UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] For the quarterly period ended September 30, 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
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, 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 September 30, December 31,
1998 1997
Current assets:
Cash $6,096 $ 2,503
Accounts receivable (less allowance
for doubtful accounts of
$250 in 1998 and $350 in 1997) 7,100 9,582
Inventories 20,869 16,636
Prepaid expenses 81 183
Deferred income taxes 354 356
Total Current Assets 34,500 29,260
Investment in Norwegian joint venture 6,030 5,505
Property, plant and equipment, at cost 75,488 71,362
Accumulated depreciation (47,224) (45,072)
Net property, plant and equipment 28,264 26,290
Bond sinking fund 2,060 885
Other assets 1,497 1,337
Total Assets $72,351 $63,277
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,367 $ 1,367
Accounts payable 4,196 2,661
Accrued expenses 2,831 1,858
Income taxes payable 24 196
Total Current Liabilities 8,418 6,082
Deferred income taxes 1,839 1,834
Long-term debt excluding current portions 25,558 20,033
Other long-term liabilities 2,525 2,539
Total Liabilities 38,340 30,488
Stockholders' equity:
Preferred stock - Series A - 19,364 276 276
Preferred stock - Series B - 19,364 166 166
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 29,431 28,209
Accumulated other comprehensive (865) (865)
Treasury stock, at cost (368) (368)
Total Stockholders' Equity 34,011 32,789
Total Liabilities and Stockholders' Equity $72,351 $63,277
The accompanying notes are an integral part of these statements.
Exolon-ESK Company
Consolidated Condensed Statements of Operations
Unaudited
(in thousands except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Net sales $14,598 $19,166 $52,667 $59,391
Cost of goods sold 12,657 14,617 42,768 45,371
Gross Profit 1,941 4,549 9,899 14,020
Operating Expenses
Depreciation 903 700 2,369 2,211
Selling, general & administrative
expenses 1,449 1,362 4,306 4,076
Research and development - 20 32 44
2,352 2,082 6,707 6,331
Operating (Loss) Income (411) 2,467 3,192 7,689
Other (Expense) Income:
Equity in Earnings before
income taxes of Norwegian
Jt. venture 201 254 525 333
Interest expense (406) (260) (824) (775)
Abandoned acquisition costs (364) - (364) -
Miscellaneous expense (161) (22) (325) (263)
(730) (28) (988) (705)
(Loss) Earnings before income
taxes (1,141) 2,439 2,204 6,984
Income tax benefit (expense) 367 (1,061) (950) (2,766)
Net (Loss) Earnings ($774) $1,378 $1,254 $4,218
(LOSS) EARNINGS PER COMMON SHARE:
Basic ($0.83) $1.42 $1.27 $4.34
Diluted ($0.83) $1.40 $1.24 $4.20
(LOSS) EARNINGS PER CLASS A COMMON SHARE:
Basic ($0.78) $1.33 $1.19 $4.08
Diluted ($0.78) $1.32 $1.17 $3.96
The accompanying notes are an integral part of these statements.
Exolon-ESK Company
Consolidated Condensed Statements of Cash Flows
Unaudited
(in thousands)
Nine Months
Ended
September 30,
1998 1997
Net cash provided by operating activities $3,618 $3,246
Cash Flow from Investing Activities:
Capital expenditures (4,342) (8,708)
Proceeds from restricted cash
equivalents - 5,334
Net Cash Used by Investing Activities (4,342) (3,374)
Cash Flow from Financing Activities:
Borrowings on debt 4,350 831
Dividends paid (33) (33)
Net Cash Provided by Financing Activities 4,317 798
Net increase in cash 3,593 670
Cash at beginning of period 2,503 275
Cash at end of period $6,096 $945
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 September 30, 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 September 30, 1998 and December 31,
1997 :
September 30, December 31,
1998 1997
(Unaudited)
Raw Materials $1,623 $2,839
Semi-Finished and
Finished Goods 21,203 16,183
Supplies and Other 1,531 965
24,357 19,987
Less: LIFO Reserve (3,488) (3,351)
$20,869 $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 September
30, 1998, the Company has incurred approximately
$13,517,000 of capital costs related to the facility
improvements. The remaining costs are expected to be
incurred in the fourth 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 Spring 1999.
The action remains ongoing against various other
Defendants.
