<PAGE> 1
CONFORMED
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 1-228
ZEMEX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or other (I.R.S. employer
jurisdiction of identification number)
incorporation or
organization)
CANADA TRUST TOWER, BCE PLACE, 161 BAY STREET, SUITE 3750
TORONTO, ONTARIO, CANADA M5J 2S1
(416) 365-8080
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
Toronto Stock Exchange and
New York Stock Exchange Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
The aggregate market value of the registrant's voting stock (common
shares, no par value) held by non-affiliates as of March 18, 1999 (based
on the closing sale price of $5.125 on the New York Stock Exchange) was
$23,812,749.
As of March 18, 1999, 8,707,796 shares of the registrant's common shares,
no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the Year Ended
December 31, 1998 Part II
Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A with respect to the
1999 Annual Meeting of Shareholders Part III
<PAGE> 2
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
AND
CROSS-REFERENCE SHEET
PART I
PAGE
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 8
Item 3. Legal Proceedings................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................. 9
Item 10. Executive and Other Officers of the Registrant(A)................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters(B).............................................. 9
Item 6. Selected Financial Data(C).......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation(D)............................................. 9
Item 8. Financial Statements and Supplementary Data(E) .................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 10
PART III
Item 10. Directors and Executive Officers of the Registrant(F)............... *
Item 11. Executive Compensation(F)........................................... *
Item 12. Security Ownership of Certain Beneficial Owners and Management(F)... *
Item 13. Certain Relationships and Related Transactions(F)................... *
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 11
<PAGE> 3
- --------------------------
(A) Included in Part I, Item 1, pursuant to Instruction 3 of Item 401(b)
of Regulation S-K.
(B) Information responsive to this Item is set forth on page 31 of the
registrant's Annual Report to Shareholders for the year ended
December 31, 1998 (the "Annual Report to Shareholders") and is
incorporated herein by reference. The Annual Report to Shareholders
is included as Exhibit 13 to this Form 10-K Annual Report. The
Annual Report to Shareholders, except for those portions thereof
which are expressly incorporated by reference herein, is furnished
for the information of the Commission and is not to be deemed
"filed" as part of this Form 10-K report.
(C) Information responsive to this Item is set forth on page 62 of the
Annual Report to Shareholders and is incorporated herein by
reference.
(D) Information responsive to this Item is set forth on pages 23
through 31 of the Annual Report to Shareholders and is incorporated
herein by reference.
(E) Financial statements responsive to this Item are set forth on pages
32 through 61 of the Annual Report to Shareholders and are
incorporated herein by reference. The Supplementary Schedule
required by this Item is set forth on page S-1 of this Form 10-K
Annual Report.
(F) Information responsive to these Items is set forth in the
registrant's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A and in the Annual Report to
Shareholders on page 52 (Note 14) and is incorporated herein by
reference.
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
Zemex Corporation (the "Corporation" or "Zemex"), a company subject to
the laws of the Canada Business Corporations Act, is a niche producer of
specialty materials and products for use in a variety of industrial
applications. Zemex operates through three major divisions: (i)
industrial minerals, (ii) metal powders, and (iii) aluminum recycling.
Its major products include feldspar, feldspathic minerals, kaolin, sand,
mica, talc, ferrous and non ferrous powders, and aluminum dross
derivatives. Zemex currently operates eighteen plants throughout Canada
and the United States.
Originally, Zemex was incorporated under the laws of the State of Maine
in 1907 and was known as Yukon Gold Corporation. At its annual meeting of
shareholders on May 20, 1938, a resolution was passed to change its name
to Yukon-Pacific Mining Corporation. On November 8, 1939, Zemex
reorganized, incorporated under the laws of the State of Delaware, and
changed its name to Pacific Tin Consolidated Corporation. Also in 1939,
Zemex listed on the New York Stock Exchange. In 1985, Zemex changed its
name to its current form and reincorporated under the laws of the State
of Delaware as the successor to Pacific Tin Corporation. Effective
January 21, 1999 Zemex completed a reincorporation merger and
reincorporated under the Canada Business Corporations Act.
INDUSTRIAL MINERALS
The Corporation's industrial minerals is comprised of The Feldspar
Corporation ("TFC"), Suzorite Mica Products Inc. ("Suzorite"), Suzorite
Mineral Products, Inc. ("SMP"), Zemex Fabi-Benwood, LLC, Zemex Industrial
Minerals, Inc. and Zemex Mica Corporation (collectively, "Zemex
Industrial Minerals" or "ZIM"). Each of these companies is a wholly-owned
subsidiary of Zemex except for Zemex Fabi-Benwood, LLC of which Zemex
owns 60%.
TFC has mining and processing facilities in Edgar, Florida; Monticello,
Georgia; and Spruce Pine, North Carolina. Using traditional methods, TFC
mines sodium feldspar from two different ore deposits in the Spruce Pine
area; potassium feldspar is mined from two deposits close to the
Monticello plant. TFC's kaolin and sand products are recovered by
dredging and wet separation at the Edgar property. All mined and
recovered products are subjected to standard and proprietary milling and
drying techniques.
TFC produces numerous products at its operating plants, including sodium
and potassium feldspar, silica, low iron sand, muscovite mica and kaolin
clay. Feldspathic materials are key ingredients for the ceramic industry,
and are incorporated into the production of ceramic floor and wall tiles,
dinnerware, plumbing fixtures, glazes and electrical insulators. TFC
supplies its products primarily to the glass and ceramics industries.
Feldspar and certain grades of industrial sand are also used to
manufacture bottles, jars, and other glass containers, fibreglass, paints
and plastics, and television picture tubes. Industrial sand is used for
filter, filler, beach sand, blasting and concrete applications. TFC also
produces a low iron sand product for use in highly specialized glass
applications.
Suzorite mines phlogopite mica in an open pit mining operation in Suzor
Township, Quebec, Canada, approximately 300 kilometres north of Montreal,
Quebec. The ore is mined by standard open pit methods and delivered to a
siding for transportation by rail to the processing plant, which is
located in Boucherville,
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Quebec, a suburb of Montreal. Because of its distinct thermal stability
advantage over competitive materials, phlogopite mica is used to impart
rigidity in technological and high temperature plastic applications.
Suzorite's phlogopite mica is used as a partial or complete substitute
for asbestos in fire retardation. It is also used in friction materials,
oil well drilling needs, caulking and molding compounds, coatings,
plasters and plastics. The principal markets served by Suzorite are the
automobile, construction and oil drilling industries. These products are
marketed under the trade names Suzorite Mica and Suzorex.
SMP produces talc and other minerals at Natural Bridge, New York; Murphy,
North Carolina; Van Horn, Texas; and Benwood, West Virginia. SMP
purchases raw materials for conversion and processing at its plant in
Natural Bridge and processes products directed primarily to the cosmetic
and pharmaceutical industries. The production facility in Van Horn
processes ores mined in proximity to the plant for the coatings, plastics
and ceramics industries. The Benwood operation processes a wide range of
talc products from imported raw materials for ultimate use in the
plastics industry. The Murphy plant produces, from purchased sources,
baryte products, primarily for the oil drilling and coatings industries.
In late 1996, SMP completed the installation of a new mill at its
facility in Benwood, West Virginia. This new fine grind milling capacity
is part of SMP's strategy to develop a niche in the talc marketplace by
offering very finely divided high purity talc products to industrial
markets. SMP believes that it is one of the few talc producers in North
America to produce products of this purity and fineness. The products
find application in performance plastics, high end coatings and other
markets. With the addition of these new fine grind products, Benwood has
the ability to produce a broad spectrum of high purity talc products.
In January 1998, the Corporation acquired a muscovite mica producer in
the Spruce Pine, North Carolina area. The facilities acquired in the
purchase operate under the name Zemex Mica Corporation ("ZMC") and are
located close to TFC's feldspar plant where by-product muscovite mica is
produced. This acquisition enhances the Corporation's position as a major
mica supplier.
In February 1998, Industria Mineraria Fabi S.r.l. ("Fabi"), a leading
European talc producer, became an investor in the Corporation's talc
facility located in Benwood, West Virginia by acquiring a 40% interest in
a new limited liability company, Zemex Fabi-Benwood, LLC. As part of the
transaction, Fabi paid $3.1 million and is providing access to its
technology and premium talc deposit in Australia. SMP manages the new
entity pursuant to an operating agreement.
Demand for Zemex's industrial minerals is related to the pace of the
general economy and, particularly, the residential and commercial
construction industries.
The Corporation's industrial minerals sales were $44.8 million in 1998,
compared with $43.4 million in 1997 and $40.5 million in 1996. This
business segment reported operating income of $5.8 million in 1998, $6.5
million in 1997 and $2.8 million in 1996.
During 1998, considerable efforts were directed to product development,
marketing, capital expansion projects and product quality improvement.
The Corporation expects these efforts will bear fruit in the future.
Capital expenditures were $8.3 million in 1998 compared to $9.9 million
in 1997 and $11.9 million in 1996. Major capital spending in 1998
included the retrofitting of the recently acquired muscovite mica
operation in Spruce Pine, North Carolina.
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METAL POWDERS
The metal powders division consists of two wholly-owned subsidiaries,
Pyron Corporation and Pyron Metal Powders, Inc. (together, "Pyron").
Pyron operates plants located in Niagara Falls, New York; St. Marys,
Pennsylvania; and Greenback and Maryville, Tennessee. Pyron's major
products include iron, steel, copper, copper alloy powders and manganese
sulfide. The primary applications of metal powders are in the fabrication
of precision metal parts using powder metallurgy and in the friction
industry. Powder metallurgy is an efficient, economical process for the
production of complex components used in the automotive, farm, garden and
lawn equipment, and business machine industries. Key features of powder
metallurgy technology are low scrap ratios and lower production costs
when compared to other conventional metal working processes.
In recent years, metal powder use in the friction industry and,
particularly, in automotive and rail braking systems has grown rapidly as
a replacement for asbestos, achieving better performance and improved
environmental and health conditions. Metal powders are also used in the
production of welding rods, for cutting and scarfing of steel ingots and
billets, for the inspection of oil field pipe and tubing, and in food
supplements.
In 1995, Pyron completed construction of a blending plant in St. Marys,
Pennsylvania. Through its blending facility, Pyron is able to provide
custom pre-packaged powders and just-in-time service to its customers.
In late 1996, Pyron completed construction of a facility for the
production of manganese sulfide at its Greenback, Tennessee location.
Pyron's new product, Manganese Sulfide Plus (MnS+TM), was developed in
Pyron's laboratory and is used as an additive by the powder metallurgical
industry to enhance tool life and aid in machinability. Customer demand
for MnS+TM has been strong and, as a result, the capacity of the facility
was doubled in 1997 to satisfy orders. Manganese sulfide is a natural
complement to Pyron's core ferrous and non-ferrous businesses as it
further broadens Pyron's expansive product line.
Sales for the metal powders group increased to $35.6 million in 1998 from
$33.9 million in 1997. Sales were $31.7 million in 1996. The increase
from 1997 to 1998 was due to higher volumes of ferrous and non ferrous
metal powders. During the same interval, operating income increased from
$2.4 million in 1997 to $4.0 million in 1998. Operating income was $2.4
million in 1996. Management anticipates improved margins in this segment
in 1999 as a result of new products, higher metal powder production,
continuing cost reductions, and efficiency improvement programs.
Capital expenditures for the metal powders group were $2.1 million in
1998 as compared to $1.3 million in 1997 and $2.2 million in 1996. The
1998 expenditures were primarily directed towards retrofitting a furnace
and general sustaining capital requirements. In 1999, capital
expenditures are anticipated to be $3.7 million.
ALUMINUM RECYCLING
Zemex's aluminum recycling group is composed of Alumitech, Inc.,
Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc., ETS Schaefer
Corporation and AWT Properties, Inc. (collectively, "Alumitech"), all of
which are direct or indirect wholly-owned subsidiaries.
Zemex acquired its initial interest in Alumitech in 1994 and increased
its ownership to 100% in 1995. Alumitech now has three facilities:
aluminum dross reprocessing plants in Cleveland, Ohio and Wabash,
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Indiana, and a heat containment fabrication plant in Macedonia, Ohio. Its
administrative office is in Streetsboro, Ohio.
Alumitech is an aluminum dross processor that has developed and patented
proprietary technology to recycle secondary aluminum drosses into
industrial feedstock components, eliminating the necessity for landfill.
Aluminum dross is the waste by-product produced by primary and secondary
aluminum smelters. Secondary dross, which has a high salt content, forms
the primary feedstock for Alumitech's process. Conventional dross
processors simply recover aluminum metal and some oxides and send the
residue to landfill. Using its patented process, Alumitech has the
ability to separate the dross into its basic components: aluminum metal,
alumina and metal fines, salts and non-metallic product ("NMP") and
further refine the NMP for use as a feedstock for the production of
calcium aluminate, refractory ceramic fibre and other commercially
acceptable products. Currently, competitive processes landfill anywhere
from 40%-75% of the volume of dross received, whereas Alumitech's
recycling process has the ability to virtually eliminate the need for
landfill. Alumitech is considered the industry leader in the development
of alternative uses for NMP. Alumitech's patents on its technology to
process NMP have a remaining life of approximately 12 years.
In February 1997, Alumitech, through its wholly-owned subsidiary,
Engineered Thermal Systems, Inc., acquired the assets of Schaefer
Brothers, Inc., a small regional manufacturer of ceramic fibre-based heat
containment systems located in Medina, Ohio. The Schaefer Brothers
business was merged with Engineered Thermal Systems, Inc., also a
manufacturer of ceramic fibre-based heat containment systems, to form ETS
Schaefer Corporation.
In June 1998, Alumitech acquired 100% of the issued and outstanding
shares of Alumitech of Wabash, Inc. (previously known as S&R Enterprises,
Inc.), a Wabash, Indiana based aluminum dross processor. This acquisition
provides Alumitech with additional metal melting capacity and the
opportunity to expand its NMP processing capability.
Sales for the aluminum recycling group increased to $23.5 million in 1998
from $19.9 million in 1997. Sales were $14.2 million in 1996. The
increase from 1997 to 1998 was due to higher volumes and the acquisition
of Alumitech of Wabash, Inc. During the same interval, operating income
increased from $1.9 million in 1997 to $2.9 million in 1998. Operating
income was $0.2 million in 1996. Management anticipates improved margins
in this segment in 1999 as a result of new products, continuing cost
reductions, and efficiency improvement programs.
Capital expenditures for the metal products group were $10.1 million in
1998 as compared to $5.3 million in 1997 and $2.3 million in 1996. The
1998 expenditures were primarily directed to the construction and
commercialization of a new NMP processing facility at the Cleveland plant
and the acquisition of the aluminum dross recycling operation in Wabash,
Indiana. In 1999, capital expenditures are anticipated to be $3.9
million.
RAW MATERIALS AND OTHER REQUIREMENTS
In recent years, the Corporation has not experienced any substantial
difficulty in satisfying the raw materials requirements for its metal
products operations, which is the segment that consumes, rather than
supplies, raw materials. However, no assurance can be given that any
shortages of these or other necessary materials or equipment will not
develop or that increased prices will not adversely affect the
Corporation's business in the future.
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SEASONALITY
The efficiency and productivity of the Corporation's operations can be
affected by unusually severe weather conditions. During the winter of
1998, there were minor production outages at the Corporation's operating
facilities in North Carolina, New York, Ohio and Quebec due to inclement
weather, but they were not significant enough to materially affect 1998
operating results.
COMPETITION
All of the Corporation's products are sold in highly competitive markets
which are influenced by price, performance, customer location, service,
competition, material substitution and general economic conditions. The
Corporation competes with other companies active in industrial minerals
and metal products. No material part of the Corporation's business is
dependent upon any single customer, or upon very few customers, the loss
of any one of which could have a material adverse impact on the
Corporation.
Industrial mineral prices generally are not subject to the price
fluctuations typical of commodity metals. Demand for industrial minerals
is primarily related to general economic conditions, particularly in the
automotive, housing and construction industries. Markets for industrial
mineral products are sensitive not only to service, product performance,
and price, but also to competitive pressures and transportation costs. In
the United States, there are three major feldspathic mineral producers,
including the Corporation. The Corporation is the only North American
producer of phlogopite mica and one of many talc producers.
The Corporation is one of five North American producers of metal powders.
The market for metal powders is affected primarily by product
performance, consistency of quality and price. To some extent,
competition in the metal powder industry is affected by imports of
finished metal powder parts. Product prices over the last several years
have been strongly influenced by available capacity. Demand for metal
powders is a function of general economic conditions, particularly in the
automotive market.
There are numerous aluminum dross processors in the United States,
however, only Alumitech has patented technology which enables it to
process aluminum dross without the necessity for landfill. While the
Corporation competes for the supply of aluminum dross with a number of
other dross processors, the major factor affecting the supply of dross is
the level of activity of the aluminum smelting industry. In addition, as
aluminum is one of the products of aluminum dross reprocessing, commodity
price fluctuations of aluminum may have an impact on the earnings of the
Corporation.
