ITEM 3.
LEGAL PROCEEDINGS
On November 17, 2000, a subsidiary of the Corporation (“Zemex U.S.”) entered into a Stock Purchase Agreement with Hecla Mining Company (“Hecla”) whereby Zemex U.S. agreed to purchase, subject to certain conditions precedent, the shares of two of Hecla’s subsidiaries collectively known as K-T Clay. The Corporation guaranteed the obligations of Zemex U.S. under the Stock Purchase Agreement. As specifically permitted under the Stock Purchase Agreement, in January 2001 Zemex U.S. notified Hecla that due to a material adverse change in the business of K-T Clay, Zemex U.S. would not close the transaction contemplated by the Stock Purchase Agreement in its then current form. On January 22, 2001, Hecla filed suit in the United States District Court for the Northern District of Illinois against the Corporation (but not Zemex U.S.) alleging breach of the Corporation’s guarantee and seeking specific performance and an award of damages. The claim for specific performance was subsequently withdrawn. The Corporation was of the opinion that Hecla’s claims were without merit; however, the Corporation determined that it was prudent to eliminate the financial exposure arising from the uncertain outcome of litigation. In January 2003, the dispute was settled for $3,950,000.
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 the Toronto Stock Exchange, under the symbol ZMX. The price range in which the shares have traded on the New York Stock Exchange for the past two years is shown below:
Common Shares
As of March 21, 2003, there were approximately 1,344 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 OPERATIONS
The following is a discussion and analysis of the results of operations and financial condition of the Corporation for the years ended December 31, 2002, 2001 and 2000, 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.
CRITICAL ACCOUNTING POLICIES
Impairment of Long-Lived Assets and Valuation of Deferred Tax Assets
The fair value of the long-lived assets is dependant 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 book value of the asset, 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.
The 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 allowances 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 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.
Allowances for doubtful accounts are estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Corporation considers these balances adequate and proper, changes in economic conditions in specific markets in which the Corporation operates could have a material effect on reserve balances required.
The Corporation’s inventories are valued at the lower of cost or net realizable value. Under certain market conditions, estimates and judgments regarding the valuation of inventory are employed by the
Corporation to properly value inventory. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.
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. These future reclamation costs are determined using mineral resource estimates which are imprecise and depend partly on statistical inferences drawn from drilling and other data, which may prove to be unreliable.
Pension assets and liabilities are determined on an actuarial basis and are affected by the estimated market value of plan assets; estimates of the expected return on plan assets and discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. The postretirement benefits other than pension liability are also determined on an actuarial basis and are affected by assumptions including the discount rate and expected trends in health care costs. Changes in the discount rate and differences between actual and expected health care cost will affect the recorded amount of postretirement benefits expense.
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.
OVERVIEW
The Corporation is a diversified producer of specialty materials and products for use in a variety of industrial applications. The Corporation operates in two principal business segments: (i) industrial minerals, which includes The Feldspar Corporation, Suzorite Mica Products Inc., 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.
1.
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 $3.1 million and was financed by a drawdown on the Corporation’s credit facility.
2.
On February 1, 2002, Zemex Attapulgite, LLC, a newly incorporated subsidiary, acquired the assets of an attapulgite clay operation from Milwhite, Inc. The Corporation paid $11.6 million for the acquisition and funded it by a drawdown from its credit facility.
3.
On March 20, 2001, the Corporation sold its 60% interest in the Zemex Fabi-Benwood, LLC, subsidiary of the industrial minerals group, and its Natural Bridge, New York talc processing plant to Industria Minearia Fabi S.r.l. (“Fabi”), a former partner of Zemex Fabi-Benwood, for $7.5 million. A pre-tax gain of $0.3 million was recognized in the first quarter of 2001.
4.
Zemex Mica Corporation, a muscovite mica producer, was placed on care and maintenance effective December 31, 2000 as management reassessed the process and markets. Due to a significant reduction of by-product feed availability, more mined material had to be used. The mined material was not of the quality and consistency desired resulting in the inability to produce high quality, consistent product and causing higher than acceptable costs. A write-down of goodwill of $2.2 million, a provision for asset impairment of $2.0 million and a provision for care and maintenance costs were recorded in 2000.
5.
On April 11, 2000, the Corporation completed the sale of its metal powders division, which included Pyron Corporation and Pyron Metal Powders, Inc., for $42.0 million to North American Höganäs Holdings, Inc., a subsidiary of Höganäs AB. The Corporation recognized a pre-tax gain of $15.7 million in fiscal 2000; the after-tax gain from this sale transaction was $10.5 million, or $1.24 per share. The sale proceeds were applied to the Corporation’s credit facilities. Because of the sale, the metal powders division was disclosed as a discontinued operation and the prior period figures were reclassified accordingly.
6.
To effect the disposition of Pyron Corporation and Pyron Metal Powders, Inc., on March 8, 2000 the Corporation redeemed its outstanding Senior Secured Notes. The redemption was financed by a bridge facility structured as an amendment to the Corporation’s pre-existing credit facility, bearing interest at the same rate and was secured by the same security package as the pre-existing credit facility. The bridge facility was fully repaid by October 31, 2000. The redemption necessitated a make-whole payment to the noteholders of $1.2 million, which was recorded as other expense in the first quarter of 2000. Additionally $0.3 million was paid out in related transaction expenses and $1.7 million in deferred financing expenses related to the issuance of the Senior Secured Notes were written-off.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales
The Corporation’s net sales from operations for 2002 were $73.9 million, an increase of $16.5 million, or 28.8%, from 2001. In fiscal 2002, sales in the industrial minerals group and the aluminum recycling group improved by $8.5 million and $8.0 million, respectively.
Net sales from the industrial minerals group were $48.4 million in fiscal 2002 as compared to $39.9 million in fiscal 2001. The increase of $8.5 million, or 21.2%, over 2001 was mainly due to the revenue generated from the attapulgite clay operation which was acquired by the Corporation in February 2002. The increased revenue from feldspar and mica contributed $1.7 million and $0.7 million, respectively, to the improvement in revenues in 2002. A decline of $1.9 million in net sales from the talc operations partially offset the increase. The decline in 2002 talc revenues reflects the fact that sales revenue for 2001 included three months of activity from talc plants which were disposed of in the first quarter of 2001.
Net sales of the aluminum recycling group improved 46.4% to $25.5 million in 2002. Of the $8.0 million increase, $5.6 million is attributable to the West Virginia aluminum dross processor which was acquired in the first quarter of 2002. Net sales from the Cleveland and Wabash locations increased by 31.5% and 27.9%, respectively, over the same period in 2001. The decrease of $0.8 million, or 11.3%, in net sales from the heat containment system operation partially offset the increase in revenue generated from the aluminum plants.
