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 March 31, 1998
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 Identification
jurisdiction of 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 8, 1998 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
Consolidated Condensed Balance Sheet
(in thousands except share amounts)
(Unaudited)
ASSETS March 31, December 31,
1998 1997
Current assets:
Cash $ 2,941 $ 2,503
Accounts receivable (less allowance
for doubtful accounts of $350 in
1998 and $350 in 1997) 10,034 9,582
Inventories 16,914 16,636
Prepaid expenses 321 183
Deferred income taxes 356 356
Total Current Assets 30,566 29,260
Investment in Norwegian joint venture 5,561 5,505
Property, plant and equipment, at cost 72,513 71,362
Accumulated depreciation (45,700) (45,072)
Net property, plant and equipment 26,813 26,290
Bond sinking fund 1,101 885
Other assets 1,373 1,337
Total Assets $65,414 $63,277
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,367 $ 1,367
Accounts payable 3,343 2,661
Accrued expenses 1,807 1,858
Income taxes payable 901 196
Total Current Liabilities 7,418 6,082
Deferred income taxes 1,834 1,834
Long-term debt excluding current portions 19,633 20,033
Other long-term liabilities 2,553 2,539
Stockholders' 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 29,396 28,209
Cumulative translation adjustment (865) (865)
Treasury stock, at cost (368) (368)
Total Stockholders' Equity 33,976 32,789
Total Liabilities and Stockholders' $65,414 $63,277
Equity
The accompanying notes are an integral part of these statements.
Exolon-ESK Company
Consolidated Condensed Statements of Income
Unaudited
(in thousands except per share amounts)
Three Months
Ended March 31,
1998 1997
Net sales $20,351 $20,191
Cost of goods sold 15,957 15,608
Gross Profit Before Depreciation 4,394 4,583
Operating Expenses
Depreciation 733 755
Selling, general & administrative
expenses 1,448 1,330
Research and development 34 15
Total Operating Expenses 2,215 2,100
Operating Income 2,179 2,483
Other Income(Expense):
Equity in Earnings before income
taxes of Norwegian Jt. venture 56 12
Interest expense (213) (252)
Miscellaneous expense (105) (87)
Total Other Income(Expense) (262) (327)
Earnings before income taxes 1,917 2,156
Income tax expense (720) (808)
Net Earnings $1,197 $1,348
EARNINGS PER COMMON SHARE:
Basic $1.23 $1.38
Diluted $1.19 $1.34
EARNINGS PER CLASS A COMMON SHARE:
Basic $1.16 $1.29
Diluted $1.12 $1.26
The accompanying notes are an integral part of these
statements.
Exolon-ESK Company
Consolidated Condensed Statements of Cash Flows
Unaudited
(in thousands)
Three Months
Ended
March 31,
1998 1997
Net cash provided by operating activities 2,322 3,267
Cash Flow from Investing Activities:
Capital expenditures (1,256) (4,253)
Cash Flow from Financing Activities:
Borrowings (repayments) on debt (400) 1,048
Payments to bond sinking fund (217) (217)
Dividends paid (11) (11)
Net Cash Provided (Used) by Financing
Activities (628) 820
Net increase (decrease) in cash 438 (166)
Cash at beginning of period 2,503 275
Cash at end of period $2,941 $109
The accompanying notes are an integral part of these
statements.
EXOLON-ESK COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance
with generally accepted accounting principles for
interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a
fair presentation have been included. Results for the
period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the
year ending December 31, 1998.
For further information, refer to the financial
statements and footnotes thereto for the year ended
December 31, 1997 included in the Company's Annual
Report on Form 10-K filed with the Securities and
Exchange Commission.
NOTE 2 The following are the major classes of inventories (in
thousands) as of March 31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
(Unaudited)
Raw Materials $2,439 $2,839
Semi-Finished and 16,787 16,183
Finished Goods
Supplies and Other 939 965
20,165 19,987
Less: LIFO Reserve (3,251) (3,351)
$16,914 $16,636
NOTE 3 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 during 1996.
In order to comply with the Consent Order and complete
facility improvements, the Company expects to incur
capital costs of up to $14,000,000. As of March 31,
1998, the Company has incurred approximately
$12,834,000 of capital costs related to the facility
improvements. The remaining costs are expected to be
incurred in the second quarter of 1998. The cost of
these required capital improvements was financed
principally with the $13,000,000 of proceeds from long-
term bonds, a portion of which are tax-exempt, issued
by the Upper Illinois River Valley Development
Authority.
