Zemex Corporation 1996 Annual Report Financial Highlights 1996 1995 1994 SUMMARY OF OPERATIONS Net Sales	 $86,420,000 $85,056,000 55,306,000 Net Income 2,612,000 8,418,000 6,250,000 Capital Expenditures 16,426,000 15,451,000 3,077,000 - ---------------------------------------------------------------------------- FINANCIAL POSITION Working Capital $18,688,000 $19,709,000 $26,046,000 Shareholders' Equity 70,997,000 70,900,000 54,052,000 - ---------------------------------------------------------------------------- PER COMMON SHARE Net Income $ 0.33 $ 1.03 $ 1.12 Shareholders' Equity 8.59 8.49 7.54 - ---------------------------------------------------------------------------- Average Common Shares and Common Share Equivalents Outstanding 8,000,522 8,208,874 5,588,682 Common Shares Issued and Outstanding at Year End 8,269,099 8,355,722 7,168,153 - ----------------------------------------------------------------------------- TABLE OF CONTENTS 	To Our Shareholders 2 	Industrial Minerals 4 	Metal Powders 6 	Alumitech 8 Management's Discussion and Analysis 10 Independent Auditors' Report 17 Management's Report 18 	Audit Committee Report 	 18 	Financial Statements 	 19 Notes to Financial Statements 23 Selected Financial Data 41 <PAGE 2> TO OUR SHAREHOLDERS The year 1996 was one of disappointment tempered by accomplishment. The cost of resolving several operating issues coupled with poor earnings performance in some areas took a significant toll on the bottom line. However, great strides were made towards building a solid future as many of our capital and research programs were successfully completed. The Corporation made real progress in improving the efficiency of resource production and more is to come. Certainly the efforts and accomplishments of 1996 should make a positive contribution to the future earnings of the Corporation. Industrial Minerals During the first quarter of 1996, the Corporation's feldspar, talc and mica divisions were combined into one organization, Zemex Industrial Minerals. Peter Goodwin, Vice President of Zemex and previously President of the talc and mica operations, was appointed President of the new organization and is currently implementing a plan to capitalize on the marketing, management and operating synergies of this group. The year also saw the construction of a low iron sand plant; the low iron sand material, which is used in high-technology glass applications is being sold pursuant to a long term contract. The project was completed on time and on budget. In addition, by year end, work was near completion on the installation of a new fine grind milling facility at Benwood, West Virginia. Increased revenue attributable to these two projects should enhance the profitability of the industrial minerals segment in 1997 and beyond. Unfortunately, the minerals group suffered some major setbacks in 1996 and, consequently, earnings were negatively affected. A $1.8 million charge was taken during the first quarter in connection with the reorganization and the write-down of inventory that had been exported in an attempt to penetrate the Brazilian feldspar market. Furthermore, during the fourth quarter, the Corporation recognized the write-down of parts and supplies that had been rendered obsolete as the result of the Spruce Pine expansion. A reserve of $750,000 was also taken at year end due to the default by the purchaser of a property previously sold by the Corporation in August 1995. Alumitech Nowhere was the dichotomy of the year more evident than at Alumitech. On one hand, Alumitech made great progress in refining its process and developing new alternative commercial applications for its non-metallic product ("NMP"). On the other hand, decreasing aluminum prices over the year overshadowed Alumitech's record throughput levels and prevented it from being profitable. Consistent with its long term objective of commercializing its proprietary technology, Alumitech signed a letter of intent with IMCO Recycling Inc., the world's largest aluminum recycler, to jointly construct the first of the dross reprocessing "super plants". Under the terms of the agreement, IMCO will supply the required feedstock and Alumitech, for its part, will contribute its closed loop technology. Although the joint venture agreement has not yet been signed, both parties are working to this end. <PAGE 3> Alumitech has also initiated a $3.5 million capital project at its Cleveland location to construct a full-scale facility to commercialize NMP and derivative products. Earlier in the year, Alumitech was awarded the maximum grant allowable under the federal government's NICE3 program, underscoring its contribution and future importance to the environment. Specifically, Alumitech's patented closed loop technology allows it to convert NMP, the waste by-product that results from reprocessing dross and saltcake materials, into usable commercial products. The NICE3 program, sponsored jointly by the Department of Energy and the Environmental Protection Agency, is a national competition awarding grants to assist companies in the commercialization of processes which improve competitiveness, foster energy efficiency, and reduce waste and waste treatment. Alumitech was one of only 17 companies to receive this award. Metal Powders The metal powder group had a less than satisfactory year. Sponge iron product sales exceeded expectations, but atomized sales failed to materialize to the levels forecasted. However, a number of new products were developed during the year, and some were brought to commercialization. One such product was a manganese sulfide material. Toward the end of the year, the Corporation also introduced test materials from its development of high molybdenum containing powders. We believe that 1997 should be a solid year for the metal powders group with the continuation of strong sponge iron sales, the introduction of new products, and a greater focus on the strategic direction of our atomized and non-ferrous materials into niche markets. Share Repurchase The Corporation has been repurchasing its common stock from time to time on the open market since the end of 1994. Since the share repurchase program was first initiated, it has repurchased 773,000 shares in total for the treasury. The board of directors has recently given its approval for the purchase of up to another 5% of the Corporation's issued and outstanding shares. Outlook The year 1996 was meant to be a transition year with all businesses performing better than the 1995 results. This did not happen; however, we anticipate that 1997 will attain and hopefully surpass many of those benchmarks set for 1996. We have introduced new products, improved efficiencies and, generally, are well poised to increase overall sales and improve margins. We are most grateful for the contribution of our board of directors, the continued support of our shareholders and, most particularly, for the outstanding endeavors of our employees in a very difficult year. We believe that 1997, the Corporation's ninetieth year in business, should start to see the benefit of our efforts of the past two years. Richard L. Lister Peter Lawson-Johnston President and Chief Executive Officer Chairman <PAGE 4> Industrial Minerals In 1996, the Corporation's feldspar, talc and mica operations were combined into one group, Zemex Industrial Minerals ("ZIM"), to take advantage of the synergistic strengths and resources that exist among the various businesses. As a result of the reorganization, ZIM is benefiting from the depth and experience of its restructured sales and marketing team, particularly in the talc area. The market focus of the new organization is divided into three areas: ceramics; plastics, coatings and specialty products; and international sales, with each area assigned a dedicated sales team. The realignment of the sales and marketing force by market should reduce expenses, improve efficiency and, most importantly, increase the amount of time spent with customers. As a result, customer service will be enhanced and sales should increase. The consolidation also brings with it significant operational efficiencies. The implementation of centralized management allows for cross-fertilization of ideas, knowledge and experience across the organization. In addition, ZIM is now able to justify the creation and retention of specialized groups, such as its new engineering team. This team is dedicated to maximizing the efficiency of each of the operating units with a specific focus on unit cost reduction and capital expansion programs. The consolidation also serves to heighten financial controls. Ceramics Despite the work involved with the reorganization in 1996, ZIM remained sharply focused on its strategy of being a major supplier to niche industries. The group posted a record year for shipments of its sodium feldspar due to increased presence and a strong market for ceramic floor tiles and plumbing fixtures. The group also experienced significant volume growth in potassium feldspar, attributable to a shift in marketing strategy. ZIM concentrates on being the major supplier to niche markets and has achieved that goal in the sanitaryware and ceramic tile industries. The company currently enjoys a strong position in the domestic sodium feldspar market and, with the recent capacity expansion at its plant in Spruce Pine, North Carolina, anticipates that as demand continues to grow, its market share will as well. In keeping with its by-product utilization strategy, the industrial minerals group recently completed the construction of a new low iron sand plant at its Spruce Pine location. Using a sophisticated and highly controlled process, a low margin by-product is converted into a high value-added material for use in specialized glass applications. The product is sold pursuant to a long term contract and is expected to make a healthy contribution to future earnings. Plastics, Coatings and Specialty Products In 1996, the focus at the mica operation was twofold: enhance the efficiency and cost effectiveness of the processing plant and develop new products and markets. As a result of its product development effort, ZIM will introduce an improved treated mica in the spring of 1997. This new surface modified product offers plastic compounders a potential substitute for more expensive fiberglass reinforcements. <PAGE5> The talc business continues to develop market share with its regular grades; however, this process is slow as it entails winning market share from other producers. As part of the company's strategy to seek out niche business opportunities for value-added products, a fine grind milling system was installed at the Benwood, West Virginia facility to produce ultra fine products. These products have met with ready customer acceptance and commercial shipments are in the initial phase. Expanding the market share for ZIM'S talc business will continue to have a very high priority in 1997. The development of our new feldspar product line, Felex, for the coatings industry was also completed in 1996. The line is getting positive response from the industry and samples are being evaluated by target accounts. While the product line must still be evaluated by customers, the company is optimistic about its potential given the quality of, and established demand for, the Felex product. International ZIM's initial foray into the Brazilian market in late 1995 was an unsuccessful and expensive learning experience. However, in 1996, the international sales and marketing efforts were successful in increasing the sales of the company's clay and talc into Mexico. As well, by entering into an agreement with a toll grinder, ZIM was able to profitably export feldspar to Italy. The Future The reorganization of the industrial minerals group has given birth to a stronger and more cohesive business unit, combining the best aspects of management, products, plants and processes from three established operations. It is with this dynamic framework that Zemex