CONFORMED UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission file number 1-228 [GRAPHIC OMITTED] ZEMEX CORPORATION (Exact name of registrant as specified in its charter) CANADA NONE (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) CANADA TRUST TOWER, BCE PLACE 161 BAY STREET, SUITE 3750 TORONTO, ONTARIO, CANADA M5J 2S1 (Address of principal executive offices) (416) 365-8080 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act TORONTO STOCK EXCHANGE/NEW YORK STOCK EXCHANGE CAPITAL STOCK, NO PAR VALUE Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ----------- --------- YES X NO ----------- --------- As of November 6, 2001, there were 8,190,743 shares of capital stock outstanding. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ZEMEX CORPORATION CONSOLIDATED BALANCE SHEETS (US$) SEPTEMBER 30, 2001 December 31, 2000 ------------------ ----------------- (unaudited) ASSETS CURRENT ASSETS Cash $ 1,100,000 $ 2,175,000 Accounts receivable 11,535,000 12,850,000 Inventories 15,387,000 16,844,000 Prepaid expenses and other current assets 420,000 530,000 Income taxes receivable 767,000 120,000 Future income tax benefits 21,000 21,000 ------------- ------------ 29,230,000 32,540,000 PROPERTY, PLANT AND EQUIPMENT 56,957,000 65,846,000 OTHER ASSETS 6,834,000 7,153,000 FUTURE INCOME TAX BENEFITS (NON-CURRENT) 8,040,000 8,040,000 ------------- ------------ TOTAL ASSETS $ 101,061,000 $113,579,000 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank indebtedness $ 11,500,000 $ 17,145,000 Accounts payable 3,286,000 5,618,000 Accrued liabilities 3,790,000 4,412,000 Current portion of long term debt 339,000 534,000 ------------- ------------ 18,915,000 27,709,000 LONG TERM DEBT 110,000 261,000 OTHER NON-CURRENT LIABILITIES 2,258,000 683,000 FUTURE INCOME TAX OBLIGATIONS 1,574,000 1,656,000 ------------- ------------ 22,857,000 30,309,000 ------------- ------------ NON-CONTROLLING INTEREST - 3,367,000 ------------- ------------ SHAREHOLDERS' EQUITY Common stock 54,660,000 57,212,000 Retained earnings 27,272,000 25,958,000 Note receivable from shareholder (1,259,000) (1,259,000) Cumulative translation adjustment (2,469,000) (2,008,000) ------------- ------------ 78,204,000 79,903,000 ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 101,061,000 $113,579,000 ============= ============ Prepared in accordance with Canadian GAAP 2 ZEMEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (US$) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (unaudited) NET SALES $14,125,000 $18,447,000 $45,181,000 $59,217,000 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of goods sold 9,300,000 14,088,000 29,898,000 43,444,000 Selling, general and administrative 2,940,000 2,939,000 8,766,000 8,557,000 Depreciation, depletion and amortization 1,487,000 2,049,000 4,590,000 5,963,000 ----------- ----------- ----------- ----------- 13,727,000 19,076,000 43,254,000 57,964,000 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) 398,000 (629,000) 1,927,000 1,253,000 ----------- ----------- ----------- ----------- Interest income 10,000 30,000 77,000 118,000 Interest expense (170,000) (365,000) (744,000) (1,982,000) Other income (expense), net 1,000 (16,000) 599,000 (3,010,000) ----------- ----------- ----------- ----------- (159,000) (351,000) (68,000) (4,874,000) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR (RECOVERY OF) INCOME TAXES AND NON-CONTROLLING INTEREST 239,000 (980,000) 1,859,000 (3,621,000) Provision for (recovery of) income taxes 149,000 (588,000) 532,000 (1,969,000) Non-controlling interest in subsidiary earnings -- 14,000 10,000 105,000 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS 90,000 (406,000) 1,317,000 (1,757,000) INCOME FROM DISCONTINUED OPERATIONS -- -- -- 10,330,000 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 90,000 $ (406,000) $ 1,317,000 $ 8,573,000 =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE BASIC Continuing operations $ 0.01 $ (0.05) $ 0.16 $ (0.21) Discontinued operations $ -- $ -- $ -- $ 1.22 ----------- ----------- ----------- ----------- $ 0.01 $ (0.05) $ 0.16 $ 1.01 =========== =========== =========== =========== DILUTED Continuing operations $ 0.01 $ (0.05) $ 0.16 $ (0.21) Discontinued operations $ -- $ -- $ -- $ 1.22 ----------- ----------- ----------- ----------- $ 0.01 $ (0.05) $ 0.16 $ 1.01 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 8,147,376 8,438,945 8,279,589 8,484,544 DILUTED 8,277,101 8,438,945 8,362,750 8,484,544 ----------- ----------- ----------- ----------- Prepared