(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 Norwegian State Pollution Control Authority has
issued limits regarding dust emissions and Sulfur
Dioxide emissions that will apply to all Norwegian
silicon carbide producers. Specific target emission
limits have been set, and a compliance timetable
ranging from the present until January 1, 2001 has been
established. The costs associated with achieving
compliance with these limits are uncertain as a result
of various alternatives presently being considered by
the Norwegian joint venture. Management believes the
joint venture can meet the sulfur requirements with
changes in production techniques and raw material
procurement including low sulfur coke rather than
capital expenditures. Based upon current known
information the Company estimates the costs associated
with achieving compliance with these limits would
range from $4 to $5 million.
b. Legal Matters
(i) Federal Proceedings and Related Matters
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. 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. In October 1997, the
Norton Company was named an additional defendant in
both cases. The Company believes that it has
meritorious defenses to the allegations, and it intends
to vigorously defend against the charges.
In 1994, the U.S. Defense Logistics Agency (the "DLA")
temporarily suspended the Company from contracting with
the U.S. Government under procurement or non-
procurement programs. During 1997, the Company and the
DLA entered into a two-year Administrative Agreement
which lifted the suspension.
(ii) Exolon-ESK Company of Canada, Ltd.
An action for damages was brought against Exolon-ESK
Company and Exolon-ESK Company of Canada, Ltd. by
International Oxide Fusion Inc. of Niagara Falls,
Ontario in December, 1996. This action alleges that
the Thorold, Ontario facility is in the possession of
technology that was provided in 1990 to Exolon-ESK
Company to produce MagChrome and Fused Magnesium Oxide
and has refused to pay further royalty payments.
International Oxide Fusion Inc. claims damages for loss
of royalty payments from the number 4 furnace.
Further, International Oxide Fusion alleges that number
6 furnace, which was designed in 1996, utilizes the
International Oxide Fusion's 1990 furnace design
technology and seeks royalty payment. Exolon-ESK
Company and Exolon-ESK Company of Canada, Ltd. have
filed a Statement of Defense and Counterclaim against
International Oxide Fusion Inc., Edward J. Bielawski,
Robert Thiel (the principals of International Oxide
Fusion Inc.), Thomas Farr and Fusion Unlimited
(Niagara) Inc. which was issued in January, 1997 in
Toronto, Ontario. The Plaintiffs originally sought
$182 million as damages, which management considers to
be beyond any reasonable understanding. The Company's
counterclaim is in the amount of approximately $ 10
million. A motion for summary judgment on royalty
payments for furnace number 4 was decided against the
Company in December 1997 and the Company paid
royalties, interest and other costs of approximately
$298,000 Canadian dollars in April 1998. A further
expedited trial was ordered on the remaining claims and
counterclaim. It is the opinion of management that the
number 6 furnace does not use the same technology as
the number 4 furnace.
A separate, unrelated lawsuit was commenced by The
Exolon-ESK Company of Canada, Ltd. against Theeb, Ltd.
and Edward J. Bielawski in August, 1997. The action
arises out of a 1985 contract in connection with a
crane and its runway system. The Company is seeking $2
million in damages for negligence and punitive damages.
A Statement of Defense has been filed by the
defendants.
In June 1993, the Company commenced a civil 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) ( the "Defendants") on various charges
related to allegations that they defrauded the Company
and Exolon-Canada of money, property and services over
many years (the Perrotto Case ). Summary Judgment was
granted on the issue of liability against Paul Perrotto
and Michael Perrotto on July 16, 1997 with a Reference
(hearing) directed in Toronto on the issue of damages.
The hearing is expected to be held in the Fall 1998.
The action remains ongoing against various other
Defendants.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Comparison of the Three Months Ended March 31, 1998 with the
Three Months Ended March 31, 1997.
Net Sales. Total net sales increased by 1% to $20,351,000
during the three months ended March 31, 1998 from $20,191,000 in
the first three months of 1997.
Gross Profit. Gross profit before depreciation expense was
$4,394,000 in the first three months of 1998 compared to
$4,583,000 in the first three months of 1997. As a percent of
net sales, gross margins were 21.6% in the first three months of
1998 compared to 22.7% in the same period of 1997. The decrease
in gross profit as a percent of net sales can be attributed to a
decrease in the overall price received for products resulting
from a change in product mix.
Operating Expenses. Total operating expenses increased to
$2,215,000 in the three months ended March 31, 1998 from
$2,100,000 in the same period of 1997. Operating expenses as a
percent of sales increased to 10.9% in the first three months of
1998 from 10.4% for the first three months of 1997. The
Company's largest portion of operating expense, selling, general
and administrative expense, increased to $1,448,000 in the first
three months of 1998 when compared to $1,330,000 during the first
three months of 1997. The increase in selling, general and
administrative expense in the first quarter of 1998 can be
attributed to increased advertising and sales commissions
expense. As a percent of net sales, selling and general and
administrative expense increased to 7.1% in the first three
months of 1998 from 6.6% in the first three months of 1997.
