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CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 1-228
[ZEMEX LOGO]
ZEMEX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
95 WELLINGTON STREET WEST, SUITE 2000
TORONTO, ONTARIO, CANADA M5J 2N7
(Address of principal executive offices)
(416) 365-8080
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
TORONTO STOCK EXCHANGE/NEW YORK STOCK EXCHANGE CAPITAL STOCK, NO PAR VALUE
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
As of July 23, 2002, there were 8,210,518 shares of capital stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ZEMEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(US$)
====================================================================================================
JUNE 30, 2002 December 31, 2001
- ----------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 301,000 $ 532,000
Accounts receivable 11,956,000 8,639,000
Inventories 17,346,000 16,417,000
Prepaid expenses and other current assets 629,000 380,000
Income taxes receivable 317,000 601,000
Future income tax benefits 384,000 384,000
- ----------------------------------------------------------------------------------------------------
30,933,000 26,953,000
PROPERTY, PLANT AND EQUIPMENT 69,080,000 56,962,000
GOODWILL (notes 2 and 7) 2,787,000 2,701,000
OTHER ASSETS 3,708,000 3,505,000
FUTURE INCOME TAX BENEFITS (NON-CURRENT) 8,421,000 7,394,000
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 114,929,000 $ 97,515,000
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness $ 24,700,000 $ 11,000,000
Accounts payable 3,561,000 2,957,000
Accrued liabilities (note 3) 6,183,000 2,578,000
Current portion of long term debt 339,000 284,000
- ----------------------------------------------------------------------------------------------------
34,783,000 16,819,000
LONG TERM DEBT 286,000 211,000
OTHER NON-CURRENT LIABILITIES 2,466,000 2,281,000
FUTURE INCOME TAX OBLIGATIONS 1,470,000 1,399,000
- ----------------------------------------------------------------------------------------------------
39,005,000 20,710,000
- ----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 54,027,000 53,786,000
Retained earnings 25,326,000 26,820,000
Note receivable from shareholder (1,259,000) (1,259,000)
Cumulative translation adjustment (2,170,000) (2,542,000)
- ----------------------------------------------------------------------------------------------------
75,924,000 76,805,000
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 114,929,000 $ 97,515,000
====================================================================================================
Prepared in accordance with Canadian GAAP
- 2 -
ZEMEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(US$)
=============================================================================================================================
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(unaudited)
NET SALES $ 18,064,000 $ 14,493,000 $ 33,037,000 $ 31,055,000
- -----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 12,761,000 9,192,000 23,367,000 20,598,000
Selling, general and administrative 3,034,000 3,063,000 5,762,000 5,826,000
Depreciation, depletion and amortization 1,605,000 1,484,000 3,116,000 3,103,000
- -----------------------------------------------------------------------------------------------------------------------------
17,400,000 13,739,000 32,245,000 29,527,000
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 664,000 754,000 792,000 1,528,000
- -----------------------------------------------------------------------------------------------------------------------------
Interest income 3,000 17,000 34,000 67,000
Interest expense (306,000) (306,000) (519,000) (574,000)
Other income, net 39,000 296,000 43,000 599,000
- -----------------------------------------------------------------------------------------------------------------------------
(264,000) 7,000 (442,000) 92,000
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND NON-CONTROLLING INTEREST 400,000 761,000 350,000 1,620,000
Provision for income taxes 270,000 217,000 169,000 383,000
Non-controlling interest in subsidiary earnings -- -- -- 10,000
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 130,000 $ 544,000 $ 181,000 $ 1,227,000
=============================================================================================================================
NET INCOME PER SHARE
BASIC $0.02 $0.07 $0.02 $0.15
DILUTED $0.02 $0.06 $0.02 $0.15
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 7,938,485 8,283,234 7,929,950 8,346,791
DILUTED 8,093,323 8,440,871 8,007,222 8,397,255
=============================================================================================================================
Prepared in accordance with Canadian GAAP
- 3 -
ZEMEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US$)
==========================================================================================================================
NOTE
RECEIVABLE CUMULATIVE
COMMON RETAINED FROM TRANSLATION
STOCK EARNINGS SHAREHOLDER ADJUSTMENT TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 57,212,000 $ 25,958,000 $(1,259,000) $(2,008,000) $ 79,903,000