Industrial Minerals will focus on moving forward and growing the business. <PAGE 6> Metal Powders Pyron Corporation, originally incorporated in 1940, was acquired by Zemex in 1977. During the past five years, Pyron has augmented its sponge iron production with the addition of an atomizing facility in Niagara Falls, New York and the acquisition of two non-ferrous businesses, one in Maryville, Tennessee and another in Greenback, Tennessee. As a result, Pyron has evolved from a single market supplier into a broad spectrum ferrous and non-ferrous metal powder producer serving a diversity of markets. During the 1990s, advanced technology has accelerated market growth for atomized powders as they displaced other traditional methods of production such as machining, casting and forging. These rapid technological developments dictate that continuous improvements be made to both the critical characteristics of materials used in powder metallurgy ("P/M") and Pyron's strategy with respect to the marketplace. Hydrogen Reduced Sponge Iron Ten years ago, trends in the P/M market indicated that hydrogen reduced sponge iron would be replaced by atomized materials. Ten years later, due in part to a healthy friction market and the growth of alternative applications, the demand for sponge iron continues to grow. In order to ensure that Pyron maintains its competitive position in the marketplace, cost improvements have recently been implemented at the sponge iron plant in Niagara Falls, New York. Plans are also underway to optimize sponge production capacity and to expand the company's focus to the global friction market. Atomized Products During the past three years, industry capacity of atomized products has significantly outstripped market demand with industry shipments in 1996 indicating only a marginal improvement. Moreover, a major portion of Pyron's atomized business, and that of the industry, is tied to automotive and related industries. The cost pressures that the automotive manufacturers are undergoing would appear to indicate that there is little likelihood of price relief in the immediate future. In response to these market conditions, Pyron changed its strategic direction in 1996 to one of creating new specialty products and services and identifying alternative sectors where these value-added products can be sold. Research and marketing efforts to support this strategy are underway and it is anticipated that Pyron will introduce a number of new products over the next eighteen months. Non-Ferrous Powders In 1992, Pyron acquired a copper powder producer in Maryville, Tennessee. In 1994, it acquired the assets of another non-ferrous producer in nearby Greenback, Tennessee. In 1996, in order to optimize production efficiencies and lower operating costs, the two Tennessee plants were consolidated. In addition, a new water atomized copper powder process was successfully commissioned at the Greenback location during the third quarter. The start-up of this high capacity system enables Pyron to be more aggressive in pursuing the growing market for water atomized copper. <PAGE 7> Manganese Sulfide In late 1995, as part of its niche market focus, Pyron announced its intention to become the only U.S. producer of manganese sulfide. Manganese sulfide is an additive used by the P/M industry to enhance tool life and aid in machinability. For Pyron, this product is a natural complement to its core ferrous and non-ferrous businesses. For Pyron's customers, it means a reliable low cost domestic source of this essential material. Machinability and fatigue tests have shown Manganese Sulfide Plus (MnS+ TM) to be superior to any P/M machinability enhancer on the market. Construction of a facility to produce this newly developed product was completed in late 1996 at the Greenback location and the new material is now commercially available. Response from customers has been very positive. Custom Blends In response to changing dynamics in the P/M marketplace, Pyron constructed a specialized blending facility in St. Marys, Pennsylvania in 1995. Through this location Pyron is able to provide warehousing, custom pre-packaged powders, and just-in-time service to its customers. As anticipated, many customers are discovering that it is more cost efficient to purchase pre-blends, such as those offered by the St. Marys plant, than to blend in-house. Strategically, the St. Marys blending facility will play a significant role going forward as the P/M market continues to evolve and customers consolidate vendors, pool purchases and demand more from suppliers. The blending plant plays a dual role as a service center and as an additional channel of distribution for Pyron's products. The Future Pyron's long term focus includes capitalizing on its hydrogen reduced sponge iron and developing new value-added products using its ferrous and non-ferrous atomizing processes. Pyron's business is predicated on the development of products and market segments where it can utilize its unique production methods to enhance customer efficiency. <PAGE 8> Alumitech Alumitech's strategy has been to create an environmentally friendly, economically competitive process that will convert aluminum waste by-products normally diverted to landfill into commercially saleable products. The process includes the recovery of aluminum metal and salt fluxes, which are sold back to the secondary aluminum industry, and the reclamation of non-metallic products ("NMP"), predominantly metallic oxides. Conventional dross processors simply recover aluminum metal and send any remaining materials to landfill. However, with its patented technology and technical expertise, Alumitech is able to divert NMP from landfill and convert it into raw materials for commercial products. Alumitech is the industry leader in the development of alternative uses for NMP; it has developed the ability to use NMP in the production of refractory ceramic fiber, as well as products for the chemical and metallurgical industries. The Process The secondary aluminum industry is the major source of feedstock for Alumitech's process. The melting process used by the secondary aluminum industry causes the exposed surface of the molten aluminum to oxidize and form a protective barrier. Salts are added to increase metal recovery and facilitate the separation of the metal from the oxides. The molten salts form a barrier layer, containing 8-15% aluminum, which is skimmed off and cooled. The resultant product is known as black dross. Black dross is the primary feedstock for Alumitech's process. Conventional dross processors break down the dross into two parts: aluminum, which is sold back to secondary smelters, and saltcake, which is typically landfilled. This is where Alumitech differentiates itself. Alumitech separates saltcake and black dross into their basic components: aluminum metal, alumina and metal fines, salts, and NMP. In addition, using its proprietary process, Alumitech can also further refine the NMP for use in the production of commercially acceptable industrial products. NMP Applications Alumitech has developed several applications for NMP. The first, a high temperature refractory ceramic fiber, is used as insulation in industrial applications where temperatures range up to 2000 degreesF. During 1996, using NMP as a raw material, ceramic fiber was successfully produced in a large-scale pilot trial, and the quality of the test material positively verified by independent third parties. The test was of importance because it demonstrated that, by applying Alumitech's patented process, NMP could be used in the production of commercial products. Encouraged by these results, Alumitech continues to seek other possible applications for NMP. A number of products have been developed and yielded positive assessments when tested by potential customers. Likely markets for the new products are the steel and cement industries, refractories and the brown alumina markets. <PAGE 9> As part of Alumitech's focus on developing derivative products from NMP, engineering is currently being completed to retrofit the Cleveland facility for the commercialization of NMP. The expanded facility, which will include full-scale pyrometallurgical and hydrometallurgical operations, will be dedicated to the production of products derived from NMP. It is anticipated that this capital project will cost approximately $3.5 million and be completed by the end of 1997. National Award Recently, Alumitech was the recipient of a $400,000 federal grant, awarded jointly by the Department of Energy and the Environmental Protection Agency. The award is in recognition of Alumitech's technical achievements and is to contribute to the commercialization of NMP-derived products produced using its proprietary process. Alumitech was one of only seventeen companies nationwide to be recognized under this program. The Future The next major step in Alumitech's growth is the construction of a large-scale facility. To this end, in November 1996, Alumitech signed a letter of intent with respect to forming a joint venture with IMCO Recycling Inc. The proposed joint venture is for the construction of a large-scale facility, which would see Alumitech contributing its proprietary technology, IMCO supplying the required feedstock, and both parties contributing equally to the capital requirements. It is anticipated that a joint venture agreement will be signed over the course of the next several months. Environmental protection and liability are very contentious issues these days. Accordingly, as litigation and legislative activity increase, so has the potential liability associated with landfilling. It is with this in mind that Alumitech continues to lay the groundwork for its new "super plant" and to develop alternative applications for NMP. <PAGE 10> Management's Discussion And Analysis The following is a discussion and analysis of the financial condition and results of operations of the Corporation for the years ended December 31, 1996, 1995 and 1994, and certain factors that may affect the Corporation's prospective financial condition and results of operations. The following should be read in conjunction with the Consolidated Financial Statements and related notes thereto. OVERVIEW The Corporation is a diversified producer of specialty materials and products for use in a variety of industrial applications. The Corporation operates in two principal business segments: (i) industrial minerals, which includes The Feldspar Corporation, Suzorite Mica Products Inc. and Suzorite Mineral Products, Inc.; and (ii) metal products, which includes Pyron Corporation, Pyron Metal Powders, Inc. and Alumitech, Inc. During 1994, the Corporation acquired the assets of Greenback Industries, Inc.; the talc operations of Whittaker, Clark & Daniels, renamed Suzorite Mineral Products, Inc.; and a 42% interest in Alumitech, Inc. In 1995, the Corporation completed its acquisition of 100% of Alumitech, Inc. and acquired a mineral processing facility in Benwood, West Virginia. The Corporation's strategy going forward is to enhance its position as a leading supplier of specialty materials through investments in its core businesses, the introduction of new products, strategic acquisitions, and investments in new technologies. RESULTS OF OPERATIONS Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net Sales - ------------------------------------------------------------------------ 1996 1995 Change Change - ------------------------------------------------------------------------ Industrial Minerals $40,469,000 $37,089,000 $3,380,000 9.1% Metal Products 45,951,000 47,967,000 (2,016,000) (4.2%) -------------------------------------- $86,420,000 $85,056,000 $1,364,000 1.6% - ------------------------------------------------------------------------ The Corporation's net sales for 1996 were $86.4 million, an increase of $1.4 million, or 1.6%, from 1995. The major components of the increase were: the full year consolidation of Alumitech, Inc. and