-term exclusive
contract from its newly constructed facility at Spruce Pine, North Carolina.
This product, which is used in specialized glass applications and exotic
lighting, can be produced in wet and dry forms. Currently, ZIM has qualified
the wet material with its customer and is working towards qualifying the dry
product. This low iron sand is a high margin product for the industrial
minerals group and was expected to make a healthy contribution to 1997
earnings; unfortunately, due to the customer's slower than anticipated sales,
this was not the case. ZIM's estimates for 1998 remain conservative, however,
there is significant upside potential for this product.
ZIM's other major products, which include sodium and potassium feldspar, clay,
and phlogopite mica, also had successes in 1997 that are noteworthy. Sales of
both clay and potassium feldspar were up significantly in 1997; sales of
potassium feldspar, a product used in electrical porcelain, increased as a
result of a change in market strategy that was implemented two years ago. This,
coupled with improved mining and processing costs, contributed to a record year
for ZIM's potassium feldspar business. Improvements in mining and processing
costs were also made at ZIM's mica facility and have resulted in a dramatic
improvement in the efficiency of that operation. ZIM's recently upgraded sodium
feldspar facility located in Spruce Pine, North Carolina also had a good year.
The emphasis at this facility during the year was, and continues to be, on
improving operating efficiencies and product quality.
Although ZIM continues to grow through internal expansion, it is actively
pursuing acquisition opportunities synergistic to its businesses. In January
1998, ZIM announced that it had acquired the business of Aspect Minerals, Inc.,
a muscovite mica producer, for approximately $2.2 million, including the
assumption of debt. The two facilities acquired in the purchase are located in
the Spruce Pine, North Carolina area and are operated under the name Zemex Mica
Corporation. These recently acquired facilities are located within close
proximity of ZIM's feldspar plant in Spruce Pine where by-product muscovite
mica is produced. This acquisition should create the opportunity to cost
effectively add value to excess mica by-product and augment the company's
existing mica business. Muscovite mica is marketed to the paint and plastics
industries, the same markets ZIM currently serves with its mica, talc and
barytes products.
ZIM has come a long way since its reorganization in 1996, emerging as a
well-regarded international supplier of industrial mineral products. In 1998,
ZIM's objective is to continue refining its existing operations and to seek out
further opportunities that will complement its core competencies and contribute
to earnings.
<PAGE> 10
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METAL POWDERS
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Zemex Corporation's metal powders group, recognized as one of North America's
oldest metal powder producers, consists of two wholly-owned subsidiaries, Pyron
Corporation and Pyron Metal Powders, Inc. (together "Pyron"). With four
locations to serve its customer base, Pyron offers an extensive range of
products and services to supply the powder metallurgy industry: hydrogen
reduced sponge iron and atomized steel powders at its facility in Niagara
Falls, New York; water and air atomized copper and non-ferrous alloys at its
Maryville and Greenback, Tennessee operations; and customized powder blending
at its plant in St. Marys, Pennsylvania.
In 1997, Pyron redirected its efforts towards capitalizing on its high quality
hydrogen reduced sponge iron products and developing and introducing new
value-added products using its ferrous and non-ferrous atomizing processes.
Pyron's focus on the development of new products and market segments began in
late 1996 when market conditions indicated that it would be more advantageous
for Pyron, given its unique production methods, to make this transition.
Pyron's process is well suited to producing customized products that enhance
customer value and efficiency. To effect this new strategy, Pyron's sales and
marketing team has been totally recast and directed to optimizing product mix
and customer value while at the same time keeping an eye on changing market
conditions and potential opportunities. The Pyron team completed the
implementation of the first phase of these new strategic initiatives in 1997;
however, further measures will continue to be taken in 1998 and beyond to
increase Pyron's return on investment and profitability.
Powder metals manufactured by Pyron are used by fabricators to produce complex
parts, such as brake shoes and gears. The process is commonly referred to as
powder metallurgy (P/M). P/M is globally recognized for its value-added role in
producing finished parts requiring little or no secondary processing and
creating significant reductions in cycle time, cost and work in process when
compared to parts made by more traditional processes such as casting and
forging. According to industry reports, P/M's acceptance continues to grow,
displacing other more established methods of production. The spill-over in
application and acceptance of powder metals into markets that extend far beyond
traditional P/M and friction applications holds particular promise for Pyron's
unique products and services.
Pyron's role as a supplier to its core markets, P/M and friction, continued to
expand in 1997 with the successful introduction of several new products,
product line extensions and services. One new product was Manganese Sulfide
Plus (MnS+(TM)), a patent pending machinability enhancer developed by Pyron in
1996 and now commercially produced at Pyron's facility in Greenback, Tennessee.
MnS+(TM) has gained
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widespread acceptance throughout the P/M industry as an additive to enhance
tool life and aid in machinability. Running at near capacity, Pyron's MnS+a
facility at Greenback, Tennessee has already undergone an expansion to meet
current demand and improve service levels; another expansion is planned in
1998. Pyron is the only producer of manganese sulfide in the United States.
Introduced in late 1997, Pyron Moly Alloys ("PMAs") are a family of molybdenum
containing iron powders. As engineered powders, PMAs are designed to replace
wrought material and extend P/M technology to applications where the design
characteristics of wear resistance, hardness, and heat treatability are
desirable. Typical applications where PMAs would be applied are in the
production of gears and similar complex geometric parts. Pyron's PMAs have been
sampled extensively by potential customers and production level orders have
already been shipped.
Initial evaluations of Pyron's most recently developed product,
Ferro-Phosphorous or "Ferrophos" ("Fe3P"), are quite encouraging. This
additive, when mixed with water atomized iron, enhances sintering and improves
magnetic properties. Plans for 1998 include marketing commercial quantities of
Fe3P to the P/M market.
Pyron's St. Marys blending and service center, located in the geographic heart
of the P/M industry, has firmly established itself as a provider of value-added
goods and services to the local market. Pyron has used its strategic presence
to provide an additional channel of distribution for its products, offering
local blending services to its customers. Contract blending complements Pyron's
core competencies and provides significant pull through opportunities.
Although Pyron's non-ferrous water atomized copper facility at Greenback,
Tennessee ran at high levels of capacity for the second half of 1997, its level
of profitability continues to be an ongoing challenge. Water atomization
results in a copper powder that is different in quality and, in many cases,
more commercially desirable than products made by air atomization. Demand for
the company's water atomized copper and related powders accelerated to the
point where the Maryville, Tennessee facility was brought back on line in late
1997. It is anticipated that the additional capacity will further improve
Pyron's cost position and profit contribution.
As Pyron continues its change of direction, the successful strategic
redeploying of assets and resources will be one of the fundamental drivers that
will fuel its future growth. To support this effort, Pyron will continue to
search for and serve markets that extend beyond its core powder metal and
friction products. Identifying innovative process and product opportunities
will also serve to round out efforts to add value. Operating efficiencies and
cost reductions will ensure Pyron remains competitive and its products remain
attractive in markets where competitive material challenges exist. These
efforts will be supported by a corporate culture that fosters an environment of
continuous product improvement for its customers.
<PAGE> 14
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ALUMITECH
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Alumitech posted a number of major accomplishments in 1997. It set record
production levels for the fifth consecutive year and increased sales of its
heat containment systems and fiber products by over 60%. These factors,
combined with improved aluminum metal recovery and higher aluminum metal
prices, resulted in a strong performance in 1997 compared to 1996.
In addition, Alumitech reached a major milestone in 1997 by successfully
demonstrating commercialization of another new product, calcium aluminate,
manufactured from non-metallic product ("NMP"), a by-product of its proprietary
aluminum dross processing system. As part of its objective to commercialize
production of calcium aluminate and other NMP-based products, construction of a
new hydrometallurgical processing facility was started in 1997 at its Cleveland
facility, Aluminum Waste Technology, Inc., and is now in the final phases of
completion. Based on the success of Alumitech's new calcium aluminate in
initial customer trials, demand for the product is anticipated to be strong.
Initially, the primary target market for Alumitech's patented calcium aluminate
product is the steel industry, where a critical component to making steel is
the formation and control of slag in the steel making process. Calcium
aluminate is used to treat molten steel in the ladle during the final stages of
steel refinement, just prior to casting. The calcium aluminate produced by
Alumitech is engineered to facilitate creation of an optimal slag to enable the
steel maker to produce high quality steel in a minimal amount of time.
Additionally, Alumitech's calcium aluminate is designed to protect the ladle's
refractory lining from wear and tear during the refining operation.
In February 1997, Alumitech, through its wholly-owned subsidiary, Engineered
Thermal Systems, Inc., acquired the assets of Schaefer Brothers, Inc., a
regional manufacturer of ceramic fiber-based heat containment systems located
in Medina, Ohio. The Schaefer Brothers business was merged with Engineered
Thermal Systems to form ETS Schaefer Corporation. As a result of the
acquisition, Alumitech strengthened the fiber side of its business with
additional technology, personnel and a complementary customer base. With its
newly combined technology, ETS Schaefer now produces a wide range of products
for containing heat in high temperature applications, such as industrial
furnaces, ladle covers and various refractory preheaters. Using its patented
attachment systems, the inherently poor mechanical strength of a ceramic fiber
product can be transformed into a durable, long-lived lining that preserves the
fiber's superior insulating properties. ETS Schaefer's linings are unmatched in
effectiveness and performance. They are excellent insulators and are not
subject to spalling, fracturing, and other limitations often associated with
conventional refractories. In 1998, ETS Schaefer will
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[PHOTOGRAPH]
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concentrate on consolidating its operations into one location, and continue
developing new applications and markets for its various products to further
penetrate related fiber markets and industries.
Alumitech's fiber manufacturing operations were originally purchased in 1994 to
facilitate its research and development program on the usage of NMP as
feedstock for refractory ceramic fiber applications. As this research was
successfully concluded in 1996, Alumitech felt it was in its best long term
interest to augment its ceramic fiber manufacturing capability and technology
by forming a joint venture with Thermal Ceramics, Inc., a recognized producer
of ceramic fiber and other refractories. The ceramic fiber manufacturing
facilities were sold to this joint venture in August 1997. Under the terms of
the agreement, Thermal Ceramics is responsible for the fiber manufacturing
operations, while ETS Schaefer is the primary marketer of the fiber products
produced by the joint venture. ETS Schaefer will continue to offer a full line
of insulating fiber and related products, and design, manufacture and market
its patented lines of heat containment systems, Monster Module(TM) and
Perm+A+Lining(TM).