RESEARCH AND DEVELOPMENT
The Corporation carries on an active program of product development and
improvement. Research and development expense was $0.6 million in 1998,
$1.0 million in 1997 and $0.6 million in 1996.
Financial information about industry segments is set forth on pages 53 to
55 of the Annual Report to Shareholders and is incorporated herein by
reference.
ENVIRONMENTAL CONSIDERATIONS
Laws and regulations currently in force which do or may affect the
Corporation's domestic operations include the Federal Clean Air Act of
1970, the National Environmental Policy Act of 1969, the Solid Waste
Disposal Act (including the Resource Conservation and Recovery Act of
1976), the Toxic Substances Control Act, CERCLA (superfund) and
regulations under these Acts, the environmental
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protection regulations of various governmental agencies (e.g. the Bureau
of Land Management Surface Management Regulations, Forest Service
Regulations, and Department of Transportation Regulations), laws and
regulations with respect to permitting of land use, various state and
local laws and regulations concerned with zoning, mining techniques,
reclamation of mined lands, air and water pollution and solid waste
disposal. Currently, the Corporation is not aware of any materially
adverse environmental problems or issues.
EMPLOYEES
The approximate number of employees in the Corporation as of December 31,
1998 is set forth below:
<TABLE>
<S> <C>
Industrial Minerals 325
Metal Powders 172
Aluminum Recycling 187
Corporate 7
-------
Total 691
=======
</TABLE>
Approximately 60 employees at the Corporation's metal powder operations
in Niagara Falls, New York, are covered by a three-year collective
bargaining agreement, which expires April 15, 2001. At the ferrous metal
powder facilities in Tennessee, approximately 41 employees are covered by
a four-year agreement, which expires February 28, 2002.
Approximately 20 employees at Suzorite are covered by a three-year
collective bargaining agreement that expires December 13, 1999.
At Alumitech, approximately 28 employees are covered by two collective
bargaining agreements, one agreement expiring April 30, 1999 and one
agreement expiring December 31, 1999.
On March 26, 1998, the hourly employees at TFC's plant in Spruce Pine,
North Carolina voted in favour of union certification. Contract
negotiations have commenced. The Corporation considers its labour
relations to be good.
FOREIGN OPERATIONS
Most of the Corporation's operations are located in the United States.
One is located in Canada, a country whose institutions and governmental
policies are generally similar to those of the United States. Although
there can be no assurance as to future conditions, the Corporation has
experienced no political activities, social upheavals, currency
restrictions or similar factors which have had any material adverse
effect to date on the results of its operations or financial condition.
EXPORT SALES
The Corporation's industrial minerals, metal powders and aluminum
recycling operations sell their products internationally to a wide
variety of customers including the ceramics, glass and powder metallurgy
industries. Export sales in these three segments were less than 9% of
total sales.
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EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED IN
OFFICER POSITION AGE POSITION SINCE
<S> <C> <C> <C>
Peter Lawson-Johnston Chairman of the Board of Directors 72 1975
Richard L. Lister President and Chief Executive Officer 60 1993
Allen J. Palmiere Vice President, Chief Financial Officer 46 1993
and Assistant Secretary
Peter J. Goodwin President, Industrial Minerals 48 1994
Terrance J. Hogan President, Alumitech, Inc. 43 1995
George E. Gillespie President, Metal Powders 56 1997
Patricia K. Moran Corporate Secretary and 33 1997
Assistant Treasurer
</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.
Mr. Goodwin joined the Corporation in August 1994 and became President of
the Corporation's talc operations in December 1994. From May 1993 to
August 1994, Mr. Goodwin was a self-employed consultant. Mr. Goodwin was
President and Chief Executive Officer of Miller and Co. from August 1990
to May 1993.
Mr. Hogan became President of Alumitech, Inc. in May 1995. Prior to
becoming President, Mr. Hogan was Chief Operating Officer of Alumitech's
subsidiary, Aluminum Waste Technology, Inc., from December 1992 to May
1995.
Mr. Gillespie became President of the Metal Powders Group in April 1997.
Prior to joining the Corporation, Mr. Gillespie was Chairman of the
Operating Committee for three divisions of The Carborundum Company in
1996. Mr. Gillespie was Vice-President Refractories from 1993 to 1996 for
The Carborundum Company.
Ms. Moran assumed the duties of Corporate Secretary and Assistant
Treasurer in May 1997. Prior to that time Ms. Moran served as Assistant
Secretary-Treasurer since February 1995. Ms. Moran has been with the
Corporation since 1993.
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CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE
UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this
report are forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
targeted or projected results. Factors that could cause actual results to
differ materially include, among others, fluctuations in aluminum prices,
problems regarding unanticipated competition, processing, access and
transportation of supplies, availability of materials and equipment,
force majeure events, the failure of plant equipment or processes to
operate in accordance with specifications or expectations, accidents,
labor relations, delays in start-up dates, environmental costs and risks,
the outcome of acquisition negotiations and general domestic and
international economic and political conditions, as well as other factors
described herein or in the Corporation's filings with the Commission.
Many of these factors are beyond the Corporation's ability to predict or
control. Readers are cautioned not to put undue reliance on forward
looking statements.
ITEM 2. PROPERTIES
The industrial minerals segment has operations and mines in Edgar,
Florida; Monticello, Georgia; Boucherville, Quebec; Suzor Township,
Quebec; Natural Bridge, New York; Murphy, North Carolina; Spruce Pine,
North Carolina; Van Horn, Texas; and Benwood, West Virginia. This segment
owns approximately 391,500 square feet of office and plant floor space.
As well, the 60% owned processing facility in Benwood, West Virginia has
approximately twelve acres of land. In 1996, The Feldspar Corporation
purchased 655 acres which contain, at minimum, 20 years additional ore
resources for its Spruce Pine, North Carolina facility. The mineral
deposits currently operated by the industrial minerals segment are
estimated by the Corporation to be at least 25 years, except in the case
of the mica mine in Suzor Township where resources are estimated to be in
excess of 100 years. All of the Corporation's mining properties are
either owned or leased, with the leases expiring from 1999 to 2018.
The metal powders group has operations in Niagara Falls, New York; St.
Marys, Pennsylvania; Greenback, and Maryville, Tennessee. At its facility
in Niagara Falls, Pyron Corporation utilizes approximately 79,000 square
feet of office and plant floor space which it leases from the Niagara
County Industrial Development Agency as part of the Industrial
Development Revenue Bond issued in November 1989 to finance the
construction of an atomized steel powder plant. Lease payments are to be
sufficient to pay the debt service on the Industrial Development Revenue
Bond. The atomized plant utilizes approximately 16,000 square feet of
floor space and is adjacent to the existing facility. The blending plant
in St. Marys, Pennsylvania has 32,000 square feet of plant, office and
storage space and is situated on 3.4 acres of land. The Greenback
facility is situated on 27.5 acres of land of which 6 acres is actively
used in the operations. The Maryville facility is a leased facility which
utilizes approximately 23,000 square feet of office and plant floor
space.
The aluminum recycling group has operations in Cleveland, Ohio;
Macedonia, Ohio; Streetsboro, Ohio and Wabash, Indiana. The aluminum
dross processing plant in Cleveland, Ohio owns 6.1 acres and has
buildings totaling 51,000 square feet. The Streetsboro, Ohio operation
leases approximately 10% of a 36,000 square foot building, which it uses
primarily for office space. The recently built Macedonia facility
includes 72,210 square feet of plant of which 10,000 is designated office
space and is situated on 8 acres of land. The aluminum recycling
operation in Wabash, Indiana sits on approximately 25 acres of land and
has 73,300 square feet of plant and office space.
All facilities are maintained in good operating condition.
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ITEM 3. LEGAL PROCEEDINGS
During 1998, a civil action brought by Dryvit Systems, Inc. ("Dryvit") in
the State of Rhode Island captioned Dryvit Systems, Inc. v. The Feldspar
Corporation, Taggart Sand Products Corp., Surface Systems, Inc., The
Morie Company, Inc., Eriez Magnetics, Inc., and Law Engineering, Inc.,
C.A. No. KC 93-108, State of Rhode Island, Kent was settled. Dryvit
alleged that between approximately 1985 and 1990, that the sand it
purchased from TFC and other suppliers and utilized to manufacture
exterior insulation finishes for the exterior of buildings developed rust
stains because the sand contained pyrite and magnetic materials. The
Corporation's settlement costs were covered by its liability insurance.
In February 1999, the Corporation received notice that it was party to an
action captioned Marsha Fisher-Carrington Administratrix to the Estate of
Larry Carrington v. Aluminum Waste Technology, Inc. and Alumitech, Inc.,
et al., Court of Common Pleas, Cuyahoga County, Ohio, Case Number 373502.
The action arises from an accidental fatality that occurred at Alumitech
of Cleveland, Inc. in January 1997. The plaintiff is seeking damages on
the basis that the Corporation failed to provide a safe working area. The
Corporation is of the opinion that the claim is without merit; however,
should the plaintiff be successful, the Corporation believes its costs
will be covered by primary and excess liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Information responsive to this Item is set forth on page 31 of
registrant's Annual Report to Shareholders and is incorporated herein by
reference. The Annual Report to Shareholders is included as Exhibit 13 to
this Form 10-K Annual Report. The Annual Report to Shareholders, except
for those portions thereof which are expressly incorporated by reference
herein, is furnished for the information of the Commission and is not to
be deemed "filed" as part of this Form 10-K report.
ITEM 6. SELECTED FINANCIAL DATA
Information responsive to this item is set forth on page 62 of the Annual
Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Information responsive to this Item is set forth on pages 23 through 31
of the Annual Report to Shareholders and is incorporated herein by
reference.
9
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements responsive to this Item are set forth on pages 32
through 61 of the Annual Report to Shareholders and are incorporated
herein by reference. The Supplementary Schedule required by this Item is
set forth on page S-1 of this Form 10-K Annual Report. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about the directors of the Corporation required by this
item is located in the Corporation's Proxy Statement for the 1999 Annual
Meeting to be filed within 120 days after the end of the fiscal year.
Information about the Executive Officers of the Corporation required by
this item appears in Part I, Item 1, of this Annual Report on Form 10-K*.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Corporation's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after
the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this item appears in the Corporation's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after
the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Corporation's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after
the end of the fiscal year.
[FN]
- --------
* Reference in this Annual Report on Form 10-K to material contained in
the Corporation's Proxy Statement for the 1999 Annual Meeting to be filed
within 120 days after the fiscal year incorporate such material into this
Report by reference.
</FN>
10
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
1. Financial statements and independent auditors' report filed as part of
this report:
(a) Consolidated Balance Sheets at December 31, 1998 and
1997, which information is incorporated by reference
under Item 8 of this report;
(b) Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1998, which information
is incorporated by reference under Item 8 of this
report;
(c) Consolidated Statements of Income for the three years
ended December 31, 1998, which information is
incorporated by reference under Item 8 of this report;
(d) Consolidated Statements of Cash Flows for the three
years ended December 31, 1998, which information is
incorporated by reference under item 8 of this report;
(e) Notes to the Consolidated Financial Statements, which
information is incorporated by reference under Item 8
of this report;
(f) Independent Auditors' Report, which information is
incorporated by reference under Item 8 of this report;
(g) the Corporation's Current Report on Form 8-K dated
January 15, 1999 and filed with the Commission on
January 20, 1999; and
(h) the Corporation's Current Report on Form 8-K dated
January 21, 1999 and filed with the Commission on
January 22, 1999.
2. Financial statement schedules and independent auditors' report filed
as part of this report:
SCHEDULE NUMBER DESCRIPTION
-- Report of Independent Auditors
Schedule IX Valuation and Qualifying Accounts
and Reserves (page S-1)
All other financial statements and schedules not listed have been omitted
since the required information is included in the consolidated financial
statements or the related notes thereto, or is not applicable or
required.
With the exception of the aforementioned financial statements and
schedule, and the information incorporated in Items 1 and 2 and Items 5
through 8, the 1998 Annual Report is not deemed to be filed as part of
this Annual Report on Form 10-K. Schedules not included in this Form 10-K
have been omitted because they are not applicable or the required
information is shown in the financial statements in the 1998 Annual
Report or notes related thereto.
11
<PAGE> 15
3. EXHIBITS
(3)(a) Articles of Continuance (Incorporated by reference from
Exhibit 3.1 of the Corporation's Registration Statement on
Form S-4, Registration No. 333-65307, which was declared
effective on December 10, 1998)
(3)(b) Articles of Amendment to the Articles of Continuance
(Incorporated by reference from Exhibit 3.2 of the
Corporation's Registration Statement on Form S-4,
Registration No. 333-65307, which was declared effective on
December 10, 1998)
(3)(c) By-Law No. 1 (Incorporated by reference from Exhibit 3.3 of
the Corporation's Registration Statement on Form S-4,
Registration No. 333-65307, which was declared effective on
December 10, 1998)
(4)(a) Indenture of Trust dated as of November 1, 1989 between
Niagara County Industrial Development Agency and The Bank
of New York as trustee for Pyron Corporation (Incorporated
by reference from Exhibit (4)(a) of the Corporation's
Annual Report on Form 10-K filed March 31, 1990)
(4)(b) Agency Mortgage and Security Agreement dated as of November
1, 1989 from Pyron Corporation and Niagara County
Industrial Development Agency to The Bank of New York
(Incorporated by reference from Exhibit (4)(b) of the
Corporation's Annual Report on Form 10-K filed March 31,
1990)
(4)(c) Letter of Credit Reimbursement Agreement dated as of
November 1, 1989 between Pyron Corporation and Chemical
Bank (Incorporated by reference from Exhibit (4)(c) of the
Corporation's Annual Report on Form 10-K filed March 31,
1990)
(4)(d) First Amendment to Letter of Credit Reimbursement Agreement
dated as of November 1, 1989 between Pyron Corporation and
Chemical Bank (Incorporated by reference from Exhibit
(4)(d) of the Corporation's Annual Report on Form 10-K
filed March 31, 1990)
(4)(e) Second Amendment to Letter of Credit Reimbursement
Agreement dated as of March 15, 1995 between Pyron
Corporation and Chemical Bank (Incorporated by reference
from Exhibit (4)(e) of the Corporation's Annual Report on
Form 10-K filed March 30, 1995)
(4)(f) Bank Mortgage and Security Agreement dated as of November
1, 1989 from Pyron Corporation and Niagara County
Industrial Development Agency to Chemical Bank
(Incorporated by reference from Exhibit (4)(e) of the
Corporation's Annual Report on Form 10-K filed March 31,
1990)
(4)(g) Building Loan Agreement dated as of November 1, 1989
between Chemical Bank and Pyron Corporation (Incorporated
by reference from Exhibit (4)(f) of the Corporation's
Annual Report on Form 10-K filed March 31, 1990)
12
<PAGE> 16
(4)(h) Security Agreement dated as of November 1, 1989 between
Pyron Corporation and Chemical Bank (Incorporated by
reference from Exhibit (4)(g) of the Corporation's Annual
Report on Form 10-K filed March 31, 1990)
(4)(i) Corporate Guaranty dated as of November 1, 1989 from Zemex
Corporation to Chemical Bank (Incorporated by reference
from Exhibit (4)(h) of the Corporation's Annual Report on
Form 10-K filed March 31, 1990)
(4)(j) First Amendment to Corporate Guaranty dated as of November
1, 1989 of Zemex Corporation to Chemical Bank (Incorporated
by reference from Exhibit (4)(i) of the Corporation's
Annual Report on Form 10-K filed March 31, 1990)
(4)(k) Second Amendment to Corporate Guaranty dated as of March
14, 1991 of Zemex Corporation to Chemical Bank
(Incorporated by reference from Exhibit (4)(j) of the
Corporation's Annual Report on Form 10-K filed March 31,
1991)
(4)(l) Third Amendment to Corporate Guaranty dated as of February
25, 1992 of Zemex Corporation to Chemical Bank
(Incorporated by reference from Exhibit (4)(m) of the
Corporation's Annual Report on Form 10-K filed March 31,
1993)
(4)(m) Fourth Amendment to Corporate Guaranty dated as of March 8,
1993 of Zemex Corporation to Chemical Bank (Incorporated by
reference from Exhibit (4)(o) of the Corporation's Annual
Report on Form 10-K filed March 31, 1993)
(4)(n) Fifth Amendment to Corporate Guaranty dated as of March 15,
1995 of Zemex Corporation to Chemical Bank (Incorporated by
reference from Exhibit (4)(n) of the Corporation's Annual
Report on Form 10-K filed March 30, 1995)
(4)(o) Loan and Security Agreement dated as of March 15, 1995
among Zemex Corporation and The Feldspar Corporation and
NationsBank of Tennessee, N.A. and Chemical Bank and
NationsBank of Tennessee, N.A., as Agent (Incorporated by
reference from Exhibit (4)(p) of the Corporation's Annual
Report on Form 10-K filed March 30, 1995)
(4)(p) Amendment No. 1 dated as of March 12, 1997 to the Loan and
Security Agreement dated as of March 15, 1995 among Zemex
Corporation and The Feldspar Corporation and NationsBank of
Tennessee, N.A. and Chemical Bank and NationsBank of
Tennessee, N.A., as Agent
*(10)(a) Key Executive Common Stock Purchase Plan (Incorporated by
reference from Exhibit (10)(b) of the Corporation's Annual
Report on Form 10-K filed March 31, 1991)
(10)(b) Consent to Assignment of Lease and to Agreement Sublease,
and permission to Make Payments dated November 7, 1978 each
from Joberta Enterprises, Inc. to NL Industries, Inc. and
The Feldspar Corporation (Incorporated by reference from
Exhibit 10(pp) to the Corporation's Registration Statement
on Form S-2, Registration No. 33-7774, filed on August 5,
1986)
(10)(c) Additional Lease Agreement dated as of November 1, 1989
between Niagara County Industrial Development Agency and
Pyron Corporation (Incorporated by reference from Exhibit
(10)(ll) of the Corporation's Annual Report on Form 10-K
filed March 31, 1990)
13
<PAGE> 17
*(10)(d) Subscription Agreement with Richard L. Lister dated
November 26, 1991 (Incorporated by reference from Exhibit
(5)(a) of the Corporation's Annual Report on Form 10-K
filed March 31, 1992)
(10)(e) 1995 Stock Option Plan (Incorporated by reference from
Exhibit B of the Corporation's 1995 Definitive Proxy
Statement, filed on March 29, 1995)
(10)(f) Suzorite Mica Product Inc.'s Mining Lease dated August 25,
1975 between the Province of Quebec and Marietta Resources
International Ltd. (Incorporated by reference from Exhibit
10(av) of the Corporation's Annual Report on Form 10-K
filed March 31, 1994)
(10)(g) Employee Stock Purchase Plan (Incorporated by reference as
Exhibit A to the Corporation's Proxy Statement filed May 6,
1994)
(10)(h) Asset Purchase Agreement dated December 7, 1994 between
Whittaker, Clark & Daniels, Inc., Clark Minerals, Inc.,
Cherokee Minerals, Inc. and Pioneer Talc Company and
Suzorite Mineral Products, Inc. and Zemex Corporation
(Incorporated by reference from Exhibit 10(u) of the
Corporation's Annual Report on Form 10-K filed March 30,
1995)
(10)(i) 1999 Stock Option Plan (Incorporated by reference from
Exhibit A of the Corporation's 1999 Definitive Proxy
Statement, filed on March 25, 1999)
(10)(j) 1999 Employee Stock Purchase Plan (Incorporated by
reference as Exhibit B to the Corporation's Proxy Statement
filed March 25, 1999)
(13) 1998 Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23)(a) Consent of Deloitte & Touche LLP, Independent Auditors
(27) Financial Data Schedule
* Management contract or compensatory plan or arrangement.