increased industrial minerals sales of $3.4 million, offset by decreased metal powder sales of $2.7 million. The industrial minerals segment recorded a 9.1% increase in sales from $37.1 million in 1995 to $40.5 million in 1996. The increase was due to a $1.7 million increase from the feldspar group, a $1.2 million increase in the talc group's sales and a $0.5 million increase in sales of phlogopite mica. <PAGE 11> The increase in talc sales is largely due to the inclusion of a full year's sales from the Benwood facility, which was acquired in May 1995. Talc sales are expected to increase in 1997 as new products are introduced and approved by customers. Feldspar sales continue to grow steadily due to increased demand from ceramic manufacturers and increased availability of the new low iron sand product. Net sales of the metal products group decreased 4.2%, or $2.0 million, from $48.0 million in 1995 to $46.0 million in 1996. Of this decrease, $2.1 million is primarily due to lower copper prices and slightly lower volume of copper sales affecting sales at Pyron Metal Powders, Inc. as well as a $1.3 million decline in atomized steel sales. These decreases were offset in part by increased sales of $0.7 million from Alumitech, Inc. Sponge iron sales increased by 2.3% while atomized steel sales decreased 21.2%. In 1997, modest sales growth in both metal powders and aluminum dross processing is anticipated. Cost of Goods Sold Cost of goods sold were $66.4 million in 1996 compared to $64.4 million in 1995. The corresponding gross margin was 23.1% for 1996 and 24.3% for 1995. The decline in gross margin was primarily due to lower aluminum prices. The decline in aluminum prices realized in 1996 compared to 1995 resulted in margin erosion of 1.8%, offsetting a slight improvement achieved by the other groups. In addition, cost of goods sold was negatively affected by the write-down of parts and supplies that had been rendered obsolete as the result of the expansion of the sodium feldspar plant at Spruce Pine, North Carolina. Selling, General and Administrative Expenses Selling, general and administrative expense ("SG&A") increased 21.0% from $8.7 million in 1995 to $10.5 million in 1996. As a percent of sales, SG&A was 12.1% in 1996 as compared to 10.2% in 1995. The increase was the result of the full year consolidation of Alumitech, Inc. in 1996 and the addition of sales and marketing staff for the industrial minerals segment. It is anticipated that there will be minimal increases in SG&A as future sales increase. Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased by $1.0 million, or 27.2%, from $3.7 million in 1995 to $4.7 million in 1996. This increase results from the 19.4% net increase in property, plant and equipment during 1996 as a result of capital expenditures. Prospectively, depreciation will continue to increase as current capital programs are placed into service. Operating Income Before Reorganization Charges Operating income before reorganization charges was $4.8 million in 1996 compared to $8.3 million in 1995. A $1.8 million reorganization charge was recognized in the first quarter of 1996 in connection with the reorganization of the Corporation's industrial minerals division, a write-down to market of its Brazilian inventory, and the recognition of a provision for storage costs and selling expenses in connection thereto. <PAGE 12> Operating Income Operating income after reorganization charges decreased to $3.1 million for fiscal 1996 from $8.3 million in fiscal 1995, representing a 63.2% decline. This decline was due to reasons discussed previously. Interest Expense, Net Net interest expense for the year ended December 31, 1996 was $0.9 million, an increase of $0.4 million over 1995. This is attributable to an increase in total indebtedness from $13.1 million in 1995 to $26.6 million in 1996. Other, Net In 1996, the Corporation recognized other net expense of $0.5 million. The largest component of this expense was a $0.7 million provision relating to a property sale that the purchaser had defaulted on. The offset was a number of small income items which reduced the total expense. Recovery of Income Taxes In 1996, the Corporation realized an income tax recovery of $0.9 million as compared to a recovery of $0.5 million in 1995. The recoveries reflect the recognition of the benefit of net operating losses available to the Corporation. In 1997 and beyond, the Corporation will incur an effective tax rate of approximately 35% to calculate its income taxes, reflecting the ongoing permanent difference arising from a percentage depletion allowance. Net Income and Earnings Per Share As a result of the factors discussed above, net income for the year ended December 31, 1996 was $2.6 million, a decrease of $5.8 million from 1995. As the impact of the recognition of the benefits of the loss carryforwards is significant, the Corporation's earnings per share have been restated below on a fully-taxed basis using an effective rate of 35%. - -------------------------------------------------------------------------- 1996 1995 Pre-Tax Income $1,663,000 $7,899,000 Primary EPS(as reported) $0.33 $1.03 EPS(fully taxed at 35%) $0.14 $0.63 - -------------------------------------------------------------------------- <PAGE 13> Results of Operations Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Net Sales - -------------------------------------------------------------------------- 1995 1994 Change Change Industrial Minerals	 $37,089,000 $30,378,000 $ 6,711,000 22.1%	 Metal Products		 47,967,000 24,928,000 23,039,000 92.4% ----------------------------------- $85,056,000 $55,306,000 $29,750,000 53.8% - -------------------------------------------------------------------------- The Corporation's net sales for 1995 were $85.1 million, an increase of $29.7 million, or 53.8%, from 1994. The major components of the increase were: the consolidation of Alumitech, Inc., $13.6 million; increased industrial mineral sales, $6.7 million; and increased metal powder sales, $9.4 million. The industrial minerals segment recorded a 22.1% increase in sales from $30.4 million in 1994 to $37.1 million in 1995. The change was due to an incremental $6.0 million in sales from the talc operations which were acquired December 1, 1994 and a $2.0 million increase from the feldspar group, offset in part by lower sales of phlogopite mica. Net sales for the metal products group increased $23.0 million, or 92.4%, from $24.9 million in 1994 to $48.0 million in 1995. Of this increase, $13.6 million was due to the consolidation of Alumitech, Inc., which was previously accounted for as an equity investment. Sales from the metal powder group increased 38.0% in 1995, primarily due to increased non-ferrous sales following the September 1994 acquisition of Greenback Industries, Inc. Sponge iron sales increased by 4.7% while atomized steel sales increased 20.0%, notwithstanding the significant negative impact of the explosion of the atomization furnace at the plant in Niagara Falls, New York in March 1995. Cost of Goods Sold Cost of goods sold were $64.4 million in 1995 compared to $40.6 million in 1994. The corresponding gross margins were 24.3% for 1995 and 26.7% for 1994. The decline in gross margin was due to several factors: a decline in high-end mica product sales; an increase in sales of several lower margin industrial mineral products; and lower margins due to competitive pressures in certain metal powder product lines. Selling, General and Administrative Expenses SG&A increased 31.4% from $6.6 million in 1994 to $8.7 million in 1995. The increase was the result of acquisitions in late 1994 and early 1995. As a percent of sales, SG&A was 10.2% in 1995 as compared to 11.9% in 1994, reflecting the benefit derived from higher volumes. Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased by $1.4 million, or 59.4%, from $2.3 million in 1994 to $3.7 million in 1995. This increase was driven by the 73.2% increase in property, plant and equipment during 1995 as a result of acquisitions and capital expenditures. <PAGE 14> Operating Income Operating income rose to $8.3 million for fiscal 1995 from $5.8 million in fiscal 1994. While this represents a 42.8% increase, the operating margin declined from 10.6% in 1994 to 9.8% in 1995. This decline was due to reasons discussed previously. Interest Expense, Net Net interest expense for the year ended December 31, 1995 was $0.5 million, an increase of $0.1 million over 1994. This is attributable to an increase in total indebtedness from $6.7 million at December 31, 1994 to $13.1 million at December 31, 1995, offset in part by a decline in interest rates. Recovery of Income Taxes In 1995, the Corporation realized an income tax recovery of $0.5 million as compared to a recovery of $0.7 million in 1994. The 1995 recovery reflects the recognition of the benefit of the balance of the net operating tax loss carryforwards available to the Corporation. Net Income and Earnings Per Share As a result of the factors discussed above, net income for the year ended December 31, 1995 was $8.4 million, an increase of $2.2 million from 1994. As the impact of the recognition of the benefits of the loss carryforwards is significant, the Corporation's earnings per share have been restated below on a fully-taxed basis using an effective rate of 35%. - ------------------------------------------------------------------------- 1995 1994 Pre-Tax Income $7,899,000 $5,579,000 Primary EPS(as reported) $1.03 $1.12 EPS(fully taxed at 35%) $0.63 $0.65 - ------------------------------------------------------------------------- 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, 1996, the Corporation partially funded all capital expenditures, acquisitions and debt reduction from a combination of additional debt and cash flow from operations. In addition, in September 1994 the Corporation completed a public offering, raising net proceeds of approximately $18.5 million. During 1995, outstanding warrants were exercised which resulted in net proceeds of $4.8 million. These funds were utilized in part to repay long term debt, fund acquisitions and purchase treasury stock. <PAGE 15> Cash Flow from Operations The Corporation had $18.7 million of working capital at December 31, 1996, compared to working capital of $19.7 million at December 31, 1995. Net cash provided by operating activities for the year ended December 31, 1996 was $6.0 million, down $1.2 million, or 16.4%, relative to 1995. Earnings before interest, taxes, and depreciation, depletion and amortization for the year ended December 31, 1996 were $7.3 million, a decrease of 39.7% over the $12.1 million generated in 1995. Financing Agreements In March 1995, the Corporation entered into a $30.2 million credit facility with a syndicate of two banks. The credit facility is further subdivided into four facilities: (i) a $10.0 million revolving credit and term loan facility; (ii) a $10.0 million multiple advance term loan facility; (iii) a $5.2 million standby letter of credit; and (iv) a $5.0 million operating line. These facilities are secured by specific assets and a floating charge over a significant portion of the Corporation's assets. The facilities bear interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon the financial position of the Corporation. As at December 31, 1996, there was $5.0 million outstanding under the operating line, $9.2 million outstanding under the multiple advance term loan facility, $5.0 million outstanding under the revolving credit and term loan facility and the standby letter of credit was issued to secure the Corporation's Industrial Revenue Bond. The operating line matures June 30, 1997 and is reviewed annually for renewal. The multiple advance term loan facility requires quarterly payments of $0.3 million which commenced April 1, 1996 with the balance outstanding, if any, due January 1, 2000. Capital Expenditures The Corporation's primary capital activities in the past involved the