Stock issued under ESPP, net (a) 175,000 -- -- -- 175,000
Stock purchased for treasury (1,742,000) -- -- -- (1,742,000)
Stock options repurchased -- (3,000) -- -- (3,000)
Net income for the period -- 1,227,000 -- -- 1,227,000
Translation adjustment -- -- -- (94,000) (94,000)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 55,645,000 $ 27,182,000 $(1,259,000) $(2,102,000) $ 79,466,000
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 53,786,000 $ 26,820,000 $(1,259,000) $(2,542,000) $ 76,805,000
STOCK ISSUED UNDER ESPP, NET (a) 241,000 -- -- -- 241,000
STOCK PURCHASED FOR TREASURY -- -- -- -- --
NET INCOME FOR THE PERIOD -- 181,000 -- -- 181,000
GOODWILL IMPAIRMENT DUE TO
CHANGE IN ACCOUNTING POLICY (b) -- (1,675,000) -- -- (1,675,000)
TRANSLATION ADJUSTMENT -- -- -- 372,000 372,000
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ 54,027,000 $ 25,326,000 $(1,259,000) $(2,170,000) $ 75,924,000
==========================================================================================================================
Prepared in accordance with Canadian GAAP
(a) Employee Stock Purchase Plan ("ESPP")
(b) See note 7
- 4 -
ZEMEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(US$)
=================================================================================================================================
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,000 $ 544,000 $ 181,000 $ 1,227,000
Adjustments to reconcile net income to
net cash flows from operating activities
Depreciation, depletion and amortization 1,605,000 1,484,000 3,116,000 3,103,000
Increase (decrease) in future income tax obligations 72,000 65,000 70,000 (15,000)
Non-controlling interest in subsidiary earnings -- -- -- 10,000
Loss (gain) on sale of assets 2,000 12,000 2,000 (290,000)
Decrease (increase) in other assets 44,000 (126,000) (222,000) (169,000)
Increase in other non-current liabilities 4,000 25,000 5,000 42,000
Changes in non-cash working capital items 1,639,000 (1,085,000) 60,000 (2,988,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,496,000 919,000 3,212,000 920,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (1,335,000) (736,000) (2,507,000) (1,044,000)
Acquisitions, net of cash acquired -- -- (14,706,000) --
Proceeds from sale of assets 6,000 4,000 10,000 3,635,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,329,000) (732,000) (17,203,000) 2,591,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in bank indebtedness (2,300,000) 500,000 13,700,000 (3,000,000)
Net decrease in long term debt (173,000) (144,000) (279,000) (308,000)
Issuance of common stock 126,000 95,000 241,000 175,000
Purchase of common stock and options -- (1,375,000) -- (1,745,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (2,347,000) (924,000) 13,662,000 (4,878,000)
- ---------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 100,000 115,000 98,000 (27,000)
- ---------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (80,000) (622,000) (231,000) (1,394,000)
CASH AT BEGINNING OF PERIOD 381,000 1,403,000 532,000 2,175,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 301,000 $ 781,000 $ 301,000 $ 781,000
=================================================================================================================================
Prepared in accordance with Canadian GAAP
- 5 -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The consolidated financial statements prepared in accordance with Canadian GAAP,
include the accounts of Zemex Corporation and its subsidiaries (the
"Corporation"). The financial data for the three months ended June 30, 2002 and
2001 and for the six months ended June 30, 2002 and 2001 is unaudited but, in
the opinion of management, reflects all adjustments, considered necessary for a
fair presentation of the financial position, results of operations and cash
flows. The results of operations and cash flows for the three-month and
six-month periods ended June 30, 2002 are not necessarily indicative of
operations for the entire year. All material intercompany transactions have been
eliminated. The following should be read in conjunction with the audited
Consolidated Financial Statements and related notes thereto for the year ended
December 31, 2001.
The Corporation is a diversified producer of specialty materials and products
for use in a variety of industrial applications. The Corporation operates in two
principal business segments: (i) industrial minerals, which includes The
Feldspar Corporation, Suzorite Mica Products Inc., Suzorite Mineral Products,
Inc., Zemex Industrial Minerals, Inc., Zemex Mica Corporation and Zemex
Attapulgite, LLC; and (ii) aluminum recycling, which includes Alumitech, Inc.,
Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc., Alumitech of West
Virginia, Inc., ETS Schaefer Corporation and AWT Properties, Inc.
2. ACQUISITIONS AND DISPOSITIONS
a. On March 27, 2002, the Corporation purchased through a newly formed
subsidiary, Alumitech of West Virginia, Inc., the assets of Resource
Recovery Industries, LLC, an aluminum dross processor located in Friendly,
West Virginia. The purchase price was approximately $3.1 million and was
financed by a drawdown on the Corporation's credit facility.
