ITEM 1. BUSINESS
GENERAL
Zemex Corporation (the "Corporation" or "Zemex"), a company incorporated under 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. As at December 31, 1999, Zemex operated eighteen plants throughout Canada and the United States.
On December 8, 1999, the Corporation announced that it had retained Banc of America Securities, LLC to review methods and opportunities to maximize value for the Corporation's shareholders. On April 11, 2000, the Corporation announced that it had completed the sale of the two subsidiaries comprising the metal powders division, Pyron Corporation and Pyron Metal Powders, Inc., to a subsidiary of Hoganas AB for gross proceeds of approximately $41 million in cash, subject to certain post-closing adjustments. There can be no assurance that any further transactions will result from these efforts to maximize shareholder value. As a result of the sale of the Pyron companies, the metal powders division has been reflected as discontinued operations in the Corporation's consolidated statements of income.
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 reorganization pursuant to which shareholders of the predecessor Delaware corporation became shareholders of a corporation incorporated under the Canada Business Corporations Act.
INDUSTRIAL MINERALS
The Corporation's industrial minerals division 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 ("ZMC") (collectively, "Zemex Industrial Minerals" or "ZIM"). Each of these companies is either directly or indirectly 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, 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 talc 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 talc 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 purchases raw materials and produces baryte products, primarily for the oil drilling and coatings industries.
In January 1998, the Corporation acquired ZMC, a muscovite mica producer in the Spruce Pine, North Carolina area close to TFC's feldspar plant where by-product muscovite mica is produced. A major capital expenditure program to retrofit and expand these facilities was completed at the end of 1999 and it is expected that the plant will be operating at close to full capacity by mid-2000. 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 $3.4 million and is providing access to its technology and to its 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 $50.4 million in 1999, compared to $44.8 million in 1998 and $43.4 million in 1997. This business segment reported operating income of $8.0 million in 1999, $5.8 million in 1998, and $6.5 million in 1997.
During 1999, 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 $7.1 million in 1999 compared to $8.3 million in 1998 and $9.9 million in 1997. Major capital spending in 1999 included the retrofitting of the muscovite mica operation that was acquired in 1998. In 2000, capital expenditures are expected to be approximately $3.4 million.
METAL POWDERS
The metal powder 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. As noted below in more detail, the metal powders division was sold on April 11, 2000.
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.
Sales for the metal powders group increased to $39.0 million in 1999 from $35.6 million in 1998 as a result of higher sales volumes of ferrous and non ferrous metal powders. Sales were $33.9 million in 1997. During the same period, operating income increased from $4.0 million in 1998 to $6.1 million in 1999. Operating income was $2.4 million in 1997. This division anticipates margins to further improve in the year 2000 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 $1.6 million in 1999 as compared to $2.1 million in 1998 and $1.3 million in 1997. During 1999, expenditures were primarily directed towards general sustaining capital requirements. In 2000, capital expenditures are anticipated to be $1.6 million.
On April 11, 2000, the Corporation announced the completion of the sale of its metal powder division for gross proceeds of approximately $41 million, subject to certain post-closing adjustments. The sale resulted in a gain of approximately $18 million. These subsidiaries have been reflected as discontinued operations on the Corporation's consolidated statement of income and prior years have been reclassified to reflect this disclosure.
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. Alumitech has three facilities: aluminum dross reprocessing plants in Cleveland, Ohio and Wabash, 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 11 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 fiber-based heat containment systems located in Medina, Ohio. The Schaefer Brothers business was merged with Engineered Thermal Systems, Inc., also a manufacturer of ceramic fiber-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 $27.2 million in 1999 from $23.5 million in 1998 and $19.9 million in 1997. The increase from 1998 to 1999 was primarily due to increased sales from Alumitech of Wabash, Inc., which was acquired in June 1998. The 1999 numbers include a full year of operation. During the same interval, operating income decreased slightly to $2.8 million in 1999 from $2.9 million in 1998. Operating income was $1.9 million in 1997. Management anticipates improved margins in this segment in 2000 as a result of new products, continuing cost reductions, and efficiency improvement programs.
Capital expenditures for the aluminum recycling group were $5.0 million in 1999 as compared to $10.1 million in 1998 and $5.3 million in 1997. The 1999 expenditures were primarily directed to the construction and commercialization of a new NMP processing facility at the Cleveland plant and the expansion of the aluminum dross recycling operation in Wabash, Indiana. In 2000, capital expenditures are anticipated to be $3.7 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 powders and aluminum recycling operations, which are the segments that consume, rather than supply, raw materials. However, no assurance can be given that any shortages of these or other necessary materials or equipment will not develop or that increased prices will not adversely affect the Corporation's business in the future.
SEASONALITY
The efficiency and productivity of the Corporation's operations can be affected by unusually severe weather conditions. During the winter of 1999, 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 1999 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, metal powders and aluminum recycling. 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. The Corporation completed the sale of its metal powder division on April 11, 2000.
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 $1.1 million in 1999, $0.6 million in 1998 and $1.0 million in 1997.
Financial information about continuing operations by industry segment is set forth on pages to of this report. Financial information for the metal powders division, which has been disclosed as a discontinued operation, is set forth on pages to.
ENVIRONMENTAL CONSIDERATIONS
Laws and regulations currently in force which do or may affect the Corporation's domestic operations include the Federal Clean Air Act of 1970, the National Environmental Policy Act of 1969, the Solid Waste Disposal Act (including the Resource Conservation and Recovery Act of 1976), the Toxic Substances Control Act, CERCLA (superfund) and regulations under these Acts, the environmental protection regulations of various governmental agencies (e.g. the Bureau of Land Management Surface Management Regulations, Forest Service Regulations, and Department of Transportation Regulations), laws and regulations with respect to permitting of land use, various state and local laws and regulations concerned with zoning, mining techniques, reclamation of mined lands, air and water pollution and solid waste disposal. Each of the Corporation's operations strives to be environmentally sensitive. 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, 1999 is set forth below:
Approximately 65 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 38 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 12, 2002.