in accordance with Canadian GAAP 3 ZEMEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30 (US$) 2001 2000 ---------- ----------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,317,000 $ 8,573,000 Adjustments to reconcile net income to net cash flows from operating activities Depreciation, depletion and amortization 4,590,000 6,343,000 Amortization of and write-off of deferred financing costs -- 1,759,000 Decrease in future income tax obligations (82,000) (58,000) Non-controlling interest in subsidiary earnings 10,000 105,000 Gain on sale of assets (294,000) (266,000) Gain on sale of discontinued operations -- (15,191,000) Increase in other assets (192,000) (2,753,000) Increase in other non-current liabilities 75,000 76,000 Changes in non-cash working capital items (2,817,000) 3,015,000 ---------- ----------- Net cash provided by operating activities 2,607,000 1,603,000 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (2,363,000) (4,607,000) Proceeds from sale of assets 7,364,000 234,000 Proceeds from sale of discontinued operations -- 39,353,000 Proceeds from sale of securities -- 5,134,000 ---------- ----------- Net cash provided by investing activities 5,001,000 40,114,000 ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in bank indebtedness (5,645,000) 9,395,000 Net decrease in long term debt (333,000) (50,221,000) Issuance of common stock 290,000 366,000 Purchase of common stock (2,845,000) (1,093,000) ---------- ----------- Net cash used in financing activities (8,533,000) (41,553,000) ---------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (150,000) (74,000) ---------- ----------- NET (DECREASE) INCREASE IN CASH (1,075,000) 90,000 CASH AT BEGINNING OF PERIOD 2,175,000 1,592,000 ---------- ----------- CASH AT END OF PERIOD $1,100,000 $ 1,682,000 ========== =========== Prepared in accordance with Canadian GAAP 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of Zemex Corporation and its subsidiaries (the "Corporation"). The financial data for the three months ended September 30, 2001 and 2000 and for the nine months ended September 30, 2001 and 2000 is unaudited but, in the opinion of management, reflect all adjustments, considered necessary for a fair presentation of the financial position, results of operations and cash flows. The results of operations and cash flows for the three-month and nine-month periods ended September 30, 2001 are not necessarily indicative of operations for the entire year. All material intercompany transactions have been eliminated. The following should be read in conjunction with the audited Consolidated Financial Statements and related notes thereto for the year ended December 31, 2000. OVERVIEW The Corporation is a diversified producer of specialty materials and products for use in a variety of industrial applications. The Corporation operates in two principal business segments: (i) industrial minerals, which includes The Feldspar Corporation, Suzorite Mica Products Inc., Suzorite Mineral Products, Inc., Zemex Industrial Minerals, Inc. and Zemex Mica Corporation (see note 1 below); and (ii) aluminum recycling, which includes Alumitech, Inc., Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc., ETS Schaefer Corporation and AWT Properties, Inc. 1. On March 27, 2001, effective February 28, 2001, the Corporation completed the sale of its Natural Bridge, New York talc facility and its 60% interest in Zemex Fabi-Benwood, LLC for approximately $7.5 million to IMI Fabi S.p.A. ("IMI Fabi"). The Corporation recognized a pre-tax gain of $0.3 million from this transaction which was recorded as other income in the first quarter of 2001. Of the sale proceeds, $3.7 million was received in March 2001 and applied to reduce the Corporation's outstanding borrowings under its credit facilities. The balance, which originally was included in accounts receivable, was received in September 2001. 2. On April 11, 2000, the Corporation completed the sale of its metal powders division, which included Pyron Corporation and Pyron Metal Powders, Inc., for $42.0 million to North American Hoganas Holdings, Inc., a subsidiary of Hoganas AB. The Corporation recognized a pre-tax gain of $15.2 million in the second quarter of 2000; the after-tax gain from this sale transaction was $9.4 million, or $1.11 per share. The sale proceeds were applied to the Corporation's credit facilities. In 2000, the metal powders division was disclosed as a discontinued operation. 