The Alumitech/Thermal Ceramics joint venture agreement includes provisions for
the development of new technology and uses for NMP recovered from recycling
aluminum dross and saltcake in both hard and soft refractory applications. The
joint development agreement gives Alumitech the opportunity to enhance the
economics of certain refractories, to continue making significant improvements
to broaden its products and services, and to substantially strengthen its
access to technical expertise in the production of feedstock for the
refractories industry.
The completion of the new NMP production facility has taken longer than
anticipated; however, when the full-scale commercialization of the NMP process
comes on line in mid-1998, it has the potential to make a significant
contribution to Alumitech. Once the NMP processing plant is in full operation,
Alumitech's next step will be to expand its business through strategic
alliances and the construction of new plants. Alumitech is currently evaluating
a number of strategies and tactics to develop such opportunities and will
pursue a path that will reap the greatest benefits for the Corporation.
<PAGE> 18
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FINANCIAL REVIEW
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Management's Discussion and Analysis 19
Independent Auditors' Report 27
Management's Report 28
Audit Committee Report 28
Consolidated Statements of Income 29
Consolidated Balance Sheets 30
Consolidated Statements of Shareholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to the Consolidated Financial Statements 33
1.Summary of Significant Accounting Policies 33
2.Acquisitions and Dispositions 35
3.Inventories 37
4.Property, Plant and Equipment 37
5.Other Assets 38
6.Income Taxes 38
7.Pension Plans and Other Postretirement Benefits 40
8.Long Term Debt 41
9.Common Shares, Stock Options and Warrants 43
10.Reorganization Charges and Unusual Items 45
11.Operating Leases and Other Commitments 46
12.Quarterly Financial Data (Unaudited) 47
13.Financial Instruments 47
14.Changes in Non-Cash Working Capital Items 48
15.Related Party Transactions 48
16.Segment Information 48
17.Contingencies 50
18.Subsequent Events 50
19.Comparative Figures 50
Selected Financial Data 51
</TABLE>
<PAGE> 19
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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The following is a discussion and analysis of the results of operations and
financial condition of the Corporation for the years ended December 31, 1997,
1996 and 1995, and certain factors that may affect the Corporation's
prospective financial condition and results of operations. The following should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto.
OVERVIEW
The Corporation is a diversified producer of specialty materials and products
for use in a variety of industrial applications. The Corporation operates in
two principal business segments: (i) industrial minerals, which includes The
Feldspar Corporation, Suzorite Mica Products Inc. and Suzorite Mineral
Products, Inc.; and (ii) metal products, which includes Pyron Corporation,
Pyron Metal Powders, Inc. and Alumitech, Inc.
The financial performance of the Corporation was significantly better in 1997
than in 1996. Net sales were up 12.5% but, more importantly, the gross margin
improved from 23% in 1996 to 27% in 1997. This was partially as a result of the
focus on operational efficiency and cost control.
In August 1997, the Corporation entered into an agreement with respect to
Alumitech, Inc.'s fiber manufacturing operation located in Streetsboro, Ohio.
Under the agreement, the fiber line was sold to a new corporation in which
Alumitech, Inc. retained an interest. The one-time gain, when netted against
certain other non-recurring items, resulted in other income of $1.6 million.
During the first quarter of 1996, the Corporation recognized reorganization
costs of $1.8 million in connection with the reorganization of its industrial
minerals division, a write-down to market of inventory held in Brazil and the
recognition of a provision for anticipated costs associated with storing and
selling the material. The Brazilian enterprise was unsuccessful primarily due
to rapidly deteriorating market prices which made market penetration extremely
difficult.
The Corporation's strategy going forward is to enhance its position as a
leading supplier of specialty materials through investments in its core
businesses, the introduction of new products, strategic acquisitions, and
investments in new technologies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales
<TABLE>
<CAPTION>
1997 1996 Change Change
----------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Industrial Minerals $43,396,000 $40,469,000 $ 2,927,000 7.2%
Metal Products 53,830,000 45,951,000 7,879,000 17.1%
----------- ----------- ----------- -----
$97,226,000 $86,420,000 $10,806,000 12.5%
=========== =========== =========== =====
</TABLE>
<PAGE> 20
The Corporation's net sales for 1997 were $97.2 million, an increase of $10.8
million, or 12.5%, from 1996. Sales in the industrial minerals segment and the
metal products group increased $2.9 million and $7.9 million, respectively.
The industrial minerals segment recorded a 7.2% increase in sales from $40.5
million in 1996 to $43.4 million in 1997. The increase was primarily due to a
$1.7 million increase from the feldspar group generated by a favorable product
mix, and a $1.4 million increase in talc sales. Talc sales are expected to
increase in 1998 as market share continues to increase. Feldspar sales to the
sanitaryware industry should increase; however, uncertainty exists in the tile
industry due to the devaluation of the Malaysian currency.
Net sales of the metal products group increased 17.1%, or $7.9 million, from
$46.0 million in 1996 to $53.8 million in 1997. Of the increase, approximately
$1.3 million was due to an increase in the price of aluminum, $2.6 million was
due to increased sales of ceramic fiber products, and $1.7 million was due to
increased sales of ferrous metal powders. In 1998, modest sales growth in both
metal powders and aluminum dross processing is anticipated.
COST OF GOODS SOLD
Cost of goods sold were $70.8 million in 1997 compared to $66.4 million in
1996. The corresponding gross margins were 27.2% for 1997 and 23.2% for 1996.
The main increase came from the industrial minerals group where the gross
margin increased from 27.1% to 34.2% as a result of production efficiencies and
a favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 15.9% from
$10.5 million in 1996 to $12.2 million in 1997. As a percent of net sales, SG&A
expense was 12.5% in 1997 as compared to 12.1% in 1996. The increase was due to
increased staffing in the industrial minerals group, expenses associated with
investigating potential acquisitions, and bonuses paid pursuant to the
Corporation's management incentive program.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization increased by $1.2 million, or 25.1%,
from $4.7 million in 1996 to $5.9 million in 1997. This increase was driven by
the capital expenditures made by the Corporation over the past several years.
Prospectively, depreciation will continue to increase as current capital
programs are placed into service.
OPERATING INCOME BEFORE REORGANIZATION CHARGES
Operating income before reorganization charges was $8.4 million in 1997
compared to $4.8 million in 1996. A $1.8 million dollar reorganization charge
was recognized in the first quarter of 1996 in connection with the
reorganization of the Corporation's industrial minerals division, a write-down
to market of its Brazilian inventory, and a provision for storage costs and
selling expenses in connection thereto.
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OPERATING INCOME
Operating income increased from $3.1 million for fiscal 1996 to $8.4 million in
fiscal 1997, representing a 173.1% increase.
INTEREST EXPENSE, NET
Interest expense for the year ended December 31, 1997 was $1.9 million, an
increase of $1.0 million over 1996. During 1996, the interest expense relating
to the expansion of the Spruce Pine facility was capitalized. During 1997, the
project was completed and, accordingly, the related interest was expensed.
Total indebtedness decreased from $26.6 million in 1996 to $25.5 million in
1997.
OTHER, NET
In 1997, the Corporation recognized other net income of $1.6 million. The
largest component of this revenue was generated by a one-time gain on the sale
of Alumitech, Inc.'s fiber line.
PROVISION FOR (RECOVERY OF) INCOME TAXES
The provision for income taxes for the fiscal year 1997 was $2.3 million as
compared to a tax recovery of $0.9 million in 1996. The 1996 tax recovery
reflected the recognition of the benefit of net operating losses available to
the Corporation. In 1998 and beyond, the Corporation will use a tax rate of
approximately 30% to calculate its income taxes, reflecting the permanent
difference arising from the application of percent depletion to income derived
from extractive industries.
NET INCOME AND EARNINGS PER SHARE
As a result of the factors discussed above, net income for the year ended
December 31, 1997 was $5.8 million, an increase of $3.2 million from 1996.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net Income $5,793,000 $2,612,000
Earnings Per Share - Basic $ 0.72 $ 0.33
Earnings Per Share - Diluted $ 0.70 $ 0.32
---------- ----------
</TABLE>
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales
<TABLE>
<CAPTION>
1996 1995 Change Change
----------- ----------- ------------ ------
<S> <C> <C> <C> <C>
Industrial Minerals $40,469,000 $37,089,000 $ 3,380,000 9.1%
Metal Products 45,951,000 47,967,000 (2,016,000) (4.2%)
----------- ----------- ----------- -----
$86,420,000 $85,056,000 $ 1,364,000 1.6%
----------- ----------- ----------- -----
</TABLE>
The Corporation's net sales for 1996 were $86.4 million, an increase of $1.4
million, or 1.6%, from 1995. The major components of the increase were: the
full year consolidation of Alumitech, Inc. and increased industrial minerals
sales of $3.4 million, offset by decreased metal powder sales of $2.7 million.
The industrial minerals segment recorded a 9.1% increase in sales from $37.1
million in 1995 to $40.5 million in 1996. The increase was due to a $1.7
million increase from the feldspar group, a $1.2 million increase in the talc
group's sales and a $0.5 million increase in sales of phlogopite mica. The
increase in talc sales was largely due to the inclusion of a full year's sales
from the Benwood facility, which was acquired in May 1995.
Net sales of the metal products group decreased 4.2%, or $2.0 million, from
$48.0 million in 1995 to $46.0 million in 1996. Of this decrease, $2.1 million
was primarily due to lower copper prices and slightly lower volume of copper
sales affecting sales at Pyron Metal Products, Inc. as a well as a $1.3 million
decline in atomized steel sales. These decreases were offset in part by
increased sales of $0.7 million from Alumitech, Inc. Sponge iron sales
increased by 2.3% while atomized steel sales decreased 21.2%.