At Alumitech, approximately 28 employees are covered by two collective bargaining agreements, one agreement expiring April 30, 2001 and one agreement expiring December 31, 2001.
Approximately 57 hourly employees at TFC's sodium feldspar plant in Spruce Pine, NC are covered by a wage agreement, which expires January 31, 2001.
The Corporation considers its labour relations to be good.
FOREIGN OPERATIONS
The Corporation's operations are located in the United States and Canada, countries whose institutions and governmental policies are generally similar. 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 were 8.5% of total sales for the year ended December 31, 1999.
EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
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.
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.
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. TFC also owns 703 acres which contain, at minimum, 50 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 range from 4 years to in excess of 100 years. All of the Corporation's mining properties are either owned or leased, with the leases expiring from 2000 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. 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. On April 11, 2000, the Corporation announced the completion of the sale of the metal powders group.
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 2,300 square feet 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 relating to the Corporation's continuing operations are maintained in good operating condition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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 sought damages on the basis that the Corporation failed to provide a safe working area. The Corporation has tentatively settled this claim and is awaiting court approval of the settlement. The cost to settle will be covered by primary and excess liability insurance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
In the fourth quarters of 1998 and 1997, the Corporation declared a 2% stock dividend.
As of December 31, 1999, there were approximately 1,830 holders of record of the Corporation's capital stock. This number includes shares held in nominee name and, thus, does not reflect the number of holders of a beneficial interest in the shares.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is a discussion and analysis of the results of operations and financial condition of the Corporation for the years ended December 31, 1999, 1998 and 1997, and certain factors that may affect the Corporation's prospective financial condition and results of operations. The following should be read in conjunction with the Consolidated Financial Statements and related notes thereto found on pages to of this Annual Report on Form 10-K.
OVERVIEW
The Corporation is a diversified producer of specialty materials and products for use in a variety of industrial applications. The Corporation has operated 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. (see note 1 below); and (iii) aluminum recycling, which includes Alumitech, Inc., Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc., ETS Schaefer Corporation and AWT Properties, Inc.
The financial performance of the Corporation from continuing operations was significantly better in 1999 than in 1998. Net sales were up 13.5% but, more importantly, the gross margin improved from 31.5% in 1998 to 34.5% in 1999.
1. On April 11, 2000, the Corporation announced that its wholly-owned subsidiary, Zemex U.S. Corporation, had completed the sale of its 100% stock ownership interest in Pyron Corporation and Pyron Metal Powders, Inc. to North American Hoganas Holdings, Inc., a subsidiary of Hoganas AB, for gross proceeds of approximately $41 million in cash, subject to certain post-closing adjustments. The book value of the metal powder group as at December 31, 1999 was $23 million. Because of the sale, the two companies that make up the metal powders group have been disclosed as discontinued operations and prior years have been reclassified accordingly.
2. In January 1998, the Corporation, through its wholly-owned subsidiary, Zemex Industrial Minerals, Inc., acquired a muscovite mica producer for approximately $2.2 million, which included the assumption of debt. The two facilities acquired in the purchase are located in Bakersville, North Carolina and are operating under the name Zemex Mica Corporation. The acquisition was financed through borrowings on the Corporation's credit facility. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated first to the assets purchased and liabilities assumed, and the excess purchase price was allocated to intangible assets. The net purchase price was allocated as follows:
3. On February 24, 1998, Industria Mineraria Fabi S.r.l. ("Fabi") became a partner in the Corporation's talc facility located in Benwood, West Virginia by acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3.4 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 recognized by the Corporation on the transaction.
4. 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"), an aluminum dross processor located in Wabash, Indiana, for approximately $7.7 million, which included the assumption of debt. At the beginning of 1999, this entity was renamed Alumitech of Wabash, Inc. The Corporation used its credit facility to finance the acquisition. The acquisition of S&R was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated first to the assets purchased and liabilities assumed, and the excess purchase price was allocated to intangible assets. The net purchase price was allocated as follows:
5. During the second quarter of 1998, the Corporation initiated an attempted acquisition of control of 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 acquisition was abandoned and the Corporation sold approximately 2.6 million common shares of Inmet for proceeds of approximately C$14.9 million. In 1998 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. At December 31, 1999, the Corporation marked its investment to market and recorded a loss of $0.5 million. In February 2000 the residual position was sold at book value.
6. In August 1997, the Corporation entered into a purchase and sale agreement with respect to Alumitech's fiber manufacturing operation located in Streetsboro, Ohio. Under the agreement, the fiber line was sold to a new corporation in which Alumitech, Inc. retained 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES
The Corporation's net sales from continuing operations for 1999 were $77.5 million, an increase of $9.2 million, or 13.5%, from 1998. Sales in the industrial minerals segment and the aluminum recycling group increased $5.5 million and $3.7 million, respectively.
The industrial minerals segment recorded a 12.4% increase in sales from $44.8 million in 1998 to $50.4 million in 1999. The increase was primarily due to a $3.3 million increase from the mica group generated by an increase in sales volume of 55.6%. Approximately two-thirds of this increase came from the recently retrofitted muscovite mica operations in Bakersville, North Carolina. Talc sales rose by 12.8% during 1999 and this trend is expected to continue as the Corporation pursues greater market share. Sales of feldspar increased by 2.9%. Continued growth in mica and talc sales volume is anticipated in 2000 while new products and the utilization of byproduct material should enhance profitability from the feldspar operations.
