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 March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7276
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 May 12, 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.
THIS 10Q-A IS BEING FILED TO CORRECT AN INADVERTENT MISTAKE IN FORMAT-
TING OF THE 10Q FILED ON MAY 11, 1995.
<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 December 31,
March 31, 1995 1994
Current assets:
<S> <C> <C>
Cash $4 $467
Accounts receivable (less allowance
for doubtful accounts of $327 in 1995
and $307 in 1994) 8768 6936
Inventories 16,912 17,104
Prepaid expenses 405 399
Deferred income taxes 535 535
--------- --------
Total Current Assets 26,624 25,441
Investment in Norwegian joint venture 4,403 4,173
Property, plant and equipment, at cost 54,114 53,438
Accumulated depreciation (38,805) (38,043)
--------- ---------
Net property, plant and equipment 15,309 15,395
Other assets 343 300
--------- ---------
Total Assets $46,679 $45,309
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $195 $2,000
Current maturities of long-term debt 800 800
Current maturities of capital
lease obligations 25 25
Accounts payable 2,327 2,805
Accrued expenses 1,760 1,622
Income taxes payable 714 135
--------- ---------
Total Current Liabilities 5,821 7,387
--------- ---------
Deferred income taxes 1,135 1,548
Long-term debt excluding current
installments 17,000 14,900
Other long-term liabilities 3,941 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 13,699 13,545
Cumulative translation adjustment (362) (362)
Treasury stock, at cost (368) (368)
--------- ---------
Total Stockholders' Equity 18,782 18,628
--------- ---------
Total Liabilities and Stockholders' $46,679 $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 Ended
March 31,
1995 1994
<S> <C> <C>
Net Sales $17,177 $14,155
Cost of Goods Sold 13,399 11,511
--------- ---------
Gross Profit Before 3,778 2,644
Depreciation --------- ---------
Depreciation 762 781
Selling, general & administrative 1,234 1,211
expenses
Research and development 18 12
--------- ---------
2,014 2,004
--------- ---------
Operating Income 1,764 640
Other Expenses:
Equity in (Earnings) before income
taxes of Norwegian Jt. (230) (45)
Venture
Interest expense 330 348
Miscellaneous expense 144 138
--------- ---------
244 441
--------- ---------
Earnings Before Income Taxes
and
Cumulative Effect of 1,520 199
Accounting Change
Income tax expense 582 78
--------- --------
Earnings Before Cumulative Effect
of Accounting Change 938 121
Cumulative Effect of Accounting Change
(net of income tax benefit) 762 -
--------- ---------
Net Earnings $176 $121
========= =========
PER COMMON SHARE:
Earnings before cumulative effect
of Accounting Change $0.96 $0.11
Cumulative effect of Accounting
Change $0.79 -
--------- ---------
Net Earnings $0.17 $0.11
========= ========
PER CLASS A COMMON SHARE:
Earnings before cumulative effect
of accounting change $0.90 $0.11
Cumulative effect of $0.74 -
accounting change --------- ---------
Net Earnings $0.16 $0.11
========= =========
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)
<CAPTION>
Three Months ended
March 31,
1995 1994
<S> <C> <C>
Cash Flow from Operating Activities:
Net earnings $176 $121
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 762 781
Cumulative effect of change in
accounting for post-retirement
benefits 762 -
Equity in (earnings) of (230) (32)
Norwegian joint venture
Change in Assets and Liabilities:
(Increase) decrease in:
Accounts receivable (1,832) 207
Inventories 192 1,209
Prepaid expenses (6) (107)
Deferred income taxes - (1)
Other assets (43) (27)
(Decrease) Increase in:
Accounts payable (478) 14
Accrued expenses 138 (115)
Income taxes payable 579 (206)
Deferred income taxes (413) (4)
Other long-term liabilities 333 (28)
--------- ---------
Net Cash Provided (Used) by Operating (60) 1,812
Activities
Cash Flow from Investing Activities:
Additions to property, plant and (676) (333)
equipment --------- ---------
Net Cash (Used) for Investing (676) (333)
Activities
Cash Flow from Financing Activities:
Repayments on short-term line of
credit (1,805) (1,874)
Borrowings on long-term construction
financing loans and revolving
credit agreement 2,100 300
Principal (repayments) on capital
lease obligations - (3)
Dividends paid (22) (11)
--------- ---------
Net Cash Provided (Used) by Financing 273 (1,588)
Activities
Net (decrease) in cash (463) (109)
Cash at beginning of period 467 113
--------- ---------
Cash at end of period $4 $4
========= ========
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 March 31, 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
March 31
<CAPTION>
Joint Venture: 1995 1994
<S> <C> <C>
Net Sales $1,848 $1,417
Income before 230 45
income taxes
Net Income 166 32
</TABLE>
NOTE 3 The following are the major classes of inventories (in
thousands) as of March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Raw Materials $2,041 $3,051
Semi-Finished and 15,764 15,085
Finished Goods
Supplies and Other 1,190 1,051
--------- ---------
18,995 19,187
Less: LIFO Reserve (2,083) (2,083)
--------- ---------
$16,912 $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 March 31, 1995 borrowings of $7,400,000 were
outstanding under the revolving portion, borrowings of
$2,400,000 were outstanding under the term loan portion
and zero borrowings 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 March 31, 1995 were $125,000
(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) March 31, 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 $ 7,400 $ 5,100
LIBOR plus 2 1/2% (9.25% at
March 31, 1995).<PAGE>
Term Loan Agreement with a
U.S. Bank. Interest at prime
rate plus 1/2% or LIBOR plus
2 3/4% (9.5% at March 31, 2,400 2,600
1995)
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. --------- --------
$ 17,800 $ 15,700
Less Current maturities 800 800
--------- --------
$ 17,000 $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
$1,126,000 at March 31, 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
$180,000 and $95,000 in the three months ended March
31, 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 $730,000 at the March 31, 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.