NOTE 4 Comprehensive Income
Effective January 1, 1998 the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Statement 130 Establishes new
rules for the reporting and display of comprehensive
income and its components. The adoption of this
Statement had no impact on the Company's net income or
stockholders' equity. Statement 130 requires the
Company's cumulative translation adjustment, which
prior to adoption was reported separately in
stockholders' equity, to be included in other
comprehensive income. Prior year financial statements
have been reclassified to conform with the requirements
of Statement 130. During the three months and nine
months ended September 30, 1998 and 1997, total
comprehensive income (loss), which was comprised of net
income and foreign currency translation adjustments,
equaled net income (loss).
NOTE 5 Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share (in thousands except share
information):
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Numerator:
Net (loss) income
available to common
stockholders after
preferred stock
dividends $(796) $1,368 $1,221 $4,185
Numerator for basic earnings
per share:
Common stockholders (50%) (398) 684 610 2,093
Class A common
stockholders (50%) (398) 684 611 2,092
(796) 1,368 1,221 4,185
Net income available to
common stockholders after
assumed conversion of
preferred stock $(796) $1,368 $1,254 $4,185
Numerator for diluted
earnings per share:
Common stockholders (50%) (398) 689 627 2,109
Class A common
stockholders (50%) (398) 689 627 2,109
$(774) $1,378 $1,254 $4,218
Denominator:
Common stock:
Denominator for basic
earnings per share -
weighted average shares 481,995 481,995 481,995 481,995
Effect of dilutive
securities - convertible
preferred stock - 21,785 21,785 21,785
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 481,995 503,780 503,780 503,780
Class A common stock:
Denominator for basic
earnings per share -
weighted average shares 512,897 512,897 512,897 512,897
Effect of dilutive
securities - convertible
preferred stock - 21,785 21,785 21,785
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 512,897 534,682 534,682 534,682
The effect of convertible preferred stock on earnings per share
for three months ended September 30, 1998, has not been considered
as the impact is anti-dilutive.
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, 1998 with the
Nine Months Ended September 30, 1997.
Net Sales. Total net sales decreased by 11% to $52,667,000
during the nine months ended September 30, 1998 from $59,391,000
in the first nine months of 1998 primarily due to decreased demand
and increased foreign competition.
Gross Profit. Gross profit before depreciation expense was
$9,899,000 in the first nine months of 1998 compared to
$14,020,000 in the first nine months of 1997. As a percent of net
sales, gross margins were 19% in the first nine months of 1998
compared to 24% in the same period of 1997. The decrease in gross
profit as a percent of net sales from the first nine months of
1998 can be attributed to an increase in manufacturing costs
compared to the same period in 1997 and the decrease in overall
sales volume.
Operating Expenses. Total operating expenses increased to
$6,707,000 in the nine months ended September 30, 1998 from
$6,331,000 in the same period of 1997. Operating expenses as a
percent of sales increased to 13% in the first nine months of 1998
versus 11% for the same period in 1997. The primary reason for
the increase as a percent of sales is the decreased sales volume
in the first nine months of 1998 as compared to the same period in
1997. Selling, general and administrative expense increased to
$4,306,000 in the first nine months of 1998 compared to $4,076,000
for the same period in 1997. The primary reasons for the increase
include increased professional service fees related to accounting
and tax projects and increased commission expense.
Operating Income. Operating income decreased by 58% to
$3,192,000 in the nine months ended September 30, 1998 from
$7,689,000 in the nine months ended September 30, 1997 primarily
due to the decrease in net sales and increases in cost of sales.
Norwegian Joint Venture. The Company's 50% share of the pre-
tax earnings of its Norwegian joint venture, Orkla Exolon A/S, was
$525,000 for the nine months ended September 30, 1998 versus
$333,000 in the nine months ended September 30, 1997. The
Company's share in the venture's net sales was $5,555,000 in the
nine months ended September 30, 1998 as compared to $5,475,000 in
the nine months ended September 30, 1997.
Interest and Miscellaneous Expense. Interest expense
increased in the first nine months of 1998 to $824,000 from
$775,000 in the first nine months of 1997. The primary reason for
this increase is the interest costs related to the Company's
facility improvements in Illinois. Through June 30, 1998, these
interest costs were capitalized. As of July 1, 1998, these costs
are being expensed as the facility has been placed into service.
Miscellaneous expense was $325,000 in the first nine months
of 1998 compared to miscellaneous expense of $263,000 in the nine
months ended September 30, 1997.
Abandoned Acquisition Costs. On March 24, 1998, Exolon-ESK
Company filed a Form 8-K with the SEC with respect to a Letter of
Intent with Elektroschmelzwerk Kempten GmbH ("ESK") to purchase
all of the European silicon carbide assets of ESK. During the
period of March 24, 1998 through September 30, 1998, the Company
conducted its due diligence of the Acquisition through several
outside vendors and internal personnel at a cost of $364,381.
