UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
One) THE SECURITIES EXCHANGE ACT OF 1934
[X]
For the quarterly period ended June 30, 1995
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7276
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EXOLON-ESK COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-0427000
---------------------- ----------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1000 East Niagara Street, Tonawanda, New
York 14150
----------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(716) 693-4550
----------------------------------------
(Registrant's telephone number,
including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark 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 12 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 August 11, 1995, the registrant had outstanding 481,995
shares of $1 par value Common Stock and 512,897 shares of $1
par value Class A Common Stock.
Total Pages: 20
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Exolon-ESK Company
Condensed Consolidated Balance Sheet
(in thousands except share amounts)
<CAPTION>
(Unaudited)
ASSETS June 30, December 31,
1995 1994
______________ _____________
Current assets:
<S> <C> <C>
Cash $20 $467
Accounts receivable (less allowance
for doubtful accounts $327 in 1995
and $307 1994) 8,854 6,936
Inventories 17,427 17,104
Prepaid expenses 302 399
Deferred income taxes 535 535
-------------- -------------
Total Current Assets 27,138 25,441
Investment in Norwegian joint venture 4,684 4,173
Property, plant and equipment, at cost 55,057 53,438
Accumulated depreciation (39,562) (38,043)
-------------- -------------
Net property, plant and equipment 15,495 15,395
Other assets 343 300
-------------- -------------
Total Assets $47,660 $45,309
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $2,000 $2,000
Current maturities of long-term 1,300 800
debt
Current maturities of capital 19 25
lease obligations
Accounts payable 4,634 2,805
Accrued expenses 1,538 1,622
Income taxes payable 956 135
-------------- -------------
Total Current Liabilities 10,447 7,387
-------------- -------------
Deferred income taxes 1,133 1,548
Long-term debt excluding current 12,300 14,900
installments
Other long-term liabilities 3,984 2,846
Stockholder' equity:
Preferred stock
Series A-19,364 shares issued 276 276
Series B-19,364 shares issued 166 166
Common stock of $1 par value
Authorized 600,000 shares 512,897
issued 513 513
Class A common stock of $1 par value
- Authorized 600,000 shares,
512,897 issued 513 513
Additional paid-in capital 4,345 4,345
Retained earnings 14,713 13,545
Cumulative translation adjustment (362) (362)
Treasury stock, at cost (368) (368)
-------------- -------------
Total Stockholders' Equity 19,796 18,628
-------------- -------------
Total Liabilities and Stockholders' $47,660 $45,309
Equity ============== =============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Exolon-ESK Company
Condensed Statements of Consolidated Income
Unaudited
(in thousands except per share amounts)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net Sales $17,131 $15,252 $34,308 $29,407
Cost of Goods Sold 13,209 12,093 26,608 23,604
------- ------- ------- -------
Gross Profit Before
Depreciation 3,922 3,159 7,700 5,803
------- ------- ------- -------
Depreciation 762 780 1,524 1,561
Selling, general & administra-
tive expenses 1,329 1,273 2,563 2,484
Research and development 4 14 22 26
------- ------- ------- -------
2,095 2,067 4,109 4,071
------- ------- ------- -------
Operating Income 1,827 1,092 3,591 1,732
Other Expenses:
Equity in (Earnings) before
income taxes of Norwegian
Jt. Venture (281) (21) (511) (66)
Interest expense 379 346 709 694
Miscellaneous expense 47 402 191 540
------- ------- ------- -------
145 727 389 1,168
------- ------- ------- -------
Earnings Before Income Taxes
and Cumulative Effect of
Accounting Change 1,682 365 3,202 564
Income tax expense 668 290 1,250 368
------- ------- ------- -------
Earnings Before Cumulative
Effect of Accounting Change 1,014 75 1,952 196
Cumulative Effect of Accounting
Change (net of income tax
benefit) - - 762 -
------- ------- ------- -------
Net Earnings $1,014 $75 $1,190 $196
======= ======= ======= =======
PER COMMON SHARE:
Earnings before cumulative
effect of accounting change $1.04 $0.07 $2.00 $0.18
Cumulative effect of
accounting change - - 0.79 -
------- ------- ------- -------
Net Earnings $1.04 $0.07 $1.21 $0.18
======= ======= ======= =======
PER CLASS A COMMON SHARE:
Earnings before cumulative
effect of accounting change $0.98 $0.06 $1.88 $0.17
Cumulative effect of
accounting change - - 0.74 -
------- ------- ------- -------
Net Earnings $0.98 $0.06 $1.14 $0.17
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Exolon-ESK Company
Condensed Statements of Consolidated Cash Flows
Unaudited
(in thousands)
Six Months Ended
<CAPTION> June 30,
1995 1994
--------- ---------
<S> <C> <C>
Cash Flow from Operating Activities:
Net earnings $1,190 $196
Adjustments to reconcile net
income to net cash pro-
vided by operating activities:
Depreciation 1,524 1,561
Cumulative effect of change
in accounting for post-
retirement benefits 762 -
Equity in (earnings) of
Norwegian joint venture (511) (53)
Change in Assets and Liabilities:
(Increase) decrease in:
Accounts receivable (1,918) 188
Inventories (323) 2,120
Prepaid expenses 97 (126)
Deferred income taxes - (1)
Other assets (43) (12)
(Decrease) Increase in:
Accounts payable 1,829 652
Accrued expenses (84) 126
Income taxes payable 821 (447)
Deferred income taxes (415) (4)
Other long-term liabilities 376 (17)
------- -------
Net Cash Provided by Operating
Activities 3,305 4,183
Cash Flow from Investing Activities:
Additions to property, plant and
equipment (1,624) (773)
------- -------
Net Cash (Used) for Investing (1,624) (773)
Activities
Cash Flow from Financing Activities:
Repayments on long-term construction
financing loans and revolving credit
agreement (2,100) (3,500)
Principal (repayments) on capital
lease obligations (6) 19
Dividends paid (22) (22)
------- -------
Net Cash (Used) by Financing
Activities (2,128) (3,503)
Net (decrease) in cash (447) (93)
Cash at beginning of period 467 113
------- -------
Cash at end of period $20 $20
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Exolon-ESK COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 The financial information is prepared in conformity with
generally accepted accounting principles and such principles are
applied on a basis consistent with those reflected in the 1994 Form
10-K filed with the Securities and Exchange Commission. The financial
information included herein, has been prepared by management without
audit by independent certified public accountants. The information
furnished includes all adjustments and accruals consisting only of
normal recurring accrual adjustments which are in the opinion of
management, necessary for a fair presentation of results for the
interim period ended June 30, 1995.