Cost of Goods Sold
Cost of goods sold for 2002 was $51.0 million, an increase of $13.1 million or 34.6%, compared to the corresponding period in 2001. The increase was due to several factors: the acquisitions that occurred in the first quarter of 2002; increased overall production in 2002; and, offset by the disposition of the talc plants in 2001. Of the $13.1 million increase, the industrial minerals group and the aluminum recycling group accounted for $7.6 million and $5.5 million, respectively. Gross margin as a percentage of net sales for the industrial minerals group decreased from 39.2% in 2001 to 34.1% in 2002, while the gross margin percentage from the aluminum recycling group improved from 21.8% in 2001 to 25.1% in 2002. Overall gross margin as a percentage of sales decreased from 33.9% in 2001 to 31.0% in 2002.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased 17.0% from $11.8 million in 2001 to $13.8 million in 2002. The increase was mainly due to a one-time charge of $1.3 million arising from the accounting impact of changes to employment contracts between the Corporation and its former president and chief executive officer, and two other executives. In addition, expenses arising from the acquisitions completed in the first quarter of 2002 and higher pension expenses also contributed to the increased SG&A expense in 2002. As a percentage of sales, SG&A expense decreased from 20.6% in 2001 to 18.7% in 2002 reflecting a significant improvement in 2002 sales performance.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization (“DD&A”) was $6.2 million in 2002, an increase of 8.4%, over the comparable period in 2001. This reflects charges resulting from the acquisitions of Zemex Attapulgite, LLC and Alumitech of West Virginia, Inc. in the first quarter of 2002 offset by the elimination of all goodwill amortization.
Other Expense
In 2001, Hecla Mining Corporation filed a lawsuit alleging failure to close a contract to purchase certain assets. While the Corporation felt the lawsuit was without merit, the risk of litigation loss was such that the Corporation settled the lawsuit for $3.9 million. The Corporation recorded this amount in December 2002.
(Loss) Income Before the Undernoted
For the reasons discussed above, the Corporation recorded a loss before the undernoted of $1.2 million for fiscal 2002 as compared to income of $1.9 million during fiscal 2001. Excluding the one time charges arising from the employment contracts and litigation settlement, the income generated from operations would have improved to $4.1 million in 2002, an increase of $2.2 million, or 120.7%, over the same period in 2001.
Interest Income
Interest income for the year ended December 31, 2002 was $0.2 million as compared to $0.1 million for the corresponding period in 2001. The recognition of interest earned from funds held in escrow in connection with the Hecla litigation contributed to the increase in 2002 interest income.
Interest Expense
Interest expense for the fiscal year ended December 31, 2002 increased by $0.2 million, or 23.1%, to $1.1 million. The increase was due to increased indebtedness levels in 2002 as a result of acquisitions that closed in the first quarter of 2002. The increased level of bank indebtedness was partially offset by lower interest rates throughout 2002. Total bank indebtedness was $26.0 million as of December 31, 2002 as compared to $11.0 million as of December 31, 2001.
Other Income
In 2002, the Corporation recognized other income of $0.1 million as compared to $0.6 million in the same period of 2001. The 2001 other income arose from the disposition of the talc facilities in the first quarter and insurance proceeds received in the second quarter.
(Recovery of) Provision for Income Taxes
The Corporation recognized an income tax benefit of $0.2 million in fiscal 2002, versus an income tax expense of $0.8 million in fiscal 2001.
Net (Loss) Income and (Loss) Earnings Per Share
As a result of the factors discussed above, the Corporation recorded net loss for the year ended December 31, 2002 of $1.8 million, compared to a net income of $0.9 million in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Sales
The Corporation’s net sales from continuing operations for 2001 were $57.4 million, a decrease of $19.1 million, or 25.0%, from 2000. Sales in the industrial minerals group and the aluminum recycling group were down by $11.5 million and $7.6 million, respectively.
The sales revenue from the industrial minerals group was $39.9 million in fiscal 2001 as compared to $51.4 million in fiscal 2000. The disposal of the Natural Bridge, New York facility and the 60% interest in Zemex Fabi-Benwood, LLC in the first quarter of 2001, the closure of the muscovite mica facility effective December 31, 2000 and the lower sales revenue generated from the mica operations were the primary factors that caused the decline in sales revenue in 2001.
Net sales of the aluminum recycling group decreased 30.6%, or $7.6 million, to $17.4 million in 2001. The decrease was due to the closure of the calcium aluminate plant effective December 31, 2000, ongoing depressed metal prices and lower process volumes.
Cost of Goods Sold
Compared to 2000, cost of goods sold declined by 32.0%, or $17.8 million, to $37.9 million in 2001. Of the $17.8 million decrease, the industrial minerals group and the aluminum recycling group accounted for $11.0 million and $6.8 million, respectively. As a result, the corresponding gross margins improved from 27.2% in 2000 to 33.9% in 2001.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for 2001 were $11.8 million, a $0.6 million decrease from 2000. The decrease was mainly due to the closure of facilities in 2000 and sales of operations owned during fiscal 2001, offset by a $0.2 million increase in pension expense and a $0.4 million increase in professional fees due to costs of litigation. As a percentage of sales, SG&A expense increased from 16.2% in 2000 to 20.6% in 2001.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization (“DD&A”) decreased by $2.0 million, or 26.1%, from $7.8 million in 2000 to $5.8 million in 2001. The decrease was due to the closure and sales of facilities that occurred in the twelve months ended December 31, 2001.
Income Before the Undernoted
For the reasons discussed above, income before the undernoted improved to $1.9 million for fiscal 2001 from $0.6 million in fiscal 2000. The closure of the muscovite mica plant and the calcium aluminate operations at the end of fiscal 2000 had a positive impact on 2001 operating income.
Provision for Asset Impairment
The Corporation recorded a $24.6 million provision for asset impairment in fiscal 2000. The closure of the muscovite mica operation and non-metallic product facility accounted for $5.2 million and $17.6 million, respectively, in the industrial minerals and aluminum recycling groups. The costs associated with the unsuccessful attempt to purchase certain assets of Hecla Mining Company accounted for another $1.5 million in 2000.
Interest Income
Interest income for the year ended December 31, 2001 was $0.1 million, compared to $0.2 million for the corresponding period in 2000 reflecting the Corporation’s stronger cash balances.
Interest Expense
Interest expense for the fiscal year ended December 31, 2001 was $0.9 million, $1.5 million, or 61.9%, lower than the same period in 2000. The decrease reflected lower levels of debt and lower interest rates. Total bank indebtedness was $11.0 million as of December 31, 2001 as compared to $17.1 million as of December 31, 2000.