3. To effect the disposition of Pyron Corporation and Pyron Metal Powders, Inc., on March 8, 2000, the Corporation redeemed its outstanding Senior Secured Notes. The redemption was financed by a bridge facility structured as an amendment to the Corporation's pre-existing credit facility, bearing interest at the same rate and was secured by the same security package as the existing credit facility. The bridge facility was fully repaid by October 31, 2000. The redemption necessitated a make-whole payment to the noteholders of $1.2 million, which was recorded as other expense in the first quarter of 2000. Additionally $0.3 million was paid out in related transaction expenses and $1.7 million in deferred financing expenses related to the issuance of the Senior Secured Notes was written-off. 5 SEGMENTED INFORMATION The Corporation's continuing operations are composed of two principal lines of business and are organized into two distinct operating units based on product lines: (i) industrial minerals; and (ii) aluminum recycling. Information pertaining to sales and earnings (loss) from continuing operations and assets by business segment appears below: INDUSTRIAL ALUMINUM THREE MONTHS ENDED SEPTEMBER 30, 2001 CONSOLIDATED MINERALS RECYCLING CORPORATE ------------ ----------- ----------- ----------- NET SALES $14,125,000 $10,059,000 $ 4,066,000 $ -- OPERATING INCOME (LOSS) 398,000 1,779,000 (461,000) (920,000) INTEREST (EXPENSE) (170,000) 26,000 (5,000) (191,000) NET INCOME (LOSS) 90,000 1,625,000 (469,000) (1,066,000) ----------- ----------- ----------- ----------- Industrial Aluminum Three Months Ended September 30, 2000 Consolidated Minerals Recycling Corporate ------------ ----------- ----------- ----------- Net sales $18,447,000 $12,755,000 $ 5,692,000 $ -- Operating (loss) income (629,000) 1,489,000 (1,067,000) (1,051,000) Interest expense (365,000) (27,000) (7,000) (331,000) (Loss) income from continuing operations (406,000) 1,218,000 (1,065,000) (559,000) Income from discontinued operations -- -- -- -- Net (loss) income (406,000) 1,218,000 (1,065,000) (559,000) ----------- ----------- ----------- ----------- INDUSTRIAL ALUMINUM NINE MONTHS ENDED SEPTEMBER 30, 2001 CONSOLIDATED MINERALS RECYCLING CORPORATE ------------ ----------- ----------- ----------- NET SALES $45,181,000 $31,621,000 $13,560,000 $ -- OPERATING INCOME (LOSS) 1,927,000 5,351,000 (801,000) (2,623,000) INTEREST (EXPENSE) (744,000) 11,000 (15,000) (740,000) NET INCOME (LOSS) 1,317,000 5,328,000 (831,000) (3,180,000) ----------- ----------- ----------- ----------- Industrial Aluminum Nine Months Ended September 30, 2000 Consolidated Minerals Recycling Corporate ------------ ----------- ----------- ----------- Net sales $59,217,000 $39,566,000 $19,651,000 $ -- Operating income (loss) 1,253,000 4,489,000 (794,000) (2,442,000) Interest expense (1,982,000) (34,000) (20,000) (1,928,000) (Loss) income from continuing operations (1,757,000) 3,492,000 (772,000) (4,477,000) Income from discontinued operations 10,330,000 -- -- 9,418,000 Net income (loss) 8,573,000 3,492,000 (772,000) 4,941,000 ----------- ----------- ----------- ----------- INDUSTRIAL ALUMINUM SEPTEMBER 30, 2001 CONSOLIDATED MINERALS RECYCLING CORPORATE ------------ ----------- ----------- ----------- CURRENT ASSETS $29,230,000 $23,362,000 $ 3,379,000 $ 2,489,000 TOTAL ASSETS 101,061,000 65,621,000 21,314,000 14,126,000 TOTAL CURRENT LIABILITIES 18,915,000 4,104,000 2,251,000 12,560,000 TOTAL SHAREHOLDERS' EQUITY 78,204,000 -- -- 78,204,000 ----------- ----------- ----------- ----------- 6 Industrial Aluminum December 31, 2000 Consolidated Minerals Recycling Corporate ------------ ----------- ----------- ----------- Current assets $32,540,000 $26,809,000 $ 3,786,000 $1,945,000 Total assets 113,579,000 76,931,000 23,055,000 13,593,000 Total current liabilities 27,709,000 4,761,000 4,367,000 18,581,000 Total shareholders' equity 79,903,000 -- -- 79,903,000 ----------- ----------- ----------- ----------- COMMON SHARES AND STOCK OPTIONS Shares Outstanding As at September 30, 2001, the Corporation's authorized capital stock consists of an unlimited number of first preference shares without par value and an unlimited number of common shares without par value. There were no preference shares and 8,190,743 common shares issued and outstanding as of November 6, 2001. The Corporation repurchased 166,300 common shares in the third quarter of 2001 at an average price of $6.61 per share, compared to 63,900 common shares repurchased in the same quarter