NOTE 2 Through a wholly-owned non-operating subsidiary, the
Company's 50% interest in the Norwegian joint venture is recorded on
the equity method for financial reporting purposes. The Company's
proportionate share of the venture's net sales and income before
income taxes together with the subsidiary's net income (in thousands)
are as follows:
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
__________________ ________________
<CAPTION>
Joint Venture: 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net Sales $2,022 $1,446 $3,870 $2,863
Income before income
taxes 230 21 511 66
Net Income 166 21 368 53
</TABLE>
NOTE 3 The following are the major classes of inventories (in
thousands) as of June 30, 1995 and December 31, 1994 :
<TABLE>
<CAPTION> June 30, 1995 December 31,
(Unaudited) 1994
___________ ___________
<S> <C> <C>
Raw Materials $2,162 $3,051
Semi-Finished and
Finished Goods 16,232 15,085
Supplies and Other 1,116 1,051
---------- -----------
19,510 19,187
Less: LIFO Reserve (2,083) (2,083)
---------- -----------
$17,427 $17,104
========== ===========
</TABLE>
NOTE 4 The Company entered into a Credit Agreement on December 22,
1992 with a U.S. bank, providing for borrowings up to $10,000,000
under the revolving portion of the agreement, a $4,000,000, 5 year
term loan and for borrowing up to $2,000,000 under a demand line of
credit.
At June 30, 1995 borrowings of $3,400,000 were outstanding
under the revolving portion, borrowings of $2,200,000 were outstanding
under the term loan portion and borrowings of $2,000,000 were
outstanding under the demand line of credit portion of the U.S. Credit
Agreement.
The Company's Canadian subsidiary has a $1,000,000 (Canadian
funds) operating demand loan available as part of a credit facility
provided by a Canadian bank. Borrowings outstanding at June 30, 1995
were $25,000 (Canadian funds).
The Company is liable for making payments with respect to
$8,000,000 of Industrial Revenue Bonds issued by the Village of
Hennepin, Illinois and purchased by an insurance company upon
refinancing of the bonds on January 22, 1993. The bonds mature on
January 1, 2018.
<TABLE>
<CAPTION>
Long Term Debt (in thousands) June 30, December
Consists of: 1995 31, 1994
(Unaudited)
__________ _________
<S> <C> <C>
Revolving Credit Agreement
with a U.S. bank. Interest
at prime rate plus 1/4% or
LIBOR plus 2 1/2% (9.00% at
June 30, 1995). $ 3,400 $ 5,100
Term Loan Agreement with a
U.S. Bank. Interest at prime
rate plus 1/2% or LIBOR plus
2 3/4% (9.25% at June 30,
1995) 2,200 2,600
Industrial Revenue Bond held
by an insurance company.
Interest at a fixed rate of 8
7/8%. Bond maturity is 8,000 8,000
January 15, 2018. ---------- ---------
$ 13,600 $ 15,700
Less Current maturities 1,300 800
---------- ---------
$12,300 $14,900
========== =========
</TABLE>
NOTE 5 The Company provides certain healthcare and life insurance
benefits to eligible retired employees and their spouses.
Participants generally become eligible for these benefits after
achieving certain age and years of service requirements. These
benefits are subject to deductibles, co-payment provisions and other
limitations. The Company may amend or change the plan periodically.
Effective January 1, 1993, the Company adopted for its U.S.
operations only, Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," which requires that the estimated cost of postretirement
benefits be accrued over the period earned. Prior to 1993, the
Company recognized the costs of these benefits on the pay-as-you-go
basis. The Company's current policy is to fund these benefits on a
pay-as-you-go basis.
The Company's Canadian subsidiary also provides certain
healthcare and life insurance benefits to eligible retired employees
and their spouses. Participants generally become eligible for these
benefits after achieving certain age and years of service
requirements. The Company adopted SFAS No. 106 effective January 1,
1995 for its Canadian subsidiary and recognized the initial obligation
as a one-time, after-tax charge to earnings of $762,000 in the period
ended March 31, 1995.
The accumulated post-retirement benefits obligation at
January 1, 1995 for the Canadian subsidiary includes the following (in
thousands):
Retirees and beneficiaries $894
Fully eligible active participants 274
------
Total accumulated post-retirement $1,168
benefits obligation ======
The periodic post-retirement benefits cost for 1995 will
approximate $152,000 (Canadian) compared to $75,000 (Canadian) on the
pay-as-you-go basis.