Effective September 30, 1998, the acquisition has been abandoned
and the Company has ceased all activities related to the
acquisition.
Income Tax. The Company's effective tax rate was 43% for the
nine months ended September 30, 1998 as compared to 40% for the
nine months ended September 30, 1997.
Comparison of the Three Months Ended September 30, 1998 with
the Three Months Ended September 30, 1997.
Net Sales. Total net sales decreased by 24% to $14,598,000 in
the three months ended September 30, 1998 from $19,166,000 in the
three months ended June 30, 1997 due to decreased market demand
and increased foreign competition.
Gross Profit. Gross profit before depreciation expense was
$1,941,000 in the three months ended September 30,1998 compared
to $4,549,000 in the three months ended September 30, 1997. As a
percent of net sales, gross margins were 13% in the third quarter
of 1998 compared to 24% in the same period of 1997. The decrease
in gross profit as a percent of net sales from the second quarter
of 1998 compared to the same period for 1997 can be attributed to
increases in costs of products sold combined with a decrease in
the overall sales volume.
Operating Expenses. Total operating expenses increased to
$2,352,000 in the three months ended September 30, 1998 from
$2,082,000 in the same period of 1997. Operating expenses as a
percent of net sales increased to 16% for the three months ended
September 30, 1998 as compared to 11% for the three months ended
September 30, 1997. The Company's largest portion of operating
expense, selling, general and administrative expense, increased to
$1,449,000 in the three months ended September 30, 1998 compared
to $1,362,000 during the three months ended September 30, 1997.
As a percent of net sales, selling, general and administrative
expense increased to 10% in the three months ended September 30,
1998 compared to 7% for the three months ended September 30, 1997.
Operating Income. Operating income decreased to $411 in the
three months ended September 30, 1998 from $2,467,000 in the three
months ended September 30, 1997 primarily as a result of the
decrease in net sales.
Norwegian Joint Venture. The Company's 50% share of the pre-
tax earnings of its Norwegian joint venture, Orkla Exolon A/S,
were $201,000 for the three months ended September 30, 1998 versus
$254,000 in the three months ended September 30, 1997. The
Company's share in the venture's net sales was $1,824,000 in the
three months ended September 30, 1998 versus $1,537,000 in the
three months ended September 30, 1997.
Interest and Miscellaneous Expense. Interest expense
increased in the three months ended September 30, 1998 to $406,000
from $260,000 in the three months ended September 30, 1997. The
primary reason for this increase is the interest costs related to
the Company's facility improvements in Illinois. Through June 30,
1998, these interest costs were capitalized. As of July 1, 1998,
these costs are being expensed the facility has been placed into
service.
Miscellaneous expense was $161,000 in the three months ended
September 30, 1998 compared to miscellaneous expense of $22,000 in
the three months ended September 30, 1997. This increase is
primarily due to the foreign currency fluctuations related to the
Company's Canadian operations.
Abandoned Acquisition Costs. On March 24, 1998, Exolon-ESK
Company filed a Form 8-K with the SEC with respect to a Letter of
Intent with Elektroschmelzwerk Kempten GmbH ("ESK") to purchase
all of the European silicon carbide assets of ESK. During the
period of March 24, 1998 through September 30, 1998, the Company
conducted its due diligence of the Acquisition through several
outside vendors and internal personnel at a cost of $364,381.
Effective September 30, 1998, the acquisition has been abandoned
and the Company has ceased all activities related to the
acquisition.
Liquidity and Capital Resources
As of September 30, 1998, working capital (current assets
less current liabilities) has increased to $25,977,000, when
compared to $23,178,000 as of December 31, 1997. Accounts
receivable decreased by $2,482,000 as of September 30, 1998 versus
1997 year end primarily as a result of the decrease in sales
levels during the nine months ended September 30, 1998 as compared
to the 1997 year. Inventories increased by $4,233,000 as of
September 30, 1998 as compared to December 31, 1997. Accounts
payable increased by $1,501,000 as of September 30, 1998 when
compared to December 31, 1997. Current maturities of long term
debt have remained at the same level as of September 30, 1998 as
they were at December 31, 1997.
For the nine months ended September 30, 1998, net cash
provided by operating activities was $3,618,000. Cash reserves
increased by $3,593,000 as of September 30, 1998 compared to
December 31, 1997. Net cash provided by operating activities was
used to fund $4,342,000 of capital expenditures in the nine months
ended September 30, 1998.