On May 4, 1995, the Company received notice that it is
a target of a grand jury investigation in the Eastern
District of Virginia, which is investigating violations
of 18 U.S.C. Section 1001 based on allegedly fraudulent
certifications made in DLA sales contracts in October
and November of 1994 that denied the existence within
the past three years of indictments of the kind
involved in the pending Antitrust Proceedings. The
Company has cooperated and intends to continue to
cooperate fully in this investigation, and it is
conducting its own investigation into the basis for
these allegations.
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. The Company believes
that it has meritorious defenses to the allegations,
and it intends to vigorously defend against the
charges.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Comparison of the Quarter Ended March 31, 1995 with the Quarter
Ended March 31, 1994
Net Sales. Total net sales increased by 21% to $17,177,000
during the quarter ended March 31, 1995 from $14,155,000 in the
quarter ended March 31, 1994. The $3,022,000 increase is
primarily a result of a 22% increase in shipment volume of the
Company's primary manufactured and purchased products in the 1995
first quarter when compared to the same period of 1994 as a
result of a strong steel and automotive market within the U.S.
Average selling prices for the Company's primary products
declined by approximately 1%, principally a result of a less
favorable product mix during the first three months of 1995
compared to the first three months of 1994.
Gross Profit. Gross profit prior to depreciation expense
was $3,778,000 in the first quarter of 1995 when compared to
$2,644,000 in the first quarter of 1994. As a percent of net
sales, gross margins were 22% in the first three months of 1995
compared to 19% in the same period of 1994. The 1995 increase is
essentially a result of the increase of net sales and the
economies of scale available at higher sales levels experienced
by the Company during the first quarter of 1995.
Operating Expenses. Total operating expenses increased to
$2,014,000 in the quarter ended March 31, 1995 from $2,004,000 in
the same period of 1994. Operating expenses as a percent of
sales declined to 12% in the first quarter of 1995 compared to
14% in the first quarter of 1994. The Company's largest portion
of operating expense, selling, general and administrative
expense, increased marginally to $1,234,000 in the first quarter
of 1995 when compared to $1,211,000 during the first three months
of 1994. As a percent of net sales, selling and general and
administrative expense decreased to 7% in the 1995 first quarter
from 9% in the same period during 1994.
Operating Income. Operating income increased by 176% to
$1,764,000 in the quarter ended March 31, 1995 from $640,000 in
the quarter ended March 31, 1994 principally a result of the 1995
increase in net sales and improved margins as discussed above.
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 $230,000 for the quarter
ended March 31, 1995 versus $45,000 in the quarter ended March
31, 1994. The Company's share in the venture's net sales was
$1,848,000 in the three months ended when compared to $1,417,000
in the three months ended March 31, 1994. The 30% 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 27% for the three months ended March 31, 1995 versus 18% for
the three months ended March 31, 1994 principally due to
increased operating efficiency resulting from increased sales,
better pricing, an improved product mix and overhead cost
reductions. Additionally, the joint venture's sales have been
favorably affected by competitor shutdowns of production in
Europe and stricter regulations on imports of abrasive grains
from Eastern European countries into the European markets the
joint venture serves.
Interest and Miscellaneous Expense. Interest expense
decreased by 5% to $330,000 in the first three months of 1995
from $348,000 during the first three months of 1994. The 1995
reduction resulted from lower average borrowing levels on the
Company's term loan, revolver and operating lines of credit
during the first three months of 1995 when compared to the first
three months of 1994. Miscellaneous expense increased by $6,000
in the three months ended March 31, 1995 compared to the first
three months of 1994.
Income Tax. The Company's effective tax rate was 38% for
the three months ended March 31, 1995 when compared to 39% for
the three months ended March 31, 1994.
Net Earnings Before Cumulative Effect of Accounting Change.
Consolidated net earnings in the first three months of 1995 were
$938,000 prior to the cumulative effect of an accounting change,
when compared to $121,000 during the period ended March 31, 1994.
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.
Periodic post retirement benefit costs for 1995 will approximate
$152,000 (Canadian) compared to $75,000 (Canadian) on a pay-as-
you-go basis.
Net Earnings. Consolidated net earnings, after the
cumulative effect of an accounting change were $176,000 in the
period ended March 31, 1995 versus $121,000 in the same period of
1994.
