UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
One) SECURITIES EXCHANGE ACT OF 1934
[X]
For the quarterly period ended September 30, 1996
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 November 11, 1996, 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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Exolon-ESK Company
Condensed Consolidated Balance Sheet
(in thousands except share amounts)
(Unaudited)
ASSETS September December
30, 1996 31, 1995
__________ __________
Current assets:
Cash $93 $440
Accounts receivable (less allowance for
doubtful accounts of
$490 in 1996 and $419 in 1995) 9,921 8,896
Inventories 17,636 19,700
Prepaid expenses 696 359
_______ ______
Total Current Assets 28,346 29,395
Investment in Norwegian joint venture 5,637 5,230
Property, plant and equipment, at cost 58,696 55,903
Accumulated depreciation (42,206) (40,710)
________ _______
Net property, plant and equipment 16,490 15,193
Other assets 440 397
_______ ______
Total Assets $50,913 $50,215
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $2,000 -
Current maturities of long-term debt 1,550 1,550
Accounts payable 3,051 3,229
Accrued expenses 1,480 1,713
Income taxes payable 1,623 1,329
_______ _______
Deferred income taxes - 160
Total Current Liabilities 9,703 7,981
Deferred income taxes 1,300 1,300
Long-term debt excluding current 10,350 15,350
installments
Other long-term liabilities 3,185 3,286
Stockholder' equity:
Preferred stock
Series A - 19,364 shares 276 276
issued
Series B - 19,364 shares 166 166
issued
Common stock of $1 par value 513 513
Authorized 600,000 shares,
481,995 issued
Class A common stock of $1 par 513 513
value - Authorized 600,000 shares,
512,897 issued
Additional paid-in capital 4,345 4,345
Retained earnings 21,028 16,952
Cumulative translation adjustment (99) (99)
Treasury stock, at cost (368) (368)
_______ _______
Total Stockholders' Equity 26,374 22,298
_______ _______
Total Liabilities and Stockholders'
Equity $50,913 $50,215
_______ _______
The accompanying notes are an integral part of these statements.
Exolon-ESK Company
Condensed Statements of Consolidated Income
Unaudited
(in thousands except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
_______ _______ _______ _______
Net sales $18,903 $17,094 $58,488 $51,402
Cost of goods sold 14,629 13,042 44,975 39,650
______ _______ ______ _______
Gross Profit Before 4,274 4,052 13,513 11,752
Depreciation ______ _______ ______ _______
Depreciation 690 762 2,236 2,286
Selling, general & administrative
expenses 1,326 1,221 4,071 3,784
Research and development 8 - 13 22
______ ______ ______ ______
2,024 1,983 6,319 6,092
______ ______ ______ ______
Operating Income 2,250 2,069 7,194 5,660
Other Expenses (Income):
Equity in (Earnings) before
income taxes of Norwegian
Jt. venture (25) (260) (407) (771)
Interest expense 284 381 989 1,090
Miscellaneous expense
(income) 186 (32) (248) 159
______ ______ ______ ______
445 89 335 478
______ ______ ______ ______
Earnings before income taxes
and cumulative effect of
accounting change 1,806 1,980 6,859 5,182
Income tax expense 732 805 2,772 2,055
______ ______ ______ ______
Earnings before cumulative
effect of accounting change 1,074 1,175 4,087 3,127
Cumulative effect of accounting change
(net of income tax benefit) - - - (762)
______ ______ ______ ______
Net Earnings $1,074 $1,175 $4,087 $2,365
______ ______ ______ ______
PER COMMON SHARE:
Earnings before cumulative
effect of accounting change $1.10 $1.21 $4.21 $3.21
Cumulative effect of
accounting change - - - (0.79)
______ ______ ______ ______
Net Earnings $1.10 $1.21 $4.21 $2.42
______ ______ ______ ______
PER CLASS A COMMON SHARE:
Earnings before cumulative
effect of accounting change $1.04 $1.14 $3.95 $3.02
Cumulative effect of
accounting change - - - (0.74)
______ ______ ______ ______
Net Earnings $1.04 $1.14 $3.95 $2.28
______ ______ ______ ______
The accompanying notes are an integral part of these
statements.