Net sales of the aluminum recycling group increased 15.6%, or $3.6 million, from $23.5 million in 1998 to $27.2 million in 1999. Of the increase, approximately $3.9 million was due to increased sales from Alumitech of Wabash, Inc. This operation was acquired in June 1998 and the 1999 numbers include a full year of operation. In 2000, sales growth in heat containment systems, calcium aluminate and aluminum recycling is anticipated to increase.
COST OF GOODS SOLD
Costs of goods sold were $46.8 million in 1998 compared to $50.8 million in 1999. The corresponding gross margins were 31.5% for 1998 and 34.5% for 1999. The largest component of the increase came from the industrial minerals group where the gross margin increased from 32.1% to 36.1% as a result of the utilization of a specific feldspar quarry. It is anticipated that the gross margin in the year 2000 will be closer to that of 1998 as production shifts to another quarry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 24.1% from $9.9 million in 1998 to $12.3 million in 1999. As a percentage of sales, SG&A expense was 15.9% in 1999 as compared to 14.6% in 1998. The increase was partially due to the relocation of the industrial minerals group's administration function from Spruce Pine, North Carolina to Atlanta, Georgia, increased SG&A for the new mica operation, higher staffing levels in the management of the aluminum recycling group and a significant increase in the cost of the defined benefit pension plans. During the year the Corporation recognized pension expense of $0.7 million while the surplus, defined as the excess of the fair value of the plan assets over the benefit obligation, contained within the plans increased by $2.1 million.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization increased by $2.0 million, or 38.3%, from $5.4 million in 1998 to $7.4 million in 1999. This increase was driven by the capital expenditures and acquisitions made by the Corporation over the past several years. Prospectively, depreciation will continue to increase as current capital programs are placed into service but the rate of increase is expected to decline.
OPERATING INCOME
For the reasons discussed above, operating income increased from $6.2 million for fiscal 1998 to $7.0 million in fiscal 1999, representing a 13.1% increase.
INTEREST INCOME
Interest income for the year ended December 31, 1999 was $0.2 million, a slight decrease from the same period in 1998.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1999 was $4.3 million, an increase of $1.9 million over 1998. Total indebtedness increased by $25.9 million in 1998 and by a further $5.1 million in 1999. The sale of the metal powders group in April 2000 will result in a significant reduction in the Corporation's debt position and a corresponding reduction in interest expense.
OTHER INCOME (EXPENSE)
In 1999, the Corporation recognized other expense of $0.5 million compared to $0.8 million in 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes for each of the 1999 and 1998 fiscal years was $0.6 million.
DISCONTINUED OPERATIONS
Income from discontinued operations increased from $2.7 million for fiscal 1998 to $3.9 million in fiscal 1999. As previously discussed, in April 2000 the Corporation sold its interest in Pyron Corporation and Pyron Metal Powders, Inc. for approximate gross proceeds of $41 million in cash, subject to certain post-closing adjustments. The book value of the metal powders group as at December 31, 1999 was $23 million. While the metal powders group has been a significant contributor of late to the results of the Corporation, the opportunity to sell it at a gain of approximately $18 million enables the Corporation to crystallize some of the value that it has created for its shareholders as part of an ongoing effort to maximize shareholder value.
NET INCOME AND EARNINGS PER SHARE FROM CONTINUING OPERATIONS
As a result of the factors discussed above and given that all interest expense is reflected at the corporate level, net income from continuing operations for the year ended December 31, 1999 was $1.8 million, a decrease of $0.8 million from 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES
The Corporation's net sales for 1998 were $68.3 million, an increase of $5.0 million, or 8.0%, from 1997. Sales in the industrial minerals segment and the aluminum recycling group increased $1.4 million and $3.6 million, respectively.
The industrial minerals segment recorded a 3.3% increase in sales from $43.4 million in 1997 to $44.8 million in 1998. Of the increase, $0.7 million was primarily due to a favorable feldspar product mix, resulting in slightly higher margins, and $0.7 million was attributable to an increase in talc sales volumes.
Net sales from the aluminum recycling group increased 18.1%, or $3.6 million, from $19.9 million in 1997 to $23.5 million in 1998. This increase was due to the acquisition of Alumitech of Wabash, Inc. 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 sold.
COST OF GOODS SOLD
Costs of goods sold were $46.8 million in 1998 compared to $43.2 million in 1997. The corresponding gross margins were 31.5% for 1998 and 31.7% for 1997. A 2.1% decrease in the gross margin from the industrial mineral group was off-set by a 3.9% increase from the aluminum recycling group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 6.9% from $9.3 million in 1997 to $9.9 million in 1998. As a percentage of sales, SG&A expense was 14.6% in 1998 as compared to 14.7% in 1997. In dollar terms, the increase was due to increased staffing in the industrial minerals group, expenses associated with investigating potential acquisitions, and bonuses paid pursuant to the Corporation's management incentive program.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization increased by $0.6 million, or 12.4%, from $4.8 million in 1997 to $5.4 million in 1998. This increase was driven by the capital expenditures made by the Corporation over the past several years. Prospectively, depreciation will continue to increase as current capital programs are placed into service.
OPERATING INCOME
Operating income increased from $6.0 million for fiscal 1997 to $6.2 million in fiscal 1998, representing a 3.5% increase.