COST OF GOODS SOLD
Cost of goods sold were $66.4 million in 1996 compared to $64.4 million in
1995. The corresponding gross margin was 23.2% for 1996 and 24.3% for 1995. The
decline in gross margin was primarily due to lower aluminum prices. The decline
in aluminum prices realized in 1996 compared to 1995 resulted in margin erosion
of 1.8%, offsetting a slight improvement achieved by the other groups. In
addition, cost of goods sold was negatively affected by the write-down of parts
and supplies that had been rendered obsolete as the result of the expansion of
the sodium feldspar plant at Spruce Pine, North Carolina.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased 21.0% from $8.7 million in 1995 to $10.5 million in
1996. As a percent of sales, SG&A expense was 12.1% in 1996 as compared to
10.2% in 1995. The increase was the result of the full year consolidation of
Alumitech, Inc. and the addition of sales and marketing staff for the
industrial minerals segment.
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DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization increased by $1.0 million, or 27.2%,
from $3.7 million in 1995 to $4.7 million in 1996. This increase results from
the 19.4% net increase in property, plant and equipment during 1996 as a result
of capital expenditures.
OPERATING INCOME BEFORE REORGANIZATION CHARGES
Operating income before reorganization charges was $4.8 million in 1996
compared to $8.3 million in 1995. A $1.8 million reorganization charge was
recognized in the first quarter of 1996 in connection with the reorganization
of the Corporation's industrial minerals division, a write-down to market of
its Brazilian inventory, and the recognition of a provision for storage costs
and selling expenses in connection thereto.
OPERATING INCOME
Operating income decreased to $3.1 million for fiscal 1996 from $8.3 million in
fiscal 1995, representing a 63.2% decline. This decline was due to reasons
discussed previously.
INTEREST EXPENSE, NET
Net interest expense for the year ended December 31, 1996 was $0.9 million, an
increase of $0.4 million over 1995. This was attributable to an increase in
total indebtedness from $13.1 million in 1995 to $26.6 million in 1996.
OTHER, NET
In 1996, the Corporation recognized other net expense of $0.5 million. The
largest component of this expense was a $0.7 million provision relating to a
property which the Corporation had sold and on which the purchaser had
defaulted. The offset was a number of small income items which reduced the
total expense.
RECOVERY OF INCOME TAXES
In 1996, the Corporation realized an income tax recovery of $0.9 million as
compared to a recovery of $0.5 million in 1995. The recoveries reflect the
recognition of the benefit of net operating losses available to the
Corporation.
NET INCOME AND EARNINGS PER SHARE
As a result of the factors discussed above, net income for the year ended
December 31, 1996 was $2.6 million, a decrease of $5.8 million from 1995.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net Income $2,612,000 $8,418,000
Earnings Per Share - Basic $ 0.33 $ 1.07
Earnings Per Share - Diluted $ 0.32 $ 1.03
---------- ----------
</TABLE>
<PAGE> 24
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LIQUIDITY AND CAPITAL RESOURCES
The Corporation has historically funded its extraction and processing
activities through cash flow from operations, bank debt and sales of capital
stock and warrants. During the most recent three-year period ended December 31,
1997, the Corporation funded all capital expenditures, acquisitions and debt
reduction from a combination of additional debt, and cash flow from operations.
In addition, during 1995, outstanding warrants were exercised which resulted in
net proceeds of $4.8 million. These funds were utilized to repay long term
debt, fund acquisitions and purchase treasury stock.
cash flow from operations
The Corporation had $19.0 million of working capital at December 31, 1997,
compared to $18.7 million at December 31, 1996. During 1997, the Corporation
generated cash flow from operations of $13.5 million as compared to $6.0
million for 1996. The increase of $7.5 million is primarily due to higher
operating income in the 1997 period and a one-time gain realized on the sale of
Alumitech, Inc's. dormant fiber line. In 1997, non-cash working capital items
generated $3.7 million of the cash otherwise generated from operations as
compared to $0.5 million used in the corresponding period of 1996 as a result
of a decrease in inventories and prepaid expenses and an increase in accounts
payable, accrued liabilities and accrued income taxes.
FINANCING AGREEMENTS
In March 1997, the Corporation amended its credit facility to increase the
total availability to $50,224,000. The credit facility is further subdivided
into four facilities: (i) a $30,000,000 revolving credit facility; (ii) a
$10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby
letter of credit; and (iv) a $5,000,000 operating line. These facilities are
secured by specific assets and a floating charge over the Corporation's assets.
The facilities bear interest at rates varying from bank prime to bank prime
plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon
certain financial tests. As at December 31, 1997, there was $3,000,000
outstanding under the operating line, $8,056,000 outstanding under the multiple
advance term loan facility, $10,000,000 outstanding under the revolving credit
facility, and the standby letter of credit was issued to secure the
Corporation's Industrial Development Revenue Bond. The operating line matures
June 30, 1998 and is reviewed annually for purposes of renewal. The multiple
advance term loan facility requires quarterly payments of $278,000 with the
balance outstanding, if any, due January 1, 2000.
CAPITAL EXPENDITURES
The Corporation's primary capital activities in the past involved the
acquisition and development of industrial mineral properties and facilities,
and capital investments to expand its facilities, increase operating
efficiencies, and meet environmental, health and safety standards at its
existing operations. During 1997, capital expenditures were $16.6 million
compared to $16.4 million and $15.5 million for
<PAGE> 25
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the years ended December 31, 1996 and 1995, respectively. The capital
expenditures were funded by cash flow from operations and bank indebtedness.
The Corporation is currently implementing and/or planning several major capital
programs. These include retrofitting of the aluminum dross plant in Cleveland.
In aggregate, 1998 capital expenditures are anticipated to be approximately
$14.1 million. The Corporation plans on funding these expenditures from a
combination of cash flow from operations and credit facilities.
Although the Corporation's capital budgets provide for certain reclamation and
environmental compliance activities, management does not believe that the cost
of the Corporation's environmental compliance will have a material adverse
effect on the Corporation's results of operations or financial condition in
1998.
SUBSEQUENT EVENTS
In January 1998, the Corporation acquired a muscovite mica producer for
approximately $2,200,000, which includes the assumption of debt. The
acquisition was financed by drawing down on the Corporation's credit facility.
In addition, in February 1998, the Corporation effected the sale of 40% of its
talc facility located in Benwood, West Virginia to Industria Mineraria Fabi
S.r.l. for $3,400,000.
SEASONALITY AND INFLATION
Although the Corporation's results from extraction and processing operations
are cyclical due to fluctuations in industrial minerals and metal products
demands, sales of the Corporation's products are generally not seasonal.
Inflation in recent years has not adversely affected the Corporation's results
of operations and is not expected to adversely affect the Corporation in the
future unless it grows substantially and the markets for industrial minerals
and metal products suffer from a negative impact on the economy in general.
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YEAR 2000
The Corporation operates in basic industries that do not rely heavily on
computerized systems. The major systems operated by the Corporation are those
for financial reporting all of which are year 2000 compliant. It is the opinion
of management that any year 2000 issues that may arise will not be significant
and will not have a material adverse impact on the financial performance of the
Corporation.
The Corporation has initiated a review of key suppliers to determine their
exposure to problems arising from Year 2000. The review is being conducted by
management personnel and additional resources are not required.
MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial statements of the Corporation due to adverse changes in financial
market prices and rates. The Corporation's market risk is primarily the result
of fluctuations in interest rates and aluminum prices. Management monitors the
movements in interest rates and performs sensitivity analysis on aluminum
prices and, on that basis, decides on the appropriate measures to take. Prices
and interest rates are such that no measures need be taken at this time.
The Corporation does not hold or issue financial instruments for trading
purposes. A discussion of the Corporation's financial intstruments is included
in the financial instruments note to the Consolidated Financial Statements.
CAPITAL STOCK
Zemex Corporation's common shares are traded on the New York Stock Exchange
under the symbol ZMX. The price range in which the shares have traded for the
past two years is shown below:
COMMON SHARE PRICES
<TABLE>
<CAPTION>
1997 Q1 Q2 Q3 Q4 Year
---- ----- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C>
High $7.75 $8.00 $9.50 $10.94 $10.94
Low 6.75 6.75 7.88 7.94 6.75
Close 6.75 7.75 9.50 8.75 8.75
----- ----- ----- ------ ------
</TABLE>
<TABLE>
<CAPTION>
1996 Q1 Q2 Q3 Q4 Year
---- ------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
High $10.00 $9.63 $8.13 $8.88 $10.00
Low 8.88 7.50 6.88 7.00 6.88
Close 9.13 7.63 7.75 7.00 7.00
------ ----- ----- ----- ------
</TABLE>
In the fourth quarter of each of 1997, 1996 and 1995, the Corporation declared
a 2% stock dividend.
As of December 31, 1997, there were approximately 1,782 holders of record of
the Corporation's common shares. This number includes shares held only in
nominee name and, thus, does not reflect the number of holders of a beneficial
interest in the shares.
<PAGE> 27
PAGE 27
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of Zemex Corporation
We have audited the accompanying consolidated balance sheets of Zemex
Corporation and its Subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Zemex Corporation and
its Subsidiaries as of December 31, 1997 and 1996 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles in the United States.
Deloitte & Touche
Chartered Accountants
Toronto, Ontario
February 6, 1998
except for Note 18(ii) as to which the date is February 24, 1998
<PAGE> 28
PAGE 28
MANAGEMENT'S REPORT
The management of Zemex Corporation and its subsidiaries has the responsibility
for preparing the consolidated financial statements presented in this Annual
Report and for their accuracy and integrity. The statements have been prepared
in conformity with generally accepted accounting principles in the United
States, and include informed judgments and estimates as required. Other
financial information in this Annual Report is consistent with the financial
statements.
Zemex Corporation's system of internal controls is designed to provide
reasonable assurance, at a justifiable cost, as to the reliability of financial
records and reporting and the protection of assets. This system includes
organizational arrangements with clearly defined lines of responsibility.
Deloitte & Touche, independent auditors, have audited the consolidated
financial statements of Zemex Corporation and their opinion is included on the
preceding page.