14
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
RE: ZEMEX CORPORATION - ANNUAL REPORT ON FORM 10-K
We have examined the supporting schedule on page S-1 of this Annual
Report of Form 10-K for the year ended December 31, 1998. In our opinion,
this schedule presents fairly, when read in conjunction with the related
consolidated financial statements, the financial data required to be set
forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
February 5, 1999
15
<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 26, 1999 Richard L. Lister
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ PETER O. LAWSON-JOHNSTON Chairman of the Board March 26, 1999
- ----------------------------------- and Director
Peter O. Lawson-Johnston
/s/ RICHARD L. LISTER President and Chief Executive March 26, 1999
- ----------------------------------- Officer and Director
Richard L. Lister (Principal Executive Officer)
/s/ PAUL A. CARROLL Director March 26, 1999
- -----------------------------------
Paul A. Carroll
/s/ MORTON A. COHEN Director March 26, 1999
- -----------------------------------
Morton A. Cohen
/s/ JOHN M. DONOVAN Director March 26, 1999
- -----------------------------------
John M. Donovan
/s/ R. PETER GILLIN Director March 26, 1999
- -----------------------------------
R. Peter Gillin
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ GARTH A.C. MACRAE Director March 26, 1999
- -----------------------------------
Garth A.C. MacRae
/s/ WILLIAM J. VANDEN HEUVEL Director March 26, 1999
- -----------------------------------
William J. vanden Heuvel
/s/ ALLEN J. PALMIERE Vice President, Chief Financial March 26, 1999
- ----------------------------------- Officer and Assistant Secretary
Allen J. Palmiere (Principal Financial and
Accounting Officer)
</TABLE>
17
<PAGE> 21
LIST OF EXHIBITS
EXHIBIT 13 1998 Annual Report to Shareholders
EXHIBIT 21 Subsidiaries of the Registrant
EXHIBIT 23(A) Independent Auditors' Consent
EXHIBIT 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
summary of operations
Net Sales $103,894,000 $ 97,226,000 $86,420,000
Operating Income 10,192,000 8,371,000 3,066,000
Other, net (expense) income (822,000) 1,635,000 455,000
Net Income 5,365,000 5,793,000 2,612,000
Capital Expenditures 20,728,000 16,584,000 16,426,000
financial position
Working Capital $ 14,810,000 $ 18,975,000 $18,688,000
Shareholders' Equity 81,898,000 76,535,000 70,997,000
per common share
Net Income $ 0.65 $ 0.70 $ 0.32
Shareholders' Equity 9.41 9.04 8.59
common shares
Weighted Average Common Shares Outstanding 8,286,178 8,267,630 8,272,904
Common Shares Issued And Outstanding At Year End 8,707,796 8,463,491 8,269,099
</TABLE>
Note: all dollar amounts shown herein are in U.S. dollars
TABLE OF CONTENTS
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . .2
Industrial Minerals . . . . . . . . . . . . . . . . . . . . . . . .5
Metal Powders . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Alumitech . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Management's Discussion and Analysis . . . . . . . . . . . . . . .23
Independent Auditors' Report . . . . . . . . . . . . . . . . . . .32
Management's Report . . . . . . . . . . . . . . . . . . . . . . . 33
Audit Committee Report . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Financial Statements . . . . . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements . . . . . . . . . . . 38
Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . .61
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 62
Zemex Corporation 1
<PAGE> 2
TO OUR SHAREHOLDERS
Despite the turmoil that affected world markets in 1998, Zemex reported a 22%
increase in operating earnings on a 7% increase in sales. Each of our divisions
executed its business strategy well in 1998, focusing on quality and service as
well as cost reduction and production optimization. We also significantly
increased margins, acquired and digested two acquisitions and developed several
new value-added products during the year. These efforts should help make our
customers more competitive and give Zemex a sustainable competitive advantage in
the marketplace, enhancing our position and profitability going forward.
We have experienced and knowledgeable teams in place at the divisional level and
have developed leading positions in niche markets, earning a reputation among
our customers and suppliers as a well-run, highly-competitive company. Our
strength is found in both our sales and marketing teams and our eighteen
operating facilities; they have positioned us as a major supplier of industrial
minerals, metal powders, and specialty products. A hidden strength is our
pre-eminent industrial mineral resource position, one of the strongest of any
competitive North American supplier.
In recent months, Zemex has had somewhat of a re-birth with its reincorporation
in Canada. In view of this, we would like to answer some questions our
shareholders have posed with respect to the past year and our strategy going
forward, and address what we believe are currently the salient issues for
shareholders.
Reincorporation
The change in domicile of the Corporation from Delaware to Canada resulted from
our desire to foster greater access to Canadian capital markets and especially
Canadian investors who appear to have a significant interest in industrial
minerals and metal processing companies. This change in domicile did not result
in any change to the business of Zemex or to the equity or voting interests of
our shareholders. However, it did result in our common shares being listed on
both the Toronto Stock Exchange and the New York Stock Exchange, which should
result in greater exposure in the marketplace and ultimately benefit our
shareholders.
The basis for this change is straightforward. Zemex is a successful and
profitable company, as witnessed by our growth over the past six years, yet this
has not been reflected in our share price or in our trading volumes. One reason
for this is that Zemex is considered to be a small company by U.S. standards
and, as a result, is often overlooked by U.S. analysts and investors. In the
Canadian marketplace, Zemex is considered a solid, mid-size company and as such
should attract greater interest from the investment community.
Acquisitions
Zemex plans to grow its three divisions, both internally and through synergistic
acquisitions. In 1998, we were fortunate enough to be able to acquire a mica
operation, which will strengthen and augment our industrial mineral group, and
an aluminum dross recycling facility, which will support our growth strategy in
Alumitech. Although we
Zemex Corporation 2
<PAGE> 3
realized some benefit from these acquisitions in 1998, the retrofitting of these
two acquisitions carried out during 1998 and early 1999 should make a
significant contribution to earnings in 1999.
One of the major frustrations of 1998 was our thwarted takeover of Inmet Mining
Corporation, a major Canadian base and precious metals mining company. We began
to look at Inmet a couple of years ago. Last spring we reviewed its assets and
decided that they could be of greater value than the marketplace perceived.
Originally, our interest in Inmet stemmed from their Austrian tungsten mine,
concentrator and processing plant, a facility which would have been synergistic
to the technology and target markets of our metal powder operations.
Unfortunately, we were prevented from acquiring Inmet by that company's
defensive measures.
Day-To-Day Business Strategy
Our focus is to substantially increase the inherent value of the Corporation on
an ongoing basis by:
o continuing to deliver superior quality and service to our customers in order
to achieve leading market share positions;
o continuing our focus on developing new value-added products and supporting
them with aggressive marketing and sales programs;
o continuing to pursue compelling, strategically important acquisitions which
meet our demanding criteria and which will closely complement our existing
activities;
o continuing to utilize and improve our technology as an integral tool to
increasing operating efficiency and maintaining our low-cost producer status;
and
o continuing to build a lean, effective, aggressive organization with the
responsiveness necessary to seize emerging opportunities.
In the future, we will continue to turn technology and markets to our advantage,
invest for growth and seek new customers and niche markets. We enter the last
year of this century proud of our accomplishments and confident in the future of
the Corporation.
Today's Zemex Corporation is a strong, growing company. Our strength comes from
the energy, ingenuity and dedication of our employees and our supportive,
knowledgeable board of directors. Their combined commitment to our success is a
competitive advantage few companies can match.
/s/ Richard L. Lister /s/ Peter O. Lawson-Johnston
Richard L. Lister Peter O. Lawson-Johnston
President and Chief Executive Officer Chairman of the Board
Zemex Corporation 3
<PAGE> 4
[ PICTURE ]
Zemex Corporation 4
<PAGE> 5
INDUSTRIAL MINERALS
[PICTURE]
Zemex's industrial minerals group ("ZIM") mines, processes and supplies
industrial mineral products primarily for the ceramics, plastics and coatings
industries. These materials include feldspar, kaolin, mica, talc, barytes and
sand for use in a multitude of consumer and industrial products and
applications. With eleven operating facilities and eight mines located in North
America, ZIM provides strong, growing cash generation and made a solid
contribution to the Corporation's financial results in 1998. ZIM's strategy is
twofold: first, to be the largest or one of the largest suppliers to niche
industries and, second, to ensure that it has the strongest resource base among
its competitors.
ZIM is a major supplier of sodium feldspar to the ceramics industry, where it is
used in the production of ceramic plumbing fixtures and in floor and wall tiles,
and potassium feldspar, which is used in frits, glazes and technical glass
applications such as television picture tubes. ZIM produces appproximately
330,000 tons of sodium and potassium feldspar annually and demand remains
strong.
Zemex Corporation 5
<PAGE> 6
[ PICTURE ]
Zemex Corporation 6
<PAGE> 7
BILL ROGERS
[ PICTURE ]
Zemex Corporation 7
<PAGE> 8
[ PICTURE ]
The company also produces a full range of mica products for use in the
manufacture of paints, plastics, and fillers and supplies almost all of the
high-end, domestic phlogopite mica market. ZIM also has about 30% of the
muscovite mica market, supplying the needs of the paint, plastics and wallboard
industries.
In 1998, the performance of several product categories stood out: sodium and
potassium feldspar sales volumes increased 11.2%, primarily as a result of
continued strong demand from the company's traditional customer base in the
ceramic tile, plumbing fixture, and glassware industries and inroads the company
has made in other new market sectors. ZIM also recorded significant volume
increases in industrial sand products as well as increased market penetration of
its muscovite mica products.
During the year, continued strides were made in margin improvements and
operating efficiencies. At ZIM's feldspar facility in Spruce Pine, North
Carolina, efforts were focused on refining the process and maximizing ore
recovery. The result: a 10% increase in feldspar recovery. Similarly, the
redesign of certain screening circuits has allowed the company to increase
capacity by 30% at ZIM's phlogopite mica processing facility in Boucherville,
Quebec.
Internationally, ZIM continued to implement its talc strategy, forming a joint
venture with Industria Mineraria Italiana Fabi S.r.l ("Fabi"), a highly regarded
technological leader and a major talc supplier to the plastics industry in
Europe. In early 1998, Fabi became a partner in ZIM's Benwood, West Virginia
grinding facility through the acquisition of a 40% interest in a new entity,
Zemex Fabi-Benwood, LLC. This joint venture gives ZIM exclusive access to Fabi's
application technology and has enabled the company to develop and introduce
Zemex Fabi-Benwood world talc products: high-quality talc products targeted to
the more sophisticated North American plastics industry. Additionally, as part
of the joint venture, ZIM has access to Fabi's Mount Seabrook talc deposit in
Australia. This relationship with Fabi will allow ZIM to accelerate its
penetration of the upper end of the finely ground talc business.
The past year also saw the company introduce a variety of muscovite mica
products to the marketplace following ZIM's acquisition of a muscovite mica
operation in the Spruce Pine area of North Carolina. After completion of its
retrofitting in early 1999, this acquisition will allow ZIM to process mined ore
as well as up-grade the by-product
Zemex Corporation 8
<PAGE> 9
[ PICTURE ]
mica produced at its nearby feldspar operation and convert that mica into
high-quality value-added material. As a result of this strategic acquisition,
ZIM will expand its offerings to the paint and plastics industries, markets it
already serves with its phlogopite mica, talc and barytes products. The addition
of muscovite mica to its already expansive product line will allow ZIM to
penetrate the mid-range mica market and become a significant full-line supplier
of mica products.
ZIM is committed to continual improvement in its health and safety record. In
1998, ZIM employees worked 555,000 hours and recorded only one lost time
accident, an improvement of 600% from the previous year. We consider this to be
a very important milestone.
ZIM's substantial growth in the industrial minerals market is being driven by a
concentrated focus on establishing the industry standard for reliable, quality
products with strong customer relationships. In the years ahead, industrial
minerals will increase their importance as a vital part of everyday life,
finding increased use in consumer products ranging from glassware and plumbing
fixtures, to ceramic floor and wall tiles, to paints and plastics. ZIM will be
instrumental in meeting the strong and growing demand for industrial minerals as
a highly efficient producer offering a broad range of quality products backed by
exceptional service and technology.
Zemex Corporation 9
<PAGE> 10
[ PICTURE ]
Zemex Corporation 10
<PAGE> 11
METAL POWDERS
[PICTURE]
Pyron, Zemex's metal powders group, is a leading supplier of ferrous and
non-ferrous metal powders. In recent years, Pyron has redefined its business
strategy to be a producer of specialty value-added products for the rapidly
growing powder metallurgy (P/M) markets serving the automotive and appliance
industries. It produces hydrogen reduced sponge iron powders primarily directed
to the friction industry, both automotive and non-automotive, and it also
produces copper and copper alloy powders for the small appliance, friction and
automotive markets. Pyron has also made significant inroads into developing
powder products for soft magnetics, oxygen removal, projectile components, and
welding rods and wires, as well as a vast array of consumer related products
that require the unique performance characteristics of Pyron's metal powders.
Highly developed complex P/M parts are made by compacting powders into a mold
and sintering the resultant shapes in a controlled-atmosphere. There is
virtually no wastage of material using this process and often little or no need
for secondary machining. Industry sources believe that future demand for P/M
parts should continue to accelerate as metal powders are utilized in larger and
more sophisticated applications.
Zemex Corporation 11
<PAGE> 12
[ PICTURE ]
Zemex Corporation 12
<PAGE> 13
WELKER FAMILY
[ PICTURE ]
Zemex Corporation 13
<PAGE> 14
The reason for this growth is twofold. First, powder producers, such as Pyron,
are now producing higher-quality, more consistent materials. Second, advances in
die and furnace design and in the press equipment used to form powder parts have
made it possible to produce larger and more intricate components. These
compelling advantages are expected to foster future exponential growth for P/M
parts at the expense of forged, machined, and cast components.
Pyron had a successful year in 1998 despite the strike at General Motors, which
resulted in overall industry shipments falling short of forecast. Fortunately,
the disruption had limited effect on Pyron primarily because of concerted
efforts to diversify its customer and market base. In fact, even in light of the
strike, the company established records in sales volumes and made significant
progress in product quality, consistency and service while successfully reducing
manufacturing costs at each of its locations. Sales were up by approximately 5%,
and, due to its focus on value-added products, maximizing production
efficiencies and reducing costs, operating income was up by over 90% compared to
1997. Internally, the development of programs to provide safer working
conditions and improve manufacturing efficiencies have met with outstanding
results and the formation of an across-the-board team spirit. The improvements
made in 1998, combined with those planned for 1999, should firmly establish
Pyron as a high-quality, cost-competitive, niche producer of specialty metal
powders.