of 2000 at an average price of $7.54 per share. The Corporation has repurchased 427,300 common shares at an average price of $6.65 per share for the nine-month period ended September 30, 2001, compared to 138,900 common shares repurchased at an average price of $7.85 per share for the same period of 2000. Stock Options Outstanding The Corporation provides stock option incentive plans, which are intended to provide long-term incentives and rewards to executive officers, directors and other key employees contingent upon an increase in the market value of the Corporation's common shares. The options vest and are exercisable from the beginning of the second year subsequent to the date of issuance. There were 1,049,150 options outstanding as of November 6, 2001 of which 717,150 are exercisable as of November 6, 2001. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). The differences between Canadian and U.S. generally accepted accounting principles ("U.S. GAAP") do not have a material effect on the Corporation's reported financial position or net income (loss) or cash flows except as follows: a. Income Statements The implementation of the American Institute of Certified Public Accountants Statement of Position 98-5 ("SOP 98-5") requires costs of start-up activities and organization costs to be expensed as incurred. Canadian GAAP permits the deferral of such costs. Under U.S. GAAP, certain costs associated with the redemption of the Senior Secured Notes would be considered to be an extraordinary item and require separate disclosure. The extraordinary item, net of tax, would have been an expense of $1,608,000, or $0.19 per share, for the nine months ended September 30, 2000. 7 The following summarizes the income statement amounts in accordance with U.S. GAAP where different from the amounts reported under Canadian GAAP. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2001 2000 2001 2000 ------- --------- ---------- ---------- Net income (loss) as reported $90,000 $(406,000) $1,317,000 $8,573,000 Add: Amortization of start-up activities and organization costs 8,000 12,000 54,000 35,000 Tax effect related thereto (1,000) (6,000) (8,000) (17,000) ------- --------- ---------- ---------- Net income (loss) under U.S. GAAP $97,000 $(400,000) $1,363,000 $8,591,000 ======= ========= ========== ========== Net income (loss) per share, under U.S. GAAP - basic $ 0.01 $ (0.05) $ 0.16 $ 1.01 - diluted $ 0.01 $ (0.05) $ 0.16 $ 0.99 ------- --------- ---------- ---------- b. Balance Sheets U.S. GAAP, SOP 98-5, requires that the costs of start-up activities and organization costs be expensed in the period incurred rather than be deferred. SOP 98-5 is effective for periods beginning after December 15, 1998. Initial implementation is reported as a cumulative effect of a change in accounting principle without retroactive application. Canadian and U.S. GAAP differs as to the methodology applied to determine the quantum of the asset impairment provision necessary. Under U.S. GAAP, the provision for asset impairment for property, plant and equipment should be based on discounted future cash flows from impaired properties. Under Canadian GAAP, future cash flows from impaired properties are not discounted. The following summarizes the balance sheet amounts in accordance with U.S. GAAP where different from the amounts reported under Canadian GAAP. SEPTEMBER 30, 2001 December 31, 2000 CANADIAN GAAP U.S. GAAP Canadian GAAP U.S. GAAP ------------- ----------- ------------- ----------- Property, plant and equipment $56,957,000 $55,517,000 $65,846,000 $64,407,000 Other assets 6,834,000 6,614,000 7,153,000 6,878,000 Future income tax benefits (non-current) 8,040,000 8,222,000 8,040,000 8,230,000 Retained earnings 27,272,000 25,794,000 25,958,000 24,434,000 ----------- ----------- ----------- ----------- 8 c. Statements of Comprehensive Income U.S. GAAP requires a statement of comprehensive income as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2001 2000 2001 2000 --------- --------- ---------- ---------- Net income (loss) under U.S. GAAP $ 97,000 $(400,000) $1,363,000 $8,591,000 Change in foreign currency translation adjustment, net of tax (2001, $(55,000), $(69,000); 2000, $(69,000), $(179,000)) (312,000) (69,000) (392,000) (180,000) --------- --------- ---------- ---------- Comprehensive (loss) income $(215,000) $(469,000) $ 971,000 $8,411,000 ========= ========= ========== ========== RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of the financial condition and results of operations of the Corporation for the three months ended September 30, 2001 and the three months ended September 30, 2000, and for the nine months ended September 30, 2001 and the nine months ended September 30, 2000, and certain factors that may affect the Corporation's prospective financial condition and results of operations. The following should be read in conjunction with the Consolidated Financial Statements and related notes thereto for the year ended December 31, 2000. 