Other (Income) Expense
In 2001, the Corporation recognized other income of $0.6 million versus $3.0 million of other expense that was recorded in 2000. Of the $0.6 million of other income, gains on the disposition of the Natural Bridge, New York facility and the 60% interest in Zemex Fabi-Benwood, LLC in the first quarter of 2001 contributed $0.3 million. The settlement of a long outstanding business interruption insurance claim relating to the previously sold metal powders group contributed the other $0.3 million. The $3.0 million of other expense recorded in 2000 was mainly due to the redemption of Senior Secured Notes necessitated by the sale of the metal powders group.
Provision for (Recovery of) Income Taxes
The Corporation recorded an income tax expense of $0.8 million in fiscal 2001, compared to an income tax benefit of $10.0 million recognized in fiscal 2000. The differences in effective tax rates reflect differences in the nature and location of taxable income in each year.
Net Income (Loss) and Earnings (Loss) Per Share before Discontinued Operations
As a result of the factors discussed above, the Corporation recorded net income from continuing operations for the year ended December 31, 2001 of $0.9 million, compared to a net loss of $19.4 million in 2000.
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, 2002, the Corporation funded all capital expenditures, acquisitions and debt reduction from a combination of additional debt, cash flow from operations and the sale of certain operations. Should it be necessary, the Corporation has sufficient cash flows and borrowing ability to fund necessary capital expenditures and acquisitions going forward.
Cash Flow from Operations
The Corporation had $16.2 million of working capital at December 31, 2002, compared to $10.1 million at December 31, 2001. The improvement of working capital reflects a number of factors:
Pursuant to an amendment, the credit facility was divided into a $10.0 million 364 day tranche and a $20.0 million two year tranche. Compared to $11.0 million borrowings recorded as bank indebtedness in 2001, the drawdown of $6.0 million under the 364 day tranche and $20.0 million under the two year tranche were recorded as bank indebtedness and long term debt, respectively, in 2002.
Increased sales resulted in a corresponding increase in accounts receivable; increased inventories in light of acquisitions made during the year; and increased future tax benefits reflecting the Hecla settlement that will be deductible for tax purposes in 2003. In conjunction with these items, the Corporation has
effectively been able to finance these movements through the use of its long term debt facility. However, the Hecla settlement will be effected through a drawdown of the 364 day tranche.
Financing Agreements
The Corporation restructured the $30.0 million credit facility with the banks in August 2002. Under the amended and restated credit agreement, the $10.0 million tranche matures on August 15, 2003 and the $20.0 million tranche matures on August 15, 2004. The credit facility bears interest at LIBOR plus 1.25% to LIBOR plus 1.75% in the case of LIBOR loans or at base rate plus 0.25% to 0.75% in the case of prime and base rate loans. The actual margin is determined by certain financial ratios.
Capital Expenditures
The Corporation’s primary capital investment activities involve 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 2002, capital expenditures for operations were $5.5 million compared to $3.6 million and $4.4 million for continuing and discontinued operations for the years ended December 31, 2001 and 2000, respectively. The capital expenditures were funded by cash flows from operations and indebtedness.
In aggregate, 2003 capital expenditures are anticipated to be approximately $4.1 million for the existing operations. The Corporation plans on funding these expenditures from cash flows 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 2003.
During 2002, the Corporation purchased, pursuant to the stock repurchase program, 21,000 common shares for an aggregate cost of $125,000 and 340,000 common shares at a cost of $2.4 million pursuant to an agreement with the former president and chief executive officer, compared to 589,000 common shares for $3.8 million in 2001 and 242,000 common shares for $1.9 million 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 it is not expected to adversely affect the Corporation in the future unless it increases substantially and the markets for industrial minerals and aluminum recycling suffer from a negative impact on the economy in general.
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 management believes 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.
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-2 of this Annual Report on Form 10-K. See Item 15.
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
Following summarizes the information about the directors of the Corporation for year 2002.
Director
Name
Age
Position with the Corporation; Principal Occupation and Business Experience During Past Five Years
Since
Jonathan Goodman
Chairman of Executive Compensation Committee since June 2002; President and Chief Executive Officer, Dundee Resources Ltd. (resource holding company); Director of Dundee Bancorp Inc. (merchant banking and financial services company), Dundee Precious Metals Inc. (investment company) and Dundee Wealth Management Inc. (financial service company); Director, Major Drilling Group International Inc. (mineral exploration drilling company); Director of Breakwater Resources Ltd., Diagem International Resource Corp., Hope Bay Gold Corporation, Odyssey Resources Ltd., Repadre Capital Corporation and Tahera Corporation (natural resource companies)
Peter Lawson-Johnston
Chairman of the Board of Directors, Member of the Executive Compensation /Pension Committee up to February 2002; Member of Executive Committee; Honorary Chairman and Trustee, Solomon R. Guggenheim Foundation; Chairman of the Board, The Harry Frank Guggenheim Foundation; Senior Partner, Guggenheim Brothers; President and Director, Elgerbar Corporation; Director, National Review, Inc.; Limited Partner Emeritus, Alex Brown & Sons, Inc.
Garth A.C. MacRae
Member of the Audit Committee and appointed as Chairman in June 2002; Member of the Executive Compensation /Pension Committee for the period from February 2002 to June 2002; Member of the Executive Committee; Vice Chairman and Director, Dundee Bancorp Inc.; Chairman and Director, Breakwater Resources Ltd.; Director, ChondroGene Limited; Director, Dundee Precious Metals Inc.; Director, Dynamic Global Fund Corporation; Director, Black Hawk Mining Inc.; Director, Dimethaid Research Inc.; Director, Eurogas Corporation; Director, Dundee Wealth Management Inc.
Director
Name
Age
Position with the Corporation; Principal Occupation and Business Experience During Past Five Years
Since
William J. vanden Heuvel
Member of the Audit Committee until June 2002; Member of the Corporate Governance Committee; Of Counsel, Stroock, Stroock & Lavan (attorneys at law, New York); Senior Advisor, Allen & Company Inc. (investment bankers); Co-Chairman, Council of American Ambassadors; Chairman, Franklin and Eleanor Roosevelt Institute; Chairman, Amromco Energy LLC
Information about the executive officers of the Corporation required by this item appears in Part I, Item 1, Page 6, of this Annual Report on Form 10-K.