acquisition and development of industrial mineral properties and facilities and necessary capital investments to maintain operating viability and meet environmental, health and safety standards at its existing operations. During 1996, capital expenditures were $16.4 million compared to $15.5 million and $3.1 million for the years ended December 31, 1995 and 1994, respectively. The capital expenditures were funded by cash on hand, cash flow from operations and an increase in total bank indebtedness of $13.5 million. The Corporation is currently implementing and/or planning several major capital programs. These include the retrofitting of the aluminum dross plant in Cleveland and the construction of a new aluminum dross processing facility in connection with a proposed joint venture. In aggregate, 1997 capital expenditures are anticipated to be approximately $16 million. The Corporation plans on funding these from a combination of cash flow from operations and credit facilities. Although the Corporation's capital budgets provide for certain reclamation and environmental compliance activities, management does not believe that the cost of the Corporation's environmental compliance will have a material adverse effect on the Corporation's results of operations or financial condition in 1997. The Corporation has no definitive acquisition agreements with respect to additional property or other acquisitions. The Corporation will, however, continue to monitor potential strategic acquisitions that would enhance its current activities. <PAGE 16> Seasonality and Inflation Although the Corporation's results from extraction and processing operations are cyclical due to fluctuations in demand for industrial minerals and metal products, sales of the Corporation's products are generally not seasonal. Inflation in recent years has not adversely affected the Corporation's results of operations or costs, and is not expected to adversely affect the Corporation in the future unless it grows substantially and the markets for industrial minerals suffer from a negative impact on the economy in general. Capital Stock The capital stock of Zemex Corporation is traded on the New York Stock Exchange. The price range in which the stock has traded is shown for the past two years in the following tables. Capital Stock Prices - -------------------------------------------------------------------------- 1996 Q1 Q2 Q3 Q4 Year - -------------------------------------------------------------------------- High 10 9 5/8 8 1/8 8 7/8 10 Low 8 7/8 7 1/2 6 7/8 7 6 7/8 Close 9 1/8 7 5/8 7 3/4 7 7 - -------------------------------------------------------------------------- 1995 Q1 Q2 Q3 Q4 Year High 10 7/8 10 7/8 10 7/8 10 10 7/8 Low 8 3/8 9 9 1/8 8 1/4 8 1/4 Close 10 5/8 9 3/8 9 5/8 10 10 - -------------------------------------------------------------------------- In the fourth quarter of each of 1996, 1995 and 1994, the Corporation declared a two percent stock dividend. As of December 31, 1996, there were approximately 1,618 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 stock. <PAGE 17> Independent Auditors' Report To the Shareholders and Board of Directors of Zemex Corporation We have audited the accompanying consolidated balance sheets of Zemex Corporation and its Subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Zemex Corporation and its Subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles in the United States. Deloitte & Touche Chartered Accountants Toronto, Ontario January 31, 1997 <PAGE 18> Management's Report The management of Zemex Corporation and its subsidiaries has the responsibility for preparing the consolidated financial statements presented in this Annual Report and for their accuracy and integrity. The statements have been prepared in conformity with generally accepted accounting principles in the United States, and include informed judgments and estimates as required. Other financial information in this Annual Report is consistent with the financial statements. Zemex Corporation's system of internal controls is designed to provide reasonable assurance, at a justifiable cost, as to the reliability of financial records and reporting and the protection of assets. This system includes organizational arrangements with clearly defined lines of responsibility. Deloitte & Touche, independent auditors, have audited the consolidated financial statements of Zemex Corporation and their opinion is included on the preceding page. Zemex Corporation has formal standards of corporate conduct and policies regarding high standards of ethics and financial integrity. These policies have been disseminated to appropriate employees and internal control procedures provide reasonable assurance that violations of these policies, if any, are detected. Allen J. Palmiere Richard L. Lister Vice President and 			President and Chief Executive Officer Chief Financial Officer Audit Committee Report The Audit Committee of the Board of Directors is composed of three independent directors, Patrick H. O'Neill, Chairman, John M. Donovan, and Thomas B. Evans, Jr. The Committee held three meetings during 1996. The Audit Committee oversees the financial reporting process of the Corporation on behalf of the Board of Directors. In fulfilling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Corporation's independent auditors. The Audit Committee met with management and representatives of the auditors, Deloitte & Touche, to review accounting, auditing and financial reporting matters. The Committee met with Deloitte & Touche representatives without management present. Patrick H. O'Neill Chairman, Audit Committee <PAGE 19> Consolidated Balance Sheets - -------------------------------------------------------------------------- December 31 1996 1995 - -------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 2,279,000 $ 1,653,000 Accounts receivable (less allowance for doubtful accounts of $452,000 at December 31, 1996 and $386,000 at December 31, 1995)(Note 15) 15,003,000 13,165,000 Inventories (Note 3) 18,171,000 20,176,000 Prepaid expenses 	 1,388,000 841,000 Deferred income taxes(Note 6) 1,013,000 - - -------------------------------------------------------------------------- 37,854,000 35,835,000 Property, Plant and Equipment(Notes 4 and 8)	62,084,000 50,271,000 Other Assets (Note 5) 9,438,000 10,575,000 - -------------------------------------------------------------------------- $ 109,376,000 $ 96,681,000 - -------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank indebtedness(Note 8) $ 6,590,000 $ 3,220,000 Accounts payable 7,091,000 8,037,000 Accrued liabilities 2,983,000 2,222,000 Accrued income taxes 301,000 269,000 Current portion of long term debt (Note 8)	 2,201,000 2,378,000 - -------------------------------------------------------------------------- 19,166,000 16,126,000 Long Term Debt (Note 8) 17,797,000 7,485,000 Other Non-Current Liabilities 599,000 605,000 Deferred Income Taxes (Note 6)			 817,000 1,565,000 - -------------------------------------------------------------------------- 38,379,000 25,781,000 - -------------------------------------------------------------------------- Shareholders' Equity Common stock (Note 9) 8,950,000 8,695,000 Paid-in capital 51,304,000 49,692,000 Retained earnings 20,040,000 18,683,000 Note receivable from shareholder (Note 9)	(1,749,000) (1,749,000) Cumulative translation adjustment (1,175,000) (1,218,000) Treasury stock at cost (Note 9) (6,373,000) (3,203,000) - -------------------------------------------------------------------------- 70,997,000 70,900,000 - -------------------------------------------------------------------------- $ 109,376,000 $ 96,681,000 - -------------------------------------------------------------------------- See Notes to the Consolidated Financial Statements <PAGE 20> Consolidated Statements of Shareholders' Equity (dollars in thousands) Note Receivable Cumulative Common Paid In Treasury Retained from Translation Stock Capital Stock Earnings Shareholder Adjustment Total Balance at Dec 31/93 $4,535 $17,910 $ - $6,738 $(1,749) $ (904) $26,530 Stock issued for cash (a) 2,348 18,174 - - - - 20,522 Stock dividend (a) 146 1,171 - (1,320) - - (3) Stock options and warrants exercised (a) 56 357 - - - - 413 Stock issued in connection with acquisition (b)136 1,091 - - - - 1,227 Stock purchased for treasury (a) - - (465) - - - (465) Net income for the year - - - 6,250 - - 6,250 Translation adjustment - - - - - (422) (422) - -------------------------------------------------------------------------- Balance at Dec 31/94 7,221 38,703 (465) 11,668 (1,749) (1,326) 54,052 Stock issued under employee stock purchase plan (a) 49 422 - - - - 471 Stock dividend (a) 167 1,233 - (1,403) - - (3) Stock options and warrants exercised (a) 626 4,423 - - - - 5,049 Stock issued in connection with Alumitech purchase (b) 632 5,133 834 - - - 6,599 Warrants repurchased (a) - (222) - - - - (222) Stock purchased for treasury (a) - - (3,572) - - - (3,572) Net income for the year - - - 8,418 - - 8,418 Translation adjustment - - - - - 108 108 - -------------------------------------------------------------------------- Balance at Dec 31/95 8,695 49,692 (3,203) 18,683 (1,749) (1,218) 70,900 Stock issued under employee stock purchase plan (a) 73 535 - - - - 608 Stock dividend (a) 161 1,089 - (1,255) - - (5) Stock options exercised (a) 21 84 - - - - 105 Stock purchased for treasury (a) - - (3,170) - - - (3,170) Stock options repurchased - (96) - - - - (96) Net income for the year - - - 2,612 - - 2,612 Translation adjustment - - - - - 43 43 - ---------------------------------------------------------------------------- Balance at Dec 31/96 $8,950 $51,304 $(6,373) $20,040 $(1,749) $(1,175) $70,997 - ---------------------------------------------------------------------------- See Notes to the Consolidated Financial Statements 	(a) See Note 9 	(b) See Note 2 <PAGE 21> Consolidated Statements of Income - -------------------------------------------------------------------------- Years ended December 31 1996 1995 1994 - -------------------------------------------------------------------------- Net Sales $86,420,000 $85,056,000 $55,306,000 - -------------------------------------------------------------------------- Costs and Expenses Cost of goods sold 66,416,000 64,356,000 40,552,000 Selling, general and administrative		 10,492,000 8,669,000 6,598,000 Depreciation, depletion and amortization		 4,694,000 3,689,000 2,315,000 - -------------------------------------------------------------------------- 81,602,000 76,714,000 49,465,000 - -------------------------------------------------------------------------- Operating Income Before Reorganization Charges 4,818,000 8,342,000 5,841,000 Reorganization Charges (Note 10) 1,752,000 - - Operating Income 3,066,000 8,342,000 5,841,000 Other Income (Expenses) Interest expense, net(Note 8) (948,000) (523,000) (425,000) Other, net(Notes 2 and 10) (455,000) 80,000 163,000 - -------------------------------------------------------------------------- (1,403,000) (443,000) (262,000) - -------------------------------------------------------------------------- Income Before Recovery of Income Taxes 1,663,000 7,899,000 5,579,000 Recovery of Income Taxes(Note 6) 949,000 519,000 671,000 - -------------------------------------------------------------------------- Net Income $ 2,612,000 $ 8,418,000 $ 6,250,000 - -------------------------------------------------------------------------- Net Income per Share $0.33 $1.03 $1.12 - -------------------------------------------------------------------------- Average Common Shares and Common Share Equivalents Outstanding 8,000,522 8,208,874 5,588,682 - -------------------------------------------------------------------------- See Notes to the Consolidated Financial Statements <PAGE 22> Consolidated Statements of Cash Flows - -------------------------------------------------------------------------- Years ended December 31 1996 1995 1994 - -------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $2,612,000 $8,418,000 $6,250,000 Adjustments to reconcile income from operations to net cash flows from operating activities Depreciation, depletion and amortization 4,694,000 3,754,000 2,315,000 Loss on assets held for resale - 61,000 - Decrease in deferred income taxes (1,761,000) (122,000) (1,366,000) Share of net income of investee - (87,000) (267,000) Loss on sale of property, plant and equipment 255,000 22,000 15,000 Decrease (increase) in other assets 771,000 (227,000) (63,000) (Decrease) increase in non-current liabilities (6,000) 56,000 67,000 Changes in non-cash working capital items(a) (533,000) (4,660,000) (4,311,000) - -------------------------------------------------------------------------- Net cash provided by operating activities 6,032,000 7,215,000 2,640,000 - -------------------------------------------------------------------------- Cash Flows from Investing Activities Additions to property, plant and equipment (16,426,000) (15,451,000) (3,077,000) Assets acquired in connection with acquisitions(b) - (3,658,000) (4,888,000) Proceeds from sale of assets 86,000 - 78,000 Investment(b) - - (2,019,000) Promissory notes - - (371,000) - -------------------------------------------------------------------------- Net cash used in investing activities (16,340,000) (19,109,000) (10,277,000) - -------------------------------------------------------------------------- Cash Flows from Financing Activities Deferred financing costs - (467,000) - Proceeds from long term debt 12,882,000 6,219,000 266,000 Proceeds(payments) net, on bank indebtedness 3,370,000 3,040,000 (415,000) Repayment of long term debt (2,747,000) (5,343,000) (8,094,000) Cash paid in lieu of fractional shares (5,000) (3,000) (3,000) Issuance of common stock(c) 713,000 5,520,000 20,935,000 Purchase of common stock and warrants for treasury(c) (3,266,000) (3,794,000) (465,000) - -------------------------------------------------------------------------- Net cash provided by financing activities 10,947,000 5,172,000 12,224,000 - -------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (13,000) 32,000 (40,000) - -------------------------------------------------------------------------- Net Increase(Decrease)in Cash 626,000 (6,690,000) 4,547,000 Cash and Cash Equivalents at Beginning of Year 1,653,000 8,343,000 3,796,000 - -------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 2,279,000 $ 1,653,000 $ 8,343,000 - -------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Income taxes paid $ 393,000 $ 303,000 $ 233,000 Interest paid 937,000 656,000 573,000 - -------------------------------------------------------------------------- Supplemental Disclosure of Non-Cash Activities Notes issued in connection with purchase of assets(b) $ - $ - $ 1,102,000 Stock issued in connection with acquisition(b) - 6,599,000 1,227,000 Assumption of liabilities in connection with asset purchases - - 793,000 Notes received in connection with sale of assets held for resale(d) - 423,000 - - -------------------------------------------------------------------------- See Notes to the Consolidated Financial Statements 	(a) See Note 14 	(b) See Note 2 	(c) See Note 9 	(d) See Note 10 <PAGE 23> Notes to the Consolidated Financial Statements December 31, 1996 and 1995 1.	Summary of Significant Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Corporation's significant accounting policies are as follows: a.	Principles of Consolidation The consolidated financial statements include the accounts of Zemex Corporation and its wholly-owned subsidiaries (the "Corporation"). All material intercompany transactions have been eliminated. As discussed in Note 2, Alumitech, Inc. ("Alumitech") was acquired in two separate transactions and, accordingly, was accounted for on an equity basis until it became a wholly-owned subsidiary in February 1995. b.	Inventories Inventories are stated at the lower of cost or market and are computed using the average cost method. It is not practical to segregate finished products from ore and concentrates. Supplies are stated at cost using the first-in, first-out or average cost method. c.	Property, Plant and Equipment Property, plant and equipment are recorded at cost. Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. When assets are sold or otherwise retired, the cost and accumulated depreciation or depletion are removed from the accounts and any gain or loss is included in results of operations. Provisions for depreciation are based upon estimated useful lives, using principally the straight-line method. Depletion of mining properties and depreciation of other mining assets are computed using the unit-of-production method, except in the case of the Corporation's mica operation where the estimated reserves exceed the expected production during the term of the mining lease. The mica mining lease rights and deferred costs, including all preproduction and set-up costs, are amortized using the straight-line method over the term of the mining lease. d.	Postretirement Benefits Pension Plans The funding policy of the Corporation, generally, is to contribute annually at a rate that is intended to provide for the cost of benefits earned during the year and which will amortize prior service costs over periods of 10 to 30 years, subject to Internal Revenue Service limits for deductible contributions. <PAGE 24> Healthcare and Other Postretirement Benefits Other Than Pensions The Corporation accounts for healthcare and other postretirement benefits other than pensions in accordance with Statement of Financial Accounting Standards ("SFAS") No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions". This Statement requires the accrual of all postretirement benefits other than pensions during the years in which employees render the necessary services to be entitled to receive such benefits. The 1996, 1995 and 1994 amounts include the current year expense and the transition liability which is being amortized over twenty years as allowed by SFAS No. 106 (Note 7). e.	Foreign Currency Translation The functional currency for the Corporation's foreign operations is the local currency. Foreign currency assets and liabilities are translated using the exchange rates in effect at the balance sheet date. The effect of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars is accumulated as part of the cumulative translation adjustment component of shareholders' equity. Results of operations and cash flows are translated using the average exchange rates during the year. Gains and losses from foreign currency transactions are included in net income for the year. f.	Research and Development Expense Research and development expense was $622,000 in 1996, $320,000 in 1995 and $315,000 in 1994. g.	Provision for Future Reclamation Costs Costs for future reclamation have been provided for based upon estimated future reclamation costs allocated over the expected productive lives of the quarries. h.	Income Taxes The Corporation accounts for income taxes in accordance with SFAS No. 109 "Accounting for Income Taxes". This Statement requires the liability method of accounting for income taxes. i.	Earnings Per Share Earnings per share is based upon the weighted average number of common shares and common share equivalents outstanding. Common share equivalents include stock options issued under the employee stock option plans and stock issued under the Key Executive Common Stock Purchase Plan (Note 9). For the purpose of calculating earnings per share, stock dividends are considered to be issued at the beginning of the period. <PAGE 25> j.	Deferred Financing Costs Costs associated with the issuance of long term debt are deferred, and are being amortized over the term of the debt on a straight-line basis. The unamortized balance is included in other assets. k.	Other Assets Other assets include assets held for sale which are stated at the lower of cost or estimated net realizable value. In determining the estimated net realizable value, the Corporation deducts from the estimated selling price the projected costs to bring the assets into a saleable condition, to dispose of the assets and to hold the property to an expected date of sale. Other assets also includes patents which are stated at cost and are being amortized over their remaining life of 14 years on a straight-line basis. Intangible assets are evaluated periodically and, if conditions warrant, an impairment valuation is provided. l.	Cash Equivalents For purposes of the consolidated statements of cash flows, highly liquid investments with original maturities of three months or less, when purchased, are considered as cash equivalents. m.	Stock-Based Compensation Costs Stock-based compensation costs for pro forma presentation purposes (Note 9) are based on the fair value of each option at the grant date. The option value is calculated using the Black-Scholes option-pricing model. 2.	ACQUISITIONS Acquisition of Alumitech, Inc. In June 1994, the Corporation acquired its initial 39.53% investment in Alumitech by investing $2,000,000 to acquire treasury stock. In 1995, the Corporation increased its interest to 100% by issuing 722,352 shares of common stock with an ascribed value of $6,599,000. The shares were issued as to 266,106 to Dundee Bancorp International Inc. ("Dundee"), the Corporation's largest shareholder, and as to 266,106 to Clarion Capital Corporation, a company controlled by a director of the Corporation. Alumitech, an aluminum dross processor, has developed proprietary technology that enables it to have the ability to convert 100% of its dross feed into marketable products. The acquisition of Alumitech has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based upon the fair values at the date of acquisition. The net purchase price was allocated as follows: <PAGE 26> - -------------------------------------------------------------------------- Working capital $ 73,000 Property, plant and equipment 5,527,000 Patents 7,363,000 Other assets 225,000 Other liabilities (2,192,000) Deferred income taxes (2,025,000) - -------------------------------------------------------------------------- $ 8,971,000 - -------------------------------------------------------------------------- 	Consideration 	Carrying value of investment at date of acquisition of remaining interest $ 2,372,000 Capital stock 6,599,000 - -------------------------------------------------------------------------- $ 8,971,000 - -------------------------------------------------------------------------- The operating results of Alumitech have been included in the consolidated statements of income from the date of acquisition. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1994, rather than at February 15, 1995, consolidated net sales would have been $64,500,000 for fiscal 1994, and $86,900,000 for fiscal 1995. Consolidated pro forma income and earnings per share would not have been materially different from the reported amounts for fiscal 1994 and 1995. Such pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of fiscal 1994. Acquisition of the assets of Benwood Limestone Company, Inc. On May 15, 1995, the Corporation acquired the assets of Benwood Limestone Company, Inc. ("Benwood"), through its wholly-owned subsidiary, Suzorite Mineral Products, Inc. ("SMP"), for $3,658,000. The acquisition of Benwood augmented the Corporation's talc and mineral processing capability. Benwood will continue to process consumer products for its former owner under a long term contract. Acquisition of the talc operations of Whittaker, Clark & Daniels, Inc. In December 1994, the Corporation, through SMP, acquired from Whittaker, Clark & Daniels, Inc. ("WCD") certain assets including its talc operations. Consideration for the purchase included $4,388,000 in cash, 136,360 common shares of the Corporation with an ascribed value of $1,227,000, and the assumption of certain current liabilities directly relating to the operations acquired aggregating $267,000. Concurrent with the purchase, the Corporation entered into an agreement with WCD whereby WCD agreed to act as the exclusive marketing, distribution and sales agent for the Corporation's premium talc products. <PAGE 27> Acquisition of the assets of Greenback Industries, Inc. In September 1994, the Corporation, through its wholly-owned subsidiary, Pyron Metal Powders, Inc., acquired the assets and assumed certain liabilities of Greenback Industries, Inc. ("Greenback"). Consideration for the purchase was $500,000 in cash, the issuance of two promissory notes having principal amounts of $650,000 and $451,563, respectively, and the assumption of certain current liabilities aggregating $526,000. The Greenback facilities provide the Corporation with increased capacity to produce powdered copper as well as powdered tin, and powdered copper and tin alloys. 