Exolon-ESK Company
Condensed Statements of Consolidated Cash Flows
Unaudited
(in thousands)
Nine Months
Ended
September 30,
1996 1995
_____ _____
Cash Flow from Operating Activities:
Net earnings $ 4,087 $ 2,365
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 2,236 2,286
Cumulative effect of change in
accounting for post-retirement
benefits - 762
Equity in (earnings) of Norwegian
joint venture (407) (771)
(Gain) on fixed asset disposals 184 37
Deferred income taxes (159) (417)
Change in Assets and Liabilities:
(Increase) decrease in:
Accounts receivable (1,025) (2,664)
Inventories 2,064 (2,225)
Prepaid expenses (337) 38
Other assets (43) (43)
(Decrease) Increase in:
Accounts payable (178) 886
Accrued expenses (234) 134
Income taxes payable 294 1,439
Other long-term liabilities (101) 404
______ ______
Net Cash Provided (Used) by Operating
Activities 6,381 2,232
Cash Flow from Investing Activities:
Additions to property, plant and
equipment (3,718) (2,148)
Proceeds from fixed asset disposals - -
______ ______
Net Cash (Used) for Investing Activities (3,718) (2,148)
Cash Flow from Financing Activities:
Borrowings (repayments) on long-term
construction financing loans and
revolving credit agreement (3,000) (425)
Dividends paid (11) (33)
______ ______
Net Cash Provided (Used) by Financing
Activities (3,011) (458)
Net (decrease) in cash (347) (374)
Cash at beginning of period 440 467
______ ______
Cash at end of period $ 93 $ 93
______ ______
The accompanying notes are an integral part of these
statements.
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 1995 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
September 30, 1996.
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:
Three Months Nine Months
Ended Ended
September 30 September 30
Joint Venture: 1996 1995 1996 1995
______ ______ ______ ______
Net Sales $2,336 $1,855 $6,094 $5,725
Income Before
Income Taxes 25 260 407 771
Net Income 15 187 290 555
NOTE 3 The following are the major classes of inventories (in
thousands) as of September 30, 1996 and December 31,
1995 :
September 30,
1996 December 31,
(Unaudited) 1995
___________ ____________
Raw Materials $2,324 $2,119
Semi-Finished and 16,610 18,640
Finished Goods
Supplies and Other 1,034 1,011
______ ______
19,968 21,770
Less: LIFO Reserve (2,332) (2,070)
______ ______
$17,636 $19,700
______ ______
NOTE 4 On October 1, 1996 the Company extended it s Credit
Agreement dated December 22, 1992 with a U.S. bank.
This agreement provides for borrowings up to
$10,000,000 under the revolving portion of the
agreement, a $4,000,000 5 year term loan originated in
December 1992 remains in effect through January 1998
and the $2,000,000 demand line of credit remains in
effect until December 31, 1996. Additionally, this
agreement provides for a letter of credit to support
bonds totaling $13,000,000 to be issued by the Upper
Illinois River Valley Development Authority. These
bonds are expected to be issued prior to December 31,
1996.
At September 30, 1996 borrowings of $2,700,000 were
outstanding under the revolving portion, borrowings of
$1,200,000 were outstanding under the term loan portion
and borrowings of $2,000,000 were outstanding under the
demand line of credit portion of the U.S. Credit
Agreement.
The Company's Canadian subsidiary has a $1,000,000
(Canadian funds) operating demand loan available as
part of a credit facility provided by a Canadian bank.
Borrowings outstanding at June 30, 1996 were $0
(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.
September
Long Term Debt (in 30, 1996 December
thousands) Consists of: (Unaudited) 31, 1995
__________ ________
Revolving Credit Agreement
with a U.S. bank. Interest
at prime rate plus 1/4% or $4,700 $ 7,100
LIBOR plus 2-1/2 % (8.5% at
September 30, 1996).