Reports Required by Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation’s directors and executive officers, and persons who own more than 10% of the Corporation’s common shares to file reports of ownership and changes in ownership of the Corporation’s common shares with the Securities and Exchange Commission and any exchange on which the Corporation’s common shares are traded. Based solely on its review of the copies of Forms 3, 4 and 5 received by the Corporation, or written representations from certain reporting persons that no Form 5’s were required for such persons, the Corporation believes that, during the fiscal year ended December 31, 2002, all Section 16(a) filing requirements applicable to its officers, directors and 10% shareholders were complied with.
Summary Compensation Table
During 2002, the Corporation negotiated comprehensive employment agreements with Messrs. Goodwin and Palmiere. These Agreements replaced all existing employment related agreements and arrangements. The intent was to provide equitable employment contracts that provide us with the long-term commitment of the executives and the executives with comprehensive and competitive employment arrangements. Agreements with each of Terrance J. Hogan, Peter J. Goodwin and Allen J. Palmiere provide for certain benefits in the event such officer is no longer employed by us or our subsidiaries following a change in control transaction. If, within two years after the arrangement, the officer is dismissed without cause or the officer terminates his employment following a triggering event (which includes a specified adverse change in duties, benefits, title, reporting, or regular work location), he is entitled to payment of twice his then current annual base salary, benefits and average annual bonus over the prior two years, immediate vesting of stock options and shares purchased pursuant to our employee stock purchase plan and certain outplacement services. These agreements, which expire on December 31, 2004 unless extended, were filed as exhibits to our Form 10-Q for the fiscal quarter ended September 30, 2002, in the case of Messrs. Goodwin and Palmiere and our Form 10-K for the fiscal year ended December 31, 1999, in the case of Mr. Hogan, and reference is made thereto for further information. In addition, Terrance J. Hogan, Peter J. Goodwin and Allen J. Palmiere also have entered into change of control agreements pursuant to which they will receive cash payments in an amount not to exceed $25,000 individually and $75,000 in the aggregate upon completion of the Arrangement.
In November, 2002, the Corporation entered into an employment with Mr. Peter Gillin for a term from November 18, 2002 until May 1, 2003 pursuant to which Mr. Gillin is paid $25,000 per month. Upon completion of the Arrangement, Mr. Gillin will receive a success bonus in the amount of $500,000. The amount of Mr. Gillin’s bonus was negotiated subsequent to determination of the final terms of the Arrangement based upon guidelines established in his employment agreement with us and consideration of his engagement as chief executive officer to provide broad strategic planning advice to us. His employment agreement provided that the bonus arrangement would be consistent with the customary bonus arrangements for our chief executive officer, adjusted to reflect that Mr. Gillin would not participate as chief executive officer in our stock option plans or in our employee stock purchase plan.
Compensation for Directors
During the fiscal year ended December 31, 2002 each director who is not one of our salaried employees was paid $15,000 per annum on a semi-annual basis for his services as a director. Directors were also paid a fee of $1,000 for each board and committee meeting attended, and reimbursement of their travel related expenses. From time to time, directors may, at the discretion of our board or any committee thereof, be paid a per diem fee, approximating the meeting fee, for special assignments. In 2002, our directors were paid an aggregate of $279,000 in directors’ and other fees.
On June 14, 2002, two directors who were not our salaried employees were granted options under our 1999 Stock Option Plan to acquire 10,000 of our common shares, and one director who was not one of our salaried employees was granted options under our 1999 Stock Option Plan to acquire 37,500 of our common shares exercisable at $6.83 per share, the market price at the time of the grant. These options are exercisable as to half on June 14, 2003 and are fully exercisable on June 14, 2004. They expire on June 14, 2008.
In 2002, we purchased directors’ and officers’ liability insurance with a liability limit of $15,000,000 for which we paid an annual premium of $157,000. The policy provides for a deductible payable by us of $100,000.
Option Exercises and Year-End Values Table
With respect to the Named Officers, the following table sets forth the number of options exercised and the value realized upon exercise and the value of outstanding options at December 31, 2002, using $5.04, the closing price of our common shares on the New York Stock Exchange on December 31, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Option Grants to Named Officers
In the year ended December 31, 2002, the following options were granted to our Named Officers pursuant to our 1999 Stock Option Plan.
OPTIONS/SAR GRANTS DURING THE MOST RECENTLY
COMPLETED FINANCIAL YEAR
*
Potential realizable values are net of exercise price and are before taxes and market values of the common shares underlying the options are based on the assumption that our common shares appreciate at the annual rates shown, compounded annually, from the date of grant until the expiration of the option term. These numbers are calculated based on the requirements of the Securities and Exchange Commission and do not reflect our estimates of future stock price growth.
1999 Employee Stock Purchase Plan
The table below discloses benefits that were received in fiscal 2002 by each of the following under the Employee Stock Purchase Plan.
BENEFITS UNDER
1999 EMPLOYEE STOCK PURCHASE PLAN
*
Represents the amount of our contribution which matches the contribution of the employee.
Indebtedness of Directors, Named Officers and Senior Officers
The table below summarizes any indebtedness owed to us as at December 31, 2002 of our directors and Named Officers entered into in connection with a purchase of our common shares, excluding routine indebtedness.
TABLE OF INDEBTEDNESS OF DIRECTORS, NAMED OFFICERS AND SENIOR OFFICERS
UNDER SECURITIES PURCHASE PROGRAMS
The following chart summarizes any indebtedness to us as at December 31, 2002 of our directors and Named Officers not entered into in connection with a purchase of our common shares, excluding routine indebtedness.
TABLE OF INDEBTEDNESS OF DIRECTORS, NAMED OFFICERS AND SENIOR OFFICERS
OTHER THAN UNDER SECURITIES PURCHASE PROGRAMS
*
This loan bears interest at a rate equal to the average cost of borrowing under our credit facilities, is supported by a promissory note and secured by a pledge of 9,500 of our common shares. All directors’ fees paid in cash are applied to reduce the loan.
Pension Plan
Pursuant to our pension plan, employees are entitled to pension benefits after five years of service with us. The amount of such benefits depends upon salary and length of service as shown in the table below. The service factor is 1.5% per year. Benefits for US employees are coordinated with US Social Security retirement benefits by reducing the service factor to 0.9% with respect to average salary less than or equal to the average covered Social Security wages ($43,968 for an employee who retires at age 65 during 2003). As of January 1, 2003, the number of credited years of service and the compensation covered by the pension plan for the Named Officers are: Richard L. Lister, 18.5 and $200,000; Peter J. Goodwin, 10.1 and $200,000; and Allen J. Palmiere, 11.2 and $196,682. As of January 1, 2003, Mr. Goodwin is a US employee; neither Mr. Lister nor Mr. Palmiere are US employees.