For measuring the post-retirement benefits obligation as of
January 1, 1995, an 8% annual rate of increase in the health care
rates was assumed for the next 6 years and 6% per year thereafter.
Increasing the annual rate of increase in the health care rates by one
percentage point in each year would increase the accumulated post-
retirement benefits obligation by $107,000 and would increase the
periodic post-retirement benefits cost by $17,000 (Canadian). The
group life insurance premiums are not assumed to be subject to
increase. An assumed discount rate of 8% was used.
The Company's current policy is to fund these benefits on a
pay-as-you-go basis.
NOTE 6 Commitments
(a) Lease Agreements
The Company leases certain machinery and equipment under
capital and operating leases. Total minimum lease payments due
through 1998 are approximately $1,097,000 at June 30, 1995.
(b) Royalty Agreements
The Company has a royalty agreement covering production of
crude aluminum oxide at its Thorold, Ontario plant using process
technology acquired as part of the construction and completion of a
furnace plant. A separate royalty agreement covers the production of
certain specialty products for the refractory markets. The agreements
are for a period of 10 years each and expire July 31, 1996 and April
30, 2001 respectively. The royalty expense in U.S. dollars amounted
to $311,000 and $279,000 in the six months ended June 30, 1995 and
1994, respectively.
NOTE 7 Contingencies
a. Environmental Issues
Hennepin, Illinois Plant
By letter dated September 28, 1992 the Illinois
Environmental Protection Agency ("IEPA") informed the Company that
certain alleged non-compliance with the Illinois Environmental
Protection Act ("Act") had been referred to the Office of the Illinois
Attorney General ("IAG") for the preparation of a formal enforcement
complaint. On June 25, 1993, the Company received a Notice of
Violation letter from the United States Environmental Protection
Agency ("EPA") with regard to alleged violations of Federal air
quality regulations at the plant. Both of these letters allege that
the Company, has violated and continues to violate certain conditions
of the plant's air operating permit and related statutory and
regulatory requirements.
On April 25, 1994, a Civil Complaint (the "Complaint") was
brought by the State of Illinois in the Tenth Judicial Circuit Court
for Putnam County, Illinois (No. 94-CH-3), against the Company under
the title People of the State of Illinois ex. rel. Roland W. Burris v.
Exolon-ESK Company relating to alleged violations under the Act.
On June 27, 1994, the Company received a Notice of Violation
letter from the EPA with regard to alleged violations of special
conditions #6(a) and #6(c)(iv) of its Operating Permit relating to the
removal of particulates from the Hennepin plant off-gas. In
addition, the EPA also alleged violation of the Clean Air Act in that
the Company has not obtained an appropriate permit for the Hennepin
plant.
On October 6, 1994, the Company entered into a Consent Order
(the "Consent Order") with the IAG and the IEPA in complete settlement
of the violations alleged in the Complaint. The Consent Order
provides a schedule for the Company to install a Continuous Emissions
Monitoring System ("CEMS") and to implement the required Best
Available Control Technology (BACT) for air emissions, pursuant to an
IEPA approved construction and operating permit. The Company is
applying for a construction permit to implement the BACT.
Under the terms of the Consent Order the Company has also
agreed to pay a civil penalty of $1,300,000, payable in installments
of $260,000 each on November 1, 1994, April 1, 1995, February 1, 1996,
January 1, 1997 and November 1, 1997. The Company recorded an
expense of $1,300,000 in the year ended December 31, 1994, which
represents the civil penalty.
In order to comply with the Consent Order and complete
facility improvements, the Company expects to incur capital costs
within the range from $11,000,000 to $15,000,000 over the next two
years. The Company expects to finance the costs of the required
capital improvements through an underwritten credit enhanced bond
offering possibly on a tax-exempt basis. The Company will seek to
obtain a modification of its Industrial Revenue Bond Agreement to
allow for the required capital expenditures under the Consent Order.
Pursuant to its statutory authority, the EPA could pursue a
number of enforcement options against the Company including issuance
of an administrative order asserting penalties or commencement of a
civil action seeking injunctive relief and non-compliance penalties.
However, because the IEPA Consent Order provides for a systematic
approach to control of the emissions that would be the subject of an
EPA order, and because the amount of the civil penalties payable by
the Company under the Consent Order was determined using the same
models that would be used to determine the amount of any penalty that
the EPA might seek, the Company expects that the EPA may determine
that the Consent Order constitutes an acceptable resolution of the
problem and exercise its discretion not to take enforcement action
against the Company. If the EPA were to take an enforcement action,
the Company believes it has meritorious defenses.
Norwegian Joint Venture
The Government of Norway has held discussions with certain
Norwegian industries including the abrasive industry concerning the
implementation of reduced gaseous emission standards. The Company's
joint venture is participating in these discussions to help achieve
the Norwegian Government's objectives as well as assuring long term
economic viability for the joint venture.
The Company's joint venture has appointed a project group to
complete a study and define a project to minimize sulfur and dust
emissions which was presented to the Norwegian State Pollution Control
Authority on March 1, 1995. The authority will need one year for the
internal study of the report and a decision on the method for
environmental compliance should be implemented by March 1996. The
corrective actions proposed by the joint venture included capital
investments costing approximately 4.5 million krone (approximately
$705,000 at the June 30, 1995 exchange rate). The full costs
associated with the implementation of these corrective actions are, as
yet, not known as a result of various alternatives presently being
considered by the Norwegian joint venture.
b. Legal Matters
The Company is currently involved in certain legal matters
as described in (a) above, and as further described below including
certain employment and environmental matters. The Company is unable
to determine at this time if it will be subject to civil or criminal
penalties and if received, the potential amount of such penalties. In
addition to the potential liabilities that the Company may experience
in the legal proceedings brought by the Department of Justice, third
parties or any that may be initiated by the EPA, the Company may incur
material expenses in defending against the actions, and it may incur
such expenses even if it is found to have no liability for any of the
charges asserted against it.