Term Loan Agreement with a
U.S. Bank. Interest at
prime rate plus 1/2% or LIBOR 1,200 1,800
plus 2-3/4% (8.75% at June 30,
1996)
Industrial Revenue Bond held
by an insurance company.
Interest at a fixed rate of 8,000 8,000
8-7/8%. Bond maturity is ______ ______
January 15, 2018.
$ 13,900 $ 16,900
Less Current Maturities 3,550 1,550
______ ______
$10,350 $15,350
NOTE 5 The Company provides certain health care 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 reserves the right to amend,
change, or terminate the benefits at any time.
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
health care 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 $502,000 in the year
ended December 31, 1995. The Company's current policy
is to fund these benefits on a pay-as-you-go basis.
NOTE 6 Commitments
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 (expired) and April 30, 2001
respectively. The royalty expense in U.S. dollars
amounted to $463,000 in the first nine months of 1996
and $483,000 in the same period of 1995.
NOTE 7 Contingencies
a. Environmental Issues
(i) Hennepin, Illinois Plant
On October 6, 1994, the Company entered into a Consent
Order (the Consent Order ) with the Illinois Attorney
General and the Illinois Environmental Protection
Agency ( IEPA ) in complete settlement of a complaint
brought by them which alleged that the Company had
violated certain air quality requirements in the
operating permit for its Hennepin, Illinois plant. 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 obtained final approval for a construction
permit to implement the BACT on June 11, 1996. The
Company purchased a 20 acre parcel of land adjacent to
its property and construction has commenced.
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 June 30, 1996 Consent Order
and complete facility improvements, the Company expects
to incur capital costs within the range from
$13,100,000 to $14,000,000 over the next two years.
As of September 30, 1996, the Company has incurred
approximately $2,302,000 of capital costs related to
the facility improvements. The Company is seeking to
finance the costs of the required capital improvements
through an underwritten credit enhanced bond offering
on a tax-exempt basis through the State of Illinois to
the extent permitted by law and a taxable basis for the
remaining portion. The Company has obtained a
modification of its Industrial Revenue Bond Agreement
to allow for the required capital expenditures under
the Consent Order. A commitment letter with a U.S.
bank was executed October 1, 1996 for this project to
finance long term taxable and tax-exempt bonds through
the Upper Illinois River Valley Development Authority
in an aggregate principal amount not exceeding
$13,000,000 dollars which expires December 31, 1996.
(ii) Norwegian Joint Venture
The Government of Norway 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 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 has prepared an internal study of
the report and the Authority s draft for new
concessions was presented to the joint venture in
February 1996. Based on a consensus for the
metallurgical industry, the joint venture has initiated
discussions with the Authority to obtain acceptable
emissions levels. The costs associated with the
implementation of environmental expenditures are
uncertain as a result of various alternatives presently
being considered by the Norwegian joint venture.
b. Legal Matters
(i) Federal Proceedings and Related Matters
In February 1994, the Company, its former 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: (a) prior to the
mid-1980's and from the mid 1980's 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; (b) during the
same period, the Company and its former President
willfully violated the terms of a Consent Decree dated
November 16, 1948 against the Company and its officers,
which permanently enjoined them from entering into
conspiracies or combinations to fix prices of
artificial abrasive grain; and that (c) 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 July 12, 1996 a Plea
Agreement was executed by the United States Department
of Justice and the Company in full settlement of the
Criminal Antitrust Proceedings pending against the
Company. The Plea Agreement provides that the Company
will plead guilty to contempt of court in violation of
the 1948 Consent Decree described in (b) above. All
other charges against the Company will be dismissed.
The Company has agreed to pay a fine totaling $100,000
plus a $200 special assessment. There are no
conditions of probation or any further penalties
provided. In addition, all antitrust and consent
decree violation charges against individual former
officers of the Company as set forth in (a) and (b)
above will be dismissed. This Agreement must be
approved by the Federal District Court for the Western
District of New York, which has the authority to accept
the Plea Agreement or to reject it in its entirety.