INTEREST INCOME
Interest income increased from $0.1 million for fiscal 1997 to $0.2 million in fiscal 1998.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1998 was $2.4 million, an increase of $0.5 million over 1997. During 1998, the Corporation's debt increased by $25.9 million due to capital programs and the residual investment in Inmet.
OTHER, NET
In 1998, the Corporation recognized other expense of $0.8 million. In 1997 the Corporation realized a one-time gain of $1.8 million on the disposition of certain assets utilized to manufacture refractory ceramic fiber. This gain was recorded as other income.
PROVISION FOR INCOME TAXES
The provision for income taxes for the fiscal year 1998 was $0.6 million as compared to $1.7 million in 1997.
DISCONTINUED OPERATIONS
Income from discontinued operations increased from $1.7 million for fiscal 1997 to $2.7 million for fiscal 1998.
NET INCOME AND EARNINGS PER SHARE FROM CONTINUING OPERATIONS
As a result of the factors discussed above, net income from continuing operations for the year ended December 31, 1998 was $2.7 million, a decrease of $1.5 million from 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has historically funded its extraction and processing activities through cash flow from operations, bank debt and sales of capital stock and warrants. During the most recent three-year period ended December 31, 1999, the Corporation funded all capital expenditures, acquisitions and debt reduction from a combination of additional debt and cash flow from operations. The net proceeds of the sale of the metal powders group in April 2000 will be applied against the
Corporation's outstanding debt. Should it be necessary, the Corporation will have increased borrowing ability to fund capital and acquisitions going forward.
CASH FLOW FROM OPERATIONS
The Corporation had $27.6 million of working capital at December 31, 1999, compared to $14.8 million at December 31, 1998. The issuance of the senior secured notes discussed below resulted in a reclassification of a portion of the debt formerly classed as current to long-term, which resulted in an increase in working capital of $6.0 million. During 1999, the Corporation generated cash flow from operations of $8.5 million as compared to $4.6 million for 1998. In 1999, non-cash working capital items used $5.5 million of the cash otherwise generated from operations consistent with the $5.5 million used in 1998.
FINANCING AGREEMENTS
In March 1997, the Corporation amended its credit facility to increase the total availability to $50,224,000. The credit facility was 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. Specific assets and a floating charge secured these facilities. The facilities bore interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon certain financial tests.
In May 1999, the Corporation replaced its credit facility. It completed a private placement of two series of notes: $35,000,000 in 7.54% Senior Secured Notes, Series A, due May 15, 2009 and $15,000,000 in 7.76% Senior Secured Notes, Series B, due May 15, 2014. The proceeds of the Senior Secured Notes were used to retire the Corporation's existing bank debt and its Industrial Development Revenue Bond. In conjunction with the Secured Notes, the Corporation entered into a credit agreement with a bank that provided for a senior secured revolving credit facility in the amount of $20,000,000 (the "Credit Facility"). The noteholders and the bank were secured pari-passu by a pledge of shares of the Corporation's subsidiaries and a floating charge on the assets of the subsidiaries. The revolving credit facility bears interest at LIBOR plus 1.625% to LIBOR plus 1.875% in the case of LIBOR loans or at base rate plus 0.625% to 0.875% in the case of prime and base rate loans. The actual margin is determined by certain financial ratios. The term of the revolver, which was originally 364 days, was extended to May 18, 2001 subsequent to December 31, 1999.
In March 2000, in connection with the sale of the metal powders group, the Corporation redeemed the Senior Secured Notes by drawing down on a $50 million bridge facility (the "Bridge Facility") provided by the bank that provided the Credit Facility. The Bridge Facility bears interest at the same rate as the Credit Facility, is secured by the same security package and matures October 31, 2000. The Bridge Facility is being repaid in part from the net proceeds of the sale of the metal powders group. The make-whole fee associated with the redemption of the Senior Secured Notes amounted to $1.1 million and will be expensed in the first quarter of 2000.
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. On September 1, 1999, the Corporation repaid the outstanding principal amount, purchased the facility and retired the bonds.
CAPITAL EXPENDITURES
The Corporation's primary capital activities in the past involved the acquisition and development of industrial mineral and metal processing properties and facilities, and capital investments to expand its facilities, increase operating efficiencies, and meet environmental, health and safety standards at its existing operations. During 1999, capital expenditures from continuing and discontinued operations were $13.8 million compared to $20.7 million and $16.6 million for the years ended December 31, 1998 and 1997, respectively. The capital expenditures were funded by cash flow from operations and indebtedness.
The Corporation has completed several major capital programs, including retrofitting the aluminum dross plant in Cleveland and the muscovite mica operation in Bakersville, North Carolina. In aggregate, 2000 capital expenditures from continuing operations are anticipated to be approximately $7.1 million. The Corporation plans on funding these expenditures from cash flow from operations.
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 2000.
SEASONALITY AND INFLATION
Although the Corporation's results from continuing extraction and processing operations are cyclical due to fluctuations in industrial minerals and aluminum recycling demands, sales of the Corporation's products are generally not seasonal. Inflation in recent years has not adversely affected the Corporation's results of operations and is not expected to adversely affect the Corporation in the future unless it grows substantially and the markets for industrial minerals and aluminum recycling suffer from a negative impact on the economy in general.
YEAR 2000
The Corporation operates in basic industries that do not rely heavily on computerized systems. Although the change in date has occurred and the Corporation has suffered no consequences, it is not possible to conclude that all aspects of the year 2000 issue affecting the Corporation have been fully resolved.
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
In the fourth quarters of 1998 and 1997, the Corporation declared a 2% stock dividend.