In June 1993, the Company commenced a legal action in
Ontario, Canada Court (General Division) against one of its former
officers and certain former employees of Exolon-Canada on various
charges related to allegations that they defrauded the Company and
Exolon-Canada of money, property and services over many years. The
Company is seeking $2,000,000 in damages together with such other
damages that may be determined. A reasonable estimation of the
Company's potential recovery, if any, cannot be made at this time.
In February 1994, the Company, its President, its former
Executive Vice President and certain other parties were the subject of
an indictment under federal antitrust laws (the "Antitrust
Proceedings") which alleged, among other things, that: sometime prior
to the mid-1980's and continuing into 1992, the defendants and unnamed
co-conspirators entered into and engaged in a combination and
conspiracy to fix the prices of artificial abrasive grain in restraint
of interstate trade; during the same period, the Company and its
President willfully violated the terms of a permanent injunction dated
November 16, 1948 on the Company and its officers against entering
into conspiracies or combinations to fix prices of artificial abrasive
grain; and that the Company's former Executive Vice President
destroyed documents and made false declarations in response to a grand
jury subpoena issued in an investigation of price fixing for
artificial abrasive grain.
On December 8, 1994, in an ex parte proceeding the U.S.
Defense Logistics Agency (the "DLA") issued a Memorandum of Decision
that temporarily suspended the defendants in the Antitrust Proceedings
from contracting with the U.S. Government under procurement or non-
procurement programs pending the completion of the Antitrust
Proceedings. On January 31, 1995, the DLA amended the Memorandum of
Decision (as amended, the "DLA Suspension") to include under the DLA
Suspension sixteen alleged affiliates of the defendants including the
Company's subsidiary, Exolon-ESK Company of Canada Ltd., and Orkla-
Exolon A/S K/S, the Norwegian partnership in which the Company's
subsidiary, Norsk Exolon A/S, has a 50% partnership interest. The DLA
Suspension alleges as causes for the suspension (I) the indictments of
the parties in the Antitrust Proceedings, and (ii) on separate
occasions in October and November of 1994 the Company's President (who
has been indefinitely suspended pending the outcome of the Antitrust
Proceedings) and former Executive Vice President individually made
alleged false certifications in DLA sales contracts denying the
existence within the past three years of any indictments of the kind
involved in the pending Antitrust Proceedings.
In general, the DLA Suspension provides, during the term of
the suspension, that the suspended parties will be prohibited from
entering into new contracts, or renewing or extending old contracts
with the U.S. government or its agencies, unless the head of the
contracting agency states in writing that there is a compelling reason
to do so; that the suspended parties may not conduct business with the
U.S. Government as an agent or representative of other contractors;
that no U.S. Government contractor may award a suspended party a
subcontract in excess of $25,000 unless there is compelling reason to
do so and the contracting party complies with certain notification
provisions; and, that each suspended party's relationship to any
organization doing business with the government will be examined to
determine the impact of those ties on the responsibility of the other
organization to be a government contractor or subcontractor.
At this time, the Company is not able to predict the amount
and nature of criminal penalties or fines that might be imposed
against the Company or its President or former Executive Vice
President, if any of them were convicted of any of the charges alleged
in the Antitrust Proceedings, but if the Antitrust Proceedings were
resolved in a manner adverse to the Company, such penalties or fines
could be substantial and could materially adversely affect the
Company. The Company believes there are meritorious defenses to the
alleged violations and, accordingly, the Company believes that the DLA
Suspension against it will be lifted at the conclusion of the
Antitrust Proceedings. The Company intends to vigorously defend
against the Antitrust Proceedings and to seek to have the DLA
Suspension against it lifted as soon as possible.
The DLA Suspension, for so long as it remains in force, will
prevent the Company from purchasing crude abrasive grains from U.S.
Government stockpiles, but is not otherwise expected to impact the
Company's operations as the Company does not otherwise deal with the
U.S. Government as a contractor or subcontractor. As long as there is
an adequate supply of crude abrasive grains and the U.S. Government
does not sell from its stockpiles of such grains at below market
prices, the DLA Suspension is not expected to have a material adverse
effect on the Company's operations. Presently, and for at least the
next one year period, the Company expects crude abrasive grains to be
in adequate supply. However, the Company is unable to predict under
what circumstances the U.S. Government might choose to sell from its
stockpiles, and if it were to undertake an aggressive program of
selling abrasive grains at below market prices the Company could be
placed at a disadvantage in relation to its competitors.
On October 18, 1994, a law suit was commenced in the U.S.