9 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Net Sales The Corporation's net sales from continuing operations for the three months ended September 30, 2001 were $14.1 million compared to $18.4 million for the three months ended September 30, 2000, a decrease of $4.3 million, or 23.4%. Net sales of $10.1 million in the industrial minerals group for the three-month period ended September 30, 2001 represented a decrease of $2.7 million, or 21.1%, from the same period in 2000. Sales revenue decreased by $2.2 million due to the first quarter 2001 sale of the Natural Bridge, New York and the Benwood, West Virginia talc plants. The placing on care and maintenance of the Zemex Mica Bakersville, North Carolina plant resulted in a $0.4 million reduction in sales. The balance of the decrease was due to a decline in mica sales due to the automotive slowdown. Net sales for the aluminum recycling group for the three months ended September 30, 2001 were $4.1 million, a decrease of $1.6 million, or 28.6%, from the third quarter of 2000. The decrease is primarily due to the deterioration of the secondary aluminum market which began in the third quarter of 2000. The slowdown in the U.S. steel industry has also adversely impacted the demand for heat containment systems manufactured by the ETS Schaefer subsidiary of the aluminum recycling group. Cost of Goods Sold Cost of goods sold for the three months ended September 30, 2001 was $9.3 million, a decrease of $4.8 million, or 34.0%, from the comparable period in 2000. The decrease in cost of goods sold arose from several factors: the closure of the aluminum recycling group's calcium aluminate facility; the sale of two talc facilities; the placing on care and maintenance of the Zemex Mica plant; the decision, made in late 2000, to shed marginal business in the aluminum recycling group; and the previously discussed slowdown of mica sales. Additionally the Corporation has been producing low iron sand feedstock for inventory which reduces costs of goods sold. For these reasons, the Corporation's gross margin as a percentage of sales improved to 34.2% for the three months ended September 30, 2001 from 23.6% during the third quarter of 2000. Selling, General and Administrative Expense Selling, general, and administrative expense ("SG&A") for the three months ended September 30, 2001 and September 30, 2000, both are $2.9 million. The increase in the provision for pension expenses and professional fees are offset by the decrease in expenses due to closure and/or sales of operations which occurred in the last twelve months. Depreciation, Depletion and Amortization Depreciation, depletion and amortization ("DD&A") for the three months ended September 30, 2001 was $1.5 million, a decrease of 27.4% over the comparable period in 2000 as a result of assets being sold or taken out of service over the last twelve months. 10 Operating Income (Loss) Operating income for the three-month period ended September 30, 2001 was $0.4 million, compared to a loss from operations of $0.6 million reported in the same period in 2000. Interest Income Interest income for the three months ended September 30, 2001 was $10,000, down 67.9% or $20,000, from the same period in 2000. Interest Expense Interest expense for the three months ended September 30, 2001 was $0.2 million, down from $0.4 million for the comparable period in 2000. The decrease is primarily due to the sale of the two talc operations, the proceeds from which were applied to pay down the Corporation's credit facilities. Total bank indebtedness was $11.5 million as of September 30, 2001 compared to $17.1 million as of December 31, 2000. Provision for (Recovery of) Income Taxes During the third quarter of 2001, the Corporation's provision for income tax expense was $0.1 million. For the three months ended September 30, 2000, the Corporation recognized a marginal income tax benefit of $0.6 million from continuing operations. Net Income (Loss) As a result of the factors discussed