ZEMEX CORPORATION RETIREMENT PENSION PLAN
Estimated Pension Benefits
Note:
All benefits shown were estimated using the 2003 Social Security Law and assume the employee terminates employment during 2003 on his NRD (age 65). The benefits shown are payable at NRD as a Five Year Certain and Life Annuity, the normal form for an unmarried participant. All amounts are annual.
ZEMEX CORPORATION RETIREMENT PENSION PLAN
Estimated Pension Benefits (Canadian employees only)
Note:
All benefits shown were estimated using the 2003 Social Security Law and assume the employee terminates employment during 2003 on his NRD (age 65). The benefits shown are payable at NRD as a Five Year Certain and Life Annuity, the normal form for an unmarried participant. All amounts are annual.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information relating to the equity compensation plan is as follows:
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of March 25, 2003, information concerning the shares beneficially owned by each person who, to our knowledge, is the holder of 5% or more of our common shares, each director and each officer who was an executive officer as of that date, and all of our executive officers and directors as a group. Except as otherwise noted, each beneficial owner has sole investment and voting power with respect to the listed shares.
Ownership Table
All of our outstanding options have been vested, subject to completion of the Arrangement.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation provides management services to a company owned by its largest shareholder, Dundee Bancorp, Inc. (“Dundee”). The Corporation charged $68,000, $69,000 and $67,000 in 2002, 2001 and 2000, respectively. The fee has been established based upon fees charged for comparable services provided by a consultant operating on an arms length basis. This contract was terminated effective December 31, 2002.
During the year the Corporation paid $63,000 (2001 - $74,000 and 2000 - $87,000) to a subsidiary of Dundee for services provided as a financial advisor for the management of the Corporation’s pension plan.
The Corporation’s Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as of a date within 90 days of the filing of this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1.
Financial statements and independent auditors’ report filed as part of this report:
2.
Financial statement schedules and independent auditors’ report filed as part of this report:
Schedule Number
Description
Schedule II
Valuation and Qualifying Accounts and Reserves (page S-2)
There were no reports Form 8-K filed in the fourth quarter of 2002.
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.
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:
CERTIFICATION
I, R. Peter Gillin, certify that:
1.
I have reviewed this annual report on Form 10-K of Zemex Corporation;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated this 27th day of March, 2003.
By:
/s/ R. PETER GILLIN
R. Peter Gillin
President and Chief Executive Officer
CERTIFICATION
I, Allen J. Palmiere, certify that:
1.
I have reviewed this annual report on Form 10-K of Zemex Corporation;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated this 27th day of March, 2003.
By:
/s/ ALLEN J. PALMIERE
Allen J. Palmiere
Vice President, Chief Financial Officer and Corporate Secretary
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Zemex Corporation
We have audited the consolidated financial statements of Zemex Corporation as at December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002, and have issued our report thereon dated February 18, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Zemex Corporation listed in Item 15. This financial statement schedule is the responsibility of Zemex Corporation’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
February 18, 2003
S-1
ZEMEX CORPORATION
And Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
For the Year Ended December 31,
(All amounts are in thousands of U.S. dollars)
S-2
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Zemex Corporation
We have audited the consolidated balance sheets of Zemex Corporation as at December 31, 2002 and 2001 and the consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2002. 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 Canadian generally accepted auditing standards and auditing standards generally accepted in the United States of America. 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in accordance with Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
February 18, 2003 except as to Note 21, which is as of March 3, 2003
Comments by Auditor on Canada-United States of America Reporting Difference
In the United States of America, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principle that has a material effect on the comparability of the Corporation’s financial statements, such as the change described in note 1(l) to the financial statements. Our report to the shareholders, dated February 18, 2003 except as to note 21, which is as of March 3, 2003 is expressed in accordance with Canadian reporting standards which does not require a reference to such change in accounting principles in the auditors’ report when the change is properly accounted for and adequately disclosed in the financial statements.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
February 18, 2003 except as to Note 21, which is as of March 3, 2003
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 Canadian generally accepted accounting principles, 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 report is included on the preceding page.
Zemex Corporation has formal standards of corporate conduct and policies regarding high standards of ethics and financial integrity. These policies have been disseminated to appropriate employees and internal control procedures provide reasonable assurance that violations of these policies, if any, are detected.
/s/ Allen J. Palmiere
/s/ R. Peter Gillin
Allen J. Palmiere
Vice President, Chief Financial Officer and Corporate Secretary
R. Peter Gillin
President and Chief Executive Officer
AUDIT COMMITTEE REPORT
The audit committee of the board of directors is currently composed of three independent directors, Garth A.C. MacRae, Morton A. Cohen and John M. Donovan. The audit committee held seven meetings during 2002.
The audit committee oversees the financial reporting process of the Corporation on behalf of the board of directors. In fulfilling its responsibility, the audit 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 audit committee also met with Deloitte & Touche LLP representatives without management present.
/s/ Garth A.C. MacRae
Garth A.C. MacRae
Chairman, Audit Committee
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts are in thousands of U.S. dollars, except share and per share amounts)
Prepared in accordance with Canadian GAAP
See notes to the consolidated financial statements
CONSOLIDATED BALANCE SHEETS
(All amounts are in thousands of U.S. dollars)
Prepared in accordance with Canadian GAAP
See notes to the consolidated financial statements
Approved by the Board of Directors
/s/ Garth A.C. MacRae
/s/ John M. Donovan
Director
Director
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(All amounts are in thousands of U.S. dollars)
Prepared in accordance with Canadian GAAP
See notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (note 12)
(All amounts are in thousands of U.S. dollars)
Prepared in accordance with Canadian GAAP
See notes to the consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. Examples include provisions for bad debts, inventory reserves, property, plant and equipment, impairment, reclamation reserves, tax provision and pension liabilities. Actual results could differ from those estimates. The significant accounting policies of Zemex Corporation and its subsidiaries are as follows:
a.
Principles of Consolidation
The consolidated financial statements include the accounts of Zemex Corporation and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
b.
Inventories
Inventories, specifically ore, raw materials, work in process and finished products, are stated at the lower of cost or net realizable value and are computed using the average cost method. 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 are amortized using the straight-line method over the term of the mining lease.
d.
Recoverability of Asset Carrying Value
The Corporation evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets, including 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 as 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.
e.
Postretirement Benefits
Pension Plans
The funding policy of the Corporation with respect to the pension plans for U.S. employees is to contribute annually, to the extent necessary, 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 2002, 2001 and 2000 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.
f.
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 the foreign currency assets and liabilities of the Corporation’s
self-sustaining foreign operation 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 (loss) income for the year.
g.