District court for the Eastern District of Pennsylvania (No. 94-CV-
6332) under the title "General Refractories Company v. Washington
Mills Electro Minerals Corporation and Exolon-ESK Company." The suit
purports to be a class action seeking treble damages from the
defendants for allegedly conspiring with unnamed co-conspirators
during the period from January 1, 1985 through the date of the
complaint to fix, raise, maintain and stabilize the price of
artificial abrasive grains and to allocate among themselves their
major customers or accounts for purchases of artificial grains, in
violation of Section 1 of the Sherman Act, 15 U.S.C. Section 1. The
plaintiffs allegedly paid more for abrasive grain products than they
would have paid in the absence of such anti-trust violations and were
allegedly damaged in an amount that they are presently unable to
determine. On or about July 17, 1995, a law suit captioned ``Arden
Architectural Specialties, Inc. v. Washington Mills Electro Minerals
Corporation and Exolon-ESK Company, '' (95-CV-05745(m)), was commenced
in the United States District Court for the Western District of New
York. The Arden Architectural Specialties complaint purports to be a
class action that is based on the same matters alleged in the General
Refractories complaint. The Company believes that it has meritorious
defenses to the allegations, and it intends to vigorously defend
against the charges.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Comparison of the Six Months Ended June 30, 1995 with the Six Months
Ended June 30, 1994
Net Sales. Total net sales increased by 17% to $34,308,000 during
the six months ended June 30, 1995 from $29,407,000 in the first six
months of 1994. The $4,901,000 increase is principally a result of an
18% increase in shipment volume of the Company's primary manufactured
and purchased products in the first half of 1995 when compared to the
first six months of 1994 as a result of the continuation of a strong
steel and automotive market within the U.S.
Gross Profit. Gross profit prior to depreciation expense was
$7,700,000 in the first six months of 1995 when compared to $5,803,000
in the first six months of 1994. As a percent of net sales, gross
margins were 22% in the first six months of 1995 compared to 20% in
the same period of 1994.
Operating Expenses. Total operating expenses increased to
$4,109,000 in the six months ended June 30, 1995 from $4,071,000 in
the same period of 1994. Operating expenses as a percent of sales
declined to 12% in the first half of 1995 compared to 14% in the first
half of 1994. The Company's largest portion of operating expense,
selling, general and administrative expense, increased marginally to
$2,563,000 in the first six months of 1995 when compared to $2,484,000
during the first six months of 1994. As a percent of net sales,
selling and general and administrative expense decreased to 7% in the
1995 first half from 8% in the same period of 1994.
Operating Income. Operating income increased by 107% to
$3,591,000 in the six months ended June 30, 1995 from $1,732,000 in
the six months ended June 30, 1994, principally a result of the 1995
increase in net sales and improved gross margins.
Norwegian Joint Venture. The Company's Norwegian joint venture,
Orkla Exolon A/S, reported the Company's 50% share in the pre-tax
earnings of the venture was $511,000 for the six months ended June 30,
1995 versus $66,000 in the six months ended June 30, 1994. The
Company's share in the venture's net sales was $3,870,000 in the six
months ended June 30, 1995 when compared to $2,863,000 in the six
months ended June 30, 1994. The 35% increase in net sales resulted
primarily from an increase in shipment volume, an improved product mix
and increases in selling prices. The joint venture's gross margins,
prior to depreciation, increased to 28% for the six months ended June
30, 1995 versus 16% for the six months ended June 30, 1994 principally
due to increased operating efficiency resulting from increased sales,
an improved product mix and overhead cost reductions.
Interest and Miscellaneous Expense. Interest expense increased
marginally in the first six months of 1995 due to higher average
interest rates. Average borrowing levels of the Company's bank debt
were reduced by approximately 1.5 million in the first six months of
1995. Miscellaneous expense decreased by $349,000 in the six months
ended June 30, 1995 compared to the first six months of 1994.
Income Tax. The Company's effective tax rate was 39% for the six
months ended June 30, 1995 when compared to 65% for the six months
ended June 30, 1994. The decrease is primarily a result of the non-
recurrence of $350,000 of non-deductible environmental reserves as
recorded in the six months ended June 30, 1994 and the tax effects
therefrom.
Cumulative Effect of Accounting Change. The Company adopted
Statement of Financial Accounting Standards No. 106, ``Employers'
Accounting for Postretirement Benefits Other Than Pensions '', for its
Canadian operations, effective January 1, 1995. The Standard requires
that the estimated cost of postretirement benefits be accrued over the
period earned. Prior to 1995, the Company's Canadian subsidiary
recognized the costs of these benefits on the pay-as-you-go basis.
The Company's current policy is to fund these benefits on a pay-as-
you-go basis. The Company recognized the obligation due to this
adoption as a one-time, after tax charge to earnings of $762,000 in
the first three months of 1995. As a result of this accounting method
change, periodic post retirement benefit costs for 1995 will
approximate $152,000 (Canadian) compared to $75,000 (Canadian) on a
pay-as-you-go basis.
Comparison of the Three Months Ended June 30, 1995 with the Three
Months Ended June 30, 1994
Net Sales. Total net sales increased by 12% to $17,131,000 in
the three months ended June 30, 1995 from $15,252,000 in the three
months ended June 30, 1994. Shipment volume of the Company's primary
manufactured and purchased products increased by approximately 15% in
the second quarter of 1995, when compared to the same period during
1994.
Gross Profit. Gross profit prior to depreciation expense was
$3,922,000 in the three months ended June 30, 1995 when compared to
$3,159,000 in the three months ended June 30, 1994. As a percent of
net sales, gross margins were 23% in the second quarter of 1995
compared to 21% in the second quarter of 1994. The 1995 increase is
primarily a result of the increase in net sales experienced by the
Company in the second quarter of 1995.
Operating Expenses. Total operating expenses increased
marginally in the three month period ended June 30, 1995 from the same
period of 1994. Selling, general and administrative expense increased
$56,000 in the quarter ended June 30, 1995 when compared to the
quarter ended June 30, 1994. As a percent of net sales, selling,
general and administrative expense decreased to 7% in the second
quarter of 1995 from 8% in the same period of 1994.