Operating Income. Operating income decreased by 12.2% to
$2,179,000 in the three months ended March 31, 1998 from
$2,483,000 in the three months ended March 31, 1997 due to the
increase in selling and general and administrative expense and
research and development costs.
Norwegian Joint Venture. The Company's 50% share of the
pre-tax earnings of its Norwegian joint venture, Orkla Exolon
A/S, was $56,000 for the three months ended March 31, 1998 versus
$12,000 in the three months ended March 31, 1997. The Company's
share in the venture's net sales was $1,278,000 in the three
months ended March 31, 1998 as compared to $1,902,000 in the
three months ended March 31, 1997.
Interest and Miscellaneous Expense. Interest expense
decreased in the first three months of 1998 to $213,000 from
$252,000 in the first three months of 1997. Average borrowing
levels of the Company's bank debt were reduced by approximately
$1,425,000 in the first three months of 1998 when compared to the
first three months of 1997. Interest costs on the debt related
to the Company's facility improvements in Illinois are being
capitalized. Interest costs of $50,000 were capitalized during
the three months ended March 31, 1998.
Miscellaneous expense of $105,000 was reported in the first
three months of 1998 compared to miscellaneous expense of $87,000
in the three months ended March 31, 1997.
Income Tax. The Company's effective tax rate was 38% for
the three months ended March 31, 1998 and March 31, 1997.
Liquidity and Capital Resources
As of March 31, 1998, working capital (current assets less
current liabilities) has decreased to $23,148,000, when compared
to $23,178,000 as of December 31, 1997. Accounts receivable
increased by $452,000 as of March 31, 1998 versus 1997 year end
primarily as a result of the increase in sales levels during the
first three months of 1998. Accounts payable increased by
$682,000 when compared to December 31, 1997.
For the three months ended March 31, 1998, net cash provided
by operating activities was $2,322,000. Cash reserves increased
by $438,000 at March 31, 1998 compared to December 31, 1997. Net
cash provided by operating activities was used to fund $1,256,000
of capital expenditures in the three months ended March 31, 1998.
The Company's current ratio decreased to 4.1 to 1.0 at March
31, 1998 from 4.8 to 1.0 as of December 31, 1997. The ratio of
total liabilities to shareholder's equity remained unchanged at
0.9 to 1.0 as of March 31, 1998 and December 31, 1997.
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.
Reference is made to the information included in Note 3 to
the Notes to Consolidated Financial Statements beginning on page
5 of this Form 10-Q Report which is incorporated herein by
reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
International Oxide Fusion, Inc. v. Exolon-ESK Company
and Exolon-ESK Company of Canada, Ltd.
Reference is made to the information concerning the
lawsuit filed by International Oxide Fusion, Inc.
against Exolon-ESK Company and Exolon-ESK Company of
Canada, Ltd. contained in Note 3(b)(ii) of the Notes to
Consolidated Condensed Financial Statements included in
this Form 10-Q.
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
The following exhibits and reports are included/incorporated
by reference herein:
(a) Exhibits
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K Report, dated March 24, 1998,
concerning a press release issued with respect to the
letter of intent with Elektroschmelzwerk Kempten GmbH
( ESK ) to purchase all of the European Silicon Carbide
assets of ESK.
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/Robert Rieger
Robert Rieger
President and Chief Executive Officer
/S/Michael Bieger
Michael Bieger
Vice President Finance and
Chief Financial Officer
Date: May 8, 1998
Exhibit 11
Exolon-ESK Company and Subsidiaries
Computation of Earnings Per Share
(In Thousands, Except Per Share Data)
Three Months
Ended
March 31,
1998 1997
Net earnings $1,197 $1,348
Less Preferred Stock
Dividends:
Series A (5) (5)
Series B (5) (5)
Undistributed earnings $1,187 $1,338
Net earnings attributable
to:
Common Stock (50.0%) 593 669
Class A Common Stock 594 669
(50.0%)
$1,187 $1,338
Net earnings per share of
Common Stock: $1.23 $1.39
Basic
Diluted $1.19 $1.34
Net earnings per share of
Class A Common Stock:
Basic $1.16 $1.30
Diluted $1.12 $1.26
Weighted Average Shares
Outstanding:
Basic:
482,000 482,000
Common Stock
Class A Common Stock 513,000 513,000
Diluted:
Common Stock 504,000 504,000
Class A Common Stock 535,000 535,000
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