3.	INVENTORIES - -------------------------------------------------------------------------- 1996 1995 Ore, concentrates and finished products Industrial minerals $ 8,565,000 $ 10,852,000 Metal products 5,035,000 4,042,000 - -------------------------------------------------------------------------- 13,600,000 14,894,000 - -------------------------------------------------------------------------- Materials and supplies Industrial minerals 3,683,000 3,867,000 Metal products 888,000 1,415,000 - -------------------------------------------------------------------------- 4,571,000 5,282,000 - -------------------------------------------------------------------------- $ 18,171,000 $ 20,176,000 - -------------------------------------------------------------------------- 4.	PROPERTY, PLANT AND EQUIPMENT - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- Land $ 5,246,000 $ 4,952,000 Mining properties and deferred costs 6,605,000 5,535,000 Buildings 16,728,000 15,304,000 Machinery and equipment 50,937,000 45,797,000 Construction in progress 15,065,000 7,609,000 - -------------------------------------------------------------------------- Total property, plant and equipment, at cost 94,581,000 79,197,000 Less: Accumulated depreciation, depletion and amortization 32,497,000 28,926,000 - -------------------------------------------------------------------------- Net property, plant and equipment $ 62,084,000 $ 50,271,000 - -------------------------------------------------------------------------- As of December 31, 1996, the Corporation estimates that approximately $4,592,000 will be expended to complete its construction in progress. <PAGE 28> 5.	OTHER ASSETS 	 - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- Prepaid pension cost(Note 7) $ 1,488,000 $ 1,632,000 Assets held for resale(Note 10) 300,000 250,000 Deferred financing costs 659,000 802,000 Other deferred charges 318,000 443,000 Promissory notes receivable, non-current portion - 369,000 Patents, net 6,673,000 7,079,000 - -------------------------------------------------------------------------- $ 9,438,000 $ 10,575,000 - -------------------------------------------------------------------------- 6.	INCOME TAXES The provision for income taxes consists of the following components: - -------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Income from operations before provision for income taxes Domestic $ 1,492,000 $ 7,708,000 $ 3,631,000 Foreign 171,000 191,000 1,948,000 - -------------------------------------------------------------------------- Total pre-tax income $ 1,663,000 $ 7,899,000 $ 5,579,000 - -------------------------------------------------------------------------- Current tax provision Federal $ 478,000 $ 1,849,000 $ 880,000 State and local 123,000 293,000 258,000 Foreign 76,000 37,000 425,000 - -------------------------------------------------------------------------- Total 677,000 2,179,000 1,563,000 - -------------------------------------------------------------------------- Deferred tax provision Federal (1,369,000) 283,000 - State and local (257,000) 55,000 - Foreign - 40,000 256,000 - -------------------------------------------------------------------------- Total (1,626,000) 378,000 256,000 - -------------------------------------------------------------------------- Benefit of operating loss and tax credit carryforwards - (3,076,000) (2,490,000) - -------------------------------------------------------------------------- Recovery of income taxes $ (949,000) $ (519,000) $ (671,000) - -------------------------------------------------------------------------- <PAGE 29> The following tabulation reconciles the U.S. federal statutory income tax rate to the federal, state and foreign overall effective income tax rate. - -------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- PERCENT PERCENT PERCENT Statutory federal rate 34.0 34.0 34.0 Benefit of operating loss carryforwards (net of foreign income taxes) (43.8) (38.1) (46.0) Percentage depletion (47.9) (4.9) - Other 0.6 2.4 - - -------------------------------------------------------------------------- Effective income tax rate (57.1) (6.6) (12.0) - -------------------------------------------------------------------------- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1996, the Corporation had unused tax benefits of $6,172,000 related to U.S. federal and state net operating loss and tax credit carryforwards. Significant components of the Corporation's deferred tax assets and liabilities as of December 31 are as follows (dollars in thousands): - -------------------------------------------------------------------------- 1996 1995 U.S. Foreign Total U.S. Foreign Total - -------------------------------------------------------------------------- Deferred tax assets Net operating loss and tax credit carryforwards $ 6,172 $ - $ 6,172 $4,102 $ - $ 4,102 Accrued expenses and reserves 763 - 763 444 - 444 Bad debt allowances 139 - 139 112 - 112 Inventories 526 - 526 505 - 505 Other 63 - 63 137 - 137 - -------------------------------------------------------------------------- Gross deferred tax assets 7,663 - 7,663 5,300 - 5,300 - -------------------------------------------------------------------------- Deferred tax liabilities Property, plant and equipment 2,656 2,075 4,731 2,159 2,075 4,234 Patent 1,791 - 1,791 1,929 - 1,929 Pension contributions 521 - 521 600 - 600 Other 424 - 424 102 - 102 - -------------------------------------------------------------------------- Total 5,392 2,075 7,467 4,790 2,075 6,865 - -------------------------------------------------------------------------- Net deferred tax (assets) liabilities $(2,271) $2,075 $ (196) $ (510) $ 2,075 $ 1,565 - -------------------------------------------------------------------------- <PAGE 30> The net change in the valuation allowance for deferred tax assets was a decrease of $1,645,000 in the year ended December 31, 1995 related primarily to benefits arising from recognition of net operating loss carryforwards. In 1995, the benefit of the balance of the net operating losses was recognized and, accordingly, the valuation allowance was reduced to nil. At December 31, 1996, the Corporation had approximately $15,000,000 of federal operating loss carryforwards available to reduce future taxable income which will expire between 2002 and 2011. Additionally, the Corporation has unused general business tax credits, which expire between 1997 and 2011, and alternative minimum tax credits. 7.	PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Pension Plans The Corporation has several pension plans covering substantially all domestic employees. The plans covering salaried employees provide pension benefits that are based on the compensation of the employee. In all plans, the plan assets exceed the benefit obligations and hence the plans are overfunded. Net periodic pension cost (income) included the following components: - -------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Current service costs $ 528,000 $ 369,000 $ 422,000 Interest cost on projected benefit obligations 1,028,000 940,000 882,000 Actual return on assets (389,000) (2,587,000) 368,000 Net amortization and deferral (1,023,000) 1,164,000 (1,704,000) - -------------------------------------------------------------------------- Net pension expense (income) $ 144,000 $ (114,000) $ (32,000) - -------------------------------------------------------------------------- Net amortization and deferral consists of amortization of net assets at transition and deferral of subsequent net gains and losses. The assumptions used to determine projected benefit obligations were (i) a discount rate of 7 percent in 1996 and 1995 and 7.5 percent in 1994; (ii) an expected long term rate of return on assets of 8.75% in 1996, 1995 and 1994; and (iii) an increase in the level of compensation of 6% for 1996, 1995 and 1994. <PAGE 31> 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, 1996 and 1995 are tabulated below: - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefit obligation $ 11,687,000 $ 11,059,000 - -------------------------------------------------------------------------- Accumulated benefit obligation $ 11,896,000 $ 11,261,000 - -------------------------------------------------------------------------- Projected benefit obligation $ (15,925,000) $(15,042,000) Plan assets at fair value 16,432,000 16,646,000 - -------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 507,000 1,604,000 Unrecognized net loss 1,071,000 226,000 Prior service cost not yet recognized in net periodic pension cost 239,000 282,000 Unrecognized net asset at year end (329,000) (480,000) - -------------------------------------------------------------------------- Prepaid pension cost included in consolidated balance sheets $ 1,488,000 $ 1,632,000 - -------------------------------------------------------------------------- Other Postretirement Benefits The Corporation provides healthcare and life insurance benefits for certain retired employees which, are accrued as earned (Note 1). The cost of such benefits was $105,000 in 1996, $95,000 in 1995, and $73,000 in 1994. The unrecognized obligation for postretirement benefits is not material. 8.	LONG TERM DEBT - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- Term loan facility (a) $ 14,167,000 $ 2,700,000 Other term loans (b) 813,000 1,038,000 Industrial Development Revenue Bonds (c) 4,080,000 4,612,000 Promissory notes (d) 113,000 811,000 Capital leases (e) 488,000 330,000 Other 337,000 372,000 - -------------------------------------------------------------------------- Total debt 19,998,000 9,863,000 Less: Current portion 2,201,000 2,378,000 - -------------------------------------------------------------------------- Long term debt $ 17,797,000 $ 7,485,000 - -------------------------------------------------------------------------- <PAGE 32> (a)	During 1995, the Corporation entered into a $30,224,000 credit facility with a syndicate of two banks. The credit facility is further subdivided into four facilities: (i) a $10,000,000 revolving credit and term loan facility; (ii) a $10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby letter of credit; and (iv) a $5,000,000 operating line. These facilities are secured by specific assets and a floating charge over a significant portion of the Corporation's assets. The facilities bear interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon the financial position of the Corporation. As at December 31, 1996 and December 31, 1995, there was $5,000,000 and $2,000,000, respectively, outstanding under the operating line and $9,167,000 and $2,700,000, respectively, outstanding under the multiple advance term loan facility. Advances under the revolving credit and term loan facility as at December 31, 1996 were $5,000,000, and the standby letter of credit was issued to secure Pyron's Industrial Development Revenue Bonds (see (c) below). The operating line matures June 30, 1997 and is reviewed annually for renewal. The multiple advance term loan facility requires quarterly payments of $278,000 which commenced April 1, 1996 with the balance outstanding, if any, due January 1, 2000. (b)	The other term loans bear interest at the prime