Operating Income. Operating income increased by $735,000 or 67%
to $1,827,000 in the second quarter of 1995 from $1,092,000 in the
second quarter of 1994, primarily as a result of the increase in sales
and gross profit. The increase in operating income was partially
offset by the increase in selling, general and administrative expense.
Norwegian Joint Venture. The Norweg ian joint venture Orkla
Exolon-A/S, reported the Company's 50% share in the pre-tax earnings
of the venture was $281,000 for the three months ended June 30, 1995
versus a pre-tax profit of $21,000 during the three months ended June
30, 1994. The Company's share in the venture's net sales was
$2,022,000 in the three months ended June 30, 1995 when compared to
$1,446,000 in the three months ended June 30, 1994. The 40% increase
in net sales resulted primarily from an increase in shipment volume
and an improved product mix.
Interest and Miscellaneous Expense. Interest expense increased
by $33,000 to $379,000 in the second quarter of 1995 from $346,000
during the second quarter of 1994. The 9% increase resulted from
higher average interest rates on the Company's revolver and operating
lines of credit during the second quarter of 1995 when compared to the
second quarter of 1994. Miscellaneous expense decreased by $355,000
in the three months ended June 30, 1995. The decrease in
miscellaneous expense is principally a result of the Company's
recording of $350,000 of environmental reserves in the second quarter
of 1994.
Liquidity and Capital Resources
As of June 30, 1995, working capital (current assets less current
liabilities) has decreased to $16,691,000, when compared to
$18,054,000 as of December 31, 1994. Accounts receivable increased by
$1,918,000 as of June 30, 1995 versus 1994 year end primarily as a
result of the increase in net sales during the first six months of
1995 versus 1994. Accounts payable and income taxes payable increased
by $1,829,000 and $821,000, respectively as of June 30, 1995 versus
December 31, 1994. The adverse effect of the payable increases were
substantially offset by the $2,100,000 decrease in long-term debt
recorded in the first six months of 1995.
For the six months ended June 30, 1995, net cash provided by
operating activities was $3,305,000. Outstanding bank indebtedness
decreased by $2,100,000, and cash reserves decreased by $447,000. Net
cash provided by operating activities was sufficient to fund
$1,624,000 of capital expenditures in the six months ended June 30,
1995.
The Company's current ratio decreased to 2.6 to 1.0 at June 30,
1995 from 3.5 to 1.0 as of December 31, 1994. The ratio of total
liabilities to shareholder's equity was 1.4 to 1.0 as of June 30, 1995
and as of December 31, 1994. Management believes that the cash
provided by operations and long-term borrowing arrangements will
provide adequate funds for current commitments and other requirements
in the near future.
The Company has been directed by the Illinois Environmental
Protection Agency ("IEPA") to control its sulfur emissions at its
Hennepin, Illinois silicon carbide furnace plant. For further
information see Note 7(a) to the Notes to Consolidated Financial
Statements beginning on page 7, which is incorporated herein by
reference.
In June 1993, the Company commenced a legal action in Ontario,
Canada Court (General Division) against one of its former officers and
certain former employees of Exolon-Canada on various charges related
to allegations that they defrauded the Company and Exolon-Canada of
money, property and services over many years. The Company is seeking
$2,000,000 in damages together with such other damages that may be
determined. A reasonable estimation of the Company's potential
recovery, if any, cannot be made at this time.
In February 1994 the U.S. Department of Justice brought an
indictment under federal antitrust laws against the Company,
Washington Mills Electro Minerals Corporation and certain officers of
the Company (the ``Antitrust Proceedings''), which alleged that from
sometime prior to the mid-1980's and continuing into 1992 the
defendants engaged in a conspiracy to fix the prices of artificial
abrasive grain in violation of the Sherman Act and that these
activities constituted a willful violation of a 1948 injunction
against a predecessor of the Company. The Company is not able to
predict the amount and nature of any criminal penalties or fines,
which could be significant, that might be imposed on it or its former
officers if convicted under these charges. However, the Company
believes there are meritorious defenses to the alleged violations, and
it intends to vigorously defend against the charges.
On December 8, 1994, in an ex parte proceedings the U.S. Defense
Logistics Agency (the ``DLA'') issued a Memorandum of Decision that
temporarily suspended the defendants in the Antitrust Proceedings from
contracting with the U.S. Government under procurement or non-
procurement programs pending the completion of the Antitrust
Proceedings. On January 31, 1995, the DLA amended the Memorandum of
Decision (as amended, the ``DLA Suspension'') to include under the DLA
Suspension sixteen alleged affiliates of the defendants including the
Company's subsidiary, Exolon-ESK Company of Canada, Ltd., and Orkla-
Exolon A/S K/S, the Norwegian partnership in which the Company's
subsidiary, Norsk Exolon A/S, has a 50% interest. The DLA Suspension
alleges as causes for the suspension (I) the indictments of the
parties in the Antitrust Proceedings, and (ii) on separate occasions
in October and November of 1994 the Company's President (who has been
indefinitely suspended pending the outcome of the Antitrust
Proceedings) and former Executive Vice President individually made
alleged false certifications in DLA sales contracts denying the
existence within the past three years of any indictments of the kind
involved in the pending Antitrust Proceedings. For a more complete
discussion of the Antitrust Proceedings and the DLA Suspension,
reference is made to Note 7(b). to the Notes to Consolidated Condensed
Financial Statements beginning on page 9, which is hereby incorporated
herein by reference.
The DLA Suspension, for so long as it remains in force, will
prevent the Company from purchasing crude abrasive grains from U.S.