The Company's current ratio decreased to 4.0 to 1.0 at
September 30, 1998 from 4.8 to 1.0 as of December 31, 1997. The
ratio of total liabilities to shareholder's equity increased at
1.1 to 1.0 as of September 30, 1998 as compared to 0.9 to 1.0 at
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.
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 3(a)(i) to the Notes to Consolidated
Financial Statements on page 5, which is incorporated herein by
reference.
Reference is made to the descriptions of the following legal
matters, within Note 3(b) to the Notes to Consolidated Financial
Statements under the caption Legal Matters beginning on page 6
of this Form 10-Q Report, which descriptions are incorporated
herein by reference: (1) 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; (2) a temporary suspension imposed upon the Company by the
U.S. Defense Logistics Agency; (3) a civil lawsuit brought against
the Company in December 1996 by International Oxide Fusion, Inc.;
(4) civil lawsuit brought by the Company in August 1997 against
Theeb, LTD and Edward J. Bielawski; and (5) 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.
Impact of the Year 2000
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that
have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it
will be required to modify or replace significant portions of its
software and certain hardware so that those systems will properly
utilize dates beyond December 31, 1999. The Company presently
believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be
mitigated. However, if such modifications and replacements are
not made, or are not completed timely, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation, testing, and
implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. The completed assessment indicated that most of
the Company's significant information technology systems could be
affected. That assessment also indicated that there was little,
if any, risk associated with the production and manufacturing
systems. Further, the Company has determined that there is no
risk with respect to the products it has sold and continues to
sell. In addition, the Company has gathered information about the
Year 2000 compliance status of its significant suppliers and
continues to monitor their compliance.
For its information technology exposures, the Company has
decided to completely replace the existing software and associated
hardware. To date, the Company has installed the new information
systems at its Tonawanda, New York facility, which includes the
corporate headquarters, and is in the final stages of testing and
implementation. This process is expected to be completed prior to
December 31, 1998. The Company anticipates implementing the new
systems for its other locations beginning January 1, 1999, with an
expected completion date of not later than March 31, 1999.
The Company has queried its significant suppliers that do not
share information systems with the Company (external agents). To
date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company
has no means of ensuring that external agents will be Year 2000
ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external
agents is not determinable.
The Company will utilize both internal and external resources
to replace, test, and implement the software and certain hardware
for Year 2000 modifications. The total cost of the Year 2000
project is estimated at $950,000, which includes $723,000 for the
purchase of new software and hardware that will be capitalized and
$227,000 that will be expensed and incurred. To date, the Company
has incurred approximately $720,000 ($60,000 expensed and $660,000
capitalized for new systems and equipment), related to all phases
of the Year 2000 project.
Management of the Company believes it has an effective
program in place to resolve the Year 2000 issue in a timely
manner. As noted above, the Company has not yet completed all
necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, the Company would
be unable to take customer orders, manufacture and ship products,
invoice customers or collect payments. In addition, disruptions
in the economy generally resulting from Year 2000 issues could
also materially adversely affect the Company. The amount of
potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company currently has no contingency plans in place in
the event it does not complete all phases of the Year 2000
program. The Company plans to evaluate the status of completion
in March 1999 and determine whether such a plan is necessary.<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
a. Federal Proceedings and Related Matters
Reference is made to the information concerning lawsuits
filed by General Refractories Company and Arden
Architectural Specialties, Inc. against the Company
contained in Note 3(b)(i) of the Notes to Consolidated
Condensed Financial Statements included in this Form 10-Q.
b. 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.
c. The Exolon-ESK Company of Canada, Ltd. v. Theeb, Ltd.
and Edward J. Bielawski
Reference is made to the information concerning a
lawsuit filed against Theeb, Ltd. and Edward J.
Bielawski contained in Note 3(b)(ii) of the Notes to
Consolidated Condensed Financial Statements included in
this Form 10-Q.
d. Exolon-ESK Company and Exolon-ESK Company of Canada,
Ltd. v. Michael Perrotto, et al.
Reference is made to the information concerning the
Perrotto case contained in Note 3(b)(ii) of the Notes to
Consolidated Condensed Financial Statements included in
this Form 10-Q, 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
None
Item 5. Other Information
The Board of Directors of Exolon-ESK Company on September 14,
1998 appointed J. Fred Silver as President.<PAGE>
Item 6. Exhibits and Reports on Form 8-K
The following exhibits and reports are included/incorporated
by reference herein:
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
EXOLON-ESK COMPANY
S/J. Fred Silver
President and Chief Executive Officer
S/Michael Bieger
Vice President Finance and
Chief Financial Officer
Date: November 11, 1998
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