Zemex Corporation has formal standards of corporate conduct and policies
regarding high standards of ethics and financial integrity. These policies have
been disseminated to appropriate employees and internal control procedures
provide reasonable assurance that violations of these policies, if any, are
detected.
Allen J. Palmiere Richard L. Lister
Vice President and President and
Chief Financial Officer Chief Executive Officer
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is composed of three independent
directors, Patrick H. O'Neill, Chairman, John M. Donovan, and Thomas B. Evans,
Jr. The Committee held one meeting during 1997.
The Audit Committee oversees the financial reporting process of the Corporation
on behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareholder
approval, the selection of the Corporation's independent auditors. The Audit
Committee met with management and representatives of the auditors, Deloitte &
Touche, to review accounting, auditing and financial reporting matters. The
Committee met with Deloitte & Touche representatives without management
present.
Patrick H. O'Neill
Chairman, Audit Committee
<PAGE> 29
PAGE 29
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $97,226,000 $86,420,000 $85,056,000
COSTS AND EXPENSES
Cost of goods sold 70,826,000 66,416,000 64,356,000
Selling, general & administrative 12,158,000 10,492,000 8,669,000
Depreciation, depletion
& amortization 5,871,000 4,694,000 3,689,000
------------ ----------- -----------
88,855,000 81,602,000 76,714,000
Operating Income Before
Reorganization Charges 8,371,000 4,818,000 8,342,000
Reorganization Charges (Note 10) -- 1,752,000 --
------------ ----------- ----------
Operating Income 8,371,000 3,066,000 8,342,000
------------ ----------- ----------
OTHER INCOME (EXPENSES)
Interest expense, net (Note 8) (1,944,000) (948,000) (523,000)
Other, net (Notes 2 and 10) 1,635,000 (455,000) 80,000
------------ ----------- ----------
(309,000) (1,403,000) (443,000)
------------ ----------- ----------
Income Before Income Taxes 8,062,000 1,663,000 7,899,000
Provision for (recovery of)
income taxes (Note 6) 2,269,000 (949,000) (519,000)
------------ ----------- ----------
Net Income $ 5,793,000 $ 2,612,000 $ 8,418,000
------------ ----------- ----------
Net Income Per Share - Basic $ 0.72 $ 0.33 $ 1.07
Net Income Per Share - Diluted 0.70 0.32 1.03
------------ ----------- ----------
Average Common Shares Outstanding 8,097,642 7,937,379 7,843,992
------------ ----------- ----------
</TABLE>
See Notes to the Consolidated Financial Statements
<PAGE> 30
PAGE 30
-----------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,189,000 $ 2,279,000
Accounts receivable (less allowance
for doubtful accounts of $328,000
at December 31, 1997 and $452,000
at December 31, 1996)(Notes 2 and 15) 16,287,000 15,003,000
Inventories (Note 3) 17,595,000 18,171,000
Prepaid expenses 786,000 1,388,000
Deferred income taxes (Note 6) 1,328,000 1,013,000
------------ ------------
38,185,000 37,854,000
Property, Plant and Equipment
(Notes 4 and 8) 70,812,000 62,084,000
Other Assets (Note 5) 9,777,000 9,438,000
------------ ------------
$118,774,000 $109,376,000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank indebtedness (Note 8) $ 3,000,000 $ 6,590,000
Accounts payable 9,805,000 7,091,000
Accrued liabilities 3,151,000 2,983,000
Accrued income taxes 1,235,000 301,000
Current portion of long term debt (Note 8) 2,019,000 2,201,000
------------ ------------
19,210,000 19,166,000
Long Term Debt (Note 8) 20,527,000 17,797,000
Other Non-Current Liabilities 1,014,000 599,000
Deferred Income Taxes (Note 6) 1,488,000 817,000
------------ ------------
42,239,000 38,379,000
Shareholders' Equity
Common stock (Note 9) 9,204,000 8,950,000
Paid-in capital 53,298,000 51,304,000
Retained earnings 24,235,000 20,040,000
Note receivable from shareholder (Note 9) (1,749,000) (1,749,000)
Cumulative translation adjustment (1,588,000) (1,175,000)
Treasury stock at cost (Note 9) (6,865,000) (6,373,000)
------------ ------------
76,535,000 70,997,000
------------ ------------
$118,774,000 $109,376,000
------------ ------------
</TABLE>
See Notes to the Consolidated Financial Statements
<PAGE> 31
PAGE 31
- - -----------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (in thousands)
- - -----------------------------------------------------------------
<TABLE>
<CAPTION>
Note
Receivable Cumulative
Common Paid-In Retained From Translation Treasury
Stock Capital Earnings Shareholder Adjustment Stock Total
------- -------- -------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $7,221 $38,703 $11,668 $(1,749) $(1,326) (465) $54,052
Stock issued under employee
stock purchase plan (a) 49 422 -- -- -- -- 471
Stock dividend (a) 167 1,233 (1,403) -- -- -- (3)
Stock options and warrants
exercised (a) 626 4,423 -- -- -- -- 5,049
Stock issued in connection
with Alumitech purchase (b) 632 5,133 -- -- -- 834 6,599
Warrants repurchased (a) -- (222) -- -- -- -- (222)
Stock purchased for treasury (a) -- -- -- -- -- (3,572) (3,572)
Net income for the year -- -- 8,418 -- -- -- 8,418
Translation adjustment -- -- -- -- 108 -- 108
Balance at December 31, 1995 8,695 49,692 18,683 (1,749) (1,218) (3,203) 70,900
Stock issued under employee
stock purchase plan (a) 73 535 -- -- -- -- 608
Stock dividend (a) 161 1,089 (1,255) -- -- -- (5)
Stock options exercised (a) 21 84 -- -- -- -- 105
Stock purchased for treasury (a) -- -- -- -- -- (3,170) (3,170)
Stock options repurchased -- (96) -- -- -- -- (96)
Net income for the year -- -- 2,612 -- -- -- 2,612
Translation adjustment -- -- -- -- 43 -- 43
Balance at December 31, 1996 8,950 51,304 20,040 (1,749) (1,175) (6,373) 70,997
Stock issued under employee
stock purchase plan (a) 75 528 -- -- -- -- 603,000
Stock dividend (a) 165 1,428 (1,598) -- -- -- (5)
Stock options exercised (a) 14 205 -- -- -- -- 219
Stock purchased for treasury (a) -- -- -- -- -- (492) (492)
Stock options repurchased -- (167) -- -- -- -- (167)
Net income for the year -- -- 5,793 -- -- -- 5,793
Translation adjustment -- -- -- -- (413) -- (413)
Balance at December 31, 1997 $9,204 $53,298 $24,235 $(1,749) $(1,588) $(6,865) $76,535
</TABLE>
See Notes to the Consolidated Financial Statements
(a) See Note 9 (b) See Note 2
<PAGE> 32
PAGE 32
-----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,793,000 $ 2,612,000 $ 8,418,000
Adjustments to reconcile net income
from operations to net cash flows
from operating activities
Depreciation, depletion & amortization 5,871,000 4,694,000 3,689,000
Amortization of deferred financing costs1 147,000 101,000 65,000
Loss on assets held for resale -- -- 61,000
Decrease in deferred income taxes 356,000 (1,761,000) (122,000)
Share of net income of investee -- -- (87,000)
(Gain) loss on sale of property,
plant and equipment( 1,831,000) 255,000 22,000
(Increase) decrease in other assets (957,000) 670,000 (227,000)
Increase (decrease) in non-current liabilities 415,000 (6,000) 56,000
Changes in non-cash working capital items(a) 3,709,000 (533,000) (4,660,000)
------------ ----------- -----------
Net cash provided by operating activities 13,503,000 6,032,000 7,215,000
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (16,584,000) (16,426,000) (15,451,000)
Assets acquired in connection with acquisitions (b) -- -- (3,658,000)
Proceeds from sale of assets 3,939,000 86,000 --
------------ ----------- -----------
Net cash used in investing activities (12,645,000) (16,340,000) (19,109,000)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds net, on bank indebtedness (3,590,000) 3,370,000 3,040,000
Proceeds from long term debt 5,717,000 12,882,000 6,219,000
Repayment of long term debt (3,169,000) (2,747,000) (5,343,000)
Deferred financing costs -- - (467,000)
Cash paid in lieu of fractional shares (5,000) (5,000) (3,000)
Issuance of common stock (c) 679,000 713,000 5,520,000
Purchase of common stock, options
and warrants for treasury (c) (516,000) (3,266,000) (3,794,000)
------------ ----------- -----------
Net cash (used in) provided
by financing activities (884,000) 10,947,000 5,172,000
------------ ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (64,000) (13,000) 32,000
NET (DECREASE) INCREASE IN CASH (90,000) 626,000 (6,690,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,279,000 1,653,000 8,343,000
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,189,000 $ 2,279,000 $ 1,653,000
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 821,000 $ 393,000 $ 303,000
Interest paid 2,412,000 937,000 656,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Stock issued in connection with acquisition (b) $ -- $ -- $ 6,599,000
Notes received in connection with
sale of assets held for resale(b)(d) 2,274,000 -- 423,000
------------ ----------- -----------
</TABLE>
See Notes to the Consolidated Financial Statements
(a) See Note 14 (b) See Note 2 (c) See Note 9 (d) See Note 10
<PAGE> 33
PAGE 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Corporation's significant
accounting policies are as follows:
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Zemex
Corporation and its wholly-owned subsidiaries (the "Corporation"). All material
intercompany transactions have been eliminated. As discussed in Note 2,
Alumitech, Inc. ("Alumitech") was acquired in two separate transactions and,
accordingly, was accounted for on an equity basis until it became a
wholly-owned subsidiary in February 1995.
b. INVENTORIES
Inventories are stated at the lower of cost or market and are computed
using the average cost method. It is not practical to segregate finished
products from ore and concentrates. Supplies are stated at cost using the
first-in, first-out or average cost method.
c. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs and
maintenance are charged to expense as incurred. Expenditures for major renewals
and improvements are capitalized. When assets are sold or otherwise retired,
the cost and accumulated depreciation or depletion are removed from the
accounts and any gain or loss is included in results of operations. Provisions
for depreciation are based upon estimated useful lives, using principally the
straight-line method. Depletion of mining properties and depreciation of other
mining assets are computed using the unit-of-production method, except in the
case of the Corporation's mica operation where the estimated reserves exceed
the expected production during the term of the mining lease. The mica mining
lease rights and deferred costs, including all preproduction and set-up costs,
are amortized using the straight-line method over the term of the mining lease.
d. POSTRETIREMENT BENEFITS
Pension Plans
Generally, the funding policy of the Corporation is to contribute annually
at a rate that is intended to provide for the cost of benefits earned during
the year and which will amortize prior service costs over periods of 10 to 30
years, subject to Internal Revenue Service limits for deductible contributions.