As of December 31, 1999, there were approximately 1,830 holders of record of the Corporation's capital stock. This number includes shares held in nominee name and, thus, does not reflect the number of holders of a beneficial interest in the shares.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements responsive to this Item are set forth on pages through of this Annual Report on Form 10-K. The Supplementary Schedule required by this Item is set forth on page S-1 of this Annual Report on Form 10-K. See Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year.* _______________________
* References in this Annual Report on Form 10-K to material contained in the Corporation's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the fiscal year incorporate such material into this report by reference.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Corporation's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year.
ITEM 12.
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 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Corporation's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year.
PART IV
ITEM 14.
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, 1999 and 1998, which information is found on page of this report;
(b) Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1999, which information is found on page of this report;
(c) Consolidated Statements of Income for the three years ended December 31, 1999, which information is found on page of this report;
(d) Consolidated Statements of Cash Flows for the three years ended December 31, 1999, which information is found on page of this report;
(e) Notes to the Consolidated Financial Statements, which information is found on pages to of this report; and
(f) Independent Auditors' Report, which is found on page of this report.
2. Financial statement schedules and independent auditors' report filed as part of this report:
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.
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)
(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
(4)(q) Credit Agreement dated as of May 21, 1999 among Zemex Corporation and Zemex U.S. Corporation, Bank of America Canada, Bank of America National Trust and Savings Association et al.
(4)(r) Amendment No. 1 dated September 24, 1999 to the Credit Agreement dated as of May 21, 1999 among Zemex Corporation and Zemex U.S. Corporation, Bank of America Canada, Bank of America National Trust and Savings Association et al.
(4)(s) Amendment No. 2 dated March 7, 2000 to the Credit Agreement dated as of May 21, 1999 among Zemex Corporation and Zemex U.S. Corporation, Bank of America Canada, Bank of America National Trust and Savings Association et al.
(4)(t) Zemex U.S. Corporation, Note Purchase Agreement Dated as of May 21, 1999 (Incorporated by reference from Exhibit (4)(r) of the Corporations Form 10-Q filed on August 9, 1999)
*(10)(a) Key Executive Common Stock Purchase Plan (Incorporated by reference from Exhibit (10)(b) of the Corporation's Annual Report on Form 10-K filed March 31, 1991)
(10)(b) Consent to Assignment of Lease and to Agreement Sublease, and permission to Make Payments dated November 7, 1978 each from Joberta Enterprises, Inc. to NL Industries, Inc. and The Feldspar Corporation (Incorporated by reference from Exhibit 10(pp) to the Corporation's Registration Statement on Form S-2, Registration No. 33-7774, filed on August 5, 1986)
(10)(c) Additional Lease Agreement dated as of November 1, 1989 between Niagara County Industrial Development Agency and Pyron Corporation (Incorporated by reference from Exhibit (10)(ll) of the Corporation's Annual Report on Form 10-K filed March 31, 1990)
*(10)(d) Subscription Agreement with Richard L. Lister dated November 26, 1991 (Incorporated by reference from Exhibit (5)(a) of the Corporation's Annual Report on Form 10-K filed March 31, 1992)
(10)(e) 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)
(10)(k) Stock Purchase Agreement by and between North American Hoganas Holdings, Inc. and Zemex U.S. Corporation, Pyron Corporation and Pyron Metal Powders, Inc. dated as of March 6, 2000 (Incorporated by reference from the Corporation's Current Report on Form 8-K dated March 8, 2000 and filed on March 9, 2000)
*(10)(1) Agreement between Zemex Corporation and Richard L. Lister dated as of the 1st day of October, 1999.
*(10)(m) Agreement between Zemex Corporation and Allen J. Palmiere dated as of the 1st day of October, 1999.
*(10)(n) Agreement between Zemex Corporation and George E. Gillespie dated as of the 1st day of October, 1999.
*(10)(o) Agreement between Zemex Corporation and Peter J. Goodwin dated as of the 1st day of October, 1999.
*(10)(p) Agreement between Zemex Corporation and Terrance J. Hogan dated as of the 1st day of October, 1999.
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
* Management contract or compensatory plan or arrangement.
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, 1999. 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 April 12, 2000
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: April 12, 2000 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:
ZEMEX CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31,
S-1 AUDITORS' REPORT
To the Shareholders of Zemex Corporation
We have audited the consolidated balance sheets of Zemex Corporation as at December 31, 1999 and 1998 and the consolidated statements of income, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1999. 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 an 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 at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1999 in accordance with accounting principles generally accepted in Canada.
Deloitte & Touche LLP Chartered Accountants
Toronto, Ontario March 8, 2000
MANAGEMENT'S REPORT
The management of Zemex Corporation and its subsidiaries has the responsibility for preparing the consolidated financial statements presented in this annual report and for their accuracy and integrity. The statements have been prepared in conformity with generally accepted accounting principles in 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.
Allen J. Palmiere Richard L. Lister Vice President and President and Chief Chief Financial Officer Executive Officer
AUDIT COMMITTEE REPORT
The audit committee of the board of directors is currently composed of three independent directors, John M. Donovan, Garth A.C. MacRae and William J. vanden Heuvel. The Committee held two meetings during 1999.
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.
John M. Donovan Chairman, Audit Committee
CONSOLIDATED STATEMENTS OF INCOME (All amounts are in U.S. dollars)
See notes to the consolidated financial statements
CONSOLIDATED BALANCE SHEETS (note 10) (All amounts are in U.S. dollars)
See notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (All amounts are in U.S. dollars)
See notes to the consolidated financial statements (a) See note 9 (b) Employee stock purchase plan ("ESPP") (c) See basis of preparation
CONSOLIDATED STATEMENTS OF CASH FLOWS (note 10) (All amounts are in U.S. dollars)
See notes to the consolidated financial statements (a) See note 13 (b) See note 2 (c) See note 9
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 the 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 consolidated entities as though the new structure had been in place for all periods presented.