Revenue Recognition
Revenue is recognized when goods are shipped to customers and when all significant contractual obligations have been satisfied. Consignment sales are recognized when a customer draws the goods from inventory.
h.
Research and Development Expenses
Research expenses are charged to earnings in the periods in which they are incurred. Development costs are also expensed unless they are significant and meet generally accepted criteria for deferral. Research and development expenses were $325,000, $545,000 and $470,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
i.
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.
Income taxes are 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. Future income taxes are adjusted to reflect the effect of enacted or substantively enacted changes in the tax laws and tax rates.
k.
Earnings Per Share
Earnings per share are calculated based upon the weighted average number of common shares outstanding. Diluted earnings per share are calculated in accordance with the treasury stock method.
l.
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. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles such as goodwill, the reassessment of the useful lives of existing recognized intangibles, the reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The following table summarizes the adjustment to the consolidated statements of operations on the adoption of this standard (all amounts are in thousands of U.S. dollars):
Section 3062 also requires the Corporation to complete a transitional goodwill impairment test within six months from the date of adoption. This transitional review was completed as at June 30, 2002 for the goodwill that had been recorded by the Corporation’s aluminum recycling group, the operations of which collectively comprise a reporting unit, on the acquisition of S&R Enterprises, Inc. The review indicated an impairment of goodwill. The impairment reflected the decline of the fair market value of the reporting unit due to the depressed nature of the secondary aluminum industry. An after tax amount of $1.7 million (total write down of $2.7 million less tax effect 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.
m.
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
cost of the capital stock cancelled is charged to selling, general and administrative expense, net of any tax effect.
2.
ACQUISITIONS AND DISPOSITIONS
Acquisition of Friendly, West Virginia Plant
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 $3.1 million and was financed by a drawdown on the Corporation’s credit facility (see note 19).
Acquisition of Attapulgus, Georgia Plant
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 $11.6 million for the assets and funded the acquisition through a drawdown from its credit facility.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition (all amounts are in thousands of U.S. dollars).
The following table presents pro forma information as though the transaction had taken place as at January 1, 2000 (all amounts are in thousands of U.S. dollars, except per share amounts):
Sale of Natural Bridge Facility and Interest in Zemex Fabi-Benwood, LLC
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 $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.
Sale of Metal Powders Division
On April 11, 2000, the Corporation disposed of its metal powders division, which consisted of Pyron Corporation and Pyron Metal Powders, Inc. by way of a sale to North American Höganäs Holdings, Inc., a subsidiary of Höganäs AB. The Corporation recognized a pre-tax gain of $15.7 million in fiscal 2000. The after-tax gain was $10.5 million, or $1.24 per share. The metal powders division was disclosed as a discontinued operation and the prior period figures were reclassified accordingly (see note 12).
4.
PROPERTY, PLANT AND EQUIPMENT
The major components of the net change in property, plant and equipment are as follows:
As at December 31, 2002, the Corporation estimates that approximately $1,781,000 will be expended to complete its construction in progress (December 31, 2001 - $678,000). The Corporation did not capitalize any interest relating to capital projects during 2002 and 2001.
6.
PROVISION FOR ASSET IMPAIRMENT
The Corporation provided the following asset impairment in fiscal 2000 (all amounts are in thousands of U.S. dollars):
(a)
The Corporation’s subsidiary, Alumitech, invested significant time and capital in the development of a proprietary technology for the processing of aluminum dross and saltcake. While the technology was proven and a competitive product produced, a combination of a poor economic environment for secondary aluminum, a depressed steel industry and low landfill prices resulted in an inability to make the process economically viable. Accordingly, in fiscal 2000 the Corporation provided fully for a permanent asset impairment, wrote down the related assets to their estimated salvage value, and wrote off all costs associated with the process.
(b)
In 1998 the Corporation purchased 100% of the shares of Aspect Minerals, Inc. The plant was rebuilt and expanded, and the product line increased. Shortly before the commissioning phase a major source of raw material feedstock closed down. The Corporation had been unsuccessful in locating an alternate source of acceptable feedstock, and had to rely on higher quantities of mined material which were inconsistent in nature. Accordingly, in fiscal 2000, the Corporation placed the facility on care and maintenance and, based on estimated future cash flows, established a provision for permanent asset impairment.
(c)
During 2000, the Corporation incurred significant costs in evaluating and pursuing various alternatives to maximize shareholder value. In addition, the Corporation incurred significant legal, banking, environmental and other due diligence costs associated with the attempted purchase of K-T Clay Company from Hecla Mining Company (see note 21). These costs were written off in fiscal 2000.
The (recovery of) provision for income taxes consists of the following components (all amounts are in thousands of U.S. dollars):
The following analysis 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 of December 31, 2002 and 2001, the Corporation had unused tax benefits of $1,203,000 and $689,000, respectively, related to Canadian net operating losses. For the fiscal years ended December 31, 2002 and 2001, the Corporation had unused tax benefits of $10,220,000 and $9,940,000, 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 (all amounts are in thousands of U.S. dollars):
At December 31, 2002, the Corporation had approximately $3,234,000 of Canadian net operating loss carryforwards which expire between 2006 and 2009. These losses are not within the Canadian operating subsidiary and are not available to offset operating income in Canada. No benefit has been recognized in respect of these losses. At December 31, 2002, the Corporation had approximately $14,788,000 of U.S. net federal operating loss carryforwards available to reduce future taxable income, which will expire between 2010 and 2021. Additionally, the Corporation has unused general business tax credits, which expire between 2003 and 2012, and alternative minimum tax credits. The Corporation also has U.S. net state operating losses and investment credit carryforwards; however, a valuation allowance of $852,000 has been recognized to offset the related future tax benefit due to the uncertainty of realizing the full benefit of the tax attribute carryforward.
8.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Corporation has a non-contributory defined benefit pension plan covering a number of U.S. resident employees. During 2002, the Corporation set up a new supplemental executive retirement plan. These plans provide pension benefits that are based on the length of service and the compensation of the employee.
Information relating to the Corporation’s pension plans is as follows (all amounts are in thousands of U.S. dollars):
Net periodic pension expense included the following components (all amounts are in thousands of U.S. dollars):
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, 2002 and 2001 is tabulated below (all amounts are in thousands of U.S. dollars):
Other Postretirement Benefits
Information relating to other postretirement benefits is as follows (all amounts are in thousands of U.S. dollars):
Net periodic postretirement benefit expense included the following components (all amounts are in thousands of U.S. dollars):
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 (all amounts are in thousands of U.S. dollars):
Assumptions:
9.