The Court is presently reviewing the Plea Agreement. A
pre-sentencing report was ordered by the Court from the
U.S. Probation Department. The report was sent to the
Court on October 23, 1996 and the Company is currently
awaiting directions from the Court as to how the case
will proceed.
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 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 former President 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. A jury trial on a separate
criminal complaint against the Company and the former
Executive Vice President based on the alleged false
certifications in DLA sales contracts found the Company
and the former Executive Vice President not guilty of
all charges.
In general, the DLA Suspension provides, during the
term of the suspension, that the suspended parties will
be prohibited from entering into new contracts, or
renewing or extending old contracts with the U.S.
Government or its agencies, unless the head of the
contracting agency states in writing that there is a
compelling reason to do so; that the suspended parties
may not conduct business with the U.S. Government as an
agent or representative of other contractors; that no
U.S. Government contractor may award a suspended party
a subcontract in excess of $25,000 unless there is
compelling reason to do so and the contracting party
complies with certain notification provisions; and,
that each suspended party's relationship to any
organization doing business with the government will be
examined to determine the impact of those ties on the
responsibility of the other organization to be a
government contractor or subcontractor.
At this time, the Company is not able to predict the
amount and nature of criminal penalties or fines that
might be imposed against the Company or its former
President or former Executive Vice President, if the
Plea Agreement was not accepted and any of them were
convicted of any of the charges alleged in the
Antitrust Proceedings. However, 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 is actively seeking to have the
Plea Agreement accepted by the Court. 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, unless the head
of the contracting agency states in writing that there
is a compelling reason to permit such purchase.
Nonetheless, it is not otherwise expected to impact the
Company's operations as the Company does not 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
this grain from its stockpiles 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 9 month 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. 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 lawsuit 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. 1. The plaintiffs allegedly paid more for
abrasive grain products than they would have paid in
the absence of such anti-trust violations and were
allegedly damaged in an amount that they are presently
unable to determine. On or about July 17, 1995, a
lawsuit captioned Arden Architectural Specialties,
Inc. v. Washington Mills Electro Minerals Corporation
and Exolon-ESK Company, (95-CV-05745(m)), was
commenced in the United States District Court for the
Western District of New York. The Arden Architectural
Specialties complaint purports to be a class action
that is based on the same matters alleged in the
General Refractories complaint. The Company believes
that it has meritorious defenses to the allegations,
and it intends to vigorously defend against the
charges.
In addition to the potential liabilities that the
Company may experience in the legal proceedings brought
by the Department of Justice and third parties, 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.
(ii) Exolon-ESK Company of Canada, Ltd.
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-ESK Company of Canada, Ltd. (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 Canadian
Case ). 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.
On February 29, 1996, the Company and Exolon-Canada
entered into a Final Release (the Release ) with their
insurance carriers whereby they agreed to release the
carriers from all claims based on the activities of the
defendants in the Canadian Case in consideration of a
payment of $535,000 Canadian (approximately $375,000
U.S.). Under the terms of the Release, the insurance
carriers denied any liability, and the payment may not
be indicative of the amount of any recovery that may be
obtained from the defendants. The insurance carriers
have subrogated all of their third party rights and
claims to Exolon-ESK Company of Canada, Ltd.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Comparison of the Nine Months Ended September 30, 1996 with the
Nine Months Ended September 30, 1995
Net Sales. Total net sales increased by 14% to $58,488,000
during the nine months ended September 30, 1996 from $51,402,000
in the first nine months of 1995. The $7,086,000 increase is
principally a result of an increase in shipment volume of the
Company s primary manufactured and purchased products in the
first nine months of 1996 when compared to the first nine months
of 1995 as a result of the continuation of a strong abrasives,
steel and automotive market within the U.S.