<PAGE> 34
PAGE 34
Healthcare and Other Postretirement Benefits Other Than Pensions
The Corporation accounts for healthcare and other postretirement benefits
other than pensions in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". This Statement requires the accrual of all postretirement
benefits other than pensions during the years in which employees render the
necessary services to be entitled to receive such benefits. The 1997, 1996 and
1995 amounts include the current year expense and the transition liability
which is being amortized over twenty years as allowed by SFAS No. 106 (Note 7).
e. FOREIGN CURRENCY TRANSLATION
The functional currency for the Corporation's foreign operations is the
local currency. Foreign currency assets and liabilities are translated using
the exchange rates in effect at the balance sheet date. The effect of exchange
rate fluctuations on translating foreign currency assets and liabilities into
U.S. dollars is accumulated as part of the cumulative translation adjustment
component of shareholders' equity. Results of operations and cash flows are
translated using the average exchange rates during the year. Gains and losses
from foreign currency transactions are included in net income for the year.
f. REVENUE RECOGNITION
Revenue is recognized when goods are shipped to customers. Consignment
sales are recognized when a customer draws the goods from inventory.
g. RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses were $961,000, $622,000 and $320,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
h. PROVISION FOR FUTURE RECLAMATION COSTS
Costs for future reclamation have been provided for based upon estimated
future reclamation costs allocated over the expected productive lives of the
Corporation's quarries and mines.
i. INCOME TAXES
The Corporation accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This Statement requires income taxes to be
recognized during the year in which transactions enter into the determination
of financial statement income, with deferred taxes being provided for temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws.
<PAGE> 35
PAGE 35
j. EARNINGS PER SHARE
The Corporation calculates earnings per share in accordance with SFAS No.
128, "Earnings Per Share", and has given affect to this standard on a
retroactive basis. Under this standard, earnings per share is calculated based
upon the weighted average number of common shares outstanding. For the purpose
of calculating earnings per share, stock dividends are considered to be issued
at the beginning of the period.
k. DEFERRED FINANCING COSTS
Costs associated with the issuance of long term debt are deferred, and are
being amortized over the term of the debt on a straight-line basis. The
unamortized balance is included in other assets.
l. OTHER ASSETS
Other assets includes assets held for sale which are stated at the lower
of cost or estimated net realizable value. In determining the estimated net
realizable value, the Corporation deducts from the estimated selling price the
projected costs to bring the assets into a saleable condition, to dispose of
the assets and to hold the property to an expected date of sale. Other assets
also includes patents which are stated at cost and are being amortized over
their remaining life of 13 years on a straight-line basis. Intangible assets
are evaluated periodically and, if conditions warrant, an impairment valuation
is provided.
m. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, highly liquid
investments with original maturities of three months or less, when purchased,
are considered as cash equivalents.
n. STOCK-BASED COMPENSATION COSTS
Stock-based compensation costs for pro forma presentation purposes (Note
9) are based on the fair value of each option at the grant date. The option
value is calculated using the Black-Scholes option-pricing model.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
Acquisition of Alumitech, Inc.
In June 1994, the Corporation acquired its initial 39.5% investment in
Alumitech by investing $2,000,000 to acquire treasury stock. In 1995, the
Corporation increased its interest to 100% by issuing 722,352 shares of common
stock with an ascribed value of $6,599,000. The shares were issued as to
266,106 to Dundee Bancorp International Inc. ("Dundee Bancorp"), the
<PAGE> 36
PAGE 36
Corporation's largest shareholder, and as to 266,106 to Clarion Capital
Corporation, a company controlled by a director of the Corporation. The balance
of the 722,352 shares went to various other parties. Alumitech, an aluminum
dross processor, has developed proprietary technology that enables it to have
the ability to convert 100% of its dross feed into marketable products.
The acquisition of Alumitech has been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon the fair values at the date
of acquisition. The net purchase price was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Working Capital $ 73,000
Property, plant and equipment 5,527,000
Patents 7,363,000
Other assets 225,000
Other liabilities (2,192,000)
Deferred income taxes (2,025,000)
-----------
$ 8,971,000
-----------
CONSIDERATION
Carrying value of investment at date of
acquisition of remaining interest $ 2,372,000
Capital stock 6,599,000
-----------
$ 8,971,000
-----------
</TABLE>
The operating results of Alumitech have been included in the consolidated
statements of income from the date of acquisition. On the basis of a pro forma
consolidation of the results of operations as if the acquisition had taken
place at the beginning of fiscal 1994, rather than at February 15, 1995,
consolidated net sales would have been $64,500,000 for fiscal 1994, and
$86,900,000 for fiscal 1995. Consolidated pro forma income and earnings per
share would not have been materially different from the reported amounts for
fiscal 1994 and 1995. Such pro forma amounts are not necessarily indicative of
what the actual consolidated results of operations might have been if the
acquisition had been effective at the beginning of fiscal 1994.
Acquisition of the Assets of Benwood Limestone Company, Inc.
On May 15, 1995, the Corporation acquired the assets of Benwood Limestone
Company, Inc. ("Benwood"), through its wholly-owned subsidiary, Suzorite
Mineral Products, Inc. ("SMP"), for $3,658,000. The acquisition of Benwood
augmented the Corporation's talc and mineral processing capability.
<PAGE> 37
PAGE 37
DISPOSITIONS
Asset Sale
During the third quarter of 1997, the Corporation sold certain assets
previously utilized to manufacture refractory ceramic fiber. These assets were
vended into a joint venture in which the Corporation retained an interest. The
sale resulted in a pre-tax gain of $1,768,000, which has been included in other
income (expense). Total proceeds were $4,324,000, which included $2,050,000 in
cash and $2,274,000 in notes receivable included in accounts receivable.
3. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ORE, CONCENTRATES AND FINISHED PRODUCTS
Industrial minerals $ 8,312,000 $ 8,565,000
Metal products 4,110,000 5,035,000
------------ -----------
12,422,000 13,600,000
MATERIALS AND SUPPLIES
Industrial minerals 3,955,000 3,683,000
Metal products 1,218,000 888,000
------------ -----------
5,173,000 4,571,000
------------ -----------
$ 17,595,000 $18,171,000
------------ -----------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Land $ 5,344,000 $ 5,246,000
Mining properties and deferred costs 8,125,000 6,605,000
Buildings 18,092,000 16,728,000
Machinery and equipment 64,952,000 50,937,000
Construction in progress 8,308,000 15,065,000
------------ -----------
Total property, plant and equipment, at cost 104,821,000 94,581,000
Less: Accumulated depreciation,
depletion and amortization 34,009,000 32,497,000
------------ -----------
Net property, plant and equipment $ 70,812,000 $62,084,000
------------ -----------
</TABLE>
The effective lives of the Corporation's buildings and machinery and equipment
are estimated to be 30-40 years and 3-15 years, respectively. As of December 31,
1997, the Corporation estimates that approximately $3,973,000 will be expended
to complete its construction in progress.
<PAGE> 38
PAGE 38
5. OTHER ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Prepaid pension cost (Note 7) $1,378,000 $1,488,000
Assets held for resale (Note 10) 300,000 300,000
Deferred financing costs 646,000 659,000
Long term note receivable 549,000 -
Other 547,000 318,000
Patents, net 6,357,000 6,673,000
---------- ----------
$9,777,000 $9,438,000
---------- ----------
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Income from operations before
provision for income taxes
Domestic $7,476,000 $1,492,000 $7,708,000
Foreign 586,000 171,000 191,000
---------- ---------- ----------
Total pre-tax income $8,062,000 $1,663,000 $7,899,000
---------- ---------- ----------
Current tax provision
Federal $1,277,000 $478,000 $1,849,000
State and local 211,000 123,000 293,000
Foreign 350,000 76,000 37,000
---------- ---------- ----------
Total 1,838,000 677,000 2,179,000
---------- ---------- ----------
Deferred tax provision
Federal 279,000 (1,369,000) 283,000
State and local 152,000 (257,000) 55,000
Foreign - - 40,000
---------- ---------- ----------
Total 431,000 (1,626,000) 378,000
---------- ---------- ----------
Benefit of operating loss
and tax credit carryforwards - - (3,076,000)
---------- ---------- -----------
Provision for (recovery of)
income taxes $2,269,000 $ (949,000) $ (519,000)
----------- ---------- ----------
</TABLE>
<PAGE> 39
PAGE 39
The following tabulation reconciles the U.S. federal statutory income tax rate
to the federal, state and foreign overall effective income tax rate.