The metal powders industry is exacting in its demands for precision blends and
quality products. Today's international standard is ISO-9002 certification, and
in the fourth quarter of 1998 both Pyron's Niagara Falls and St. Marys
facilities earned that certification. It is anticipated that the Tennessee
facilities will receive ISO-9002 certification in 1999.
During 1998, Pyron continued to establish itself as a top line producer of metal
powders through product line extensions, new product development, and the
introduction of valued-added services. Each component is a critical element of
this group's business strategy and has contributed to strong sales growth. Some
of Pyron's recent new product introductions include:
Zemex Corporation 14
<PAGE> 15
o Manganese Sulfide Plus ("MnS+"(TM)). Industry acceptance of Pyron's patented
MnS+, a powder additive designed to improve the machining of P/M parts, grew
nearly 63% in 1998 over the previous year. Additionally, a derivative of MnS+
is currently being evaluated by Pyron as a more environmentally friendly
substitute for lead and antimony sulfide in the production of friction
products.
o Pyron Molybdenum Alloys ("PMAs"). The company recently introduced its line of
PMAs, powders which produce harder parts with higher strength and ductility.
Typical PMA applications, which include gears and sprockets, displace
expensive machined parts thereby reducing costs. Customer product evaluations
are underway and it is expected that these iron-based alloy powders may
displace competing processes and products and be utilized in a number of new
applications.
o Ferro-Phosphorous ("Fe3P"). The introduction of Fe3P, an additive used to
enhance the magnetic characteristics of P/M parts, also added to Pyron's line
of new products in 1998. The 1998 market demand for Pyron Fe3P-based blends
exceeded expectations and we see this usage accelerating in 1999.
o Cu Alloy ("MV-0"). Efforts to energize the non-ferrous product line also
proved successful. Market demand for Pyron non-ferrous products, such as
unique air-atomized and lower priced water-atomized powders, necessitated
bringing back on-line the Maryville, Tennessee production facility. The
additional capacity of the Maryville facility will be used to meet the
anticipated demand for our recently introduced diluted bronze product line
utilizing MV-0. This material is particularly well suited for use in the
production of bushings and bearings.
Pyron is firmly positioned as a market-driven provider of specialty metal
powders and technology-based services. As Pyron moves forward, the plan is to
acquire additional business units and continue to channel assets and resources
toward providing an ever-increasing value-added component for its products and
services, a strategy that should allow Pyron to meet even higher levels of
performance in 1999 and beyond.
Zemex Corporation 15
<PAGE> 16
[ PICTURE ]
Zemex Corporation 16
<PAGE> 17
A L U M I T E C H
[PICTURE]
Alumitech, Zemex's aluminum dross processor, has the potential to be a major
contributor to the future of the Corporation. Zemex initiated its interest in
Alumitech in 1994 and by mid-1995 assumed 100% ownership, believing at that
time, and believing even more so today, that Alumitech's proprietary technology
for recycling aluminum dross represents the way of the future.
Unlike conventional aluminum dross processors, who simply recover aluminum metal
values and send the remaining materials to landfill, Alumitech has a patented
process that enables it to not only recover aluminum metal present in secondary
dross and saltcake (both of which are waste by-products produced in the aluminum
recycling process) but to convert the balance traditionally landfilled into
profitable industrial products. Using its technology, Alumitech has become the
industry leader in developing alternative uses for this residual waste,
otherwise known as non-metallic product ("NMP"), by converting it into products
used in refractory, steel and other metallurgical industries.
Zemex Corporation 17
<PAGE> 18
[PICTURE]
Zemex Corporation 18
<PAGE> 19
[PICTURE]
Zemex Corporation 19
<PAGE> 20
[PICTURE]
Until Alumitech developed its unique "closed-loop" technology, much of the
aluminum dross and saltcake materials generated from secondary aluminum
processing were simply landfilled. The U.S. Department of Energy estimates that
up to two billion pounds of aluminum dross and saltcake are landfilled annually
in the United States, with volumes well in excess of that amount disposed of
elsewhere in the world. This material has been banned from landfills in some
areas of the world.
The past year was one of both ups and downs for Alumitech. On the upside,
Alumitech focused on the construction of its new NMP facility, growth through
acquisition, the consolidation of current operations and the development of new
markets and applications for its products. On the downside, aluminum prices,
which continued to decline from an average of $0.65 per pound in 1997 to an
average of $0.56 per pound in 1998, had a significant negative impact on
Alumitech's financial results. However, the partial year earnings realized from
the acquisition of S&R Enterprises, Inc., partially offset the negative impact
of the reduction in aluminum prices.
During the year, Alumitech completed the construction of the full-scale
commercial NMP regeneration operation at its Cleveland facility, Alumitech of
Cleveland, Inc. Although late, the new processing facility was brought on stream
at the end of the third quarter, but mechanical problems in the start-up phase
have slowed full-scale continuous commercial production. It has been a daunting
process, accompanied by a series of setbacks from an engineering and
construction point of view; however, Alumitech knows where the problems are, and
the solutions, including the necessary retrofitting of some of the equipment,
are being implemented. Despite the dislocation that occurred as a result of the
construction of the NMP facility, the Cleveland operation managed to approximate
the level of throughput achieved in 1997.
In 1998, Alumitech also continued to refine the quality and consistency of its
NMP product offerings: calcium aluminate and feedstock for the production of
refractory ceramic fibre. Calcium aluminate is used to treat molten steel in the
ladle during the final stages of steel refinement just prior to casting.
Although produced only in small non-continuous batches, the calcium aluminate
product has been of good consistant quality.
In June, Alumitech acquired S&R Enterprises, Inc. (since renamed Alumitech of
Wabash, Inc.), an aluminum dross processor located in Wabash, Indiana. This
acquisition improves Alumitech's ability to serve the aluminum industry
Zemex Corporation 20
<PAGE> 21
[PICTURE]
with broader geographic coverage and expanded processing capabilities. This
acquisition is an integral part of Alumitech's business plan -- to grow and
expand the business to better serve the aluminum industry and to optimize the
use of its proprietary technology. Alumitech began a significant expansion
project at this facility to increase this plant's processing capacity. This
first phase of expansion is expected to be completed on schedule by the end of
the first quarter of 1999, with start-up to commence immediately thereafter.
Once Alumitech's newly constructed regeneration facility in Cleveland is up and
running, we should see a positive impact on the company's profitability going
forward. This will, in turn, allow us to shift our sights to the recently
acquired aluminum dross processing facility in Indiana and consider other
locations to build additional processing plants in North American and other
parts of the world. Each of these will use our proprietary technology to turn
aluminum waste into saleable industrial products.
Alumitech's third wholly-owned subsidiary, ETS Schaefer Corporation,
manufactures patented engineered heat-containment systems, refractory ceramic
materials and fire protection materials for commercial structures for use in the
steel making, aluminum, and other high temperature-related industries, as well
as the commercial building industry. In 1998, ETS had record sales and profits
as a result of improved production efficiencies and strong market growth. During
the year it also built a new fabrication plant in Macedonia, Ohio. The on-time
completion of this new production facility at year end has enabled the
consolidation of four existing facilities into one as of the first quarter of
1999 and should foster further improved operating efficiencies in 1999.
Aluminum continues to gain ground as the material of choice in everything from
packaging to automobiles to electrical components. Much of the metal for this
growth is, and will continue to be, produced by the secondary aluminum industry,
Alumitech's customer base. With a greater emphasis on economically competitive,
environmentally sound alternatives to landfilling, the outlook for Alumitech is
extremely positive.
Zemex Corporation 21
<PAGE> 22
FINANCIAL REVIEW
C O N T E N T S
Management's Discussion and Analysis ........................................ 23
Independent Auditors' Report ................................................ 32
Management's Report ......................................................... 33
Audit Committee Report ...................................................... 33
Consolidated Statements of Income ........................................... 34
Consolidated Balance Sheets ................................................. 35
Consolidated Statements of Shareholders' Equity ............................. 36
Consolidated Statements of Cash Flows ....................................... 37
Notes to the Consolidated Financial Statements .............................. 38
1. Summary of Significant Accounting Policies ............................ 38
2. Acquisitions and Dispositions ......................................... 41
3. Inventories ........................................................... 42
4. Property, Plant and Equipment ......................................... 43
5. Other Assets .......................................................... 43
6. Income Taxes .......................................................... 44
7. Pension Plans and Other Postretirement Benefits ....................... 46
8. Long Term Debt ........................................................ 46
9. Common Shares and Stock Options ....................................... 48
10. Reorganization Charges and Unusual Item ............................... 50
11. Operating Leases and Other Commitments ................................ 51
12. Financial Instruments ................................................. 51
13. Changes in Non-Cash Working Capital .................................. 52
14. Related Party Transactions ............................................ 52
15. Segment Information ................................................... 53
16. Contingencies ......................................................... 56
17. Differences from United States Accounting Principles .................. 56
Financial Data (Unaudited) .................................................. 61
Selected Financial Data ..................................................... 62
Zemex Corporation 22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is a discussion and analysis of the results of operations and
financial condition of the Corporation for the years ended December 31, 1998,
1997 and 1996, along with certain factors that may affect the Corporation's
prospective financial condition and results of operations. The following should
be read in conjunction with the consolidated financial statements and related
notes thereto.
overview
The Corporation is a diversified producer of specialty materials and products
for use in a variety of industrial applications. The Corporation operates in
three principal business segments: (i) industrial minerals, which includes The
Feldspar Corporation, Suzorite Mica Products Inc., Suzorite Mineral Products,
Inc., Zemex Fabi-Benwood, LLC, Zemex Industrial Minerals, Inc. and Zemex Mica
Corporation; (ii) metal powders, which includes Pyron Corporation and Pyron
Metal Powders, Inc.; and (iii) aluminum recycling, which includes Alumitech,
Inc., Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc. and ETS Schaefer
Corporation.
The operating performance of the Corporation was significantly better in 1998
than in 1997. Net sales were up 6.9% but, more importantly, gross margin
improved from 27.2% in 1997 to 29.1% in 1998 and income from operations
increased by 21.8%. This was partially as a result of the focus on operation
efficiency and cost control.
In January 1998, the Corporation, through its wholly-owned subsidiary Zemex
Industrial Minerals, Inc., acquired a muscovite mica producer for approximately
$2.0 million. The facilities acquired in the purchase are located in the Spruce
Pine, North Carolina area and now operate under the name Zemex Mica Corporation.
This acquisition enhances the Corporation's position as a major mica supplier.
On February 24, 1998, Industria Mineraria Italiana Fabi S.r.l ("Fabi") became an
investor in the Corporation's talc facility located in Benwood, West Virginia by
acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood,
LLC. As part of the transaction, Fabi paid $3.1 million and is providing access
to its technology. Suzorite Mineral Products, Inc., a wholly-owned subsidiary of
the Corporation, will manage the new entity pursuant to an operatiing agreement.
There was no gain or loss recognized by the Corporation on the transaction.
Effective June 1, 1998, Alumitech, Inc. ("Alumitech"), a wholly-owned subsidiary
of the Corporation, acquired all of the issued and outstanding shares of S&R
Enterprises, Inc. ("S&R") for approximately $5.6 million. S&R is an aluminum
dross processor located in Wabash, Indiana. The acquisition of S&R enhances the
Corporation's position in the dross processing industry and provides a
foundation for future expansion.
Zemex Corporation 23
<PAGE> 24
During the second quarter of 1998, the Corporation proposed a business
combination with Inmet Mining Corporation ("Inmet"). Approximately 4.1 million
shares of Inmet were acquired and financed by the Corporation's credit
facilities, as amended (see Liquidity and Capital Resources). Subsequently, the
transaction was abandoned and the Corporation sold approximately 2.6 million
common shares of Inmet for proceeds of Cdn$14.9 million. The Corporation
recorded a foreign exchange loss of $0.7 million in other income (expense) as a
result of a decline in the value of its Canadian dollar investment in Inmet. The
Corporation remains a significant shareholder of Inmet with approximately 5% of
the issued and outstanding shares.
In August 1997, the Corporation entered into an agreement with respect to
Alumitech's fibre manufacturing operation located in Streetsboro, Ohio. Under
the agreement, the fibre line was sold to a new corporation in which Alumitech
retained a nominal non-voting equity participation. Alumitech and the purchaser
entered into a joint research and development agreement in conjunction with the
purchase and sale agreement. The one-time gain, when netted against certain
other non-recurring items, resulted in other income of $1.8 million.
During the first quarter of 1996, the Corporation recognized reorganization
costs of $1.2 million in connection with the reorganization of its industrial
minerals division and the recognition of a provision for anticipated costs. A
write-down to market of inventory held in Brazil in the amount of $0.5 million
was recorded as a charge against cost of goods sold. The Brazilian enterprise
was unsuccessful primarily due to rapidly deteriorating market prices, which
made market penetration extremely difficult.
The Corporation's strategy going forward is to enhance its position as a leading
supplier of specialty materials through investments in its core businesses, the
introduction of new products, strategic acquisitions and investments in new
technologies.
results of operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales
<TABLE>
<CAPTION>
1998 1997 Change % Change
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Industrial minerals $ 44,835,000 $ 43,396,000 $ 1,439,000 3.3%
Metal powders 35,556,000 33,930,000 1,626,000 4.8%
Aluminum recycling 23,503,000 19,900,000 3,603,000 18.1%
------------ ------------ ------------ ------
$103,894,000 $ 97,226,000 $ 6,668,000 6.9%
============ ============ ============ ======
</TABLE>
The Corporation's net sales for 1998 were $103.9 million, an increase of $6.7
million, or 6.9%, from 1997.
Zemex Corporation 24
<PAGE> 25
The industrial minerals segment recorded a 3.3% increase in sales from $43.4
million in 1997 to $44.8 million in 1998. The increase was primarily due to a
$0.7 million increase from the feldspar group generated by a favourable product
mix and a $0.7 million increase due to increased volume of talc sales. Talc
sales are expected to rise in 1999 as market share continues to increase.
Feldspar sales to the plumbing fixtures industry should increase; however,
uncertainty exists in the tile industry due to the devaluation of the Malaysian
currency.
Net sales of the metal powders division increased 4.8%, or $1.6 million, from
$33.9 million in 1997 to $35.6 million in 1998. The increase was due to
increased market penetration of new value-added products, improved product mix,
and increased volume of ferrous and non-ferrous atomized powders. The ferrous
business is expected to remain strong during 1999 as powdered metal parts become
more widely used by the automotive sector.
The aluminum recycling group recorded an increase of 18.1% in sales, or $3.6
million, from $19.9 million in 1997 to $23.5 million in 1998. This increase was
due to the acquisition of S&R in June 1998. If the effect of the acquisition is
removed, aluminum recycling revenues were static year over year. In the face of
a 13.5% decline in aluminum prices realized, the constant revenue was achieved
by an offsetting increase in volume.
Cost of Goods Sold
Cost of goods sold were $70.8 million in 1997 compared to $73.7 million in 1998.
The corresponding gross margins were 27.2% for 1997 and 29.1% for 1998. The main
increase came from the metal powders group as a result of production
efficiencies and a 9.1% increase in volume sold.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 10.7% from $12.2
million in 1997 to $13.5 million in 1998. As a percentage of sales, SG&A expense
was 13.0% in 1998 as compared to 12.5% in 1997. The increase was primarily due
to the incremental SG&A associated with acquisitions made in 1998, expenses
associated with investigating potential acquisitions, and increased staffing in
the metal powders group.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased by $0.7 million, or 11.8%,
from $5.9 million in 1997 to $6.6 million in 1998. This increase was driven by
capital expenditures made by the Corporation over the past several years.
Prospectively, depreciation will continue to increase as current capital
programs are placed into service.
Operating Income
Operating income increased from $8.4 million for fiscal 1997 to $10.2 million in
fiscal 1998, representing a 21.8% increase.
Zemex Corporation 25
<PAGE> 26
Interest Income
Interest income for the year ended December 31, 1998 was $0.3 million, a slight
increase of $0.1 million over the same period in 1997.
Interest Expense
Interest expense for the year ended December 31, 1998 was $2.6 million, an
increase of $0.5 million over 1997. Total indebtedness increased from $25.5
million at December 31, 1997 to $51.5 million at December 31, 1998. Interest
expense is expected to increase significantly in 1999.
Other Income (Expense)
Other income (expense) changed from income of $1.6 million in 1997 to an expense
of $0.8 million in 1998. The net change year over year was $2.4 million. In
1997, the Corporation recognized other income of $1.6 million. The largest
component of this revenue was generated by a one-time gain on the sale of
Alumitech's fibre line.
In 1998, the Corporation recognized a foreign exchange loss of approximately
$0.7 million. This loss arose from a decline in the value of the Canadian dollar
during the time that the Corporation had a significant investment in Inmet.