EMPLOYMENT CONTRACTS
During the third quarter of 2002, the Corporation and its former President and Chief Executive Officer entered into an employment agreement. Under the terms of the agreement, the Corporation purchased from this individual 340,000 common shares of the Corporation at $6.96 per share and paid $257,000 to purchase for cancellation 220,000 previously issued stock options. The individual was issued new options on 165,000 common shares at $6.96 per share and received a one time bonus of $885,000. The financial statement impact was a one time expense of $1,142,000 reflected in selling, general and administrative expense, the reduction of $2,366,000 of share capital upon cancellation of the purchased shares, the repayment of the $1,259,000 note receivable from shareholder, the repayment of the $500,000 advance to shareholder and an increase in the Corporation’s bank indebtedness of $1,300,000.
During the same quarter, the Corporation entered into employment contracts with two other executives. A one time charge of $150,000 resulted from these contracts.
Principal repayments required in respect of long term debt are as follows (all amounts are in thousands of U.S. dollars):
Shares Outstanding
As at December 31, 2002 and 2001, the authorized capital stock of the Corporation consisted of an unlimited number of first preference shares without par value and an unlimited number of common shares without par value. There were 7,870,152 common shares issued and outstanding as of December 31, 2002 and 8,178,393 common shares issued and outstanding as of December 31, 2001.
During 2002, 2001 and 2000, 69,000, 98,000 and 117,000 common shares, respectively, were issued pursuant to the Corporation’s employee stock purchase plan for aggregate proceeds to the Corporation of $455,000, $612,000 and $906,000, respectively.
As part of a stock repurchase program in 2002, the Corporation purchased 21,000 common shares at an aggregate cost of $125,000, 589,000 common shares in 2001 at an aggregate cost of $3,845,000 and 242,000 common shares in 2000 at an aggregate cost of $1,862,000.
Stock Options
The Corporation provides stock option incentive plans and has, with shareholder approval, issued options to certain of the Corporation’s 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. The options usually 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 2003 to 2010.
The following table summarizes information about the stock options outstanding at December 31, 2002:
Note Receivable from Shareholder
The note receivable from shareholder of $1,259,000 as of December 31, 2001 represented an amount due from the Corporation’s former 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, was non-interest bearing and was secured by a pledge of 176,000 shares of the Corporation. The note receivable was paid in full pursuant to the employment agreement entered into third quarter of 2002 (see note 9).
On April 11, 2000, the Corporation completed the sale of its metal powders division for gross proceeds of $42.0 million. The metal powders division included the Corporation’s wholly-owned subsidiaries, Pyron Corporation and Pyron Metal Powders, Inc. The Corporation recognized a pre-tax gain of $15.7 million in fiscal 2000 (see note 2).
Financial results from discontinued operations reflected in the Corporation’s consolidated statement of operations were as follows (all amounts are in thousands of U.S. dollars):
Cash provided by discontinued operations included in the Corporation’s consolidated statement of cash flows was as follows (all amounts are in thousands of U.S. dollars):
Operating Leases
The Corporation has a number of operating lease agreements primarily involving equipment, office space, warehouse facilities and rail sidings. The operating leases for equipment provide 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. One of the operating leases 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 to meet obligations that have initial or remaining non-cancellable lease terms in excess of one year as of December 31, 2002 are as follows (all amounts are in thousands of U.S. dollars):
Rent expense was $1,919,000, $1,028,000 and $1,186,000 in 2002, 2001 and 2000, respectively.
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. The Corporation’s exposure to interest rate risk is limited to interest on bank indebtedness and long term debt.
Financial instruments comprise cash, 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.
The Corporation has no financial interest in derivative contracts for hedging or speculative purposes.
The changes in non-cash working capital items are as follows (all amounts are in thousands of U.S. dollars):
The following summarizes related party transactions’ not otherwise disclosed in the financial statements:
As at December 31, 2002 and 2001, accounts receivable included amounts due from one director and one officer totaling $50,000. 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, 2002, $102,000 remained outstanding and is included in accounts receivable (2001 - $111,000). This obligation is secured by common shares of the Corporation and bears interest at the Corporation’s cost of borrowing (3.2% at December 31, 2002 and December 31, 2001).
The Corporation provides management services to a company owned by its largest shareholder, Dundee Bancorp, Inc. (“Dundee”). The Corporation charged $68,000, $69,000 and $67,000 in 2002, 2001 and 2000, respectively. The fee has been established based upon fees charged for comparable services provided by a consultant operating on an arms length basis. This contract was terminated effective December 31, 2002.
During the year the Corporation paid $63,000 (2001 - $74,000 and 2000 - $87,000) to a subsidiary of Dundee for services provided as a financial advisor for the management of the Corporation’s pension plan.
The Corporation’s continuing operations now comprise two principal lines of business and are 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; Van Horn, Texas; Attapulgus, Georgia; Boucherville, Quebec; and Suzor Township, Quebec. Aluminum dross is recycled at plants in Cleveland, Ohio; Wabash, Indiana and Friendly, West Virginia 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 (loss) earnings from continuing operations and assets by business segment appears below (all amounts are in thousands of U.S. dollars):
The Corporation bases its geographic allocation upon the location of its sales offices which are all domiciled in the United States.
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 established, is not expected to have a material adverse effect on the Corporation’s financial position or its results of operations and cash flows.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” which is effective for financial periods ending after December 15, 2002. FIN No. 45 defines guarantees to include indemnifications granted pursuant to contractual arrangements as well as contingent consideration.
In March 2001, the Corporation assigned its 60% interest in the Benwood Fabi J.V. Pursuant to the contract, the Corporation indemnified the assignee against financial loss arising from a breach of certain representations and warranties. The indemnification is for a three year period ending on the third anniversary of the closing date. As at December 31, 2002 the Corporation was not aware of any breach that would give rise to a financial exposure.
In March 2002, the Corporation purchased the assets of Resource Recovery Industries, LLC (see note 2). 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 under certain circumstances on an exchange ratio based upon a calculated fair market value of Alumitech and the prevailing market price of the Corporation’s common shares. 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.
20.
DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The differences between Canadian and U.S. GAAP do not have a material effect on the Corporation’s reported financial position or net (loss) income except as follows:
a.
Statements of Operations
Under U.S. GAAP, the measure “(Loss) Income before the Undernoted” is not a recognized term and would therefore not be presented. Also under U.S. GAAP, “Provision for Asset Impairment” would appear as a component of operating (loss) 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 and amortization of such costs.
Under U.S. GAAP, the provision for asset impairment for property, plant and equipment should be based on discounted future cash flows from impaired assets. Under Canadian GAAP, future cash flows from impaired assets are not discounted.