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
% % %
<S> <C> <C> <C>
Statutory federal rate 34.0 34.0 34.0
State income tax (net of federal benefit) 3.0 (0.9) 1.4
Non-recognition from foreign loss 1.3 - -
Difference in foreign tax rates 0.5 - -
Benefit of operating loss carryforwards
(net of foreign income taxes) - (43.8) (38.1)
Percentage depletion (11.4) (47.9) (4.9)
Other 0.7 1.5 1.0
----- ----- -----
Effective income tax rate 28.1 (57.1) (6.6)
----- ----- -----
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1997 and
December 31, 1996, the Corporation had unused tax benefits of $6,661,000 and
$6,172,000, respectively, related to U.S. federal and state net operating loss
and tax credit carryforwards. Significant components of the Corporation's
deferred tax assets and liabilities as of December 31 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996
U.S. Foreign Total U.S. Foreign Total
------- -------- ------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets
Net operating loss and
tax credit carryforwards $6,661 $ - $6,661 $6,172 $ - $6,172
Accrued expenses and reserves 958 - 958 763 - 763
Bad debt allowances 110 - 110 139 - 139
Inventories 280 - 280 526 - 526
Other 167 - 167 63 - 63
------- ------ ------- ------ ------
Gross deferred tax assets 8,176 - 8,176 7,663 - 7,663
Valuation allowance (523) - (523) - - -
------- ------ ------ ------- ------ ------
Net deferred tax assets 7,653 - 7,653 7,663 - 7,663
------- ------ ------ ------- ------ ------
Deferred tax liabilities
Property, plant and equipment 3,206 2,012 5,218 2,656 2,075 4,731
Patent 1,658 - 1,658 1,791 - 1,791
Pension contributions 580 - 580 521 - 521
Other 357 - 357 424 - 424
Total 5,801 2,012 7,813 5,392 2,075 7,467
------- ------ ------ ------- ------ ------
Net deferred tax
(assets) liabilities $(1,852) $2,012 $ 160 $(2,271) $2,075 $ (196)
------- ------ ------ ------- ------ ------
</TABLE>
<PAGE> 40
PAGE 40
At December 31, 1997, the Corporation had approximately $12,462,000 of federal
net operating loss carryforwards available to reduce future taxable income,
which will expire between 2002 and 2011. Additionally, the Corporation has
unused general business tax credits, which expire between 1998 and 2011, and
alternative minimum tax credits. The Corporation also has state net operating
losses and investment credit carryforwards; however, a valuation allowance of
$523,000 has been recognized to offset the related deferred tax asset due to
the uncertainty of realizing the full benefit of the tax attribute
carryforward.
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Corporation has several pension plans covering substantially all domestic
employees. The plans covering salaried employees provide pension benefits that
are based on the compensation of the employee. In all plans, the plan assets
exceed the benefit obligations and hence the plans are overfunded.
Net periodic pension cost (income) included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Current service costs $ 466,000 $ 528,000 $ 369,000
Interest cost on projected
benefit obligations 978,000 1,028,000 940,000
Actual return on assets (1,383,000) (389,000) (2,587,000)
Net amortization and deferral 49,000 (1,023,000) 1,164,000
---------- ---------- ----------
Net pension expense (income) $ 110,000 $ 144,000 $ (114,000)
---------- ---------- ----------
</TABLE>
Net amortization and deferral consists of amortization of net assets at
transition and deferral of subsequent net gains and losses. The assumptions
used to determine projected benefit obligations were (i) a discount rate of 7%
in 1997, 1996 and 1995; (ii) an expected long term rate of return on assets of
8.75% in 1997, 1996 and 1995; and (iii) an increase in the level of
compensation of 4% in 1997, and 6% in each of 1996 and 1995.
<PAGE> 41
PAGE 41
The status of the plans and the amounts recognized in the consolidated balance
sheets of the Corporation for its pension plans as of December 31, 1997 and
1996 are tabulated below:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Actuarial present value of benefit
obligations vested benefit
obligation $ 11,191,000 $ 11,687,000
------------ ------------
Accumulated benefit obligation $ 11,350,000 $ 11,896,000
------------ ------------
Projected benefit obligation $(15,126,000) $(15,925,000)
Plan assets at fair value 17,147,000 16,432,000
------------ ------------
Plan assets in excess of projected
benefit obligation 2,021,000 507,000
Unrecognized net loss (662,000) 1,071,000
Prior service cost not yet recognized
in net periodic pension cost 196,000 239,000
Unrecognized net assets at year end (177,000) (329,000)
------------ -----------
Prepaid pension cost included in
consolidated balance sheets $ 1,378,000 $ 1,488,000
------------ -----------
</TABLE>
Other Postretirement Benefits
The Corporation provides healthcare and life insurance benefits for certain
retired employees, which are accrued as earned (Note 1). The cost of such
benefits was $66,000 in 1997, $85,000 in 1996 and $95,000 in 1995. The
unrecognized obligation for postretirement benefits is not material.
8. LONG TERM DEBT
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Credit facility (a) $18,056,000 $14,167,000
Other term loans (b) - 813,000
Industrial Development
Revenue Bonds (c) 3,570,000 4,080,000
Promissory notes 70,000 113,000
Capital leases (d) 654,000 488,000
Other 196,000 337,000
----------- -----------
Total debt 22,546,000 19,998,000
Less: Current portion 2,019,000 2,201,000
----------- -----------
Long term debt $20,527,000 $17,797,000
----------- -----------
</TABLE>
(a) During 1995, the Corporation entered into a $30,224,000 credit facility
with a syndicate of two banks. During 1997, the credit facility was amended to
increase the total availability to $50,224,000. The amended credit facility is
further subdivided into four facilities: (i) a $30,000,000 revolving credit
facility; (ii) a $10,000,000 multiple advance term loan facility; (iii) a
$5,224,000 standby letter of credit; and (iv) a $5,000,000 operating line.
These facilities are secured by specific assets and a floating charge over the
Corporation's assets. The facilities bear interest at rates varying from bank
prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus
<PAGE> 42
PAGE 42
2.25%, depending upon certain financial tests. As at December 31, 1997 and
December 31, 1996, there was $3,000,000 and $5,000,000, respectively,
outstanding under the operating line and $8,056,000 and $9,167,000,
respectively, outstanding under the multiple advance term loan facility.
Advances under the revolving credit facility as at December 31, 1997 and 1996
were $10,000,000 and $5,000,000, respectively, and the standby letter of credit
was issued to secure Pyron Corporation's ("Pyron") Industrial Development
Revenue Bonds (see (c) below). The operating line matures June 30, 1998 and is
reviewed annually for renewal. The multiple advance term loan facility requires
quarterly payments of $278,000 which commenced April 1, 1996 with the balance
outstanding, if any, due January 1, 2000.
(b) The other term loans incurred interest at the prime rate of the lending
institution plus 1.25% to 1.5% and were repaid in full during 1997.
(c) Pyron entered into a lease agreement on November 29, 1989 with the Niagara
County Industrial Development Agency (the "Agency") to partially finance the
construction of a manufacturing facility, acquire and install equipment and
machinery, and renovate the existing Pyron facility for the purpose of
manufacturing atomized steel powders. The agreement authorized the Agency to
issue and sell Industrial Development Revenue Bonds in the aggregate principal
amount of $7,650,000 to provide the funds for the project.
While the bonds are not the obligation of Pyron, the agreement requires
Pyron to make quarterly rental payments equal to the debt service under the
sinking fund requirements and interest on the outstanding principal to the
Agency. The amount outstanding at December 31, 1997 and 1996 was $3,570,000 and
$4,080,000, respectively. Pyron's annual obligation under the agreement is
$510,000 until paid.
The bonds bear interest at a variable rate not to exceed 15% per annum.
The rate at December 31, 1997 was 4.15% and at December 31, 1996 was 4.15%.
Pyron has the option to convert the bonds to a fixed interest rate at any time
during the term. Under the lease agreement, Pyron may purchase the facility at
any time during the term, which expires November 1, 2004, by paying the
outstanding principal amount of the bonds plus $1.
The bonds are collateralized by a mortgage on the land, the new facility
and the existing facility, which have an aggregate net book value of
approximately $9,602,000 at December 31, 1997.
A bank has provided Pyron with a letter of credit which is available to
support Pyron's obligations under the lease agreement. If the bondholders
tender their bonds for repayment, the letter of credit will be utilized to pay
the bondholders. The letter of credit is collateralized under the credit
facility in (a) above. The letter of credit expires on October 1, 1999.
(d) The Corporation has long term capital lease agreements at various rates and
for various terms with maturities ranging from 1998 to 2002 for equipment used
in its operations. The carrying value of the leased equipment as of December
31, 1997 was $623,000. The current obligation under the long term lease
agreement is $280,000.
<PAGE> 43
PAGE 43
Principal repayments on long term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
-----------
1998 $ 2,019,000
1999 1,850,000
2000 16,515,000
2001 618,000
2002 524,000
Thereafter 1,020,000
-----------
$22,546,000
-----------
</TABLE>
Interest
Interest earned and expensed in each of the past three years is summarized
below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ ---------
<S> <C> <C> <C>
Interest income $ 150,000 $ 93,000 $ 268,000
Interest expense (2,094,000) (1,041,000) (791,000)
----------- ------------ ---------
Net interest expense $(1,944,000) $ (948,000) $(523,000)
----------- ------------ ---------
</TABLE>
9. COMMON SHARES, STOCK OPTIONS AND WARRANTS
Shares Outstanding
During 1995, the Corporation increased its authorized common stock from
10,000,000 to 25,000,000, par value one dollar per share, of which 20,000,000
will be denominated common shares and 5,000,000 will be denominated preferred
shares. There were 8,463,491 common shares issued and outstanding as of
December 31, 1997 and 8,269,099 common shares as of December 31, 1996.
During 1997, 1996 and 1995, 90,000, 80,000 and 49,000 common shares,
respectively, were purchased pursuant to the Corporation's employee stock
purchase plan for an aggregate cost of $729,000, $672,000 and $471,000,
respectively.
As part of a share repurchase program in 1997, the Corporation purchased 60,000
common shares on the open market for an aggregate cost of $492,000, 344,000
common shares in 1996 for an aggregate cost of $3,170,000, and 376,000 common
shares in 1995 for an aggregate cost of $3,572,000.
In 1995, the Corporation completed its purchase of 100% of Alumitech by issuing
722,352 common shares with an ascribed value of $6,599,000.
<PAGE> 44
PAGE 44
Dividends
On November 21, 1997, the Corporation declared a 2% stock dividend to
shareholders of record on December 1, 1997, which was paid December 15, 1997.
Retained earnings were charged $1,598,000 as a result of the issuance of
165,537 common shares of the Corporation, and cash payments of $5,000 in lieu
of fractional shares.
On October 18, 1996, the Corporation declared a 2% stock dividend to
shareholders of record on November 4, 1996, which was paid November 18, 1996.
Retained earnings were charged $1,255,000 as a result of the issuance of
161,398 common shares of the Corporation, and cash payments of $5,000 in lieu
of fractional shares.