above, the Corporation recorded net income from continuing operations for the three months ended September 30, 2001 of $0.1 million, compared to a net loss of $0.4 million for the three months ended September 30, 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Net Sales The Corporation's net sales for the nine months ended September 30, 2001 were $45.2 million, a decrease of $14.0 million, or 23.7%, from the same period in 2000. Net sales in the industrial minerals group for the nine-month period ended September 30, 2001 decreased by $8.0 million to $31.6 million from $39.6 million in the corresponding period of 2000. Of the $8.0 million decrease, approximately 56.9%, or $5.3 million, is due to the sale of the Natural Bridge, New York talc facility and Benwood, West Virginia talc joint venture in the first quarter of 2001. The placing on care and maintenance of the Zemex Mica plant effective December 31, 2000 resulted in a decline of $1.6 million in sales, while the balance is due primarily to the automotive industry slowdown in the first and second quarters resulting in decreased mica sales volume. Sales from the Corporation's aluminum recycling group for the nine months ended September 30, 2001 were $13.6 million, $6.1 million, or 31.0%, lower than in the same period of 2000. The decrease is due to two primary factors. The secondary aluminum industry became depressed in the third quarter of 2000. The decline was created by a decline in demand for secondary aluminum due, in part, to increased imports of low priced primary metal. The automotive slowdown has prolonged the downturn in the secondary industry. This slowdown has resulted in a reduction in the supply and an increase in price of the feedstock used by Alumitech. As well, the quality of the feedstock has declined. The aluminum recycling operations have been operating at reduced volumes, as the Corporation has decided not to process marginal material. The second 11 factor is the slowdown in the domestic steel industry. This has resulted in a reduction in demand for the Corporation's heat containment systems. Cost of Goods Sold Cost of goods sold for the nine months ended September 30, 2001 was $29.9 million, a decrease of $13.5 million, or 31.2%, from the comparable period in 2000. More importantly, as a percentage of net sales, gross margin increased to 33.8% for the nine months ended September 30, 2001 from 26.6% for the same period in 2000. The improvement in gross margin in the face of a decline in sales is primarily due to certain strategic steps taken in late 2000 and early 2001. The Zemex Mica plant was placed on care and maintenance and the calcium aluminate operation was closed, both effective December 31, 2000. These two operations generated operating losses in 2000. The lower margin talc operations were sold in the first quarter of 2001. The aluminum recycling group has shed its marginal business. The increase in gross margin is the result of steps taken by management to position the Corporation for the future. Selling, General and Administrative Expense SG&A expense for the nine-month period ended September 30, 2001 was $8.8 million and for the corresponding period ended September 30, 2000 was $8.6 million. SG&A was higher due to increased provisions for employee retirement plans and professional services. Depreciation, Depletion and Amortization DD&A for the nine months ended September 30, 2001 was $4.6 million, a decrease of $1.4 million, or 23.0%, over the comparable period in 2000. The decrease was due to asset sales and the impact of taking the Zemex Mica and calcium aluminate plants out of service. Operating Income Operating income for the nine-month period ended September 30, 2001 was $1.9 million, compared to $1.3 million for the same period in 2000. Interest Income Interest income for the nine months ended September 30, 2001 was $77,000, decreased by $41,000 from the same period in 2000. Interest Expense Interest expense for the nine months ended September 30, 2001 was $0.7 million, $1.3 million, or 62.5%, lower than in the same period in 2000 as a result of decreased indebtedness throughout the respective periods. Other Income (Expense), Net The Corporation recorded other income of $0.6 million for the nine months ended September 30, 2001, compared to an expense of $3.0 million for the same period in 2000. The 2001 income arose from the sale of the talc plants and insurance proceeds reflecting the settlement of a long outstanding business interruption claim related to the previously sold metal powders group. The 2000 expense was mainly due to the recognition of $3.2 million of expense in connection with the early redemption of its Senior Secured Notes in March 2000. 