Under U.S. GAAP, goodwill impairment charges recorded pursuant to a transitional impairment test under SFAS No. 142 are recognized in the Corporation’s statement of operations as a cumulative effect of the change in accounting principle. Under Canadian GAAP such impairment charges are recognized as an adjustment to opening retained earnings.
Under U.S. GAAP, certain costs associated with the redemption of the Senior Secured Notes would be considered to be an extraordinary item and require separate disclosure.
The following summarizes the income statement amounts in accordance with U.S. GAAP where different from the amounts reported under Canadian GAAP, as described above (all amounts are in thousands of U.S. dollars, except per share amounts):
b.
Balance Sheets
U.S. GAAP, SOP 98-5, requires that the costs of start-up activities and organization costs be expensed as incurred in the period incurred rather than be deferred.
Canadian and U.S. GAAP differ as to the methodology applied to determine the quantum of any necessary asset impairment provision.
Canadian and U.S. GAAP differ as to the recording of goodwill impairments on transition.
The following summarizes the balance sheet amounts in accordance with U.S. GAAP where different from the amounts reported under Canadian GAAP (all amounts are in thousands of U.S. dollars):
c.
Statements of Comprehensive (Loss) Income
U.S. GAAP requires a statement of comprehensive (loss) income as follows (all amounts are in thousands of U.S. dollars):
Under U.S. GAAP, a minimum pension liability is required to be recorded for the excess of the fair value of the benefit obligation over the pension liability.
d.
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”, and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment to SFAS No. 123”, the Corporation’s pro forma (loss) income and (loss) earning per share would be as presented below (all amounts are in thousands of U.S. dollars, except per share amounts):
Under CICA Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments” which is similar to the U.S. pronouncement, SFAS No. 148, the Corporation’s pro forma (loss) income and (loss) earning per share under Canadian GAAP would be as presented below (all amounts are in thousands of U.S. dollars, except per share amounts):
The fair value of the options granted during 2002, 2001 and 2000 is estimated to have been $339,000, $600,000 and $257,000, 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, 2001 and 2000: dividend yield of 0%; expected volatility of 29%, 28% and 28%, respectively; risk-free interest rates varying from 2.18% to 6.73%; and an expected life varying between 2 years to 5 years.
e.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, (“SFAS No. 143”), “Accounting for Asset Retirement Obligations”, which is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses the recognition and remeasurement of obligations associated with the retirement of tangible long lived assets.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, (“SFAS No. 146”), “Accounting for Costs Associated with Exit or Disposal Activities”, which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 supercedes Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)” (“EITF 94-3”). SFAS No. 146 requires that costs associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF 94-3 required recognition of a liability when an entity committed to an exit plan.
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities”. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51 - Consolidated Financial Statements to those entities defined as “Variable Interest Entities” (more commonly referred to as special purpose entities) in which equity investors do not have the characteristics of a “controlling financial interest” or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support
from other parties. FIN No. 46 applies immediately to all Variable Interest Entities created after January 31, 2003, and by the beginning of the first interim or annual reporting period commencing after June 15, 2003 for Variable Interest Entities created prior to February 1, 2003. The Corporation does not conduct any transactions through special purpose entities and does not expect FIN No. 46 to have an impact on its financial statements.
The Canadian Institute of Chartered Accountants (“CICA”) issued Accounting Guideline 13, (“AcG-13”), “Hedging Relationships”, which requires that in order to apply hedge accounting, all hedging relationships must be identified, designated, documented and effective. Where hedging relationships cannot meet these requirements, hedge accounting must be discontinued. AcG-13 is applicable for fiscal years beginning on or after July 1, 2002.
The CICA issued a revised Handbook Section 3475, “Disposal of Long-Lived Assets and Discontinued Operations”. The revised standard establishes criteria for the classification of long-lived assets as “held for sale” and requires that long-lived assets that are to be disposed of by sale be measured at the lower of carrying value or fair value less cost to sell. It eliminates the previous recommendation that enterprises include under ''discontinued operations’’ in the financial statements amounts for operating losses that have not yet occurred. Additionally, the revised standard expands the scope of discontinued operations to include all components of an enterprise with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The new Section 3475 is effective for disposal activities initiated by the enterprise’s commitment to a plan on or after May 1, 2003.
Finally, the CICA issued Handbook Section 3063, “Impairment of Long-Lived Assets”, which requires that impairment of long-lived assets held for use be determined by a two-step process, with the first step determining when an impairment is recognized and the second step measuring the amount of the impairment. Under Section 3063 an impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition and is measured as the amount by which the long-lived asset’s carrying amount exceeds its fair value. Section 3063 is effective for fiscal years beginning on or after April 1, 2003.
The Corporation has not yet determined the effect, if any, that the adoption of SFAS Nos. 143 and 146, FIN No. 46, CICA AcG-13, CICA Sections 3475 and 3063 will have on its business, results of operations and financial condition.
On November 17, 2000, a subsidiary of the Corporation entered into a Stock Purchase Agreement with Hecla Mining Company (“Hecla”) whereby the Corporation agreed to purchase, subject to certain conditions precedent, the shares of two of Hecla’s subsidiaries collectively known as K-T Clay. As specifically permitted by the Stock Purchase Agreement (the “Agreement”), on January 15, 2001 the Corporation notified Hecla of a number of conditions which resulted in Hecla’s representations and warranties being untrue and that such conditions were reasonably expected to prevent consummation of the transaction in accordance with the Agreement, thus resulting in Hecla being in default of the Agreement. The Corporation advised Hecla that, based on those conditions, it intended to terminate the Agreement and it did so formally on February 16, 2001. Despite this, on January 22, 2001, Hecla
filed an action in the United States District Court, Northern District of Illinois, alleging breach of contract and seeking to enforce performance and an award of damages. The claim for specific performance was subsequently withdrawn. The Corporation was of the opinion that Hecla’s allegations were without merit; however, the Corporation determined that it was prudent to eliminate the financial exposure arising from the uncertain outcome of litigation. In January 2003, the dispute was settled for $3,950,000. This amount has been provided for as at December 31, 2002.
On March 3, 2003, the Corporation entered into an Arrangement Agreement (“Arrangement”) with Cementos Pacasmayo S.A.A., a cement company headquartered in Lima, Peru, whereby, pursuant to the Arrangement and subject to shareholder and court approval, Pacasmayo will acquire 100% of the issued and outstanding common shares and options of the Corporation. The transaction is expected to close in May of 2003.
Certain of the comparative figures have been reclassified to comply with the current year’s presentation.
FINANCIAL DATA (UNAUDITED)
The following is a summary of certain unaudited quarterly financial data (all amounts are in thousands of U.S. dollars, except per share amounts):