Government Stockpiles, but is not otherwise expected to impact the
Company's operations as the Company does not otherwise deal with the
U.S. Government as a contractor or subcontractor. As long as there is
an adequate supply of crude abrasive grains and the U.S. Government
does not sell from its stockpiles of such grains at below market
prices, the DLA Suspension is not expected to have a material adverse
effect on the Company's operations. Presently, and for at least the
next one year period, the Company expects crude abrasive grains to be
in adequate supply. However, the Company is unable to predict under
what circumstances the U.S. Government might choose to sell from it
stockpiles, and if it were to undertake an aggressive program of
selling abrasive grains at below market prices the Company could be
placed at a disadvantage in relation to its competitors.
In October 1994, a law suit purporting to be a class action was
brought by General Refractories Company against Washington Mills
Electro Minerals Corporation, the Company and unknown co-conspirators
for alleged price fixing in the artificial abrasive grains market in
violation of the U.S. anti-trust laws during the period from January
31, 1985 through the date of the complaint. The complaint seeks
recovery of treble damages but alleges that the amount of damages are
undetermined. On or about July 17, 1995, a law suit captioned ``Arden
Architectural Specialties, Inc. v. Washington Mills Electro Minerals
Corporation and Exolon-ESK Company, ''(95-CV-05745(m)), was commenced
in the United States District Court for the Western District of New
York. The Arden Architectural Specialties complaint purports to be a
class action that is based on the same matters alleged in the General
Refractories complaint. The Company believes that it has meritorious
defenses to the complaint, and it intends to vigorously defend against
the action.
In addition to the potential liabilities that the Company may
experience in the legal proceedings brought against it, the Company
may incur material expenses in defending against the actions, and it
may incur such expenses even if it is found to have no liability for
any of the claims or charges asserted against it.
It is anticipated that the financing required for capital
expenditures including capital expenditures for environmental matters
would be made available from operations and the Company's lending
sources.
PART II - OTHER INFORMATION<PAGE>
Item 1. Legal Proceedings
a. Environmental Proceedings - Hennepin, Illinois plant
Reference is made to the information presented under the
heading "Environmental Issues - Hennepin, Illinois Plant" appearing
under Note 7(a) to the Notes to Consolidated Financial Statements
beginning on page 7 of this Form 10-Q Report, which is hereby
incorporated herein by reference.
b. Exolon-ESK Company and Exolon-ESK Company of Canada, Ltd. v.
Michael Perrotto, et al.
Reference is made to the information contained in "PART II,
Item 1. Legal Proceedings, under the heading "Exolon-ESK Company and
Exolon-ESK Company of Canada, Ltd. v. Michael Perrotto, et al." in the
Company's Form 10-Q Report for the period ended September 30, 1993,
which is hereby incorporated herein by reference.
c. Federal Proceedings
Reference is made to the information contained in Part I,
Item 3. Legal Proceedings under the heading "Federal Indictments"
contained in the Company's 1993 Form 10-K Report, which is hereby
incorporated herein by reference. The proceedings described
thereunder are hereinafter referred to as the ``Antitrust
Proceedings''.
Reference is made to the information concerning the DLA
Suspension contained in Note 7(b) ``Legal Matters '' of the Notes to
consolidated Financial Statements beginning on page 9 of this Form 10-
Q, which is hereby incorporated herein by reference.
On May 16, 1995, the Company and its former Executive Vice
President were indicted under 18 U.S.C. Section 1001 in Federal court
in the Eastern District of Virginia (Crim. No. 95-236-A) for an
allegedly false certification, which denied the existence within the
preceding three years of any indictments of the kind involved in the
pending Antitrust Proceedings, made by the Executive Vice President in
a DLA sales contract in November of 1994. After trial, which was
completed on August 1, 1995, a jury found both the Company and its
former Executive Vice President not guilty of all charges.
d. General Refractories Company v. Washington Mills Electro
Minerals Corporation and Exolon-ESK Company.
The description of a class action lawsuit relating to claims
under the Sherman Act brought by General Refractories Company against
Washington Mills Electro Mineral Corporation and the Company,
appearing under the heading ``Legal Matters'' under Note 7(b) to the
Notes to Consolidated Financial Statements on Page 10 of the Company's
Form 10-Q reported for the period ended March 31, 1995, is hereby
incorporated herein by reference. On or about July 17, 1995, a law
suit captioned ``Arden Architectural Specialties, Inc. v. Washington
Mills Electro Minerals Corporation and Exolon-ESK Company, '' (95-CV-
05745(m)), was commenced in the United States District Court for the
Western District of New York. The Arden Architectural Specialties
complaint purports to be a class action that is based on the same
matters alleged in the General Refractories complaint.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 4 of the Company's Form 10-Q for the
quarter ended March 31, 1995, which is hereby incorporated herein by
reference.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURE
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 thereunto duly authorized.