On March 6, 2000, a wholly-owned subsidiary of Zemex Corporation entered into a stock purchase agreement whereby a wholly-owned subsidiary of Hoganas AB has agreed to purchase 100% of the issued and outstanding shares of two subsidiaries, Pyron Corporation and Pyron Metal Powders, Inc. Accordingly, these subsidiaries have been reflected as discontinued operations and prior years have been reclassified to reflect this disclosure (see note 10).
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The 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 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 Canadian mica operation where the estimated reserves exceed the expected production during the term of the mining lease. The mica mining lease rights and deferred costs, including all preproduction and set-up costs, are amortized using the straight-line method over the term of the mining lease.
The Corporation evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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 1999, 1998 and 1997 amounts include the current year expense and the impact of the transition liability, which is being amortized over a twenty year period that began in 1993.
e. FOREIGN CURRENCY TRANSLATION
The functional currency for the Corporation's operations is the U.S. dollar. Foreign currency assets and liabilities are translated using the exchange rates in effect at the balance sheet date. The effect of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars is accumulated as part of the cumulative translation adjustment component of shareholders' equity. Results of operations and cash flows are translated using the average exchange rates during the year. Gains and losses from foreign currency transactions are included in net income for the year.
f. REVENUE RECOGNITION
Revenue is recognized when goods are shipped to customers. Consignment sales are recognized when a customer draws the goods from inventory.
g. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to earnings in the periods in which they are incurred. Research and development expenses were $1,060,000, $636,000 and $961,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
h. PROVISION FOR FUTURE RECLAMATION COSTS
Provisions for future reclamation costs have been established based upon estimated future reclamation costs allocated over the expected productive lives of the Corporation's quarries and mines.
i. INCOME TAXES
The Corporation early adopted CICA Handbook Section 3465, "Income Taxes" in fiscal 1998. 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 income 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 these standards, 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 which approximates the effective interest rate yield method. The unamortized balance is included in other assets.
l. OTHER ASSETS
Other assets includes assets held for sale, which are stated at the lower of cost or estimated net realizable value. In determining the estimated net realizable value, the Corporation deducts from the estimated selling price the projected costs to bring the assets into a saleable condition, to dispose of the assets and to hold the property to an expected date of sale. Other assets also includes patents, which
are stated at cost and are being amortized over their remaining life of 11 years on a straight-line basis. Intangible assets 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 at the dates of acquisition of the costs over the fair values of the net identifiable assets of subsidiaries, 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.
o. STOCK-BASED COMPENSATION PLANS
The Corporation does not recognize compensation expense for its stock-based compensation plans. Any consideration paid by employees on exercise of stock options or purchase of stock is recorded as share capital. If stock is repurchased from employees, the excess of the consideration paid over the stated capital of the stock cancelled is charged to retained earnings.
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 was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated first to the tangible assets purchased and liabilities assumed and the excess purchase price was allocated to goodwill. The net purchase price was allocated as follows:
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 was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated first to the tangible assets purchased and liabilities assumed and the excess purchase price was allocated to goodwill. The net purchase price was allocated as follows:
INVESTMENT IN INMET MINING CORPORATION
During the second quarter of 1998, the Corporation initiated an attempted acquisition of control of 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 acquisition 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 in 1988 of $0.7 million in other income (expense) as a result of a decline in the value of the Canadian dollar. At December 31, 1999, the investment was written down by $0.5 million to the amount realized when the investment was sold in February 2000.
DISPOSITIONS
SALE OF INTEREST IN BENWOOD FACILITY
On February 24, 1998, Industria Mineraria 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 $3.4 million and is providing access to its technology. Suzorite Minerals Products, Inc., a wholly-owned subsidiary of the
Corporation, manages the new entity pursuant to an operating agreement. There was no gain or loss recognized on the transaction.
ASSET SALE
During the third quarter of 1997, the Corporation sold certain assets utilized to manufacture refractory ceramic fiber. 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 was included in other income (expense). Total proceeds were $4.3 million.
3. INVENTORIES
4. PROPERTY, PLANT AND EQUIPMENT
As at December 31, 1999, the Corporation estimates that approximately $2,069,000 will be expended to complete its construction in progress (December 31, 1998, $3,015,000). During 1999, the Corporation capitalized $119,000 in interest relating to capital projects (1998, $394,000).
5. OTHER ASSETS
6. INCOME TAXES
The provision for income taxes consists of the following components:
The following tabulation reconciles the Canadian income tax rate to the effective income tax rate.
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, 1999 and 1998, the Corporation had unused tax benefits of $10,161,000 and $8,239,000, respectively, related to U.S. federal and state net operating loss and tax credit carryforwards. Significant components of the Corporation's future tax benefits and obligations as of December 31 are as follows (dollars in thousands):
At December 31, 1999, the Corporation had approximately $14,212,000 of U.S. net operating loss carryforwards available to reduce future taxable income, which will expire between 2002 and 2011. Additionally, the Corporation has unused general business tax credits, which expire between 2000 and 2019, and alternative minimum tax credits. The Corporation also has U.S. net operating losses and investment credit carryforwards; however, a valuation allowance of $1,129,000 has been recognized to offset the related future tax benefit due to the uncertainty of realizing the full benefit of the tax attribute carryforward.
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
PENSION PLANS
The Corporation has two 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:
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 $137,000 in 1999, $127,000 in 1998 and $115,000 in 1997.