12 Provision for (Recovery of) Income Taxes The Corporation recorded an income tax provision of $0.5 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2000, the Corporation recognized an income tax benefit of $2.0 million from continuing operations. Net Income (Loss) As a result of the factors discussed above, the Corporation recorded a net income of $1.3 million for the nine months ended September 30, 2001 compared to $1.8 million net loss from continuing operations for the same period ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Cash Flow from Operations During the first nine months of 2001, the Corporation generated cash flow from operations of $2.6 million as compared to $1.6 million for the first nine months of 2000. Non-cash working capital consumed $2.8 million cash in the first nine months of 2001; in the corresponding period in 2000, non-cash working capital items generated $3.0 million of cash from operations. The consumption is due to an increase in inventories and a decrease in accounts payable offset by an increase in accrued liabilities. The Corporation had working capital of $10.3 million at September 30, 2001 compared to $4.8 million at December 31, 2000. The Corporation currently has $15.0 million in existing credit facilities. Under the current arrangements this amount will be reduced to $10 million in December 2001. The Corporation is negotiating with its bankers to increase its credit facilities to $30 million. If successful, the increased credit will be used for acquisition opportunities as they present themselves. The increase in the credit facilities is not required to meet operational cash requirements. The Corporation's cash flow from operations is in excess of its capital and operational requirements. It is the opinion of management that there are sufficient sources of funds available to meet its anticipated cash requirements. ITEM 3 - MARKET RISK Market risk represents the risk of loss that may impact the consolidated financial statements of the Corporation due to adverse changes in financial market prices and rates. The Corporation's market risk is primarily a function of potential fluctuations in interest rates and aluminum prices. Management monitors the movements in interest rates and performs a periodic sensitivity analysis on aluminum prices and, on that basis, decides on the appropriate measures to take. Current prices and interest rates are such that management believes that no measures need be taken at this time. The Corporation does not hold or issue financial instruments for trading purposes. A discussion of the Corporation's financial instruments is included in the financial instruments note to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10K for the year ended December 31, 2000. 13 CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical matters, the matters discussed in this report are forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from targeted or projected results. Factors that could cause actual results to differ materially include, among others, fluctuations in aluminum prices, problems regarding unanticipated competition, processing, access and transportation of supplies, availability of materials and equipment, force majeure events, the failure of plant equipment or processes to operate in accordance with specifications or expectations, accidents, labor relations, delays in start-up dates, environmental costs and risks, the outcome of acquisition negotiations and general domestic and international economic and political conditions, as well as other factors described herein or in the Corporation's filings with the Commission. Many of these factors are beyond the Corporation's ability to predict or control. Readers are cautioned not to put undue reliance on forward looking statements. 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Refer to the 2000 Annual Report filed on Form 10-K ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K Exhibits None * * * * * Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated this 7th day of November, 2001. ZEMEX CORPORATION (Registrant) By: /s/ ALLEN J. PALMIERE ---------------------------------------------- Allen J. Palmiere Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer and authorized signatory) 15