EXOLON-ESK COMPANY
/S/ J.A. Bernardoni
-------------------------------------
James A. Bernardoni, Acting Principal
Executive, Financial, and Accounting
Officer
/S/ J.A. Bernardoni
-------------------------------------
James A. Bernardoni, Acting Principal
Executive, Financial, and Accounting
Officer
Date: August 11, 1995
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
No. Description Reference
_______ ___________________________ _________________________
<S> <C> <C>
3A Restated Certificate of Exhibit 3A to the report
Incorporation on Form 10-K for the year
ended December 31, 1989*
3A(1) Certificate of Merger Exhibit 3A(1) to the
report on Form 10-K for
the year ended December
31, 1989*
3E Amendment to By-Laws dated Exhibit 3E to the report
March 23, 1991 on Form 10-Q for the
quarter ended March 23,
1991*
3F Certificate of Amendment of Exhibit 3F to the report
Restated Certificate of on Form 10-K for the year
Incorporation dated April ended December 31, 1994*
23, 1986
3G Certificate of Amendment of Exhibit 3G to the report
Restated Certificate of on Form 10-K for the year
Incorporation dated May 4, ended December 31, 1994*
1987
3H Amendment of Certificate of Exhibit 3H to the Report
Incorporation dated October on Form 10-Q for the
28, 1992 quarter ended September
30, 1992*
3I By-Laws Exhibit 3I to the report
on Form 10-K for the year
ended December 31, 1994*
4 Instruments Defining Rights Articles of
of Security Holders Incorporation, Exhibits
3A, 3B and 3C to the
report on Form 10-K for
the year ended December
31, 1989*
10D(23) Revolving Credit Agreement Exhibit 10D(23) to the
dated December 22, 1992 Report on Form 10-K for
the year ended December
31, 1992*
10D(24) Industrial Revenue Bond Exhibit 10D(24) to the
Agreement dated January 1, Report on Form 10-K for
1993. the year ended December
31, 1992*
10F Stockholder's Agreement Exhibit 10F to the report
dated as of April 26, 1984 on Form 10-K for the year
between the Registrant and ended December 31, 1989*
Wacker Chemical Corporation
10G Restated License Agreement Exhibit 10G to the report
dated as of April 26, 1984 on Form 10-K for the year
among Elektroschmelzwerk ended December 31, 1989*
Kempten GmbH, ESK
Corporation and the
Registrant
10H Distributorship Agreement Exhibit 10H to the report
dated April 27, 1984 on Form 10-K for the year
between Elektroschmelzwerk ended December 31, 1989*
Kempten GmbH and the
Registrant
10I Indemnification Agreement Exhibit 10I to the report
dated as of December 15, on Form 10-K for the year
1984 between Wacker ended December 31, 1989*
Chemical Corporation and
the Registrant
10K Contract between Theeb, Exhibit 10K to the
Ltd. and the Exolon-ESK Report on Form 10-K for
Company of Canada, Ltd. the year ended December
dated February 28, 1985 31, 1992*
10M Federal Indictments dated Exhibit 10M to the Report
February 11, 1994 on Form 10-K for the year
ended December 31, 1993*
11 Statement of computation of Page 20
per share earnings
15 Statement re Unaudited None
Interim Financial
Information
18 Letter re Change in None
Accounting Principles
19 Report Furnished to None
Security Holders
22 Published Report Regarding None
Matters Submitted to Vote
of Security Holders
23 Consents of Experts and None
Counsel
24 Power of Attorney None
27 Financial Data Schedule Submitted electronically
99 Conditional Exhibits None
* Incorporated herein by reference
</TABLE>
<PAGE>
<TABLE>
Exhibit 11
Exolon-ESK Company and Subsidiaries
Computation of Earnings Per Share
(In Thousands, Except Per Share Data)
<CAPTION> Three Months Six Months
Ended June 30, Ended June 30
1995 1994 1995 1994
______ ______ ______ ______
<S> <C> <C> <C> <C>
Net earnings $1,014 $75 $1,190 $196
Less Preferred Stock
Dividends:
Series A (6) (6) (11) (11)
Series B (6) (6) (11) (11)
------ ------ ------ ------
Undistributed earnings $1,002 $63 $1,168 $174
Net earnings attributable
to:
Common Stock (50.0%) 501 31.5 584 87
Class A Common Stock
(50.0%) 501 31.5 584 87
------ ------ ------ ------
$1,002 $63 $1,168 $174
====== ====== ====== ======
Net earnings per share of
Common Stock:
Primary $1.04 $0.07 $1.21 $0.18
Fully Diluted $1.01 $0.08 $1.18 $0.19
Net earnings per share of
Class A Common Stock:
Primary $0.98 $0.06 $1.14 $0.17
Fully Diluted $0.95 $0.07 $1.11 $0.18
Weighted Average Shares
Outstanding:
Primary:
Common Stock 482,000 482,000 482,000 482,000
Class A Common Stock 513,000 513,000 513,000 513,000
Fully Diluted:
Common Stock 504,000 504,000 504,000 504,000
Class A Common Stock 535,000 535,000 535,000 535,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET, CONDENSED STATEMENTS OF CONSOLIDATED INCOME AND
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOW AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 20,000
<SECURITIES> 0
<RECEIVABLES> 9,181,000
<ALLOWANCES> 327,000
<INVENTORY> 17,427,000
<CURRENT-ASSETS> 27,137,000
<PP&E> 55,057,000
<DEPRECIATION> (39,562,000)
<TOTAL-ASSETS> 47,660,000
<CURRENT-LIABILITIES> 10,447,000
<BONDS> 0
<COMMON> 1,026,000
0
442,000
<OTHER-SE> 18,328,000
<TOTAL-LIABILITY-AND-EQUITY> 47,660,000
<SALES> 34,308,000
<TOTAL-REVENUES> 34,308,000
<CGS> 26,608,000
<TOTAL-COSTS> 26,608,000
<OTHER-EXPENSES> 3,789,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 709,000
<INCOME-PRETAX> 3,202,000
<INCOME-TAX> 1,250,000
<INCOME-CONTINUING> 1,952,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 762,000
<NET-INCOME> 1,190,000
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.29
</TABLE>