Gross Profit. Gross profit prior to depreciation expense
was $13,513,000 in the first nine months of 1996 when compared to
$11,752,000 in the first nine months of 1995. As a percent of
net sales, gross margins were 23% in the first nine months of
1996 compared to 23% in the same period of 1995.
Operating Expenses. Total operating expenses increased to
$6,319,000 in the nine months ended September 30, 1996 from
$6,092,000 in the same period of 1995. Operating expenses as a
percent of sales declined to 11% in the first nine months of 1996
compared to 12% in the first nine months of 1995. The Company's
largest portion of operating expense, selling, general and
administrative expense, increased to $4,071,000 in the first nine
months of 1996 when compared to $3,784,000 during the first nine
months of 1995. As a percent of net sales, selling and general
and administrative expense was 7.0% in the first nine months of
1996 compared to 7.4% in the same period of 1995.
Operating Income. Operating income increased by 27% to
$7,194,000 in the nine months ended September 30, 1996 from
$5,660,000 in the nine months ended September 30, 1995, due to
the increase in net sales and reduced operating costs.
Norwegian Joint Venture. The Company's Norwegian joint
venture, Orkla Exolon A/S, reported pre-tax earnings in the
Company's 50% share of the venture was $406,500 for the nine
months ended September 30, 1996 versus $771,000 in the nine
months ended September 30, 1995. The Company's share in the
venture's net sales was $6,094,000 in the nine months ended
September 30, 1996 as compared to $5,725,000 in the nine months
ended September 30, 1995. The joint venture's gross margins,
prior to depreciation, decreased to 20% for the nine months ended
September 30, 1996 versus 31% for the nine months ended September
30, 1995 primarily due to higher raw material and power costs
incurred in the first nine months of 1996 when compared to the
same period in 1995.
Interest and Miscellaneous Expense. Interest expense
decreased marginally in the first nine months of 1996. The
Company s bank debt was reduced by approximately $3,400,000 in
the first nine months of 1996 when compared to the first nine
months of 1995.
Miscellaneous income of $248,000 was reported in the first
nine months of 1996 compared to miscellaneous expense of $159,000
in the quarter ended September 30, 1995. The Company recorded
$375,000 in miscellaneous income during the first quarter of 1996
due to a payment for the settlement with its insurance carrier of
a claim related to a legal action in Ontario, Canada Court. For
further information, reference is made to Note 7(b)(ii) beginning
on page 9 of this Form 10-Q report.
Income Tax. The Company's effective tax rate was 40% for
the nine months ended September 30, 1996 as compared to 39% for
the nine months ended September 30, 1995.
Comparison of the Three Months Ended September 30, 1996 with the
Three Months Ended September 30, 1995.
Net Sales. Total net sales increased by 10.6% to
$18,903,000 in the three months ended September 30, 1996 from
$17,094,000 in the three months ended September 30, 1995.
Shipment volume of the Company s primary manufactured and
purchased products increased by approximately 10.7% in the third
quarter of 1996, when compared to the same period during 1995.
Gross Profit. Gross profit prior to depreciation expense
was $4,274,000 in the three months ended September 30, 1996 when
compared to $4,052,000 in the three months ended June 30, 1995.
As a percent of net sales, gross margins were 22.6% in the second
quarter of 1996 compared to 23.7% in the third quarter of 1995.
The 1996 decrease is primarily a result of the increase in raw
material costs experienced by the Company in the third quarter of
1996.
Operating Expenses. Total operating expenses increased
marginally in the three month period ended September 30, 1996
from the same period of 1995. Selling, general and
administrative expense increased $105,000 in the quarter ended
September 30, 1996 when compared to the quarter ended June 30,
1995. As a percent of net sales, selling, general and
administrative expense was 7% in the third quarter of 1996
compared with 7% in the same period of 1995.
Operating Income. Operating income increased by $181,000 or
9% to $2,250,000 in the third quarter of 1996 from $2,069,000 in
the third quarter of 1995, primarily as a result of the increase
in sales and gross profit.