rate of the lending institution plus 1.25 percent to 1.50 percent, depending on certain tests. They are secured by substantially all of the fixed assets of Alumitech and its wholly-owned subsidiaries and are repayable in monthly principal instalments of approximately $19,000 until they are repaid with a terminal payment in 1999. (c)	Pyron Corporation ("Pyron") entered into a lease agreement on November 29, 1989 with the Niagara County Industrial Development Agency (the "Agency") to partially finance the construction of a manufacturing facility, acquire and install equipment and machinery, and renovate the existing Pyron facility for the purpose of manufacturing atomized steel powders. The agreement authorized the Agency to issue and sell Industrial Development Revenue Bonds in the aggregate principal amount of $7,650,000 to provide the funds for the project. While the bonds are not the obligation of Pyron, the agreement requires Pyron to make quarterly rental payments equal to the debt service under the sinking fund requirements and interest on the outstanding principal to the Agency. The amount outstanding at December 31, 1996 and 1995 was $4,080,000 and $4,612,000, respectively. Pyron's annual obligation under the agreement is $510,000 until paid. The bonds bear interest at a variable rate not to exceed 15 percent per annum. The rate at December 31, 1996 was 4.15% and at December 31, 1995 was 5.25 percent. Pyron has the option to convert the bonds to a fixed interest rate at any time during the term. Under the lease agreement, Pyron may purchase the facility at any time during the term, which expires November 1, 2004, by paying the outstanding principal amount of the bonds plus $1. <PAGE 33> The bonds are collateralized by a mortgage on the land, the new facility and the existing facility, which have an aggregate net book value of approximately $9,480,000 at December 31, 1996. A bank has provided Pyron with a letter of credit which is available to support Pyron's obligations under the lease agreement. If the bondholders tender their bonds for repayment, the letter of credit will be utilized to pay the bondholders. The letter of credit is collateralized under the credit facility in (a) above. The letter of credit expires on October 1, 1999. (d)	In 1994, Pyron Metal Powders, Inc. issued two promissory notes to former owners in connection with the acquisition of its two operations. One promissory note with an aggregate principal amount outstanding as of December 31, 1995 of $325,000, bearing interest at 7 percent in both 1996 and 1995, was paid in full September 15, 1996. A second note with an aggregate principal amount of $113,000 outstanding as at December 31, 1996 and $263,000 at December 31, 1995 is non-interest bearing with monthly principal payments of $12,550 commencing October 15, 1994 until the final payment of $12,313 due September 15, 1997. (e)	The Corporation has long term capital lease agreements at various rates and for various terms with maturities ranging from 1997 to 2001 for equipment used in its operations. The carrying value of the leased equipment as of December 31, 1996 was $573,000. Principal repayments on long term debt are as follows: - -------------------------------------------------------------------------- 	1997					$	2,201,000 	1998						2,068,000 	1999						2,661,000 2000 10,883,000 	2001						 545,000 	Thereafter					1,640,000 - -------------------------------------------------------------------------- $ 19,998,000 - -------------------------------------------------------------------------- Interest Interest earned and expensed in each of the past three years is summarized below: - -------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Interest income $ 93,000 $ 268,000 $ 246,000 Interest expense (1,041,000) (791,000) (671,000) - -------------------------------------------------------------------------- Net interest expense $ (948,000) $ (523,000) $ (425,000) - -------------------------------------------------------------------------- <PAGE 34> 9.	COMMON STOCK, STOCK OPTIONS AND WARRANTS Shares Outstanding During 1995, the Corporation increased its authorized common stock from 10,000,000 to 25,000,000, par value one dollar per share, of which 20,000,000 shares will be denominated common stock and 5,000,000 shares will be denominated preferred stock. There were 8,269,099 shares of common stock issued and outstanding as of December 31, 1996 and 8,355,722 shares as of December 31, 1995. In May 1994, the Corporation issued 347,826 shares of common stock in a private placement transaction for aggregate proceeds of $2,000,000. In September 1994, the Corporation issued 2,000,000 shares of its common stock pursuant to a public offering of shares for net proceeds, after underwriting fees and expenses of issue, of $18,522,000. In 1995, the Corporation completed its purchase of 100 percent of Alumitech by issuing 722,352 shares of common stock with an ascribed value of $6,599,000. During 1996, 80,000 shares of common stock were purchased pursuant to the Corporation's employee stock purchase plan for an aggregate cost of $672,000. During 1995, 49,000 shares of common stock were purchased pursuant to the Corporation's employee stock purchase plan for an aggregate cost of $471,000. The plan was approved by the shareholders and provides that 250,000 shares may be purchased under the plan. The shares have been registered for listing on the New York Stock Exchange. As part of a stock repurchase program initiated in 1994, the Corporation has purchased 773,000 of shares of common stock on the open market: 344,000 common shares in 1996 for an aggregate cost of $3,170,000, 376,000 common shares in 1995 for an aggregate cost of $3,572,000 and 53,000 common shares in 1994 for an aggregate cost of $465,000. Dividends On October 18, 1996, the Corporation declared a 2 percent stock dividend to shareholders of record on November 4, 1996, which was paid November 18, 1996. Retained earnings were charged $1,255,192 as a result of the issuance of 161,398 shares of the Corporation's common stock, and cash payments of $4,357 in lieu of fractional shares. On November 10, 1995, the Corporation declared a 2 percent stock dividend to shareholders of record on November 24, 1995, which was paid December 8, 1995. Retained earnings were charged $1,403,248 as the result of the issuance of 167,149 shares of the Corporation's common stock, and cash payments of $3,375 in lieu of fractional shares. <PAGE 35> On November 14, 1994, the Corporation declared a 2 percent stock dividend to shareholders of record on November 28, 1994, which was paid December 19, 1994. Retained earnings were charged $1,320,307 as the result of the issuance of 145,708 shares of the Corporation's common stock, and cash payments of $3,218 in lieu of fractional shares. Stock Options The Corporation provides stock option incentive plans and has, with shareholder approval, issued options to certain directors outside of the plans. The plans are intended to provide long term incentives and rewards to executive officers, directors and other key employees contingent upon an increase in the market value of the Corporation's common stock. Options for 10 percent of the Corporation's outstanding common shares are issuable under the plans. The following is a summary of option transactions under the Corporation's stock option plans: - -------------------------------------------------------------------------- For the years ended December 31 1996 1995 1994 - -------------------------------------------------------------------------- Options outstanding at beginning of year 852,550 556,550 572,500 Options granted during the year 61,000 341,000 25,000 Options exercised during the year (45,000) (38,250) (23,200) Options cancelled during the year (23,000) (6,750) (17,750) - -------------------------------------------------------------------------- Options outstanding at end of year 845,550 852,550 556,550 Options exercisable at end of year 631,550 511,550 333,550 Price range of options granted during the year $7 3/4-$9 3/4 $9 1/8-$10 1/8$11 1/2 - -------------------------------------------------------------------------- The options expire from 1997 to 2002. During 1996 options for 45,000 shares of common stock were exercised for proceeds of $235,500. At December 31, 1996 there were 631,550 options exercisable. The Corporation does not recognize compensation expense for its stock-based compensation plans. Had compensation cost for the stock option plans been determined based upon fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Corporation's net income and earnings per share would have been reduced by approximately $341,000 or $0.04 per share in 1996 and $2,177,000 or $0.27 per share in 1995. The fair value of the options granted during 1996 and 1995 is estimated to be $341,000 and $2,177,000, 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 1996 and 1995: dividend yield of 0%; expected volatility of 84% and 88%, respectively; risk-free interest rate of 5.5%; and an expected life of 5 years. <PAGE 36> Warrants During 1993, in connection with the acquisition of Suzorite Mica Products Inc., the Corporation issued a transferable warrant to Dundee to purchase at any time prior to July 15, 1995 up to 100,000 shares (104,040 shares after adjustments for stock dividends) of common stock at $7.00 per share. The warrant was exercised by Dundee on July 14, 1995 for proceeds of $700,000. As a result of a stock rights offering in 1990, 725,769 warrants were issued. Each warrant entitled the holder to purchase, prior to July 15, 1995, 1.08 shares of common stock at an exercise price of $8.56 per share, which was repriced from $9.25 per share as a result of dilution due to the issuance of stock dividends. Of the 725,769 warrants originally issued, the Corporation repurchased 218,046 warrants at an aggregate cost of $222,000. During 1995, 448,000 warrants were exercised for 484,027 shares of common stock for net proceeds of $4,143,000. During 1994, 31,514 warrants were exercised resulting in the issuance of 32,771 shares of common stock at an exercise price of $8.88 per share for aggregate proceeds of $291,000. There were no remaining warrants outstanding as at December 31, 1995. Note Receivable from Shareholder The note receivable from shareholder of $1,749,000 represents amounts due from the Corporation's President and Chief Executive Officer pursuant to the Key Executive Common Stock Purchase Plan. The loan, which was used to acquire 357,000 shares of common stock of the Corporation, is non-interest bearing, secured by a pledge of the shares acquired and due on the earlier of August 12, 1998 or 30 days after the termination of employment. Since the loan arose from the sale of stock, it is classified as a reduction of shareholders' equity. 10.	REORGANIZATION CHARGES AND UNUSUAL ITEMS Reorganization Charges During the first quarter of 1996, the Corporation recognized reorganization costs of $1,752,000 in connection with the reorganization of its minerals division, a write-down to market of inventory held in Brazil and the recognition of a provision for anticipated costs associated with storing and selling the material. The Brazilian enterprise was unsuccessful primarily due to rapidly deteriorating market prices which made market penetration extremely difficult. Unusual Items In December 1991, the Corporation closed its industrial minerals plant located in Connecticut. The assets of this operation were reclassified to assets held for resale and written down in 1991 by $430,000 to their estimated net realizable value. These assets were written down by a further $300,000 in 1993. In 1995, a portion of the property was sold for approximately net book value. In 1996, the purchaser defaulted on the payment obligations. Accordingly, the Corporation instituted legal action to repossess the property. A provision of $723,000 has been recorded to provide for reclamation costs, legal costs and to write-down the property to current market value. <PAGE 37> 11.	