As contingent consideration for the purchase, the Corporation issued Series
A and Series B warrants which are exercisable for cash consideration into
shares of Alumitech, Inc., or into shares of the Corporation if Alumitech,
Inc. is not publicly listed by December 31, 2006. The warrants, which vest
in 2005 and 2006 respectively, will terminate if certain earnings targets
are not met by the aluminum operations of Alumitech by the beginning of
these fiscal years.
b. On February 1, 2002, the Corporation acquired, through Zemex Attapulgite,
LLC, a newly incorporated subsidiary under the industrial minerals group,
the assets of an attapulgite clay operation from Milwhite, Inc. The
Corporation paid approximately $11.6 million for the acquisition and funded
it by a drawdown from its existing credit facility.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of the acquisition. As a
result of third party valuation reports completed in the second quarter,
the Corporation has revised its initial allocation of the purchase price,
reclassifying $2.8 million from capital assets to goodwill.
- 6 -
===========================================================================
Current assets $ 1,123,000
Capital assets 8,840,000
Goodwill 2,787,000
---------------------------------------------------------------------------
Total assets 12,750,000
Current liabilities 991,000
Other non-current liabilities 180,000
---------------------------------------------------------------------------
Net assets acquired $ 11,579,000
===========================================================================
c. On March 20, 2001, the Corporation completed the sale of its Natural
Bridge, New York talc facility and its 60% interest in Zemex Fabi-Benwood,
LLC for approximately $7.5 million to IMI Fabi S.p.A. ("IMI Fabi"). The
Corporation recognized a pre-tax gain of $0.3 million from this transaction
which was recorded as other income in the first quarter of 2001. Of the
sale proceeds, $3.7 million was received in March 2001 and applied to
reduce the Corporation's outstanding borrowings under its credit
facilities. The balance, which was originally included in accounts
receivable, was received in September 2001.
3. DEFERRED REVENUE
Included in accrued liabilities at June 30, 2002 is deferred revenue of $1.9
million related to a "take-or-pay" arrangement with a customer. The Corporation
recognizes revenue when goods are delivered to customers or when all significant
contractual obligations have been satisfied.
4. SEGMENTED INFORMATION
The Corporation carries on its commercial activities in two principal lines of
business and is organized into two distinct operating units based on product
lines: (i) industrial minerals; and (ii) aluminum recycling.
Information pertaining to sales and earnings (loss) from operations and assets
by business segment appears below:
====================================================================================================================
INDUSTRIAL ALUMINUM
THREE MONTHS ENDED JUNE 30, 2002 CONSOLIDATED MINERALS RECYCLING CORPORATE
- --------------------------------------------------------------------------------------------------------------------
NET SALES $ 18,064,000 $ 12,502,000 $ 5,562,000 $ --
OPERATING INCOME (LOSS) 664,000 1,787,000 (191,000) (932,000)
INTEREST EXPENSE (306,000) (36,000) (6,000) (264,000)
NET INCOME (LOSS) 130,000 1,510,000 (160,000) (1,220,000)
====================================================================================================================
====================================================================================================================
Industrial Aluminum
Three Months Ended June 30, 2001 Consolidated Minerals Recycling Corporate
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 14,493,000 $ 9,815,000 $ 4,678,000 $ --
Operating income (loss) 754,000 1,824,000 (113,000) (957,000)
Interest expense (306,000) (71,000) (2,000) (233,000)
Net income (loss) 544,000 1,657,000 (127,000) (986,000)
====================================================================================================================
- 7 -
====================================================================================================================
INDUSTRIAL ALUMINUM
SIX MONTHS ENDED JUNE 30, 2002 CONSOLIDATED MINERALS RECYCLING CORPORATE
- --------------------------------------------------------------------------------------------------------------------
NET SALES $ 33,037,000 $ 22,996,000 $ 10,041,000 $ --
OPERATING INCOME (LOSS) 792,000 3,130,000 (511,000) (1,827,000)
INTEREST EXPENSE (519,000) (48,000) (11,000) (460,000)
NET INCOME (LOSS) 181,000 2,655,000 (466,000) (2,008,000)
====================================================================================================================
====================================================================================================================
Industrial Aluminum
Six Months Ended June 30, 2001 Consolidated Minerals Recycling Corporate
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 31,055,000 $ 21,562,000 $ 9,493,000 $ --
