UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
jurisdiction of
incorporation or
organization)
(I.R.S. Employer Identification
No.)
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.
<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
March 31, 1995
December 31,
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' Equity
$46,679
=========
$45,309
=========
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 Depreciation
3,778
- ---------
2,644
- ---------
Depreciation
762
781
Selling, general & administrative expenses
1,234
1,211
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. Venture
(230)
(45)
Interest expense
330
348
Miscellaneous expense
144
- ---------
138
- ---------
244
- ---------
441
- ---------
Earnings Before Income Taxes and
Cumulative Effect of Accounting
Change
1,520
199
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 accounting
change
$0.74
- ---------
- -
- ---------
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 Norwegian joint
venture
(230)
(32)
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
Activities
(60)
1,812
Cash Flow from Investing Activities:
Additions to property, plant and
equipment
(676)
- ---------
(333)
- ---------
Net Cash (Used) for Investing Activities
(676)
(333)
Cash Flow from Financing Activities:
Repayments on short-term line of credit
(1,805)
(1,874)
Borrowings on long-term construction finan-
cing 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
Activities
273
(1,588)
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 income
taxes
230
45
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,
1995
(Unaudited)
December 31,
1994
<S>
<C>
<C>
Raw Materials
$2,041
$3,051
Semi-Finished and Finished
Goods
15,764
15,085
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)
Consists of:
March 31,
1995
(Unaudited)
December
31, 1994
<S>
<C>
<C>
Revolving Credit Agreement with a
U.S. bank. Interest at prime rate
plus 1/4% or LIBOR plus 2 1/2%
(9.25% at March 31, 1995).
$ 7,400
$ 5,100
Term Loan Agreement with a U.S.
Bank. Interest at prime rate plus
1/2% or LIBOR plus 2 3/4% (9.5% at
March 31, 1995)
2,400
2,600
Industrial Revenue Bond held by an
insurance company. Interest at a
fixed rate of 8 7/8%. Bond
maturity is January 15, 2018.
8,000
- ---------
8,000
- ---------
$ 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 benefits
obligation
$1,168
=======
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 Voted
For
Shares
Withheld
<S>
<C>
<C>
Theodore E. Dann,
Jr.
320,660
1,169
Brent D. Baird
320,660
1,169
Patrick W.E.
Hodgson
320,660
1,169
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<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
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
Incorporation
Exhibit 3A to the report 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 March
23, 1991
Exhibit 3E to the report on
Form 10-Q for the quarter ended
March 23, 1991*
3F
Certificate of Amendment of
Restated Certificate of
Incorporation dated April 23,
1986
Exhibit 3F to the report on
Form 10-K for the year ended
December 31, 1994*
3G
Certificate of Amendment of
Restated Certificate of
Incorporation dated May 4, 1987
Exhibit 3G to the report on
Form 10-K for the year ended
December 31, 1994*
3H
Amendment of Certificate of
Incorporation dated October 28,
1992
Exhibit 3H to the Report on
Form 10-Q for the 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 of
Security Holders
Articles of 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 dated
December 22, 1992
Exhibit 10D(23) to the Report
on Form 10-K for the year ended
December 31, 1992*
10D(24)
Industrial Revenue Bond Agreement
dated January 1, 1993.
Exhibit 10D(24) to the Report
on Form 10-K for the year ended
December 31, 1992*
10F
Stockholder's Agreement dated as
of April 26, 1984 between the
Registrant and Wacker Chemical
Corporation
Exhibit 10F to the report on
Form 10-K for the year ended
December 31, 1989*
10G
Restated License Agreement dated
as of April 26, 1984 among
Elektroschmelzwerk Kempten GmbH,
ESK Corporation and the
Registrant
Exhibit 10G to the report on
Form 10-K for the year ended
December 31, 1989*
10H
Distributorship Agreement dated
April 27, 1984 between
Elektroschmelzwerk Kempten GmbH
and the Registrant
Exhibit 10H to the report on
Form 10-K for the year ended
December 31, 1989*
10I
Indemnification Agreement dated
as of December 15, 1984 between
Wacker Chemical Corporation and
the Registrant
Exhibit 10I to the report on
Form 10-K for the year ended
December 31, 1989*
10K
Contract between Theeb, Ltd. and
the Exolon-ESK company of Canada,
Ltd. dated February 28, 1985
Exhibit 10K to the Report on
Form 10-K for the year ended
December 31, 1992*
10M
Federal Indictments dated
February 11, 1994
Exhibit 10M to the Report on
Form 10-K for the year ended
December 31, 1993*
11
Statement of computation of per
share earnings
Page 20
15
Statement re Unaudited Interim
Financial Information
None
18
Letter re Change in Accounting
Principles
None
19
Report Furnished to Security
Holders
None
22
Published Report Regarding
Matters Submitted to Vote of
Security Holders
None
23
Consents of Experts and Counsel
None
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:
Primary
$0.17
$0.11
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>