On November 10, 1995, the Corporation declared a 2% stock dividend to
shareholders of record on November 24, 1995, which was paid December 8, 1995.
Retained earnings were charged $1,403,000 as the result of the issuance of
167,149 common shares of the Corporation, and cash payments of $3,000 in lieu
of fractional shares.
Stock Options
The Corporation provides stock option incentive plans and has, with shareholder
approval, issued options to certain directors outside of the plans. The plans
are intended to provide long term incentives and rewards to executive officers,
directors and other key employees contingent upon an increase in the market
value of the Corporation's common shares. Options for 10% of the Corporation's
outstanding common shares are issuable under the plans.
The following is a summary of option transactions under the Corporation's stock
option plans:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year 845,550 852,550 556,550
Options granted during the year 198,000 61,000 341,000
Options exercised during the year (13,800) (45,000) (38,250)
Options canceled during the year (87,000) (23,000) (6,750)
Options outstanding at end of year 942,750 845,550 852,550
Options exercisable at end of year 628,250 631,550 511,550
Price range of options granted
during the year $7.00 - 8.63 $7.75 - 9.75 $9.125-10.13
</TABLE>
The options expire from 1998 to 2003. In addition, directors out of the plan
were, in aggregate, granted 30,000 shares in 1997.
The Corporation does not recognize compensation expense for its stock-based
compensation plans. Had compensation cost for the stock option plans been
determined based upon fair value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS No. 123, "Accounting for
Stock-Based Compensation", the Corporation's net income and earnings per share
would have been reduced by approximately $221,000 or $0.03 per share in 1997,
$341,000 or $0.04 per share in 1996 and $2,177,000 or $0.28 per share in 1995.
The fair value of the options granted during 1997, 1996 and 1995 is estimated
to be $221,000, $173,000 and $1,344,000, respectively. The fair value of each
option grant is estimated on the date of grant using the
<PAGE> 45
PAGE 45
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995: dividend yield of 0%;
expected volatility of 32%, 38% and 39%, respectively; risk-free interest rate
of 5.5%; and an expected life of 5 years.
Warrants
During 1993, in connection with the acquisition of Suzorite Mica Products Inc.,
the Corporation issued a transferable warrant to Dundee Bancorp to purchase at
any time prior to July 15, 1995 up to 100,000 common shares (104,040 shares
after adjustments for stock dividends) at $7.00 per share. The warrant was
exercised by Dundee Bancorp on July 14, 1995 for proceeds of $700,000. As a
result of a stock rights offering in 1990, 725,769 warrants were issued. Each
warrant entitled the holder to purchase, prior to July 15, 1995, 1.08 common
shares at an exercise price of $8.56 per share, which was repriced from $9.25
per share as a result of dilution due to the issuance of stock dividends. Of
the 725,769 warrants originally issued, the Corporation repurchased 218,046
warrants at an aggregate cost of $222,000. During 1995, 448,000 warrants were
exercised for 484,027 common shares for net proceeds of $4,143,000. During
1994, 31,514 warrants were exercised resulting in the issuance of 32,771 common
shares at an exercise price of $8.88 per share for aggregate proceeds of
$291,000. There were no remaining warrants outstanding as at December 31, 1995.
Note Receivable from Shareholder
The note receivable from shareholder of $1,749,000 represents amounts due from
the Corporation's President and Chief Executive Officer pursuant to the Key
Executive Common Stock Purchase Plan. The loan, which was used to acquire
357,000 common shares of the Corporation, is non-interest bearing and secured
by a pledge of most of the shares acquired. The terms were amended in 1997 and
the loan is now due on the earlier of August 12, 1998 or 30 days after the
termination of employment. Since the loan arose from the sale of shares, it is
classified as a reduction of shareholders' equity.
10. REORGANIZATION CHARGES AND UNUSUAL ITEMS
Reorganization Charges
During the first quarter of 1996, the Corporation recognized reorganization
costs of $1,752,000 in connection with the reorganization of its minerals
division, a write-down to market of inventory held in Brazil, and the
recognition of a provision for costs associated with storing and selling the
material. The Brazilian enterprise was unsuccessful primarily due to rapidly
deteriorating market prices which made market penetration extremely difficult.
<PAGE> 46
PAGE 46
Unusual Items
In December 1991, the Corporation closed its industrial minerals plant located
in Connecticut. The assets of this operation were reclassified to assets held
for resale and written down in 1991 by $430,000 to their estimated net
realizable value. These assets were written down by a further $300,000 in 1993.
In 1995, a portion of the property was sold for approximately net book value.
In 1996, the purchaser defaulted on the payment obligations. Accordingly, the
Corporation instituted legal action to repossess the property. A provision of
$723,000 has been recorded to provide for reclamation costs, legal costs and to
write-down the property to current market value.
11. OPERATING LEASES AND OTHER COMMITMENTS
Operating Leases
The Corporation has a number of operating lease agreements primarily involving
equipment, office space, warehouse facilities and rail sidings. The operating
lease for equipment provides that the Corporation may, after the initial lease
term, renew the lease for successive yearly periods or may purchase the
equipment at the fair market value. An operating lease for office facilities
contains escalation clauses for increases in operating costs and property
taxes. The majority of the leases are cancellable and are renewable on a yearly
basis.
Future minimum rental payments required by operating leases that have initial
or remaining non-cancellable lease terms in excess of one year as of December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Years Minimum Lease Payments
- - ----- ----------------------
<S> <C>
1998 $ 515,000
1999 341,000
2000 287,000
2001 282,000
2002 273,000
Thereafter 556,000
----------
Total minimum lease payments $2,254,000
----------
</TABLE>
Rent expense was $492,000, $668,000 and $442,000 in 1997, 1996 and 1995,
respectively.
<PAGE> 47
PAGE 47
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of certain unaudited quarterly financial data.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES
First quarter $23,700,000 $22,405,000
Second quarter 25,199,000 21,356,000
Third quarter 24,773,000 21,601,000
Fourth quarter 23,554,000 21,058,000
----------- -----------
$97,226,000 $86,420,000
----------- ------------
OPERATING INCOME
First quarter $1,766,000 $ 170,000
Second quarter 2,255,000 1,512,000
Third quarter 2,372,000 1,444,000
Fourth quarter 1,978,000 (60,000)
---------- ----------
$8,371,000 $3,066,000
---------- ----------
NET INCOME
First quarter $ 862,000 $ 6,000
Second quarter 1,064,000 819,000
Third quarter 2,095,000 779,000
Fourth quarter 1,772,000 1,008,000
---------- ----------
$5,793,000 $2,612,000
---------- ----------
NET INCOME PER SHARE - BASIC
First quarter $.11 $.00
Second quarter .13 .10
Third quarter .26 .10
Fourth quarter .22 .13
---- ----
</TABLE>
13. FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Corporation's customer base and
their dispersion across a number of different industries, principally
construction, glass, electrical and automotive.
Financial instruments comprise cash and cash equivalents, accounts receivable,
short term bank borrowings, accounts payable, accrued liabilities, and long
term debt. The fair value of these financial instruments approximates their
carrying value reflecting: (i) the proximity to market rates of the interest
obligations on the debt instruments; and (ii) the limited durations of all of
the other instruments.
<PAGE> 48
PAGE 48
14. CHANGES IN NON-CASH WORKING CAPITAL ITEMS
The changes in non-cash working capital items are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(Increase) in accounts receivable $(1,285,000) $(1,838,000) $ (783,000)
Decrease (increase) in inventories 576,000 2,005,000 (2,742,000)
Decrease (increase) in prepaid expenses 602,000 (547,000) (16,000)
Increase (decrease) in accounts
payable and accrued liabilities 2,882,000 (185,000) (1,495,000)
Increase in accrued income taxes 934,000 32,000 376,000
----------- ---------- -----------
$ 3,709,000 $ (533,000) $(4,660,000)
----------- ---------- -----------
</TABLE>
15. RELATED PARTY TRANSACTIONS
As at December 31, 1997 and 1996, accounts receivable included amounts due from
directors of $115,000 and $350,000, respectively. These amounts are
non-interest bearing, with no fixed terms of repayment, and have not otherwise
been disclosed in the consolidated financial statements.
During 1997, the Corporation agreed to guarantee a personal loan in the amount
of $600,000 drawn down by the President and Chief Executive Officer. The
proceeds of the loan were used to acquire common shares of the Corporation on
the open market. The shares acquired are held by the Corporation as security
for the guarantee.
16. SEGMENT INFORMATION
The Corporation has two principal lines of business and is organized into two
operating units based on its product lines: (i) industrial minerals, and (ii)
metal products. Industrial mineral products include feldspar, kaolin, mica,
talc, baryte, feldspathic sand and industrial sand. These products are marketed
principally to the automotive, housing, and ceramics industries in North
America. They are produced from mines and processing plants located near Edgar,
Florida; Monticello, Georgia; Murphy, North Carolina; Spruce Pine, North
Carolina; Natural Bridge, New York; Van Horn, Texas; Benwood, West Virginia;
Boucherville, Quebec; and Suzor Township, Quebec. Metal products are processed
in Niagara Falls, New York; St. Marys, Pennsylvania; and Greenback and
Maryville, Tennessee. The Corporation's ferrous and non-ferrous metal powders
are marketed primarily in North America to manufacturers of powder metallurgy
parts used in the automotive and transportation industries. Aluminum dross is
recycled at a plant in Cleveland, Ohio and ceramic fiber products are marketed
from a plant in Streetsboro, Ohio. Corporate assets principally include cash,
term deposits, and furniture and fixtures.