Operating income (loss) 1,528,000 3,571,000 (340,000) (1,703,000)
Interest expense (574,000) (15,000) (10,000) (549,000)
Net income (loss) 1,227,000 3,703,000 (362,000) (2,114,000)
====================================================================================================================
====================================================================================================================
INDUSTRIAL ALUMINUM
JUNE 30, 2002 CONSOLIDATED MINERALS RECYCLING CORPORATE
- --------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS $ 30,933,000 $ 24,883,000 $ 3,730,000 $ 2,320,000
TOTAL ASSETS 114,929,000 79,150,000 22,974,000 12,805,000
TOTAL CURRENT LIABILITIES 34,783,000 6,637,000 2,788,000 25,358,000
TOTAL SHAREHOLDERS' EQUITY 75,924,000 -- -- 75,924,000
====================================================================================================================
====================================================================================================================
Industrial Aluminum
December 31, 2001 Consolidated Minerals Recycling Corporate
- --------------------------------------------------------------------------------------------------------------------
Current assets $ 26,953,000 $ 22,151,000 $ 2,602,000 $ 2,200,000
Total assets 97,515,000 64,490,000 20,306,000 12,719,000
Total current liabilities 16,819,000 3,501,000 1,911,000 11,407,000
Total shareholders' equity 76,805,000 -- -- 76,805,000
====================================================================================================================
5. COMMON SHARES AND STOCK OPTIONS
Shares Outstanding
As at June 30, 2002, the Corporation's authorized capital stock consists of an
unlimited number of first preference shares without par value and an unlimited
number of common shares without par value. There were no preference shares and
8,210,518 common shares issued and outstanding as of July 23, 2002.
The Corporation did not repurchase any common shares in the second quarter of
2002 as compared to 195,600 common shares repurchased in the same quarter of
2001, at an average price of $7.02 per share. The Corporation did not repurchase
any shares during the six months ended June 30, 2002, compared to 261,000 common
shares repurchased in the same period in 2001, at an average price of $6.67 per
share.
Stock Options Outstanding
The Corporation provides stock option incentive plans, which 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. The options vest and are exercisable from the
beginning of the second year subsequent to the date of issuance. There were
1,120,650 options outstanding as of July 23, 2002 of which 871,900 are
exercisable as of July 23, 2002.
- 8 -
The following is a summary of option transactions under the Corporation's stock
option plans for the three months and six months ended June 30, as follows:
====================================================================================================================
THREE MONTHS ENDED JUNE 30 2002 2001
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE Weighted-average
OPTIONS EXERCISE PRICE Options exercise price
- --------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of period 1,065,150 $7.14 1,216,150 $7.40
Options granted during period 57,500 6.83 22,000 7.25
Options exercised during the period -- -- (8,000) 6.50
Options cancelled during the period -- -- (166,500) 8.46
- --------------------------------------------------------------------------------------------------------------------
Options outstanding at end of period 1,122,650 $7.13 1,063,650 $7.23
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at end of period 873,900 731,150
- --------------------------------------------------------------------------------------------------------------------
Price range of options granted during the period $6.83 $7.25
====================================================================================================================
====================================================================================================================
SIX MONTHS ENDED JUNE 30 2002 2001
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE Weighted-average
OPTIONS EXERCISE PRICE Options exercise price
- --------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of period 1,070,650 $7.16 1,177,150 $8.17
Options granted during period 57,500 6.83 272,500 5.28
Options exercised during the period -- -- (8,000) 6.50
Options cancelled during the period (5,500) 9.75 (378,000) 8.89
- --------------------------------------------------------------------------------------------------------------------
Options outstanding at end of period 1,122,650 $7.13 1,063,650 $7.23
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at end of period 873,900 731,150
- --------------------------------------------------------------------------------------------------------------------
Price range of options granted during the period $6.83 $5.21~$7.25
====================================================================================================================
The options expire from 2002 to 2010.