8. LONG TERM DEBT
(a) In May 1999, the Corporation entered into note purchase agreements with private investors whereby the Corporation issued $35,000,000, 7.54% Senior Secured Notes, Series A, due May 15, 2009 and $15,000,000, 7.76% Senior Secured Notes, Series B, due May 15, 2014. In the event of redemption the noteholders are entitled to an interest make-whole payment based on a discounted value of future cash flows arising from the notes. The proceeds from the Senior Secured Notes were used to retire the Corporation's credit facilities existing at the time (see (b), (c) and note 18(b)).
Additionally during 1999, the Corporation entered into a 364-day, $20,000,000 revolving credit facility. The Senior Secured Notes and the credit facility rank pari-passu with respect to security. The obligations are secured by a pledge of subsidiary shares and a floating charge on the assets of the subsidiaries. As at December 31, 1999, advances under the revolving credit facility were $5,500,000. Both the Senior Secured Notes and the revolving credit facility contain certain financial covenants which determine interest rate and credit availability. The revolving credit facility bears interest at LIBOR plus 1.625% to LIBOR plus 1.875% in the case of LIBOR loans or at base rate plus 0.625% to 0.875% in the case of prime and base rate loans. The actual margin is determined by certain financial ratios. The term of the revolver, which was originally 364 days, was extended to May 18, 2001 subsequent to December 31, 1999.
(b) During 1995, the Corporation entered into a credit facility with a syndicate of two banks, which was amended during 1997 and 1998 to increase the total availability to $50,224,000, and 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 occurring February 28, 1999. The amended credit facility was 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 were secured by specific assets and a floating charge over the Corporation's assets. The facilities bore 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 and $6,945,000 outstanding under the multiple advance term loan facility. Advances under the revolving credit facility as at December 31, 1998, were $30,000,000 and a standby letter of credit was issued to secure Pyron's Industrial Development Revenue Bonds (see (d) below).
During 1999, the Corporation revised its borrowing arrangements (see (a) above) and all amounts owing under this facility were repaid in full.
(c) The other term loan bore interest at 6.79% and required annual payments of approximately $40,000. During 1999, the Corporation repaid the amount in full.
(d) 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 were not the obligation of Pyron, the agreement required 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 was $3,060,000. Pyron's annual obligation under the agreement was $510,000 until repaid.
The bonds bore interest at a variable rate not to exceed 15% per annum. The rate at December 31, 1998 was 4.02%. Pyron had the option to convert the bonds to a fixed interest rate at any time during the term. Under the lease agreement, Pyron could purchase the facility at any time during the term, which would expire November 1, 2004, by paying the outstanding principal amount of the bonds plus $1.
The bonds were collateralized by a mortgage on the land, the new facility and the existing facility, which had an aggregate net book value of approximately $10,134,000 at December 31, 1998.
On September 1, 1999, the Corporation repaid the outstanding principal amount, purchased the facility and retired the bonds.
(e) The Corporation has long term capital lease agreements at various rates and for various terms with maturities ranging from 2000 to 2003 for equipment used in its operations. The carrying value of the leased equipment as of December 31, 1999 and 1998 was $1,298,000 and $875,000, respectively. The current obligation under the long term lease agreements is $569,000 (1998, $359,000).
Principal repayments on long term debt are as follows:
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 was denominated common shares and 5,000,000 was 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 8,873,453 common shares issued and outstanding as of December 31, 1999 and 8,707,796 common shares issued and outstanding as of December 31, 1998.
During 1999, 1998 and 1997, 172,000, 131,000 and 90,000 common shares, respectively, were issued pursuant to the Corporation's employee stock purchase plan for an aggregate cost of $1,145,000, $1,045,000, and $729,000, respectively.
As part of a stock repurchase program in 1999, the Corporation purchased 10,000 common shares for an aggregate cost of $73,000, 60,000 common shares in 1998 for an aggregate cost of $499,000, and 60,000 common shares in 1997 for an aggregate cost of $492,000.
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 was 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 was 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.
STOCK OPTIONS
The Corporation provides stock option incentive plans and has, with shareholder approval, issued options to certain directors outside of the plans. The plans are intended to provide long term incentives and rewards to executive officers, directors and other key employees contingent upon an increase in the market value of the Corporation's common shares. Options for 10% of the Corporation's outstanding common shares are issuable under the plans. The options vest and are exercisable from the beginning of the second year subsequent to the date of issuance.
The following is a summary of option transactions under the Corporation's stock option plans:
The options expire from 2000 to 2009.
The following table summarizes information about the stock options outstanding at December 31, 1999:
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 note, which was used to acquire 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 1999 and the note is now due on the earlier of December 31, 2000 or 30 days after the termination of employment. Since the note arose from the sale of treasury stock, it is classified as a reduction of shareholders' equity.
10. DISCONTINUED OPERATIONS
On March 6, 2000, the Corporation announced the sale of its metal powders division for gross proceeds of approximately $41 million. The metal powders division includes the Corporation's wholly-owned subsidiaries, Pyron Corporation and Pyron Metal Powders, Inc. The sale will result in a gain of approximately $18 million, which will be recorded on closing. The sale price is subject to post-closing adjustments based on certain changes in the metal powders division's net asset values up to the effective date.
Income from discontinued operations included in the Corporation's consolidated statements of income were as follows:
Cash (used in) provided by discontinued operations included in the Corporation's consolidated statements of cash flows was as follows:
The assets and liabilities of discontinued operations included in the Corporation's consolidated balance sheets were as follows:
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 its 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 lease payments required by operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of December 31, 1999 are as follows:
Rent expense was $1,183,000, $569,000 and $492,000 in 1999, 1998 and 1997, 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.