OPERATING LEASES AND OTHER COMMITMENTS Operating Leases The Corporation has a number of operating lease agreements primarily involving equipment, office space, warehouse facilities and rail sidings. The operating lease for equipment provides that the Corporation may, after the initial lease term, renew the lease for successive yearly periods or may purchase the equipment at the fair market value. An operating lease for office facilities contains escalation clauses for increases in operating costs and property taxes. The majority of the leases are cancellable and are renewable on a yearly basis. Future minimum rental payments required by operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of December 31, 1996 are as follows: - -------------------------------------------------------------------------- Minimum Years Lease Payments - -------------------------------------------------------------------------- 1997 $ 520,000 1998 393,000 1999 271,000 2000 195,000 2001 332,000 Thereafter 538,000 - -------------------------------------------------------------------------- Total minimum lease payments $ 2,249,000 - -------------------------------------------------------------------------- Rent expense was $668,000, $442,000, and $281,000 in 1996, 1995 and 1994, respectively. Other Commitments The Corporation has a mining contract with an independent contractor expiring on September 30, 1998 to extract minerals from its open pit mine in Suzor Township, Quebec. This contract specifies the mining and delivery of approximately 50,000 tons of ore per year to the mine site rail siding at a fixed rate. <PAGE 38> 12.	QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of certain unaudited quarterly financial data from continuing operations: - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- Net Sales First quarter $ 22,405,000 $ 21,105,000 Second quarter 21,356,000 21,439,000 Third quarter 21,601,000 21,748,000 Fourth quarter 21,058,000 20,764,000 - -------------------------------------------------------------------------- $ 86,420,000 $ 85,056,000 - -------------------------------------------------------------------------- Operating Income First quarter $ 170,000 $ 2,123,000 Second quarter 1,512,000 2,465,000 Third quarter 1,444,000 1,822,000 Fourth quarter (60,000) 1,932,000 - -------------------------------------------------------------------------- $ 3,066,000 $ 8,342,000 - -------------------------------------------------------------------------- Net Income First quarter $ 6,000 $ 1,459,000 Second quarter 819,000 2,183,000 Third quarter 779,000 1,562,000 Fourth quarter 1,008,000 3,214,000 - -------------------------------------------------------------------------- $ 2,612,000 $ 8,418,000 - -------------------------------------------------------------------------- Net Income Per Share First quarter $ .00 $ .19 Second quarter .10 .28 Third quarter .10 .18 Fourth quarter .13 .37 - -------------------------------------------------------------------------- 13.	FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Corporation to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Corporation's customer base and their dispersion across a number of different industries, principally construction, glass, electrical and automotive. Financial instruments comprise cash and cash equivalents, accounts receivable, short term bank borrowings, accounts payable, accrued liabilities, and long term debt. The fair value of these financial instruments approximates their carrying value. <PAGE 39> 14.	CHANGES IN NON-CASH WORKING CAPITAL ITEMS The changes in non-cash working capital items are as follows: - -------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Increase in accounts receivable $ (1,838,000) $ (783,000) $ (2,384,000) Decrease (increase) in inventories 2,005,000 (2,742,000) (4,471,000) Increase in prepaid expenses (547,000) (16,000) (31,000) (Decrease) increase in accounts payable and accrued liabilities (185,000) (1,495,000) 2,248,000 Increase in accrued income taxes 32,000 376,000 327,000 - -------------------------------------------------------------------------- $ (533,000) $(4,660,000) $ (4,311,000) - -------------------------------------------------------------------------- 15.	RELATED PARTY TRANSACTIONS As at December 31, 1996 and 1995, accounts receivable included amounts due from directors of $350,000. These amounts are non-interest bearing, with no fixed terms of repayment, and have not otherwise been disclosed in the consolidated financial statements. 16.	SEGMENT INFORMATION The Corporation has two principal lines of business and is organized into two operating units based on its product lines: (i) industrial minerals, and (ii) metal products. Industrial mineral products include feldspar, kaolin, mica, talc, baryte, feldspathic sand and industrial sand. These products are marketed principally to the automotive, housing, and ceramics industries in North America. They are produced from mines and processing plants located near Edgar, Florida; Monticello, Georgia; Murphy, North Carolina; Spruce Pine, North Carolina; Natural Bridge, New York; Van Horn, Texas; Benwood, West Virginia; Boucherville, Quebec; and Suzor Township, Quebec. Metal products are processed in Niagara Falls, New York; St. Marys, Pennsylvania; and Greenback, Tennessee. The Corporation's ferrous and non-ferrous metal powders are marketed primarily in North America to manufacturers of powder metallurgy parts used in the automotive and transportation industries. Aluminum dross is recycled at a plant in Cleveland, Ohio and ceramic products are produced at a plant in Streetsboro, Ohio. Corporate assets principally include cash, term deposits, and furniture and fixtures. <PAGE 40> Information pertaining to sales and earnings from continuing operations and assets by business segment appears below: - -------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- Net sales (a) Industrial minerals $ 40,469,000 $ 37,089,000 $ 30,378,000 Metal products 45,951,000 47,967,000 24,928,000 - -------------------------------------------------------------------------- Total $ 86,420,000 $ 85,056,000 $ 55,306,000 - -------------------------------------------------------------------------- Operating income (a) Industrial minerals $ 3,118,000 $ 4,622,000 $ 3,865,000 Metal products 1,868,000 3,677,000 2,202,000 Reorganization charges(b) (1,752,000) - - General unallocated corporate (168,000) 43,000 (226,000) - -------------------------------------------------------------------------- Total 3,066,000 8,342,000 5,841,000 Interest expense net (948,000) (523,000) (425,000) Other (expense) income, net(b) (455,000) 80,000 163,000 - -------------------------------------------------------------------------- Income before recovery of income taxes $ 1,663,000 $ 7,899,000 $ 5,579,000 - -------------------------------------------------------------------------- Capital expenditures (a)(c) Industrial minerals $ 11,855,000 $ 9,653,000 $ 2,050,000 Metal products 4,528,000 5,784,000 878,000 Corporate 43,000 14,000 149,000 - -------------------------------------------------------------------------- Total $ 16,426,000 $ 15,451,000 $ 3,077,000 - -------------------------------------------------------------------------- Depreciation, depletion and amortization (a) Industrial minerals $ 2,352,000 $ 1,932,000 $ 1,456,000 Metal products 1,948,000 1,451,000 828,000 Corporate 394,000 306,000 31,000 - -------------------------------------------------------------------------- Total $ 4,694,000 $ 3,689,000 $ 2,315,000 - -------------------------------------------------------------------------- Identifiable assets at year end (a) Industrial minerals $ 60,915,000 $ 52,348,000 $ 36,853,000 Metal products 37,145,000 34,133,000 22,665,000 Corporate (d) 11,316,000 10,200,000 11,346,000 - -------------------------------------------------------------------------- Total $ 109,376,000 $ 96,681,000 $ 70,864,000 - -------------------------------------------------------------------------- (a)	The Corporation's businesses are located in the United States and Canada, which the Corporation considers one geographic segment. (b)	See Note 10. (c)	Capital expenditures for 1995 and 1994 exclude property, plant and equipment of $9,027,000 and $3,264,000, respectively, acquired in connection with the Corporation's 1995 and 1994 acquisitions (Note 2). (d)	Includes cash and cash equivalents for all years presented. <PAGE 41> Selected Financial Data - -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net Sales $86,420,000 $85,056,000 $55,306,000 $47,958,000 $42,020,000 Restructuring Charges - - - 1,250,000 - Reorganization Charges 1,752,000 - - - - Operating Income 3,066,000 8,342,000 5,841,000 1,237,000 1,737,000 Other Income (Expenses) (1,403,000) (443,000) (262,000) 2,421,000 (475,000) Net Income from Continuing Operations 2,612,000 8,418,000 6,250,000 3,188,000 838,000 Net Income 2,612,000 8,418,000 6,250,000 1,852,000 949,000 - ----------------------------------------------------------------------------- FINANCIAL POSITION Working Capital $ 18,688,000 $19,709,000 $26,046,000 $ 9,288,000 $ 9,431,000 Total Assets 109,376,000 96,681,000 70,864,000 48,414,000 50,773,000 Long Term Debt (non-current portion) 17,797,000 7,485,000 5,461,000 8,735,000 9,593,000 - ----------------------------------------------------------------------------- COMMON STOCK Average Common Shares Outstanding 8,000,522 8,208,874 5,588,682 4,605,440 4,440,551 Actual Common Shares Issued and Outstanding at Year End 8,269,099 8,355,722 7,168,153 4,535,283 4,491,834 - ----------------------------------------------------------------------------- PER COMMON SHARE Net Income $ 0.33 $ 1.03 $ 1.12 $ 0.40 $ 0.21 Net Income, excluding the benefit of tax loss carryforwards 0.14 0.63 0.65 0.20 0.21 - ----------------------------------------------------------------------------- COMMON STOCK PRICES High $ 10 $ 10 7/8 $ 12 1/4 $ 8 $ 6 3/8 Low 6 7/8 8 1/4 6 1/8 4 1/2 2 7/8 Year End 7 10 8 5/8 6 3/4 5 3/8 - ----------------------------------------------------------------------------- <PAGE 43> Corporate Directory BOARD OF DIRECTORS Paul A. Carroll Chairman and Chief Executive Officer, World Wide Minerals Ltd. (1) Morton A. Cohen Chairman, President and Chief Executive Officer, Clarion Capital Corporation John M. Donovan Corporate Consultant (1) (2) Thomas B. Evans, Jr. Vice Chairman, The Jefferson Group Inc. (2) Ned Goodman Chairman, President and Chief Executive Officer, Dundee Bancorp Inc. Peter Lawson-Johnston Chairman and Trustee, Solomon R. Guggenheim Foundation; Chairman, The Harry Frank Guggenheim Foundation (1) (3) Richard L. Lister President and Chief Executive Officer of the Corporation (3) Patrick H. O'Neill Corporate Consultant (2) William J. vanden Heuvel Counsel, Strook, Strook & Lavan (3) (1)	Member of the Executive Compensation/Pension Committee (2)	Member of the Audit Committee (3)	Member of the Executive Committee OFFICERS Peter Lawson-Johnston Chairman of the Board Richard L. Lister President and Chief Executive Officer Allen J. Palmiere Vice President, Chief Financial Officer and Assistant Secretary Peter J. Goodwin Vice President; President, Industrial Minerals Terrance J. Hogan President, Alumitech, Inc. G. Russell Lewis President, Metal Powers Patricia K. Moran Assistant Secretary-Treasurer EXECUTIVE OFFICE Zemex Corporation Canada Trust Tower BCE Place, 161 Bay Street Suite 3750, P.O. Box 703 Toronto, Ontario Canada M5J 2S1 Telephone: (416) 365-8080 Fax: (416) 365-8094 Independent Public Accountants Deloitte & Touche Toronto, Ontario, Canada Transfer Agent and Registrar Capital Stock First Union National Bank of North Carolina Shareholder Services Group 230 South Tryon Street Charlotte, N.C. 28288 Telephone: (800) 829-8432 Fax: (704) 374-6114 Form 10-K Copies of Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1996 will be available after April 1, 1997 by writing to Shareholder Relations at the Executive Office