The following table summarizes information about the stock options outstanding
at June 30, 2002:
====================================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES JUNE 30, 2002 CONTRACTUAL LIFE EXERCISE PRICE JUNE 30, 2002 EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------
$ 5.00 TO $ 5.99 241,500 4.63 YEARS $ 5.21 120,750 $ 5.21
$ 6.00 TO $ 6.99 405,650 6.13 YEARS 6.39 301,150 6.29
$ 7.00 TO $ 7.99 192,000 2.53 YEARS 7.31 168,500 7.29
$ 8.00 TO $ 8.99 64,000 7.44 YEARS 8.21 64,000 8.21
$ 9.00 TO $ 9.99 12,000 1.98 YEARS 9.06 12,000 9.06
$10.00 TO $10.99 207,500 1.88 YEARS 10.19 207,500 10.19
- --------------------------------------------------------------------------------------------------------------------
$ 5.00 TO $10.99 1,122,650 873,900
====================================================================================================================
6. 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,
the Corporation's net income and earnings per share would have been reduced by
approximately $129,000 or $0.02 per share in the second quarter of 2002, and
$56,000 or $0.01 per share in the same period of 2001. For the six-month periods
ended June 30, the Corporation's net income and earnings per share would have
been reduced by $129,000 or $0.02 per share in 2002, and $514,000 or $0.06
- 9 -
per share in 2001. The fair value of the options granted during 2002 and 2001 is
estimated to be $129,000 and $514,000, 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 2002 and 2001: dividend yield of 0%; expected volatility of 28% and
29%; risk-free interest rates varying from 4.18% to 5.17%; and an expected life
of 5 years.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
In 2001, the Canadian Institute of Chartered Accountants issued Section 3062
"Goodwill and Other Intangible Assets". This standard was effective January 1,
2002 and requires, among other things, the discontinuance of goodwill
amortization. The Corporation's net income would have increased by $50,000 for
the three-month period ended June 30, 2001 and $100,000 for the six-month period
ended June 30, 2001 had goodwill not been amortized during these periods. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles such as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill.
It also requires the Corporation to complete a transitional goodwill impairment
test six months from the date of adoption. This implementation review was
completed as at June 30, 2002 for the goodwill that had been recorded by the
Corporation's aluminum recycling group, the operation of which collectively
comprise a reporting unit, on the acquisition of S&R Enterprises, Inc. The
review indicated an impairment of goodwill. The impairment has arisen as a
result of the fair market value of the reporting unit declining due to the
depressed nature of the secondary aluminum industry. An amount of $1.7 million
(net of tax of $1.0 million), representing the goodwill impairment, was charged
to opening retained earnings effective January 1, 2002 in accordance with the
transitional provisions of this standard.
8. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). The
differences between Canadian and U.S. generally accepted accounting principles
("U.S. GAAP") do not have a material effect on the Corporation's reported
financial position or net income or cash flows except as follows:
a. Income Statements
The implementation of the American Institute of Certified Public
Accountants Statement of Position 98-5 ("SOP 98-5") requires costs of
start-up activities and organization costs to be expensed as incurred.
Canadian GAAP permits the deferral and amortization of such costs.
The implementation of Section 3062 of the CICA Handbook, "Goodwill and
Other Intangible Assets", and Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets", requires the assessment of potential impairments
of goodwill and where an impairment exists, the elimination of the
goodwill. For the purpose of CICA Section 3062 the impaired goodwill is
charged against opening retained earnings; however, for the purpose of SFAS
No. 142 the charge is recognized in the income statement as a cumulative
change in accounting policy.
- 10 -
The following summarizes the income statement amounts in accordance with
U.S. GAAP where different from the amounts reported under Canadian GAAP.
===================================================================================================================
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Net income as reported $ 130,000 $ 544,000 $ 181,000 $ 1,227,000
Add: Amortization of start-up activities
and organization costs 8,000 8,000 15,000 47,000
Tax effect related thereto (2,000) (2,000) (3,000) (8,000)
-------------------------------------------------------------------------------------------------------------------
Net income before cumulative change
in accounting policy 136,000 550,000 193,000 1,266,000
Less: Goodwill impairment (2,701,000) -- (2,701,000) --
Tax effect related thereto 1,026,000 -- 1,026,000 --
-------------------------------------------------------------------------------------------------------------------
Net (loss) income under U.S. GAAP $(1,539,000) $ 550,000 $(1,482,000) $ 1,266,000
===================================================================================================================
Net income per share before cumulative change
in accounting policy, under U.S. GAAP
- basic $ 0.02 $ 0.07 $ 0.02 $ 0.15
- diluted $ 0.02 $ 0.07 $ 0.02 $ 0.15
-------------------------------------------------------------------------------------------------------------------
Net (loss) income per share, under U.S. GAAP
- basic $(0.19) $ 0.07 $(0.19) $ 0.15
- diluted $(0.19) $ 0.07 $(0.19) $ 0.15
===================================================================================================================
b. Balance Sheets
Under U.S. GAAP, SOP 98-5 requires that the costs of start-up activities
and organization costs be expensed in the period incurred rather than be
deferred.
Under U.S. GAAP, the provision for asset impairment for property, plant and
equipment should be based on discounted future cash flows from impaired
properties. Under Canadian GAAP, future cash flows from impaired properties
are not discounted. This difference in methodology had an impact on
reported results of operations of $1,439,000 in the year in which the
impairment was recognized.