<PAGE> 49
PAGE 49
Information pertaining to sales and earnings from operations and assets by
business segment appears below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (a)
Industrial minerals $43,396,000 $40,469,000 $37,089,000
Metal products 53,830,000 45,951,000 47,967,000
------------ ----------- ------------
Total $97,226,000 $86,420,000 $85,056,000
------------ ----------- ------------
Operating income (a)
Industrial minerals $5,203,000 $ 3,118,000 $4,622,000
Metal products 3,221,000 1,868,000 3,677,000
Reorganization charges (b) - (1,752,000) -
General unallocated corporate (53,000) (168,000) 43,000
------------ ----------- ------------
Total 8,371,000 3,066,000 8,342,000
------------ ----------- ------------
Interest expense net (1,944,000) (948,000) (523,000)
Other income, (expense) net (b) 1,635,000 (455,000) 80,000
Income before income taxes $8,062,000 $1,663,000 $7,899,000
Capital expenditures (a) (c)
Industrial minerals $9,945,000 $11,855,000 $9,653,000
Metal products 6,633,000 4,528,000 5,784,000
Corporate 6,000 43,000 14,000
------------ ----------- ------------
Total $16,584,000 $16,426,000 $15,451,000
------------ ----------- ------------
Depreciation, depletion
& amortization (a)
Industrial minerals $3,228,000 $2,352,000 $1,932,000
Metal products 2,241,000 1,948,000 1,451,000
Corporate 402,000 394,000 306,000
Total $5,871,000 $4,694,000 $3,689,000
Identifiable assets at year end (a)
Industrial minerals $65,750,000 $60,915,000 $52,348,000
Metal products 42,400,000 37,145,000 34,133,000
Corporate (d) 10,624,000 11,316,000 10,200,000
------------ ------------ -----------
Total $118,774,000 $109,376,000 $96,681,000
------------ ------------ -----------
</TABLE>
(a) The Corporation's businesses are located in the United States and Canada,
which the Corporation considers one geographic segment.
(b) See Note 10.
(c) Capital expenditures for 1995 exclude property, plant and equipment of
$9,027,000 acquired in connection with the Corporation's 1995 acquisitions
(Note 2).
(d) Includes cash and cash equivalents for all years presented.
<PAGE> 50
PAGE 50
17. CONTINGENCIES
The Corporation is involved in various legal actions in the normal course of
business. In the opinion of management, the aggregate amount of any potential
liability, for which provision has not already been made, is not expected to
have a material adverse effect on the Corporation's financial position or its
results.
18. SUBSEQUENT EVENTS
(i) In January 1998, the Corporation, through its wholly-owned subsidiary,
Zemex Industrial Minerals, Inc., acquired Aspect Minerals, Inc., a muscovite
mica producer, for approximately $2,200,000, which includes the assumption of
debt. The two facilities acquired in the purchase are located in the Spruce
Pine, North Carolina area and will operate under the name Zemex Mica
Corporation. The acquisition was financed through borrowings on the
Corporation's credit facility.
(ii) On February 24, 1998, Industria Mineraria Fabi S.r.l. ("Fabi") became a
partner in the Corporation's talc facility located in Benwood, West Virginia by
acquiring a 40% interest in a new limited liability company, Zemex
Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3,400,000 and is
providing access to its technology. SMP, a wholly-owned subsidiary of the
Corporation, will manage the new entity pursuant to an operating agreement.
19. COMPARATIVE FIGURES
Certain 1996 and 1995 figures in the consolidated financial statements have
been reclassified to conform with the 1997 presentation.
<PAGE> 51
PAGE 51
-----------------------------------------------------------------
SELECTED FINANCIAL DATA
-----------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net Sales $ 97,226,000 $ 86,420,000 $85,056,000 $55,306,000 $47,958,000
Reorganization
and Restructuring
Charges - 1,752,000 - - 1,250,000
Operating Income 8,371,000 3,066,000 8,342,000 5,841,000 1,237,000
EBITDA(a) 15,877,000 7,305,000 12,111,000 8,319,000 6,952,000
Other Income
(Expenses) (309,000) (1,403,000) (443,000) (262,000) 2,421,000
Net Income 5,793,000 2,612,000 8,418,000 6,250,000 1,852,000
------------ ------------ ----------- ----------- -----------
FINANCIAL POSITION
Working Capital $ 18,975,000 $ 18,688,000 $19,709,000 $26,046,000 $ 9,288,000
Total Assets 118,774,000 109,376,000 96,681,000 70,864,000 48,414,000
Long Term Debt
(non-current
portion) 20,527,000 17,797,000 7,485,000 5,461,000 8,735,000
------------- ------------ ----------- ----------- ----------
COMMON SHARES
Average Common
Shares
Outstanding 8,097,642 7,937,379 7,843,992 5,149,401 4,148,009
Actual Common
Shares Issued
and Outstanding
at Year End 8,463,491 8,269,099 8,355,722 7,168,153 4,535,283
------------- ------------ ----------- ----------- ----------
PER COMMON SHARE
Basic Earnings
per Share $0.72 $0.33 $1.07 $1.21 $0.45
Diluted Earnings
per Share 0.70 0.32 1.03 1.12 0.40
EBITDA(a) per Share 1.96 0.92 1.54 1.62 1.68
------------- ------------ ----------- ---------- ----------
COMMON SHARE PRICES
High $10.94 $10.00 $10.88 $12.25 $8.00
Low 6.75 6.88 8.25 6.13 4.50
Year End 8.75 7.00 10.00 8.63 6.75
------------- ------------ ----------- ---------- -----------
</TABLE>
(a) EBITDA is defined as earnings before interest, tax, depreciation and
amortization
<PAGE> 52
PAGE 52
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Paul A. Carroll
Chairman and Chief Executive Officer,World Wide Minerals Ltd. (1)
Morton A. Cohen
Chairman, President and Chief Executive Officer,Clarion Capital Corporation
John M. Donovan
Corporate Consultant (1)(2)(3)
Thomas B. Evans, Jr.
Vice Chairman, The Evans Group, Ltd. (2)
Ned Goodman
Chairman, President and Chief Executive Officer, Dundee Bancorp Inc.
Peter O. Lawson-Johnston
Chairman and Trustee, Solomon R. Guggenheim Foundation;
Chairman, The Harry Frank Guggenheim Foundation (1)(3)
Richard L. Lister
President and Chief Executive Officer of the Corporation (3)
Patrick H. O'Neill
Corporate Consultant (2)
William J. vanden Heuvel
Counsel, Strook, Strook & Lavan (3)
(1) Member of the Executive Compensation/Pension Committee
(2) Member of the Audit Committee
(3) Member of the Executive Committee
OFFICERS
Peter O. Lawson-Johnston
Chairman of the Board
Richard L. Lister
President and Chief Executive Officer
Allen J. Palmiere
Vice President and Chief Financial Officer
Peter J. Goodwin
Vice President
President, Industrial Minerals
Terrance J. Hogan
President, Alumitech, Inc.
George E. Gillespie
President, Metal Powders
Patricia K. Moran
Corporate Secretary and Assistant Treasurer
<PAGE> 53
EXECUTIVE OFFICE
Zemex Corporation
Canada Trust Tower
BCE Place, 161 Bay Street
Suite 3750, P.O. Box 703
Toronto, Ontario
Canada M5J 2S1
Telephone: (416) 365-8080
Fax: (416) 365-8094
Website: www.zemexcorp.com
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche
Toronto, Ontario, Canada
TRANSFER AGENT AND REGISTRAR CAPITAL STOCK
First Union National Bank of North Carolina
Shareholder Services Group
1525 West W.T. Harris Blvd-3C3
Charlotte, North Carolina
U.S.A. 28262-1153
Telephone: (704) 590-7387
Fax: (704) 590-7598
FORM 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1997 will be available after April 1, 1998
by writing to Shareholder Relations at the Executive Office
Printed in Canada on recycled paper
Design: Tara Pain Rowlands Design
Photography: Jim Allen
Production: Walter J. Mishko & Co. Inc.
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
The subsidiaries listed below are directly or indirectly wholly-owned and all
are consolidated in the financial statements.
<TABLE>
<CAPTION>
STATE OR COUNTRY
IN WHICH
SUBSIDIARY NAME INCORPORATED OR ORGANIZED
- - --------------- -------------------------
<S> <C>
Alumitech, Inc. Delaware
Aluminum Waste Technology, Inc. Delaware
AWT Properties, Inc. Ohio
ETS Schaefer Corporation Ohio
The Feldspar Corporation North Carolina
Pyron Corporation New York
Pyron Metal Powders, Inc. Delaware
Suzorite Mica Products Inc. Ontario, Canada
Suzorite Mineral Products, Inc. Delaware
Zemex Industrial Minerals, Inc. Delaware
</TABLE>
<PAGE> 1
ZEMEX CORPORATION
AND SUBSIDIARIES
SCHEDULE IX - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- - -------- ---------- ----------------- --------------- ---------- --------
Balance at Additions Charged Balance
Beginning to Costs and Other Additions At End
Description of Period Expenses (Deductions) Deductions of Period
- - ----------- --------- ----------------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997
Reserves - Other $599,000 $165,000 $250,000 -- $1,014,000
Allowance for
Uncollectable
Accounts 452,000 84,000 (76,000) $132,000 328,000
-------- -------- -------- -------- ----------
1996
Reserves - Other $605,000 $100,000 -- $106,000 $ 599,000
Allowance for
Uncollectable
Accounts 386,000 148,000 $ 5,000 87,000 452,000
-------- -------- -------- -------- ---------
1995
Reserves - Other $549,000 $154,000 -- $ 98,000 $ 605,000
Allowance for
Uncollectable
Accounts 414,000 77,000 $ 2,000 107,000 386,000
-------- -------- -------- -------- ----------
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,189,000
<SECURITIES> 0
<RECEIVABLES> 16,615,000
<ALLOWANCES> (328,000)
<INVENTORY> 17,595,000
<CURRENT-ASSETS> 38,185,000
<PP&E> 104,821,000
<DEPRECIATION> (34,009,000)
<TOTAL-ASSETS> 118,774,000
<CURRENT-LIABILITIES> 19,210,000
<BONDS> 0
<COMMON> 9,204,000
0
0
<OTHER-SE> 67,330,000
<TOTAL-LIABILITY-AND-EQUITY> 118,774,000
<SALES> 97,226,000
<TOTAL-REVENUES> 97,226,000
<CGS> 70,826,000
<TOTAL-COSTS> 88,855,000
<OTHER-EXPENSES> (1,635,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,944,000
<INCOME-PRETAX> 8,062,000
<INCOME-TAX> 2,269,000
<INCOME-CONTINUING> 5,793,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,793,000
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.70
</TABLE>