Provision for Income Taxes
The provision for income taxes for the fiscal year 1998 was $1.7 million as
compared to $2.3 million in 1997. In 1999, the Corporation will use an effective
tax rate of approximately 28% to calculate its income taxes, reflecting the
permanent difference in the United States arising from the application of
percent depletion to income derived from extractive industries.
Non-Controlling Interest in Loss of Subsidiary
As a result of its sale of a 40% interest in its talc facility located in
Benwood, West Virginia, the Corporation recorded a loss of $41,000 as its
proportionate share of the loss in the new limited liability company.
Net Income and Earnings Per Share
As a result of the factors discussed above, net income for the year ended
December 31, 1998 was $5.4 million, a decrease of $0.4 million from 1997.
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net income $ 5,365,000 $ 5,793,000
Earnings per share - basic $ 0.65 $ 0.70
- - fully diluted $ 0.60 $ 0.65
============= =============
</TABLE>
Zemex Corporation 26
<PAGE> 27
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 powders 33,930,000 31,725,000 2,205,000 7.0%
Aluminum recycling 19,900,000 14,226,000 5,674,000 39.9%
----------- ----------- ----------- ----
$97,226,000 $86,420,000 $10,806,000 12.5%
=========== =========== =========== ====
</TABLE>
The Corporation's net sales for 1997 were $97.2 million, an increase of $10.8
million, or 12.5%, from 1996. Sales in the industrial minerals segment, the
metal powders group, and the aluminum recycling division increased $2.9 million,
$2.2 million and $5.7 million, respectively.
The industrial minerals segment recorded a 7.2% increase in sales from $40.5
million in 1996 to $43.4 million in 1997. The increase was primarily due to a
$1.7 million increase from the feldspar group generated by a favourable product
mix, resulting in slightly higher margins, and a $1.4 million increase due to
increased volume of talc sales.
Net sales in the metal powders group increased 7.0%, or $2.2 million, from $31.7
million in 1996 to $33.9 million in 1997. Of the increase, $1.7 million was due
to increased sales of ferrous metal powders.
The aluminum recycling group generated increased sales of $5.7 million for a
total of $19.9 million in 1997. Of the increase, $1.3 million resulted from a
positive movement in the price of aluminum, $1.6 million resulted from higher
volumes and $2.6 million was due to increased sales of ceramic fibre products.
Cost of Goods Sold
Cost of goods sold were $70.8 million in 1997 compared to $67.0 million in 1996.
The corresponding gross margins were 27.2% for 1997 and 22.5% for 1996. The main
increase in 1997 came from the industrial minerals group as a result of
production efficiencies, a favourable product mix and the 1996 write-down of
inventory held in Brazil.
Selling, General and Administrative Expenses
SG&A expenses increased 15.9% from $10.5 million in 1996 to $12.2 million in
1997. As a percentage of sales, SG&A expense was 12.5% in 1997 as compared to
12.1% in 1996. The increase was due to increased staffing in the industrial
minerals group, expenses associated with reviewing potential acquisitions, and
bonuses paid pursuant to the Corporation's management incentive program. No
management bonuses were paid in respect of the 1996 year.
Zemex Corporation 27
<PAGE> 28
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased by $1.2 million, or 25.1%,
from $4.7 million in 1996 to $5.9 million in 1997. This increase was driven by
capital expenditures made by the Corporation over the past several years.
Operating Income Before Reorganization Charges
Operating income before reorganization charges was $8.4 million in 1997 compared
to $4.3 million in 1996. A $1.2 million reorganization charge was recognized in
the first quarter of 1996 in connection with the reorganization of the
Corporation's industrial minerals division.
Operating Income
Operating income increased from $3.1 million for fiscal 1996 to $8.4 million in
fiscal 1997, representing a 173.1% increase.
Interest Income
Interest income for the year ended December 31, 1997 was $0.2 million compared
to $0.1 million in 1996.
Interest Expense
Interest expense for the year ended December 31, 1997 was $2.1 million, an
increase of $1.1 million over 1996. During 1996, interest expense relating to
the expansion of the Spruce Pine facility was capitalized. During 1997, the
project was completed and, accordingly, the related interest was expensed. Total
indebtedness declined to $25.5 million in 1997 from $26.6 million in 1996.
Other Income (Expense)
In 1997, the Corporation recognized other income of $1.6 million. The largest
component of this revenue was generated by a one-time gain from the sale of
Alumitech's fibre line.
Provision for (Recovery of) Income Taxes
The provision for income taxes for the fiscal year 1997 was $2.3 million as
compared to a tax recovery of $0.9 million in 1996. The 1996 tax recovery
reflected the recognition of the benefit of net operating losses available to
the Corporation.
Zemex Corporation 28
<PAGE> 29
Net Income and Earnings Per Share
As a result of the factors discussed above, net income for the year ended
December 31, 1997 was $5.8 million, an increase of $3.2 million from 1996.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income $ 5,793,000 $ 2,612,000
Earnings per share - basic $ 0.70 $ 0.32
- - fully diluted $ 0.65 $ 0.30
============= =============
</TABLE>
liquidity and capital resources
The Corporation has historically funded its activities through cash flow from
operations, bank debt and sales of capital stock and warrants. During the most
recent three-year period ended December 31, 1998, the Corporation funded all
capital expenditures, acquisitions and debt reduction from a combination of
additional debt, cash flow from operations, and proceeds from the sale of
assets.
Cash Flow from Operations
The Corporation had $14.8 million of working capital at December 31, 1998
compared to $19.0 million at December 31, 1997. During 1998, the Corporation
generated cash flow from operations of $4.6 million as compared to $13.5 million
for 1997. The decrease of $8.9 million was primarily due to a large swing in
non-cash working capital items and in particular a movement in accounts payable
and accrued liabilities in the aggregate amount of $7.1 million. In 1998,
non-cash working capital items consumed $5.5 million in cash as compared to
generating $3.7 million in 1997.
Financing Agreements
In March 1997, the Corporation amended its credit facility to increase the total
availability to $50,224,000. In 1998 the operating line was increased, on a
temporary basis, to $15,000,000. As at December 31, 1998, the operating line was
reduced to $10,000,000 with a further reduction to $5,000,000 to occur on
February 28, 1999. The amended credit facility is further subdivided into four
facilities: (i) a $30,000,000 revolving credit facility; (ii) a $10,000,000
multiple advance term loan facility; (iii) a $5,224,000 standby letter of
credit; and (iv) a $5,000,000 operating line. These facilities are secured by
specific assets and a floating charge over the Corporation's assets. The
facilities bear interest at rates varying from bank prime to bank prime plus
0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon the
financial position of the Corporation. As at December 31, 1998, there was
$10,000,000 outstanding under the operating line, $6,945,000 outstanding under
the multiple advance term loan facility, $30,000,000 outstanding under the
revolving credit facility, and the standby letter of credit was issued to secure
the Corporation's industrial development revenue bond. The operating line
matures June 30, 1999 and is
Zemex Corporation 29
<PAGE> 30
reviewed annually for purposes of renewal. The multiple advance term loan
facility requires quarterly payments of $278,000 with the balance outstanding,
if any, due January 1, 2000. The revolving credit facility expires and must be
repaid on January 1, 2000.
Capital Expenditures
The Corporation's primary capital activities in the past involved the
acquisition of mineral and metal processing businesses, and capital investments
to expand its facilities, increase operating efficiencies, and meet
environmental, health and safety standards at its existing operations. During
1998, capital expenditures were $20.7 million compared to $16.6 million and
$16.4 million for the years ended December 31, 1997 and 1996, respectively.
During 1998, the Corporation spent approximately $7.6 million in cash and
assumed approximately $2.3 million in long term debt to acquire S&R and Aspect
Minerals, Inc. (Zemex Mica Corporation). The capital expenditures and
acquisitions were funded by cash flow from operations and bank indebtedness.
The Corporation is currently completing several major capital programs. These
include retrofitting the aluminum dross plant in Cleveland, expanding capacity
at S&R and retrofitting the mica facility in Spruce Pine, North Carolina. In
aggregate, 1999 capital expenditures are anticipated to be approximately $15.5
million. The Corporation plans on funding these expenditures from a combination
of cash flow from operations and credit facilities.
Although the Corporation's capital budgets provide for certain reclamation and
environmental compliance activities, management does not believe that the cost
of the Corporation's environmental compliance will have a material adverse
effect on the Corporation's results of operations or financial condition in
1999.
seasonality and inflation
Although the Corporation's results from extraction and processing operations are
cyclical due to fluctuations in industrial minerals and metal powders demands,
sales of the Corporation's products are generally not seasonal. Inflation in
recent years has not adversely affected the Corporation's results of operations
and is not expected to adversely affect the Corporation in the future unless it
increases substantially.
year 2000
The Corporation operates in basic industries that do not rely heavily on
computerized systems. The major systems operated by the Corporation are those
for financial reporting all of which are year 2000 compliant. It is the opinion
of management that any year 2000 issues that may arise will not be significant
and will not have a material adverse impact on the financial performance of the
Corporation.
The Corporation is reviewing its key suppliers to determine their exposure to
problems arising from year 2000. The review is being conducted by management
personnel and additional resources are not required.
Zemex Corporation 30
<PAGE> 31
market risk
Market risk represents the risk of loss that may impact the consolidated
financial statements of the Corporation due to adverse changes in financial
market prices and rates. The Corporation's market risk is primarily the result
of fluctuations in interest rates and aluminum prices. Management monitors the
movements in interest rates and performs sensitivity analysis on aluminum prices
and, on that basis, decides on the appropriate measures to take. Prices and
interest rates are such that no measures need be taken at this time.
The Corporation does not hold or issue financial instruments for trading
purposes. A discussion of the Corporation's financial instruments is included in
the financial instruments note to the consolidated financial statements.
capital stock
Zemex Corporation's common shares are traded on the New York Stock Exchange and,
as of February 1, 1999, on the Toronto Stock Exchange under the symbol ZMX. The
price range in which the shares have traded for the past two years is shown
below:
Common Shares
<TABLE>
<CAPTION>
1998 Q1 Q2 Q3 Q4 Year
- -------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
High $ 9.75 $ 10.44 $ 9.19 $ 6.94 $ 10.44
Low 7.81 8.75 6.00 6.00 6.00
Close 9.50 8.75 6.50 6.25 6.25
</TABLE>
<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>
In the fourth quarter of each of 1998, 1997 and 1996, the Corporation declared a
2% stock dividend.
As of December 31, 1998, there were approximately 1,669 holders of record of the
Corporation's common shares. This number includes shares held in nominee name
and, thus, does not reflect the number of holders of a beneficial interest in
the shares.
Zemex Corporation 31
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of Zemex Corporation
We have audited the consolidated balance sheets of Zemex Corporation as of
December 31, 1998 and 1997 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada. Those standards require that we plan and perform the audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Zemex Corporation as of December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in accordance with
accounting principles generally accepted in Canada.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
February 5, 1999
Zemex Corporation 32
<PAGE> 33
MANAGEMENT'S REPORT
The management of Zemex Corporation and its subsidiaries has the responsibility
for preparing the consolidated financial statements presented in this annual
report and for their accuracy and integrity. The statements have been prepared
in conformity with accounting principles generally accepted in Canada, and
include informed judgments and estimates as required. Other financial
information in this annual report is consistent with the financial statements.
Zemex Corporation's system of internal controls is designed to provide
reasonable assurance, at a justifiable cost, as to the reliability of financial
records and reporting and the protection of assets. This system includes
organizational arrangements with clearly defined lines of responsibility.
Deloitte & Touche LLP, independent auditors, have audited the consolidated
financial statements of Zemex Corporation and their opinion is included on the
preceding page.
Zemex Corporation has formal standards of corporate conduct and policies
regarding high standards of ethics and financial integrity. These policies have
been disseminated to appropriate employees and internal control procedures
provide reasonable assurance that violations of these policies, if any, are
detected.
/s/ Allen J. Palmiere /s/ Richard L. Lister
Allen J. Palmiere Richard L. Lister
Vice President and President and
Chief Financial Officer Chief Executive Officer
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is currently composed of two
independent directors, John M. Donovan and Garth A.C. MacRae. The Committee held
three meetings during 1998.
The Audit Committee oversees the financial reporting process of the Corporation
on behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareholder
approval, the selection of the Corporation's independent auditors. The Audit
Committee met with management and representatives of the auditors, Deloitte &
Touche LLP, to review accounting, auditing and financial reporting matters. The
Committee met with Deloitte & Touche LLP representatives without management
present.