The following summarizes the balance sheet amounts in accordance with U.S.
GAAP where different from the amounts reported under Canadian GAAP.
===========================================================================================================
JUNE 30, 2002 December 31, 2001
-------------------------------------------------------------------
CANADIAN GAAP U.S. GAAP Canadian GAAP U.S. GAAP
-----------------------------------------------------------------------------------------------------------
Property, plant and equipment $ 69,080,000 $ 67,641,000 $ 56,962,000 $ 55,523,000
Other assets 3,708,000 3,511,000 3,505,000 3,292,000
Future income tax benefits
(non-current) 8,421,000 8,577,000 7,394,000 7,554,000
Accumulated other
comprehensive loss -- (2,170,000) -- (2,542,000)
Retained earnings 25,326,000 23,846,000 26,820,000 25,328,000
===========================================================================================================
- 11 -
c. Statements of Comprehensive (Loss) Income
U.S. GAAP requires a statement of comprehensive (loss) income as follows:
=================================================================================================================
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------
Net (loss) income under U.S. GAAP $(1,539,000) $ 550,000 $(1,482,000) $ 1,266,000
Change in foreign currency translation
adjustment 380,000 298,000 372,000 (78,000)
-----------------------------------------------------------------------------------------------------------------
Comprehensive (loss) income $(1,159,000) $ 848,000 $(1,110,000) $ 1,188,000
=================================================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition and
results of operations of the Corporation for the three months ended June 30,
2002 and the three months ended June 30, 2001, and for the six months ended June
30, 2002 and the six months ended June 30, 2001, 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 for the year ended December 31,
2001.
CRITICAL ACCOUNTING POLICIES
Impairment of Long-Lived Assets and Valuation of Deferred Tax Assets
The fair value of the long-lived assets is dependent on the performance of the
operations which the Corporation owns. In assessing potential impairment for
these assets the Corporation will consider this factor as well as the forecasted
financial performance. If the forecast is not met and the outlook does not
provide for sufficient cash flow to recoup the investments, the Corporation may
have to record additional impairment charges not previously recognized.
In assessing the recoverability of the Corporation's goodwill and other
intangibles the Corporation must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
the Corporation may be required to record impairment charges for these assets
not previously recorded.
Carrying value of the Corporation's net deferred tax assets assumes that the
Corporation will be able to generate sufficient future taxable income in certain
tax jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, the Corporation may be required to
record additional valuation allowance against its deferred tax assets resulting
in additional income tax expense in the Corporation's consolidated statement of
operations. Management evaluates the realizability of the deferred tax assets
quarterly and assesses the need for additional valuation allowance quarterly.
Use of Estimates
The preparation of financial statements in conformity with Canadian generally
accepted accounting principals 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
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statements and the reported amounts of revenues and expenses during the
reporting period. Examples include provisions for bad debts, inventory reserves,
reclamation reserves and pension liabilities. Actual results could differ from
those estimates.
The Corporation considers certain accounting policies relating to impairment of
long-lived assets and valuation of deferred tax assets to be critical policies
due to the estimation processes involved in each.
RESULTS OF OPERATIONS
There are three main factors that have impacted the results of operations in
2002:
o Effective February 28, 2001, the Corporation sold its Natural Bridge, New
York talc facility and 60% interest in Fabi-Benwood, LLC.
o On February 1, 2002, the Corporation acquired certain assets of an
attapulgite clay operation located in Attapulgus, Georgia.
o In 2001, the Corporation produced, as a co-product of its sodium feldspar
operation, feedstock for its low iron sand operation. In 2002, due to a
change in mining plan, the Corporation is producing a low value industrial
sand as a by-product. This has had an adverse impact on cost of goods sold of
approximately $0.9 million. Additionally, sales of low iron sand are
currently well behind budget. As this material is the subject of a
"take-or-pay" contract, management anticipates that revenue will be on budget
by year end.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net Sales
The Corporation's net sales from operations for the three months ended June 30,
2002 were $18.1 million compared to $14.5 million for the three months ended
June 30, 2001, an increase of $3.6 million, or 24.6%.
Net sales in the industrial minerals group for the three months ended June 30,
2002 were $12.5 million compared to $9.8 million in 2001. The increase of $2.7
million, or 27.4%, in revenue was mainly due to the revenue generated from the
newly acquired attapulgite clay operation and increased sales revenue generated
from the Suzorite Mica operation. The increase was offset by a $0.4 million
decrease in low iron sand sales during the current quarter.