13. CHANGES IN NON-CASH WORKING CAPITAL
The changes in non-cash working capital items are as follows:
14. RELATED PARTY TRANSACTIONS
As at December 31, 1999 and 1998, accounts receivable included amounts due from directors and one officer of $65,000, and $100,000, respectively. These amounts are non-interest bearing, with no fixed terms of repayment and are secured by common shares of the Corporation.
During 1998, a director became indebted to the Corporation in the amount of $124,000. At December 31, 1999, $116,000 remained outstanding and is included in accounts receivable (1998, $116,000). This obligation is secured by common shares of the Corporation and bears interest at the Corporation's cost of borrowing (7.6% at December 31, 1999, 7.4% at December 31, 1998).
15. SEGMENT INFORMATION
The Corporation's continuing operations now has two principal lines of business and is organized into two operating units based on its product lines: (i) industrial minerals, and (ii) 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. Aluminum dross is recycled at plants in Cleveland, Ohio and Wabash, Indiana and ceramic fiber 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 continuing operations and assets by business segment appears below:
The Corporation bases its geographic allocation upon the location of its sales offices which are all domiciled in the United States.
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 arose 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. Although the change in date has occurred, it is not possible to conclude that all aspects of the year 2000 issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, have been 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. STATEMENTS OF INCOME
The implementation of the American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5 requires that the costs of start-up activities and organization costs be expensed as incurred. Canadian GAAP permits the deferral of such costs.
For purposes of reporting in accordance with U.S. GAAP, certain equity securities that are not held principally for the purpose of sale in the near term are classified as available-for-sale securities, are reported at fair value, and are translated at the current exchange rate which can give rise to an exchange gain or loss (see (c) below). For Canadian GAAP purposes, such securities are reported at cost and are translated at the historical exchange rate.
For the purposes of calculating diluted earnings per share, U.S. GAAP requires the application of the treasury stock method.
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 financial statement, a statement of comprehensive income. For Canadian GAAP purposes, such securities are reported at cost, unless there is deemed to have been a permanent impairment in their value.
U.S. GAAP, SOP 98-5, requires that the costs of start-up activities and organization costs be expensed as incurred. SOP 98-5 is effective for periods beginning after December 15, 1998. Initial implementation is reported as a cumulative effect of a change in accounting principle without retroactive application.
c. STATEMENTS OF COMPREHENSIVE INCOME
U.S. GAAP requires a statement of comprehensive income as follows:
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:
Net periodic pension expense (income) included the following components:
Assumptions:
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, 1999 and 1998 are tabulated below:
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:
e. STOCK BASED COMPENSATION
The Corporation does not recognize compensation expense for its stock-based compensation plans. Had compensation cost for the stock option plans been determined based upon fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Corporation's net income and earnings per share would have been reduced by approximately $681,000 or $0.08 per share in 1999, $1,267,000 or $0.15 per share in 1998 and $589,000 or $0.07 per share in 1997. The fair value of the options granted during 1999, 1998, and 1997 is estimated to be $681,000, $1,267,000 and $589,000 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 1999, 1998 and 1997: dividend yield of 0%; expected volatility of 29%, 32% and 32%, respectively; risk-free interest rates varying from 4.73% to 6.34%; and an expected life of 5 years.
f. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which established accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. Management has not yet evaluated the effects of this statement on its results of operations. As required, the Corporation will adopt SFAS No. 133 in the first quarter of 2001.
18. SUBSEQUENT EVENTS
a. As the first step in its efforts to maximize shareholder value, on March 6, 2000, the Corporation entered into a stock purchase agreement whereby it agreed to sell the shares of Pyron Corporation and Pyron Metal Powders, Inc. The selling price will be $41 million subject to closing adjustments. The transaction is subject to regulatory approval.
b. To effect the disposition of Pyron Corporation and Pyron Metal Powders, Inc., on March 8, 2000, the Corporation redeemed its outstanding Senior Secured Notes (see note 8). The redemption was financed by a bridge facility structured as an amendment to its existing credit facility (see note 8). The bridge facility bears interest at the same rate and is secured by the same security package as its existing credit facility. The bridge facility has a term to October 31, 2000 and is to be partially repaid from the proceeds of the sale of the Pyron Corporation and Pyron Metal Powders, Inc. The redemption necessitated a make-whole payment to the noteholders of $1.1 million, which will be recorded in the first quarter of 2000.
19. COMPARATIVE FIGURES
Certain of the comparative figures have been restated to comply with the current year's presentation.
FINANCIAL DATA (UNAUDITED)
The following is a summary of certain unaudited quarterly financial data.
LIST OF EXHIBITS
EXHIBIT (4)(s) Amendment No. 2 dated March 7, 2000 to the Credit Agreement dated as of May 21, 1999 among Zemex Corporation and Zemex U.S. Corporation, Bank of America Canada, Bank of America National Trust and Savings Association et al.
EXHIBIT (10)(l) Agreement between Zemex Corporation and Richard L. Lister dated as of the 1st day of October, 1999.
EXHIBIT (10)(m) Agreement between Zemex Corporation and Allen J. Palmiere dated as of the 1st day of October, 1999.
EXHIBIT (10)(n) Agreement between Zemex Corporation and George E. Gillespie dated as of the 1st day of October, 1999.
EXHIBIT (10)(o) Agreement between Zemex Corporation and Peter J. Goodwin dated as of the 1st day of October, 1999.
EXHIBIT (10)(p) Agreement between Zemex Corporation and Terrance J. Hogan dated as of the 1st day of October, 1999.
EXHIBIT 21 Subsidiaries of the Registrant
EXHIBIT 27 Financial Data Schedule