<PAGE>
Liquidity and Capital Resources
As of March 31, 1995, working capital (current assets less
current liabilities) has increased to $20,803,000, when compared
to $18,054,000 as of December 31, 1994. Accounts receivable
increased by $1,832,000 as of March 31, 1995 versus 1994 year
end. Notes payable and accounts payable decreased by $1,805,000
and $478,000, respectively as of March 31, 1995 versus December
31, 1994.
For the three months ended March 31, 1995, net cash used by
operating activities was $60,000. Outstanding bank indebtedness
increased by $273,000, and cash reserves decreased by $463,000,
which provided the funding for 676,000 of capital expenditures
during the 1995 first quarter.
The Company's current ratio increased to 4.6 to 1.0 at March
31, 1995 from 3.5 to 1.0 as of December 31, 1994. The ratio of
total liabilities to shareholder's equity was 1.5 to 1.0 as of
March 31, 1995 and 1.4 to 1.0 as of December 31, 1994.
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. On May
4, 1995, the Company received notice that it is a target of a
grand jury investigation in the Eastern District of Virginia,
which is investigating violations of 18 U.S.C. Section 1001
based on allegedly fraudulent certifications made in DLA sales
contract in October and November of 1994 that denied the
existence within the past three years of 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. 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.
<PAGE>
PART II - OTHER INFORMATION
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 Indictments
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 this information contained in Note
7(b) "Legal Matters" of the Notes to Consolidated
Financial Statements beginning on page 9, which is
hereby incorporated herein by reference.
d. General Refractories Company v. Washington Mills
Electro Minerals Corporation and Exolon-ESK Company.
Reference is made to the information presented under
the heading "Legal Matters" appearing under Note 7(b)
to the Notes to Consolidated Financial Statements
beginning on page 9 of this Form 10-Q Report, which is
hereby incorporated herein by reference.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held on April 26,
1995
(b) The matters voted upon and the results of the voting
were as follows:
(1) The shareholders of the outstanding shares of the
Company's Common Stock and its Series A
Convertible Preferred Stock elected four persons
to the Company's Board of Directors to serve until
the next annual meeting of shareholders and until
their successors are elected and qualified. The
results were as follows:
<TABLE>
<CAPTION>
Shares Shares
Voted For Withheld
<S> <C> <C>
Theodore E. 320,660 1,169
Dann, Jr.
Brent D. Baird 320,660 1,169
Patrick W.E. 320,660 1,169
Hodgson
J. Fred Silver 320,660 1,169
</TABLE>
(2) The shareholders of the outstanding Series A
Common Stock and Series B Convertible Preferred
Stock unanimously elected Dr. Eberhard Cleff, Dr.
Hans Herrmann, Joseph R. Pinotti and Hans Jurgen
Zippel to the Company's Board of Directors to
serve until the next annual meeting of
shareholders and until their successors are
elected and qualified.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
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
By: S/James A. Bernardoni
--------------------------
James A. Bernardoni, Acting Principal
Executive, Financial, and Accounting
Officer
S/James A. Bernardoni
--------------------------
James A. Bernardoni, Acting Principal
Executive, Financial, and Accounting
Officer
Date: May 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*<PAGE>
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
Ended March 31,
1995 1994
<S> <C> <C>
Net earnings $176 $121
Less Preferred Stock Dividends:
Series A (5) (5.5)
Series B (5) (5.5)
------ ------
Undistributed earnings $166 $110
Net earnings attributable to:
Common Stock (50.0%) $83 $55
Class A Common Stock (50.0%) $83 $55
------ ------
$166 $110
====== ======
Net earnings per share of Common
Stock: $0.17 $0.11
Primary
Fully Diluted $0.17 $0.11
Net earnings per share of Class A
Common Stock:
Primary $0.16 $0.11
Fully Diluted $0.16 $0.11
Weighted Average Shares Outstanding:
Primary:
Common Stock 482,000 482,000
Class A Common Stock 513,000 513,000
Fully Diluted:
Common Stock 504,000 504,000
Class A Common Stock 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 4,000
<SECURITIES> 0
<RECEIVABLES> 8,768,000
<ALLOWANCES> 327,000
<INVENTORY> 16,912,000
<CURRENT-ASSETS> 26,624,000
<PP&E> 54,114,000
<DEPRECIATION> (38,805,000)
<TOTAL-ASSETS> 46,679,000
<CURRENT-LIABILITIES> 5,821,000
<BONDS> 0
<COMMON> 1,026,000
0
442,000
<OTHER-SE> 17,314,000
<TOTAL-LIABILITY-AND-EQUITY> 46,679,000
<SALES> 17,177,000
<TOTAL-REVENUES> 17,177,000
<CGS> 13,399,000
<TOTAL-COSTS> 13,399,000
<OTHER-EXPENSES> 1,928,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 330,000
<INCOME-PRETAX> 1,520,000
<INCOME-TAX> 582,000
<INCOME-CONTINUING> 938,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 762,000
<NET-INCOME> 176,000
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