Net sales for the aluminum recycling group were $5.6 million for the quarter
ended June 30, 2002, compared to $4.7 million for the same period in 2001. The
increase of 18.9% in revenue was primarily due to revenue from the newly
acquired aluminum dross processor located in Friendly, West Virginia in part
offset by the decrease in revenue generated from heat containment systems. The
heat containment operation remains depressed due to the condition of the steel
industry.
Cost of Goods Sold
Cost of goods sold for the quarter ended June 30, 2002 was $12.8 million, an
increase of 38.8%, from the comparable period in 2001. Of the $3.6 million
increase, the industrial minerals group accounted for $2.7 million and the
aluminum recycling group accounted for $0.9 million. The increase from the
industrial minerals group was due to the acquisition of clay operation in the
first quarter of 2002 and the change in the quarry being utilized in feldspar
operation. In 2002 the Feldspar operation generates low value industrial sand as
a by-product rather than the high value low iron sand produced last year. The
increase attributable to the aluminum recycling group was primarily due to the
acquisition of the West Virginia aluminum dross
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processor in March 2002. As a result of reasons discussed above, the gross
margin as a percentage of sales for the quarter ended June 30, 2002 decreased by
19.7% from 36.6% to 29.4%.
Selling, General and Administrative Expense
Selling, general and administrative expense ("SG&A") for the three-month period
ended June 30, 2002 was $3.0 million, effectively unchanged from the
corresponding period in 2001. SG&A expense as a percentage of revenue decreased
from 21.1% in 2001 to 16.8% in 2002.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") for the three months ended
June 30, 2002 was $1.6 million, an increase of 8.2% over the comparable period
in 2001 as a result of the acquisition of Zemex Attapulgite, LLC which was
completed in the first quarter of 2002.
Operating Income
Operating income for the three-month period ended June 30, 2002 was $0.7
million, a decrease of 12.0% from the comparable period in 2001. The decline in
low iron sand sales resulted in a shortfall of $0.2 million which changed the
variance from a positive 12% to a negative 12%.
Interest Income
Interest income for the three months ended June 30, 2002 was $3,000 as compared
to $17,000 for the same period in 2001.
Interest Expense
Interest expense for the three months ended June 30, 2002 was $0.3 million,
effectively unchanged from the comparable period in 2001. Total bank
indebtedness was $25.3 million as of June 30, 2002, as compared to $14.6 million
as of June 30, 2001. The increase in indebtedness arose from the two
acquisitions that occurred in the first quarter of 2002. Both acquisitions were
funded from the Corporation's credit facilities. Interest expense will increase
prospectively. The increased level of indebtedness was offset by lower interest
rates.
Other Income, Net
During the second quarter of 2001, the Corporation received a settlement of a
long outstanding business interruption insurance claim relating to the
previously sold metal powders operation. $0.3 million was recognized as other
income.
Provision for Income Taxes
The Corporation recorded $0.3 million as provision for income taxes for the
three months ended June 30, 2002 as compared to $0.2 million recorded in the
same period of 2001.
Net Income
As a result of the factors discussed above, the Corporation recorded net income
for the three months ended June 30, 2002 of $0.1 million compared to $0.5
million for the three months ended June 30, 2001.
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SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Sales
The Corporation's net sales for the six months ended June 30, 2002 increased to
$33.0 million, or 6.4%, from $31.0 million in the corresponding period in 2001.
Of the $2.0 million increase, the industrial minerals group contributed $1.4
million and aluminum recycling group, $0.6 million.
Net sales in the industrial minerals group were $23.0 million for the six-month
period ended June 30, 2002, compared to $21.6 million in 2001. The increase
arose from several factors: an acquisition of the attapulgite clay operation in
the first quarter of 2002, the sale of Natural Bridge, New York talc facility
and the Benwood, West Virginia talc joint venture in the first quarter of 2001
and improved sales revenue generated from the mica operation.
Net sales in the aluminum recycling group was $10.0 million for the period ended
June 30, 2002 versus $9.4 million for the same period in 2001. The revenue
generated from the newly purchased aluminum dross processor was offset by the
decrease in sales from the heat containment unit.
Cost of Goods Sold
Cost of goods sold for the six months ended June 30, 2002 was $23.4 million,
compared to $20.6 million in 2001. The increase was mainly due to the
acquisitions that occurred in the first quarter of 2002 and the dispositions of
the talc facilities in 2001. The change in low iron sand feedstock production
has also adversely impacted cost of goods sold. Gross margin as percentage of
sales decreased from 33.7% in 2001 to 29.3% in 2002.