/s/ John M. Donovan
John M. Donovan
Chairman, Audit Committee
Zemex Corporation 33
<PAGE> 34
CONSOLIDATED STATEMENTS OF INCOME
(All amounts are in U.S. dollars)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- ----------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 103,894,000 $ 97,226,000 $ 86,420,000
------------- ------------- -------------
Costs and expenses
Cost of goods sold (note 10) 73,678,000 70,826,000 66,952,000
Selling, general and administrative 13,463,000 12,158,000 10,492,000
Depreciation, depletion and amortization 6,561,000 5,871,000 4,694,000
------------- ------------- -------------
93,702,000 88,855,000 82,138,000
------------- ------------- -------------
Operating income before reorganization charges 10,192,000 8,371,000 4,282,000
Reorganization charges (note 10) -- -- 1,216,000
------------- ------------- -------------
Operating income 10,192,000 8,371,000 3,066,000
------------- ------------- -------------
Other income (expense)
Interest income 255,000 150,000 93,000
Interest expense (2,588,000) (2,094,000) (1,041,000)
Other, net (notes 2 and 10) (822,000) 1,635,000 (455,000)
------------- ------------- -------------
(3,155,000) (309,000) (1,403,000)
------------- ------------- -------------
Income before income taxes and non-controlling interest 7,037,000 8,062,000 1,663,000
Provision for (recovery of) income taxes (note 6) 1,713,000 2,269,000 (949,000)
Non-controlling interest in loss of subsidiary (note 2) (41,000) -- --
------------- ------------- -------------
Net income $ 5,365,000 $ 5,793,000 $ 2,612,000
------------- ------------- -------------
Net income per share - basic $ 0.65 $ 0.70 $ 0.32
- fully diluted $ 0.60 $ 0.65 $ 0.30
------------- ------------- -------------
Weighted average number of common shares outstanding 8,286,178 8,267,630 8,272,904
------------- ------------- -------------
</TABLE>
See notes to the consolidated financial statements
Zemex Corporation 34
<PAGE> 35
CONSOLIDATED BALANCE SHEETS
(All amounts are in U.S. dollars)
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- ------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,062,000 $ 2,189,000
Accounts receivable (less allowance for doubtful accounts of $329,000
at December 31, 1998 and $328,000 at December 31, 1997) (note 14) 17,642,000 16,287,000
Inventories (note 3) 18,036,000 17,595,000
Prepaid expenses and other 946,000 786,000
Future tax benefits (note 6) 657,000 1,328,000
------------- -------------
38,343,000 38,185,000
Property, plant and equipment (notes 4 and 8) 89,058,000 70,812,000
Other assets (note 5) 21,374,000 9,777,000
Future tax benefits (non-current) (note 6) 91,000 --
------------- -------------
$ 148,866,000 $ 118,774,000
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (note 8) $ 10,000,000 $ 3,000,000
Accounts payable 6,324,000 9,805,000
Accrued liabilities 4,433,000 3,151,000
Accrued income taxes 644,000 1,235,000
Current portion of long term debt (note 8) 2,132,000 2,019,000
------------- -------------
23,533,000 19,210,000
Long term debt (note 8) 39,354,000 20,527,000
Other non-current liabilities 1,006,000 1,014,000
Future tax obligations (note 6) -- 1,488,000
------------- -------------
63,893,000 42,239,000
------------- -------------
Non-controlling interest in subsidiary company 3,075,000 --
------------- -------------
Shareholders' equity
Common stock (note 9) 8,708,000 9,204,000
Paid-in capital 48,691,000 53,298,000
Retained earnings 28,418,000 24,235,000
Note receivable from shareholder (note 9) (1,749,000) (1,749,000)
Cumulative translation adjustment (2,170,000) (1,588,000)
Treasury stock at cost (note 9) -- (6,865,000)
------------- -------------
81,898,000 76,535,000
------------- -------------
$ 148,866,000 $ 118,774,000
============= =============
</TABLE>
See notes to the consolidated financial statements
/s/ John M. Donovan /s/ Garth A.C. MacRae
Approved by the Board of Directors John M. Donovan Garth A.C. MacRae
Director Director
Zemex Corporation 35
<PAGE> 36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(All amounts are in U.S. dollars)
<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, 1995 $ 8,695,000 $49,692,000 $18,683,000 $ (1,749,000) $(1,218,000) $(3,203,000) $70,900,000
Stock issued under ESPP(a)(b) 73,000 535,000 -- -- -- -- 608,000
Stock dividend(a) 161,000 1,089,000 (1,255,000) -- -- -- (5,000)
Stock options exercised(a) 21,000 84,000 -- -- -- -- 105,000
Stock purchased for treasury(a) -- -- -- -- -- (3,170,000) (3,170,000)
Stock options repurchased -- (96,000) -- -- -- -- (96,000)
Net income for the year -- -- 2,612,000 -- -- -- 2,612,000
Translation adjustment -- -- -- -- 43,000 -- 43,000
----------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at
December 31, 1996 8,950,000 51,304,000 20,040,000 (1,749,000) (1,175,000) (6,373,000) 70,997,000
Stock issued under ESPP(a)(b) 75,000 528,000 -- -- -- -- 603,000
Stock dividend(a) 165,000 1,428,000 (1,598,000) -- -- -- (5,000)
Stock options exercised(a) 14,000 205,000 -- -- -- -- 219,000
Stock purchased for treasury(a) -- -- -- -- -- (492,000) (492,000)
Stock options repurchased -- (167,000) -- -- -- -- (167,000)
Net income for the year -- -- 5,793,000 -- -- -- 5,793,000
Translation adjustment -- -- -- -- (413,000) -- (413,000)
----------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at
December 31, 1997 9,204,000 53,298,000 24,235,000 (1,749,000) (1,588,000) (6,865,000) 76,535,000
Stock issued under ESPP(a)(b) 112,000 776,000 -- -- -- -- 888,000
Stock dividend(a) 170,000 1,008,000 (1,182,000) -- -- -- (4,000)
Stock options exercised(a) 27,000 186,000 -- -- -- -- 213,000
Stock purchased for treasury(a) -- -- -- -- -- (499,000) (499,000)
Stock options repurchased -- (18,000) -- -- -- -- (18,000)
Cancellation of treasury stock (805,000) (6,559,000) -- -- -- 7,364,000 --
Net income for the year -- -- 5,365,000 -- -- -- 5,365,000
Translation adjustment -- -- -- -- (582,000) -- (582,000)
----------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at
December 31, 1998 $ 8,708,000 $48,691,000 $28,418,000 $ (1,749,000) $(2,170,000) $ -- $ 81,898,000
=========== =========== =========== ============ =========== =========== ============
</TABLE>
See notes to the consolidated financial statements
(a) See note 9
(b) employee stock purchase plan ("ESPP")
Zemex Corporation 36
<PAGE> 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts are in U.S. dollars)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- ----------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,365,000 $ 5,793,000 $ 2,612,000
Adjustments to reconcile net income from operations
to net cash flows from operating activities
Depreciation, depletion and amortization 6,561,000 5,871,000 4,694,000
Amortization of deferred financing costs 168,000 147,000 101,000
(Decrease) increase in future tax obligations (909,000) 356,000 (1,761,000)
Non-controlling interest in subsidiary earnings (41,000) -- --
Loss (gain) on sale of property, plant and equipment 19,000 (1,831,000) 255,000
(Increase) decrease in other assets (795,000) (957,000) 670,000
(Decrease) increase in non-current liabilities (191,000) 415,000 (6,000)
Changes in non-cash working capital items(a) (5,536,000) 3,709,000 (533,000)
------------ ------------ ------------
Net cash provided by operating activities 4,641,000 13,503,000 6,032,000
------------ ------------ ------------
Cash flows from investing activities
Additions to property, plant and equipment (20,728,000) (16,584,000) (16,426,000)
Assets acquired in connection with acquisitions,
net of cash acquired(b) (7,468,000) -- --
Acquisitions of securities(b) (14,566,000) -- --
Proceeds on sales of securities 9,696,000 -- --
Proceeds from sale of assets(b) 3,126,000 3,939,000 86,000
------------ ------------ ------------
Net cash used in investing activities (29,940,000) (12,645,000) (16,340,000)
------------ ------------ ------------
Cash flows from financing activities
Proceeds (payments) net, on bank indebtedness 7,000,000 (3,590,000) 3,370,000
Proceeds from long term debt 21,572,000 5,717,000 12,882,000
Repayment of long term debt (4,921,000) (3,169,000) (2,747,000)
Cash paid in lieu of fractional shares (4,000) (5,000) (5,000)
Issuance of common stock(c) 1,101,000 679,000 713,000
Purchase of common stock and options for treasury(c) (516,000) (516,000) (3,266,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 24,232,000 (884,000) 10,947,000
------------ ------------ ------------
Effect of exchange rate changes on cash (60,000) (64,000) (13,000)
------------ ------------ ------------
Net (decrease) increase in cash (1,127,000) (90,000) 626,000
------------ ------------ ------------
Cash and cash equivalents at beginning of year 2,189,000 2,279,000 1,653,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,062,000 $ 2,189,000 $ 2,279,000
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 2,658,000 $ 821,000 $ 393,000
Interest paid 2,957,000 2,412,000 937,000
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Notes received in connection with
sale of assets held for resale(b) (d) $ -- $ 2,274,000 $ --
============ ============ ============
</TABLE>
See notes to the consolidated financial statements
(a) See note 13 (b) See note 2 (c) See note 9 (d) See note 10
Zemex Corporation 37
<PAGE> 38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Basis of Preparation
On January 21, 1999, a reincorporation merger was completed, the effect of which
was to migrate Zemex Corporation from the United States to Canada. The
predecessor Zemex Corporation became a wholly-owned subsidiary of Zemex Canada
Corporation. Zemex Canada Corporation subsequently changed its name to Zemex
Corporation. As the Canadian parent has as its sole asset the shares of the U.S.
subsidiary, and this change in structure has no effect on the ultimate ownership
of Zemex Corporation, these financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and reflect
the results of operations, financial position and changes in cash flows of the
Corporation as though the new structure had been in place for all periods
presented.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies of Zemex Corporation and its subsidiaries (the
"Corporation") are as follows:
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Zemex
Corporation and its subsidiaries. All intercompany transactions have been
eliminated.
B. INVENTORIES
Inventories are stated at the lower of cost or net realizable value and are
computed using the average cost method. It is not practical to segregate
finished products from ore and concentrates. Materials and supplies are
stated at cost using the first-in, first-out or average cost method.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs and maintenance
are charged to expense as incurred. Expenditures for major renewals and
improvements are capitalized. When assets are sold or otherwise retired, the
cost and accumulated depreciation or depletion are removed from the accounts
and any gain or loss is included in results of operations. Provisions for
depreciation are based upon estimated useful lives, using principally the
straight-line method. Depreciation on newly constructed or purchased assets
begins when the asset is placed into production. Depletion of mining
properties and depreciation of other mining assets are computed using the
unit-of-production method, except in the case of the Corporation's mica
operation where the estimated reserves exceed the expected production during
the
Zemex Corporation 38
<PAGE> 39
term of the mining lease. The mica mining lease rights and deferred costs,
including all preproduction and set-up costs, are amortized using the
straight-line method over the term of the mining lease.
D. POSTRETIREMENT BENEFITS
Pension Plans
Generally, the funding policy of the Corporation is to contribute annually at
a rate that is intended to provide for the cost of benefits earned during the
year and which will amortize prior service costs and experience gains and
losses over the average remaining service lives of the employee group.
Healthcare and Other Postretirement Benefits Other Than Pensions
The Corporation accounts for healthcare and other postretirement benefits
other than pensions by accruing for all such amounts during the years in
which employees render the necessary services to be entitled to receive such
benefits. The 1998, 1997 and 1996 amounts include the current year expense
and the transition liability which is being amortized over a twenty-year
period which began in 1993.
E. FOREIGN CURRENCY TRANSLATION
The functional currency for the Corporation's operations is the U.S. dollar.
The assets and liabilities of the Corporation's self-sustaining foreign
operation are translated at the exchange rates in effect at the balance sheet
date. The subsidiary's revenues and expenses are translated at average rates
for the period. The resulting unrealized gains and losses are accumulated as
part of the cumulative translation adjustment component of shareholders'
equity. Foreign currency assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of operations and
cash flows are translated using the average exchange rates during the year.
Gains and losses from foreign currency transactions are included in net
income for the year.
F. REVENUE RECOGNITION
Revenue is recognized when goods are shipped to customers. Consignment sales
are recognized when a customer draws the goods from inventory.
G. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to earnings in the periods in
which they are incurred. Research and development expenses were $636,000,
$961,000 and $622,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
H. PROVISION FOR FUTURE RECLAMATION COSTS
Costs for future reclamation have been provided for based upon estimated
future reclamation costs allocated over the expected productive lives of the
Corporation's quarries and mines.
Zemex Corporation 39
<PAGE> 40
I. INCOME TAXES
The Corporation has early adopted CICA Handbook Section 3465, "Income Taxes".
Section 3465 substantially mirrors the U.S. pronouncement, SFAS No. 109,
"Accounting for Income Taxes". These pronouncements require income taxes to
be recognized during the year in which transactions enter into the
determination of financial statement income, with future taxes being provided
for temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws.
J. EARNINGS PER SHARE
The Corporation calculates basic earnings per share in accordance with
Canadian accounting principles which are substantially in accordance with the
U.S. pronouncement SFAS No. 128, "Earnings Per Share". Under this standard,
earnings per share are calculated based upon the weighted average number of
common shares outstanding. For the purpose of calculating earnings per share,
stock dividends are considered to be issued at the beginning of all periods
presented.
K. DEFERRED FINANCING COSTS
Costs associated with the issuance of long term debt are deferred, and are
being amortized over the term of the debt on a straight-line basis. The
unamortized balance is included in other assets.
L. OTHER ASSETS
Other assets includes assets held for sale which are carried at cost, unless
there has been a decline in their value that is other than temporary in which
case the value of such asset is written down accordingly. In determining the
appropriate value, the Corporation deducts from the estimated selling price
the projected costs to bring the assets into a saleable condition, to dispose
of the assets or to hold the property to an expected date of sale. Other
assets also includes patents which are stated at cost and are being amortized
over their remaining life of 12 years on a straight-line basis. Patents are
evaluated periodically and, if conditions warrant, an impairment charge is
provided.
M. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, highly liquid
investments with original maturities of three months or less when purchased
are considered as cash equivalents.
N. GOODWILL
Goodwill represents the excess of the costs of acquisitions over the fair
values of the net identifiable assets acquired, and is amortized on a
straight-line basis over its estimated useful life, up to a period of 15
years. The Corporation assesses the recoverability of goodwill at each
balance sheet date by determining whether the amortization of the balance
over its remaining useful life can be recovered through projected
undiscounted future operating cash flows.
Zemex Corporation 40
<PAGE> 41
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
Acquisition of Aspect Minerals, Inc.
In January 1998, the Corporation, through its wholly-owned subsidiary, Zemex
Industrial Minerals, Inc., acquired all of the issued and outstanding shares
of Aspect Minerals, Inc., a muscovite mica processor, for approximately $2.2
million, which included the assumption of debt. The two facilities acquired
in the transaction are located in the Spruce Pine, North Carolina area and
are operating under the name Zemex Mica Corporation ("ZMC"). The acquisition
was financed through borrowings on the Corporation's credit facility. The
acquisition of ZMC has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated first to
the assets purchased and liabilities assumed and the excess purchase price
has been allocated to goodwill. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Tangible assets acquired $ 614,000
Liabilities assumed (1,542,000)
Goodwill 2,934,000
-----------
Cash consideration $ 2,006,000
===========
</TABLE>
Acquisition of S&R Enterprises, Inc.
Effective June 1, 1998, Alumitech, Inc., a wholly-owned subsidiary of the
Corporation, acquired all of the issued and outstanding shares of S&R
Enterprises, Inc. ("S&R") for approximately $7.7 million, which included the
assumption of debt. S&R is an aluminum dross processor located in Wabash,
Indiana. The Corporation used its credit facility to finance the acquisition.
The acquisition of S&R has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated first to
the assets purchased and liabilities assumed and the excess purchase price
has been allocated to goodwill. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Tangible assets acquired $ 4,845,000
Liabilities assumed (2,849,000)
Goodwill 3,561,000
-----------
Cash consideration $ 5,557,000
===========
</TABLE>
Zemex Corporation 41
<PAGE> 42
Investment in Inmet Mining Corporation
During the second quarter of 1998, the Corporation proposed a business
combination with Inmet Mining Corporation ("Inmet"). Approximately 4.1
million shares of Inmet were acquired. The purchase was financed by the
Corporation's credit facilities, as amended. Subsequently, the transaction
was abandoned and the Corporation sold, pursuant to an issuer bid,
approximately 2.6 million common shares of Inmet for proceeds of
approximately Cdn$14.9 million. No gain or loss was recognized on the
transaction. The Corporation recorded a foreign exchange loss of $0.7 million
in other income (expense) as a result of a decline in the value of the
Canadian dollar. The Corporation's residual 5% interest in Inmet is included
in other assets.
DISPOSITIONS
Sale of Interest in Benwood Facility
On February 24, 1998, Industria Mineraria Italiana Fabi S.r.1. ("Fabi")
became an investor in the Corporation's talc facility located in Benwood,
West Virginia by acquiring a 40% interest in a new limited liability company,
Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3.1 million
and is providing access to its technology. Suzorite Mineral Products, Inc., a
wholly-owned subsidiary of the Corporation, manages the new entity pursuant
to an operating agreement. There was no gain or loss on the transaction.
Asset Sale
During the third quarter of 1997, the Corporation sold certain assets
utilized to manufacture refractory ceramic fibre. These assets were vended
into a joint venture in which the Corporation retained a nominal interest.
The sale resulted in a pre-tax gain of $1.8 million, which has been included
in other income (expense). Total proceeds were $4.3 million, which included
$2.1 million in cash and $2.3 million in notes receivable included in
accounts receivable.
3. INVENTORIES
<TABLE>
<CAPTION>
1998 1997
------------------- -------------
<S> <C> <C>
Ore, raw materials, work in process and finished products
Industrial minerals $ 9,221,000 $ 8,312,000
Metal powders 3,306,000 3,315,000
Aluminum recycling 321,000 686,000
------------------- -------------
12,848,000 12,313,000
=================== =============
Materials and supplies
Industrial minerals 3,703,000 3,955,000
Metal powders 1,032,000 1,218,000
Aluminum recycling 453,000 109,000
------------------- -------------
5,188,000 5,282,000
------------------- -------------
$ 18,036,000 $ 17,595,000
=================== =============
</TABLE>
Zemex Corporation 42
<PAGE> 43
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Effective Life 1998 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Land $ 6,410,000 $ 5,344,000
Mining properties and deferred costs 8,261,000 8,125,000
Buildings 30 - 40 years 21,267,000 18,092,000
Machinery and equipment 3 - 20 years 77,054,000 64,952,000
Construction in progress 17,077,000 8,308,000
------------ ------------
Total property, plant and equipment, at cost 130,069,000 104,821,000
Less: Accumulated depreciation and amortization (41,011,000) (34,009,000)
------------ ------------
Net property, plant and equipment $ 89,058,000 $ 70,812,000
============ ============
</TABLE>
As of December 31, 1998, the Corporation estimates that approximately
$3,015,000 will be expended to complete its construction in progress (at
December 31, 1997, $3,973,000). During 1998, the Corporation capitalized
$394,000 in interest relating to capital projects (1997, nil).
5. OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Prepaid pension cost $ 1,318,000 $1,378,000
Assets held for resale (note 10) 300,000 300,000
Deferred financing costs 445,000 646,000
Deferred start-up costs 1,191,000 --
Long term note receivable 549,000 549,000
Other 774,000 547,000
Patents, net 5,688,000 6,357,000
Goodwill 6,238,000 --
Investments 4,871,000 --
----------- ----------
$21,374,000 $9,777,000
=========== ==========
</TABLE>
Zemex Corporation 43
<PAGE> 44
6. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Total pre-tax income $ 7,037,000 $ 8,062,000 $ 1,663,000
------------- ------------ -------------
Current income tax provision
Canadian $ 557,000 $ 350,000 $ 76,000
Federal U.S. 1,461,000 1,277,000 478,000
State and local U.S. 352,000 211,000 123,000
------------- ------------ -------------
Total 2,370,000 1,838,000 677,000
------------- ------------ -------------
Future income tax provision
Canadian -- -- --
Federal U.S. (584,000) 279,000 (1,369,000)
State and local U.S. (73,000) 152,000 (257,000)
------------- ------------ -------------
Total (657,000) 431,000 (1,626,000)
------------- ------------ -------------
Provision for (recovery of) income taxes $ 1,713,000 $ 2,269,000 $ (949,000)
============= ============= =============
</TABLE>
The following tabulation reconciles the Canadian statutory income tax rate to
the effective income tax rate.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
% % %
Statutory rate 38.2 38.2 38.2
Mining taxes 2.4 0.4 0.6
Resource allowance (2.5) (1.5) --
Difference in U.S. tax rates (3.4) (3.9) (4.0)
Benefit of operating loss carryforwards -- -- (43.8)
U.S. percentage depletion (11.2) (7.7) (49.6)
Other 0.8 2.6 1.5
---- ---- ----
Effective income tax rate 24.3 28.1 (57.1)
==== ==== ====
</TABLE>
Zemex Corporation 44
<PAGE> 45
Future income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. As at December 31, 1998 and
December 31, 1997, the Corporation had unused tax benefits of $8,239,000 and
$6,661,000, respectively, related to U.S. federal and state net operating loss
and tax credit carryforwards. Significant components of the Corporation's future
tax assets and obligations as of December 31 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
Canada U.S. Total Canada U.S. Total
--------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Future tax assets
Net operating loss and tax
credit carryforwards $ -- $ 8,239 $ 8,239 $ -- $ 6,661 $ 6,661
Accrued expenses and reserves -- 513 513 -- 958 958
Bad debt allowances -- 109 109 -- 110 110
Inventories -- 173 173 -- 280 280
Other -- 173 173 -- 167 167
--------- ------- ------- -------- -------- --------
Gross future tax assets -- 9,207 9,207 -- 8,176 8,176
Valuation allowance -- (1,014) (1,014) -- (523) (523)
--------- ------- ------- -------- -------- --------
Net future tax assets -- 8,193 8,193 -- 7,653 7,653
========= ======= ======= ======== ======== ========
Future tax obligations
Property, plant and equipment 1,879 3,415 5,294 2,012 3,206 5,218
Patent -- 1,456 1,456 -- 1,658 1,658
Pension contributions -- 512 512 -- 580 580
Other -- 183 183 -- 357 357
--------- ------- ------- -------- -------- --------
Total 1,879 5,566 7,445 2,012 5,801 7,813
========= ======= ======= ======== ======== ========
Net future tax (assets) obligations $ 1,879 $(2,627) $ (748) $ 2,012 $(1,852) $ 160
========= ======= ======= ======== ======== ========
</TABLE>
At December 31, 1998, the Corporation had approximately $12,300,000 of U.S.
federal net operating loss carryforwards available to reduce future taxable
income, which will expire between 2002 and 2011. Additionally, for U.S. tax
purposes, the Corporation has unused general business tax credits, which expire
between 1999 and 2011, and alternative minimum tax credits. The Corporation also
has U.S. state net operating losses and investment credit carryforwards;
however, a valuation allowance of $1,014,000 has been recognized to offset the
related future tax asset due to the uncertainty of realizing the full benefit of
the tax attribute carryforward.