Norwegian Joint Venture. The Norwegian joint venture Orkla
Exolon-A/S, reported the Company s 50% share in the pre-tax
earnings of the venture was $25,000 for the three months ended
September 30, 1996 versus a pre-tax profit of $260,000 during the
three months ended September 30, 1995. The Company s share in
the venture s net sales was $2,336,000 in the three months ended
September 30, 1996 when compared to $1,855,000 in the three
months ended September 30, 1995. The increase in net sales
resulted primarily from an increase in European demand.
Interest and Miscellaneous Expense. Interest expense
decreased by $97,000 to $284,000 in the third quarter of 1996
from $381,000 during the third quarter of 1995. The 26% decrease
resulted primarily from lower debt levels during the third
quarter of 1996 when compared to the third quarter of 1995.
Liquidity and Capital Resources
As of September 30, 1996, working capital (current assets
less current liabilities) has decreased to $18,643,000, when
compared to $21,414,000 as of December 31, 1995. Accounts
receivable increased by $1,025,000 as of September 30, 1996
versus 1995 year end primarily as a result of the increase in
sales levels during the first nine months of 1996 versus the 1995
year. Inventory decreased by $2,064,000 at September 30, 1996
when compared to December 31, 1995. Accounts payable increased
by $103,000 as of September 30,1996 versus December 31, 1995. In
addition, the Company borrowed $2,000,000 on a short term note
with a low interest rate during the second quarter of 1996
increasing current liabilities as of June 30, 1996.
For the nine months ended September 30, 1996, net cash
provided by operating activities was $6,381,000. Cash reserves
decreased by $347,000 at September 30, 1996 compared to December
31, 1995. Net cash provided by operating activities in addition
to the reduction in cash reserves was used to fund $3,718,000 of
capital expenditures in the nine months ended June 30, 1996.
The Company's current ratio decreased to 2.9 to 1.0 at
September 30, 1996, from 3.7 to 1.0 as of December 31, 1995. The
ratio of total liabilities to shareholder's equity improved to
1.0 to 1.0 as of September 30, 1996, from 1.3 to 1.0 as of
December 31, 1995. Management believes that the cash provided by
operations and long-term borrowing arrangements will provide
adequate funds for current commitments and other requirements in
the near future.
The Company has been directed by the Illinois Environmental
Protection Agency ("IEPA") to control its sulfur emissions at its
Hennepin, Illinois silicon carbide furnace plant. For further
information see Note 7(a)(i) to the Notes to Consolidated
Financial Statements on page 7, which is incorporated herein by
reference.
Reference is made to the descriptions of the following legal
matters, within Note 7(b) to the Notes to Consolidated Financial
Statements under the caption Legal Matters beginning on page 8
of this Form 10-Q Report, which descriptions are incorporated
herein by reference: (1) a legal action commenced in June 1993 by
the Company in Ontario, Canada seeking $2,000,000 in damages
against certain former officers and employees; (2) antitrust
proceedings commenced in February 1994 against the Company and
others; (3) a temporary suspension imposed upon the Company and
others in December 1994 by the U.S. Defense Logistics Agency; and
(4) civil law suits brought against the Company and others
commenced by General Refractories Company in October 1994 and by
Arden Architectural Specialties, Inc. in July 1995.
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)(i) to the Notes to
Consolidated Financial Statements on page 7 of this
Form 10-Q Report, which is 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." (the Perrotto Case )
in the Company's Form 10-Q Report for the period ended
September 30, 1993, which is hereby incorporated herein
by reference.
On February 29, 1996, the Company and Exolon-Canada
entered into a Final Release (the Release ) with their
insurance carriers whereby they agreed to release the
carriers from all claims based on the activities of the
defendants in the Perrotto Case, in consideration of a
payment of $535,000 Canadian (approximately $390,000
U.S.). Under the terms of the Release, the insurance
carriers denied any liability, and the payment may not
be indicative of the amount of any recovery that may be
obtained from the defendants. The insurance carriers
have subrogated all of their third party rights and
claims to Exolon-Canada.
c. Federal Proceedings
Reference is made to the information contained in Part
I, Item 3. Legal Proceedings under the heading "Federal
Indictments" contained in the Company's 1993 Form 10-K
Report, which is hereby incorporated herein by
reference. The proceedings described thereunder are
hereinafter referred to as the Antitrust Proceedings .