Selling, General and Administrative Expense
SG&A expense for the six-month period ended June 30, 2002 was $5.8 million,
marginally down from the same period in 2001.
Depreciation, Depletion and Amortization
DD&A for the six months ended June 30, 2002 was $3.1 million, effectively
unchanged from the corresponding period in 2001.
Operating Income
Operating income for the six-month period ended June 30, 2002 was $0.8 million,
a decrease of $0.7 million, or 48.2%, from the comparable period in 2001.
Interest Income
Interest income for the six months ended June 30, 2002 was $34,000 versus
$67,000 for the same period in 2001.
Interest Expense
Interest expense for the six months ended June 30, 2002 was $0.5 million, 9.6%
lower than in the same period in 2001. Total indebtedness was $25.3 million as
of June 30, 2002, versus $14.6 million as of June 30, 2001. The increase in
indebtedness was mainly due to the drawdown of credit facilities to fund the
two acquisitions in 2002, compared to the paydown of credit facilities in 2001
as a result of sale of talc facilities.
- 15 -
Other Income, Net
The Corporation recorded other income of $0.6 million for the six months ended
June 30, 2001, compared to $43,000 for the same period in 2002. The 2001 income
arose from the sale of the talc plants and insurance proceeds as previously
discussed.
Provision for Income Taxes
The Corporation recorded an income tax provision of $0.2 million for the six
months ended June 30, 2002, as compared to $0.4 million recorded in the
corresponding period in 2001.
Net Income
As a result of the factors discussed above, the Corporation recorded a net
income of $0.2 million for the six months ended June 30, 2002 compared to $1.2
million for the same period ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operations
During the first two quarters of 2002, the Corporation generated cash flow from
operations of $3.2 million as compared to $0.9 million for the first six months
of 2001. Non-cash working capital generated $60,000 in the period ended June 30,
2002, versus an outflow of $3.0 million in the same period of 2001.
The Corporation had a working capital deficit of $3.9 million at June 30, 2002
compared to a $10.1 million working capital at December 31, 2001. The decrease
was mainly due to the drawdown under the credit facility to fund the
acquisitions in 2002. Because the credit facility is a 364 day facility, all the
bank debt is considered current.
The Corporation's current credit facility expires on July 31, 2002. As part of
the renewal negotiations, the banks have agreed to split the facility into two
tranches. The first $10 million tranche will remain a 364 day facility. The
second $20 million tranche will be for a two year term. Additionally the banks
have agreed to a short-term increase in the leverage covenant to provide the
Corporation with additional flexibility. There are no proposed changes to the
current pricing grid. Documentation is expected to be finalized shortly.
It is the opinion of management that there are sufficient sources of funds
available to meet its anticipated cash requirements.
ITEM 3 - 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 a function
of potential fluctuations in interest rates and aluminum prices. Management
monitors the movements in interest rates and performs a periodic sensitivity
analysis on aluminum prices and, on that basis, decides on the appropriate
measures to take. Current prices and interest rates are such that management
believes that no measures need be taken at this time.
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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 in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.
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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Corporation's 2002 Annual Meeting of Shareholders held on June 14, 2002,
the following actions were taken and votes tabulated:
1. Nine directors were elected for the ensuing year.
NAME VOTES FOR VOTES WITHHELD
--------------------------------- ---------------- ------------------
Paul A. Carroll 7,460,704 6,596
Morton A. Cohen 7,460,704 6,596
John M. Donovan 7,460,704 6,596
R. Peter Gillin 7,460,704 6,596
Jonathan Goodman 7,460,704 6,596
Peter Lawson-Johnston 7,460,704 6,596
Richard L. Lister 7,460,704 6,596
Garth A.C. MacRae 7,460,704 6,596
William J. vanden Heuvel 7,460,704 6,596
2. The appointment of Deloitte & Touche LLP as independent auditors of the
accounts of the Corporation and its subsidiaries for the fiscal year ending
December 31, 2002 was ratified.
VOTES FOR VOTES AGAINST VOTES WITHHELD
----------------- ----------------- ------------------
7,460,524 n/a 3,899
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Refer to the 2001 Annual Report filed on Form 10-K.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None
* * * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated this 24th day of July, 2002.
ZEMEX CORPORATION
(Registrant)
By: /s/ ALLEN J. PALMIERE
--------------------------------------------
Allen J. Palmiere
Vice President, Chief Financial Officer
and Corporate Secretary
(Principal Financial and Accounting Officer
and authorized signatory)
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