Zemex Corporation 45
<PAGE> 46
7. pension plans and other postretirement benefits
Pension Plans
The Corporation has several non-contributory defined benefit pension plans
covering the majority of all U.S. resident employees. The plans provide
pension benefits that are based on the length of service and the compensation
of the employee.
The following table sets forth the financial position of the pension plans:
<TABLE>
<CAPTION>
At December 31, 1998 1997
------------ ------------
<S> <C> <C>
Plan assets at market value $ 16,872,000 $ 16,447,000
Actuarial present value of accrued pension benefits 14,522,000 13,686,000
============ ============
</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 $110,000 in 1998, $66,000 in 1997 and $85,000 in 1996.
8. long term debt
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Credit facility(a) $ 36,945,000 $ 18,056,000
Other term loan(b) 128,000 --
Industrial development revenue bonds(c) 3,060,000 3,570,000
Promissory notes -- 70,000
Capital leases(d) 857,000 654,000
Other 496,000 196,000
------------ ------------
Total debt 41,486,000 22,546,000
Less: Current portion 2,132,000 2,019,000
------------ ------------
Long term debt $ 39,354,000 $ 20,527,000
============ ============
</TABLE>
Zemex Corporation 46
<PAGE> 47
(a) During 1995, the Corporation entered into a $30,224,000 credit facility
with a syndicate of two banks. During 1997, the credit facility was amended
to increase the total availability to $50,224,000. During 1998, the credit
facility was further amended to provide for a short term increase of the
operating line to $15,000,000. As at December 31, 1998, the operating line
was reduced to $10,000,000 with a further reduction to $5,000,000 to occur
February 28, 1999. The amended credit facility is further subdivided into
four facilities: (i) a $30,000,000 revolving credit facility; (ii) a
$10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby
letter of credit; and (iv) a $5,000,000 operating line. These facilities are
secured by specific assets and a floating charge over the Corporation's
assets. The facilities bear interest at rates varying from bank prime to
bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%,
depending upon the financial position of the Corporation. As at December 31,
1998, and December 31, 1997, there was $10,000,000 and $3,000,000,
respectively, outstanding under the operating line and $6,945,000, and
$8,056,000, respectively, outstanding under the multiple advance term loan
facility.
Advances under the revolving credit facility as at December 31, 1998, and
1997 were $30,000,000 and $10,000,000, respectively, and the standby letter
of credit was issued to secure Pyron's Industrial Development Bonds (see (c)
below). The operating line matures June 30, 1999 and is reviewed annually
for renewal. The multiple advance term loan facility requires quarterly
payments of $278,000 which commenced April 1, 1996 with the balance
outstanding, if any, due January 1, 2000. Advances under the revolving
credit facility are, if any, due January 1, 2000.
(b) The other term loan bears interest at 6.79%, requires annual payments of
approximately $40,000 and will be retired in the year 2001.
(c) Pyron Corporation ("Pyron") entered into a lease agreement on November 29,
1989 with the Niagara County Industrial Development Agency (the "Agency") to
partially finance the construction of a manufacturing facility, acquire and
install equipment and machinery, and renovate the existing Pyron facility
for the purpose of manufacturing atomized steel powders. The agreement
authorized the Agency to issue and sell industrial development revenue bonds
in the aggregate principal amount of $7,650,000 to provide the funds for the
project.
While the bonds are not the obligation of Pyron, the agreement requires
Pyron to make quarterly rental payments equal to the debt service under the
sinking fund requirements and interest on the outstanding principal to the
Agency. The amount outstanding at December 31, 1998 and 1997 was $3,060,000
and $3,570,000, respectively. Pyron's annual obligation under the agreement
is $510,000 until paid.
The bonds bear interest at a variable rate not to exceed 15% per annum. The
rate at December 31, 1998 was 4.02% and at December 31, 1997 was 4.15%.
Pyron has the option to convert the bonds to a fixed interest rate at any
time during the term. Under the lease agreement, Pyron may purchase the
facility at any time during the term, which expires November 1, 2004, by
paying the outstanding principal amount of the bonds plus $1.
Zemex Corporation 47
<PAGE> 48
The bonds are collateralized by a mortgage on the land, the new facility and
the existing facility, which have an aggregate net book value of
approximately $10,134,000 at December 31, 1998.
A bank has provided Pyron with a letter of credit which is available to
support Pyron's obligations under the lease agreement. If the bondholders
tender their bonds for repayment, the letter of credit will be utilized to
pay the bondholders. The letter of credit is collateralized under the
credit facility in (a) above. The letter of credit expires on October 1,
1999.
(d) The Corporation has long term capital lease agreements at various rates and
for various terms with maturities ranging from 1999 to 2002 for equipment
used in its operations. The carrying value of the leased equipment as of
December 31, 1998 was $875,000. The current obligation under the long term
lease agreements is $359,000.
Principal repayments on long term debt are as follows:
<TABLE>
<S> <C>
1999 $ 2,132,000
2000 36,771,000
2001 855,000
2002 645,000
2003 573,000
Thereafter 510,000
------------------
$ 41,486,000
==================
</TABLE>
9. COMMON SHARES AND STOCK OPTIONS
Shares Outstanding
As at December 31, 1998, the Corporation's authorized capital stock was
25,000,000 par value one dollar per share, of which 20,000,000 were
denominated common shares and 5,000,000 were denominated preferred shares.
Pursuant to the reincorporation merger effective January 21, 1999, the
authorized capital stock of the Corporation now consists of an unlimited
number of first preference shares without par value and an unlimited number
of common shares without par value. There were 8,707,796 common shares
issued and outstanding as of December 31, 1998 and 8,463,491 common shares
as of December 31, 1997.
During 1998, 1997 and 1996, 131,000, 90,000 and 80,000 common shares,
respectively, were purchased pursuant to the Corporation's employee stock
purchase plan for an aggregate cost of $1,045,000, $729,000 and $672,000,
respectively.
As part of a stock repurchase program in 1998, the Corporation purchased
60,000 common shares on the open market for an aggregate cost of $499,000,
60,000 common shares in 1997 for an aggregate cost of $492,000, and 344,000
common shares in 1996 for an aggregate cost of $3,170,000.
Zemex Corporation 48
<PAGE> 49
Dividends
On October 2, 1998, the Corporation declared a 2% stock dividend to shareholders
of record on October 19, 1998, which was paid November 2, 1998. Retained
earnings were charged $1,182,000 as a result of the issuance of 169,988 of the
Corporation's common shares, and cash payments of $4,000 in lieu of fractional
shares.
On November 21, 1997, the Corporation declared a 2% stock dividend to
shareholders of record on December 1, 1997, which was paid December 15, 1997.
Retained earnings were charged $1,598,000 as a result of the issuance of 165,537
of the Corporation's common shares, and cash payments of $5,000 in lieu of
fractional shares.
On October 18, 1996, the Corporation declared a 2% stock dividend to
shareholders of record on November 4, 1996, which was paid November 18, 1996.
Retained earnings were charged $1,255,000 as the result of the issuance of
161,398 of the Corporation's common shares, and cash payments of $5,000 in lieu
of fractional shares.
Stock Options
The Corporation provides stock option incentive plans and has, with shareholder
approval, issued options to certain directors outside of the plans. The plans
are intended to provide long term incentives and reward to executive officers,
directors and other key employees contingent upon an increase in the market
value of the Corporation's common shares. Options for 10% of the Corporation's
outstanding common shares are issuable under the plans.
The following is a summary of option transactions under the Corporation's stock
option plans:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of year 942,750 845,550 852,550
Options granted during year 357,000 198,000 61,000
Options exercised during the year (26,600) (13,800) (45,000)
Options cancelled during the year (25,500) (87,000) (23,000)
----------- ---------- ----------
Options outstanding at end of year 1,247,650 942,750 845,550
Options exercisable at end of year 746,650 628,250 631,550
----------- ---------- ----------
Price range of options granted during the year $6.50-10.19 $7.00-8.63 $7.75-9.75
=========== ========== ==========
</TABLE>
The options expire from 1999 to 2004.
Zemex Corporation 49
<PAGE> 50
Note Receivable from Shareholder
The note receivable from shareholder of $1,749,000 represents amounts due
from the Corporation's President and Chief Executive Officer pursuant to
the Key Executive Common Stock Purchase Plan. The loan, which was used to
acquire 357,000 shares of common stock of the Corporation, is non-interest
bearing and secured by a pledge of most of the shares acquired. The terms
were amended in 1998 and the loan is now due on the earlier of August 12,
1999 or 30 days after the termination of employment. Since the loan arose
from the sale of treasury stock, it is classified as a reduction of
shareholders' equity.
10. REORGANIZATION CHARGES AND UNUSUAL ITEM
Reorganization Charges
During the first quarter of 1996, the Corporation recognized
reorganization costs of $1,216,000 in connection with the reorganization
of its industrial minerals division and the recognition of a provision for
costs. A write-down to market of inventory held in Brazil in the amount of
$536,000 was also recorded as a charge against cost of goods sold. The
Brazilian enterprise was unsuccessful primarily due to rapidly
deteriorating market prices which made market penetration extremely
difficult.
Unusual Item
In December 1991, the Corporation closed its industrial minerals plant
located in Connecticut. The assets of this operation were reclassified to
assets held for resale and written down in 1991 by $430,000 to their
estimated net realizable value. These assets were written down by a
further $300,000 in 1993. In 1995, a portion of the property was sold for
approximately net book value. In 1996, the purchaser defaulted on the
payment obligations. Accordingly, the Corporation instituted legal action
to repossess the property. A provision of $723,000 was recorded in 1996 to
provide for reclamation costs, legal costs and to write-down the property
to current market value.
Zemex Corporation 50
<PAGE> 51
11. OPERATING LEASES AND OTHER COMMITMENTS
Operating Leases
The Corporation has a number of operating lease agreements primarily
involving equipment, office space, warehouse facilities and rail sidings.
The operating lease for equipment provides that the Corporation may, after
the initial lease term, renew the lease for successive yearly periods or
may purchase the equipment at the fair market value. An operating lease
for office facilities contains escalation clauses for increases in
operating costs and property taxes. The majority of the leases are
cancellable and are renewable on a yearly basis. Future minimum rental
payments required by operating leases that have initial or remaining
non-cancellable lease terms in excess of one year as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Years Minimum Lease Payments
----- ----------------------
<S> <C> <C>
1999 $ 770,000
2000 709,000
2001 631,000
2002 524,000
2003 432,000
Thereafter 2,704,000
-----------
Total minimum lease payments $ 5,770,000
===========
</TABLE>
Rent expense was $569,000, $492,000 and $668,000 in 1998, 1997 and 1996,
respectively.
12. FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Corporation's
customer base and their dispersion across a number of different
industries, principally construction, glass, electrical and automotive.
Financial instruments comprise cash and cash equivalents, accounts
receivable, short term bank borrowings, accounts payable, accrued
liabilities, and long term debt. The fair value of these financial
instruments approximates their carrying value reflecting: (i) the
proximity to market rates of the interest obligations on the debt
instruments; and (ii) the limited durations of all of the other
instruments.
Zemex Corporation 51
<PAGE> 52
13. CHANGES IN NON-CASH WORKING CAPITAL
The changes in non-cash working capital items are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(Increase) in accounts receivable $ (476,000) $(1,285,000) $(1,838,000)
(Increase) decrease in inventories (173,000) 576,000 2,005,000
(Increase) decrease in prepaid expenses and other (120,000) 602,000 (547,000)
(Decrease) increase in accounts payable and
accrued liabilities (4,177,000) 2,882,000 (185,000)
(Decrease) increase in accrued income taxes (590,000) 934,000 32,000
----------- ----------- -----------
$(5,536,000) $ 3,709,000 $ (533,000)
=========== =========== ===========
</TABLE>
14. RELATED PARTY TRANSACTIONS
As at December 31, 1998 and 1997, accounts receivable included amounts due
from directors and one officer of $100,000 and $115,000, respectively.
These amounts are non-interest bearing, with no fixed terms of repayment.
During 1997, the Corporation agreed to guarantee a personal loan in the
amount of $600,000 drawn down by the President and Chief Executive
Officer. The proceeds of the loan were used to acquire common shares of
the Corporation on the open market. The shares acquired are held by the
Corporation as security for the guarantee.
During 1998, the Corporation extended a short term loan to the President
and Chief Executive Officer. The maximum amount outstanding was $200,000
and it bore interest at the Corporation's cost of borrowing. The loan was
repaid in full by December 31, 1998.
During 1998, a director became indebted to the Corporation in the amount
of $124,000. At December 31, 1998, $116,000 remained outstanding. This
obligation is collateralized and bears interest at the Corporation's cost
of borrowing (7.4% at December 31, 1998).
Zemex Corporation 52
<PAGE> 53
15. SEGMENT INFORMATION
The Corporation has three principal lines of business and is organized
into three operating units based on its product lines: (i) industrial
minerals, (ii) metal powders and (iii) aluminum recycling. Industrial
mineral products include feldspar, kaolin, mica, talc, baryte, feldspathic
sand and industrial sand. These products are marketed principally to the
automotive, housing, and ceramics industries in North America. They are
produced from mines and processing plants located near Edgar, Florida;
Monticello, Georgia; Murphy, North Carolina; Spruce Pine, North Carolina;
Natural Bridge, New York; Van Horn, Texas; Benwood, West Virginia;
Boucherville, Quebec; and Suzor Township, Quebec. Metal powders are
processed in Niagara Falls, New York; St. Marys, Pennsylvania; and
Greenback and Maryville, Tennessee. The Corporation's ferrous and
non-ferrous metal powders are marketed primarily in North America to
manufacturers of powder metallurgy parts used in the automotive and
transportation industries. Aluminum dross is recycled at plants in
Cleveland, Ohio and Wabash, Indiana and ceramic fibre products are
fabricated at a plant in Macedonia, Ohio. Corporate assets principally
include cash, term deposits and furniture and fixtures.
The accounting policies of the segments are the same as those described in
note 1.