Reference is made to the information concerning the DLA
Suspension contained in Note 7(b)(i) of the Notes to
Consolidated Financial Statements beginning on page 8
of this Form 10-Q, which is incorporated herein by
reference.
d. General Refractories Company v. Washington Mills
Electro Minerals Corporation and Exolon-ESK Company
The description of a class action lawsuit relating to
claims under the Sherman Act brought by General
Refractories Company against Washington Mills Electro
Mineral Corporation and the Company, appearing under
the heading Legal Matters under Note 7(b) to the
Notes to Consolidated Financial Statements on Page 10
of the Company s Form 10-Q reported for the period
ended March 31, 1995, is incorporated herein by
reference. On or about July 17, 1995, a law suit
captioned Arden Architectural Specialties, Inc. v.
Washington Mills Electro Minerals Corporation and
Exolon-ESK Company, (95-CV-05745(m)), was commenced in
the United States District Court for the Western
District of New York. The Arden Architectural
Specialties complaint purports to be a class action
that is based on the same matters alleged in the
General Refractories complaint.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Computation of Earnings Per Share, Exhibit 11
Financial Data Schedule, Exhibit 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
EXOLON-ESK COMPANY
/s/ J. Fred Silver
____________________
J. Fred Silver
President and Chief Executive Officer
/s/ Michael H. Bieger
____________________
Michael H. Bieger
Vice President Finance and
Chief Financial Officer
Date: November 13, 1996
EXHIBIT INDEX
Exhibit Description Reference
No.
3A Restated Certificate of Exhibit 3A to the report
Incorporation on Form 10-K for the year
ended December 31, 1995*
3A(1) Certificate of Merger Exhibit 3A(1) to the
report on Form 10-K for
the year ended December
31, 1995*
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*
3J Restated Bylaws containing Exhibit 3J to the report
all previous amendments on Form 10-Q for the
adopted quarter ended June 30,
1996*
4 Instruments Defining Rights Articles of
of Security Holders Incorporation, Exhibits
3A, and Exhibits 3F and
3G to the Report on Form
10-K for the year ended
December 31, 1994*
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, 1995*
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, 1995*
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, 1995*
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, 1995*
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 19
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
Exhibit 11
Exolon-ESK Company and Subsidiaries
Computation of Earnings Per Share
(In Thousands, Except Per Share Data)
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
______ ______ ______ ______
Net earnings $1,074 $1,175 $4,087 $2,365
Less Preferred Stock
Dividends:
Series A (5) (6) (16) (16)
Series B (5) (6) (16) (16)
_____ _____ _____ _____
Undistributed earnings $1,064 $1,163 $4,055 $2,333
Net earnings attributable
to:
Common Stock (50.0%) 532 581.5 2,027.5 1,166.5
Class A Common Stock 532 581.5 2,027.5 1,166.5
(50.0%) ______ ______ _______ _______
$1,064 $1,163 $4,055 $2,333
______ ______ _______ _______
Net earnings per share of
Common Stock:
Primary $1.10 $1.21 $4.21 $2.42
Fully Diluted $1.09 $1.17 $4.06 $2.35
Net earnings per share of
Class A Common Stock:
Primary $1.04 $1.13 $3.95 $2.28
Fully Diluted $1.02 $1.10 $3.82 $2.21
Weighted Average Shares
Outstanding:
Primary:
Common Stock 482,000 482,000 482,000 482,000
Class A Common Stock 513,000 513,000 513,000 513,000
Fully Diluted:
Common Stock 504,000 504,000 504,000 504,000
Class A Common Stock 535,000 535,000 535,000 535,000
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