Information pertaining to sales and earnings from operations and assets by
business segment appears below:
<TABLE>
<CAPTION>
Industrial Metal Aluminum
Year Ended December 31, 1998 Consolidated Minerals Powders Recycling Corporate
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 103,894,000 $ 44,835,000 $ 35,556,000 $ 23,503,000 $ --
Depreciation, depletion and
amortization 6,561,000 3,536,000 1,208,000 1,384,000 433,000
Operating income (loss) 10,192,000 5,840,000 3,990,000 2,881,000 (2,519,000)
Interest income 255,000 -- 53,000 49,000 153,000
Interest (expense) (2,588,000) (60,000) (204,000) (34,000) (2,290,000)
Income (loss) before income taxes
and non-controlling interest 7,037,000 5,674,000 3,857,000 2,933,000 (5,427,000)
Provision for income taxes 1,713,000 556,000 -- -- 1,157,000
Non-controlling interest in
loss of subsidiary (41,000) (41,000) -- -- --
Net income (loss) 5,365,000 5,159,000 3,857,000 2,933,000 (6,584,000)
------------- ------------- ------------- ------------- -----------
</TABLE>
Zemex Corporation 53
<PAGE> 54
<TABLE>
<CAPTION>
Industrial Metal Aluminum
Year Ended December 31, 1997 Consolidated Minerals Powders Recycling Corporate
- ---------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 97,226,000 $ 43,396,000 $ 33,930,000 $ 19,900,000 $ --
Depreciation, depletion and
amortization 5,871,000 3,228,000 1,107,000 1,134,000 402,000
Operating income (loss) 8,371,000 6,497,000 2,376,000 1,925,000 (2,427,000)
Interest income 150,000 -- 50,000 73,000 27,000
Interest (expense) (2,094,000) (9,000) (245,000) (84,000) (1,756,000)
Income before income taxes 8,062,000 6,659,000 2,200,000 3,726,000 (4,523,000)
Provision for income taxes 2,269,000 350,000 -- -- 1,919,000
Net income (loss) 5,793,000 6,309,000 2,200,000 3,726,000 (6,442,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Industrial Metal Aluminum
Year Ended December 31, 1996 Consolidated Minerals Powders Recycling Corporate
- ---------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 86,420,000 $ 40,469,000 $ 31,725,000 $ 14,226,000 $ --
Depreciation, depletion and
amortization 4,694,000 2,352,000 1,032,000 915,000 395,000
Operating income (loss) 3,066,000 2,764,000 2,377,000 213,000 (2,288,000)
Interest income 93,000 -- 32,000 -- 61,000
Interest (expense) (1,041,000) (89,000) (176,000) (263,000) (513,000)
Income before income taxes 1,663,000 1,843,000 2,288,000 6,000 (2,474,000)
(Recovery of) provision for
income taxes (949,000) 75,000 -- -- (1,024,000)
Net income (loss) 2,612,000 1,768,000 2,288,000 6,000 (1,450,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Industrial Metal Aluminum
December 31, 1998 Consolidated Minerals Powders Recycling Corporate
- ----------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $148,866,000 $ 74,104,000 $ 24,969,000 $ 33,464,000 $ 16,329,000
Total current liabilities 23,533,000 5,029,000 3,210,000 3,777,000 11,517,000
Total long term liabilities 40,360,000 1,035,000 2,603,000 678,000 36,044,000
Total shareholders' equity 81,898,000 -- -- -- 81,898,000
------------ ------------ ------------ ------------ ------------
</TABLE>
Zemex Corporation 54
<PAGE> 55
<TABLE>
<CAPTION>
Industrial Metal Aluminum
December 31, 1997 Consolidated Minerals Powders Recycling Corporate
- ----------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $118,774,000 $ 65,750,000 $ 24,547,000 $ 17,853,000 $ 10,624,000
Total current liabilities 19,210,000 5,437,000 4,317,000 4,047,000 5,409,000
Total long term liabilities 23,029,000 3,065,000 3,107,000 279,000 16,578,000
Total shareholders' equity 76,535,000 -- -- -- 76,535,000
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Industrial Metal Aluminum
December 31, 1996 Consolidated Minerals Powders Recycling Corporate
- ----------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $109,376,000 $ 60,914,000 $ 24,152,000 $ 12,993,000 $ 11,317,000
Total current liabilities 19,166,000 4,752,000 3,494,000 3,783,000 7,137,000
Total long term liabilities 19,213,000 2,706,000 3,706,000 898,000 11,903,000
Total shareholders' equity 70,997,000 -- -- -- 70,997,000
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Industrial Metal Aluminum
Consolidated Minerals Powders Recycling Corporate
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998
Capital expenditures $20,728,000 $ 8,283,000 $ 2,113,000 $10,124,000 $ 208,000
Goodwill acquired 6,495,000 2,934,000 -- 3,561,000 --
----------- ----------- ----------- ----------- -----------
1997
Capital expenditures $16,584,000 $ 9,945,000 $ 1,319,000 $ 5,314,000 $ 6,000
Goodwill acquired -- -- -- -- --
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Canada U.S.
------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Capital expenditures $ 605,000 $ 734,000 $ 816,000 $20,123,000 $15,850,000 $15,610,000
Goodwill acquired -- -- -- 6,495,000 -- --
----------- ----------- ----------- ----------- ----------- -----------
The Corporation determines its geographic allocation based upon the location of
its sales offices which are all domiciled in the United States.
</TABLE>
Zemex Corporation 55
<PAGE> 56
16. CONTINGENCIES
The Corporation is involved in various legal actions in the normal course of
business. In the opinion of management, the aggregate amount of any
potential liability, for which provision has not already been made, is not
expected to have a material adverse effect on the Corporation's financial
position or its results.
Uncertainty Due to the Year 2000 Issue
The year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the year 2000 issue
may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the year 2000 issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
17. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada. The differences
between Canadian and U.S. GAAP do not have a material effect on the
Corporation's reported financial position or net income except as follows:
a. Income Statements
For the purposes of calculating fully diluted earnings per share, U.S. GAAP
requires the application of the treasury stock method.
<TABLE>
<CAPTION>
Fully diluted earnings per share 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Canadian GAAP, as reported $ 0.60 $ 0.65 $ 0.30
U.S. GAAP 0.63 0.69 0.31
======= ======= =======
</TABLE>
Zemex Corporation 56
<PAGE> 57
b. Balance Sheets
The following summarizes the balance sheet amounts in accordance with U.S.
GAAP where different from the amounts reported under Canadian GAAP.
For purposes of reporting in accordance with U.S. GAAP, certain equity
securities that are not held principally for the purpose of sale in the near
term are classified as available-for-sale securities and are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of shareholders' equity. For Canadian GAAP
purposes, such securities are to be reported at cost, unless there is deemed
to have been a permanent impairment in their value.
<TABLE>
<CAPTION>
1998 1997
Canadian GAAP U.S. GAAP
------------- ----------- -------------
<S> <C> <C> <C>
Other assets $21,374,000 $20,440,000 No difference
Unrealized loss on available-for-sale securities -- (934,000) --
------------- ----------- -------------
</TABLE>
c. Statements of Comprehensive Income
U.S. GAAP requires a statement of comprehensive income as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -------------
<S> <C> <C> <C>
Net income $ 5,365,000 $ 5,793,000 $ 2,612,000
Change in foreign currency translation adjustment,
net of tax (1998, $217,000; 1997, $154,000;
1996, ($16,000)) (365,000) (259,000) 27,000
Change in unrealized holding losses on
available-for-sale securities (934,000) -- --
------------ ----------- -------------
Comprehensive income $ 4,066,000 $ 5,534,000 $ 2,639,000
============ =========== =============
</TABLE>
Zemex Corporation 57
<PAGE> 58
d. Pension Plans
Under U.S. GAAP, the Corporation must adopt SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The following
data is based upon reports from independent consulting actuaries as at
December 31:
<TABLE>
<CAPTION>
Change in benefit obligation 1998 1997
------------ ------------
<S> <C> <C>
Benefit obligation, beginning of year $ 15,126,000 $ 15,925,000
Service cost 532,000 466,000
Interest cost 1,015,000 978,000
Plan amendments 146,000 --
Actuarial loss (gain) 778,000 (1,605,000)
Benefits paid (721,000) (638,000)
------------ ------------
Benefit obligation, end of year $ 16,876,000 $ 15,126,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Change in fair value of plan assets 1998 1997
------------ ------------
<S> <C> <C>
Fair value, beginning of year $ 17,177,000 $ 16,432,000
Actual return on plan assets 916,000 1,383,000
Employer contribution 219,000 --
Benefits paid (721,000) (638,000)
------------ ------------
Fair value, end of year $ 17,591,000 $ 17,177,000
============ ============
</TABLE>
Net periodic pension expense (income) included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current service costs $ 532,000 $ 466,000 $ 528,000
Interest cost on projected benefit obligations 1,015,000 978,000 1,028,000
Expected return on assets (1,175,000) (1,236,000) (1,309,000)
Net amortization (93,000) (98,000) (103,000)
------------ ------------ ------------
Net pension expense $ 279,000 $ 110,000 $ 144,000
============ ============ ============
</TABLE>
Zemex Corporation 58
<PAGE> 59
Assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
% % %
<S> <C> <C> <C>
Weighted average discount rate 6.5 7.0 7.0
Expected long term rate of return 8.75 8.75 8.75
Increase in level of compensation 4.0 4.0 4.0
Weighted average health care cost trend rate 8.5 9.0 9.5
Weighted average ultimate health care cost trend rate 5.0 5.0 5.0
---- ---- ----
Year in which ultimate health care cost trend rate
will be achieved 2005 2005 2005
---- ---- ----
</TABLE>
The status of the plans and the amounts recognized in the consolidated
balance sheets of the Corporation for its pension plans as of December 31,
1998 and 1997 are tabulated below:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Projected benefit obligation $ (16,876,000) $ (15,126,000)
Plan assets at fair value 17,591,000 17,147,000
------------- -------------
Plan assets in excess of projected benefit obligation 715,000 2,021,000
Unrecognized net loss (gain) 331,000 (662,000)
Prior service cost not yet recognized in net periodic pension expense 297,000 196,000
Unrecognized net assets at year end (25,000) (177,000)
------------- -------------
Prepaid pension cost included in consolidated balance sheets $ 1,318,000 $ 1,378,000
============= =============
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on accumulated postretirement benefit obligation $ 42,271 $ (38,272)
Effect on aggregate of the service and interest
cost-components of net postretirement benefit cost 4,176 (3,699)
=========== ===========
</TABLE>
Zemex Corporation 59
<PAGE> 60
e. Stock Based Compensation
The Corporation does not recognize compensation expense for its stock-based
compensation plans. Had compensation expense for the stock option plans been
determined based upon fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock-Based Compensation", the Corporation's net income and
earnings per share would have been reduced by approximately $1,267,000 or
$0.15 per share in 1998, $589,000 or $0.07 per share in 1997, $227,000 or
$0.03 per share in 1996. The fair value of the options granted during 1998,
1997, and 1996 is estimated to be $1,267,000, $589,000 and $227,000,
respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996:
dividend yield of 0 percent; expected volatility of 32%, 32% and 38%,
respectively; risk-free interest rates varying from 4.3% to 6.7%; and an
expected life of 5 years.
f. Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reports on the Costs of Start-up Activities",
which is effective for periods beginning after December 15, 1998. This
Statement requires costs of start-up activities and organization costs to be
expensed as incurred. Initial application of this Statement will, for U.S.
GAAP purposes, be reported as the cumulative effect of a change in
accounting principle, without retroactive application. In 1999, the
Corporation will adopt this treatment when reporting under U.S. GAAP and, as
a result, all of the Corporation's pre-production and set-up costs will be
removed from property, plant and equipment in effecting this change in
accounting principle. These costs were $2,303,000 and $1,105,000 at December
31, 1998 and December 31, 1997, respectively.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
established accounting and reporting standards for derivative instruments
and hedging activities. It requires an entity to measure all derivatives at
fair value and to recognize them in the balance sheet as an asset or
liability, depending on the entity's rights or obligations under the
applicable derivative contract. Management has not yet evaluated the effects
of this statement on its results of operations. As required, the Corporation
will adopt SFAS No. 133 in the first quarter of 2000.
Zemex Corporation 60
<PAGE> 61
FINANCIAL DATA (UNAUDITED)
The following is a summary of certain unaudited quarterly financial data.
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Net Sales
First quarter $ 26,446,000 $ 23,700,000
Second quarter 25,933,000 25,199,000
Third quarter 25,677,000 24,773,000
Fourth quarter 25,838,000 23,554,000
--------------- -------------
$ 103,894,000 $ 97,226,000
=============== =============
Operating Income
First quarter $ 2,373,000 $ 1,766,000
Second quarter 2,418,000 2,255,000
Third quarter 3,104,000 2,372,000
Fourth quarter 2,297,000 1,978,000
--------------- -------------
$ 10,192,000 $ 8,371,000
=============== =============
Net Income
First quarter $ 1,228,000 $ 862,000
Second quarter 1,274,000 1,064,000
Third quarter 1,358,000 2,095,000
Fourth quarter 1,505,000 1,772,000
--------------- -------------
$ 5,365,000 $ 5,793,000
=============== =============
Net Income Per Share - Basic
First quarter $ 0.15 $ 0.10
Second quarter 0.15 0.13
Third quarter 0.16 0.25
Fourth quarter 0.18 0.22
=============== =============
</TABLE>
Zemex Corporation 61
<PAGE> 62
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $103,894,000 $ 97,226,000 $ 86,420,000 $85,056,000 $55,306,000
Reorganization charges -- -- 1,216,000 -- --
Operating income 10,192,000 8,371,000 3,066,000 8,342,000 5,841,000
Other, net (expense) income (822,000) 1,635,000 (455,000) 80,000 163,000
Net income 5,365,000 5,793,000 2,612,000 8,418,000 6,250,000
------------ ------------ ------------ ----------- -----------
FINANCIAL POSITION
Working capital $ 14,810,000 $ 18,975,000 $ 18,688,000 $19,709,000 $26,046,000
Total assets 148,866,000 118,774,000 109,376,000 96,681,000 70,864,000
Long term debt (non-current portion) 39,354,000 20,527,000 17,797,000 7,485,000 5,461,000
------------ ------------ ------------ ----------- -----------
COMMON SHARES
Weighted average common shares
outstanding 8,286,178 8,267,630 8,272,904 8,342,276 5,813,473
Actual common shares issued and
outstanding at year end 8,707,796 8,463,491 8,269,099 8,355,722 7,168,153
------------ ------------ ------------ ------------ -----------
PER COMMON SHARE
Basic earnings per share $ 0.65 $ 0.70 $ 0.32 $ 1.01 $ 1.08
Fully diluted earnings per share 0.60 0.65 0.30 0.92 0.91
------------ ----------- ----------- ----------- -----------
COMMON SHARE PRICES
High $ 10.44 $ 10.94 $ 10.00 $ 10.88 $ 12.25
Low 6.00 6.75 6.88 8.25 6.13
Year end 6.25 8.75 7.00 10.00 8.63
============ ========== =========== ========== ===========
</TABLE>
Zemex Corporation 62
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The subsidiaries listed below are, directly or indirectly, wholly-owned
and all are consolidated in the financial statements.
STATE OR COUNTRY
IN WHICH
SUBSIDIARY NAME INCORPORATED OR ORGANIZED
Alumitech, Inc. Delaware
Alumitech of Cleveland, Inc. Delaware
Alumitech of Wabash, Inc. Indiana
AWT Properties, Inc. Ohio
ETS Schaefer Corporation Ohio
The Feldspar Corporation North Carolina
Pyron Corporation New York
Pyron Metal Powders, Inc. Delaware
Suzorite Mica Products Inc. Ontario, Canada
Suzorite Mineral Products, Inc. Delaware
Zemex Fabi-Benwood, LLC North Carolina
Zemex Industrial Minerals, Inc. Delaware
Zemex Mica Corporation Delaware
Zemex U.S. Corporation Delaware
<PAGE> 1
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
To the Shareholders and
Board of Directors of Zemex Corporation
We hereby consent to the incorporation in the Zemex Corporation Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 of our
Independent Auditors' Reports, each dated February 5, 1999, which appear
on page 32 of the Annual Report to Shareholders and page 15 of the Form
10-K, respectively.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Toronto, Ontario
February 5, 1999
<PAGE> 2
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
- -------- -------- -------- -------- -------- --------
ADDITIONS
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COSTS AND ADDITIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DEDUCTIONS) DEDUCTIONS OF PERIOD
- ----------- --------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
1998
RESERVES - OTHER $1,014,000 $64,000 $(72,000) -- $1,006,000
ALLOWANCE FOR
UNCOLLECTABLE ACCOUNTS 328,000 5,000 -- $4,000 329,000
1997
RESERVES - OTHER $599,000 $165,000 $250,000 -- $1,014,000
ALLOWANCE FOR
UNCOLLECTABLE ACCOUNTS 452,000 84,000 (76,000) $132,000 328,000
1996
RESERVES - OTHER $605,000 $100,000 -- $106,000 $599,000
ALLOWANCE FOR
UNCOLLECTABLE ACCOUNTS 386,000 148,000 $5,000 87,000 452,000
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,062,000
<SECURITIES> 0
<RECEIVABLES> 17,971,000
<ALLOWANCES> (329,000)
<INVENTORY> 18,036,000
<CURRENT-ASSETS> 38,343,000
<PP&E> 130,069,000
<DEPRECIATION> (41,011,000)
<TOTAL-ASSETS> 148,866,000
<CURRENT-LIABILITIES> 23,533,000
<BONDS> 0
0
0
<COMMON> 8,708,000
<OTHER-SE> 73,190,000
<TOTAL-LIABILITY-AND-EQUITY> 148,866,000
<SALES> 103,894,000
<TOTAL-REVENUES> 103,894,000
<CGS> 73,678,000
<TOTAL-COSTS> 93,702,000
<OTHER-EXPENSES> 822,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,333,000
<INCOME-PRETAX> 7,037,000
<INCOME-TAX> 1,713,000
<INCOME-CONTINUING> 5,365,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,365,000
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.60
</TABLE>
