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 June 30, 1999
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 July 31, 1999 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 June 30, December 31,
1999 1998
Current assets:
Cash $4,863 $ 5,289
Accounts receivable (less
allowance for doubtful accounts
of $250 in 1999 and $250 in 1998) 6,077 7,325
Income Taxes Recoverable 581 1,124
Inventories 18,770 20,219
Prepaid expenses 352 96
Deferred income taxes 543 541
------ ------
Total Current Assets 31,186 34,594
Investment in Norwegian joint venture 5,395 5,594
Property, plant and equipment, at cost 75,781 75,267
Accumulated depreciation (49,854) (48,189)
------- -------
Net property, plant and equipment 25,927 27,078
Bond sinking fund 2,932 2,422
Other assets 1,592 1,598
------ ------
Total Assets $67,032 $71,286
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ - $ 503
Current maturities of long-term debt 967 967
Accounts payable 3,214 3,113
Accrued expenses 2,529 2,145
------- ------
Total Current Liabilities 6,710 6,728
Deferred income taxes 1,976 1,979
Long-term debt excluding current portions 23,778 27,643
Other long-term liabilities 2,401 2,360
------- ------
Total Liabilities 34,865 38,710
------- ------
Stockholders' equity:
Preferred stock - Series A -
19,364 shares issued 276 276
Preferred stock - Series B -
19,364 shares issued 166 166
Common stock, $1 par value - Auth.
600,000 shares, 512,897 issued 513 513
Class A common stock, $1 par value -
Auth. 600,000, 512,897 issued 513 513
Additional paid-in capital 4,345 4,345
Retained earnings 27,779 28,188
Accumulated other comprehensive
income (1,057) (1,057)
Treasury stock, at cost (368) (368)
------- -------
Total Stockholders' Equity 32,167 32,576
------- -------
Total Liabilities and Stockholders'
Equity $67,032 $71,286
======= =======
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 Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------
Net sales $12,817$17,718 $27,040 $38,069
Cost of goods sold 10,986 14,154 23,027 30,111
------- ------ ------ ------
Gross Profit 1,831 3,564 4,013 7,958
------- ------ ------ ------
Operating Expenses
Depreciation 915 733 1,830 1,466
Selling, general &
administrative expenses 1,315 1,409 2,548 2,857
Research and development 12 (2) 29 32
----- ----- ----- -----
Total Operating Expenses 2,242 2,140 4,407 4,355
----- ----- ----- -----
Operating (Loss) Income (411) 1,424 (394) 3,603
----- ----- ----- -----
Other Income (Expense):
Equity in (Loss) Earnings
before income taxes of
Norwegian Jt. venture (125) 268 (199) 324
Interest expense (411) (205) (810) (418)
Miscellaneous income
(expense) 207 (59) 796 (164)
----- ----- ----- -----
Total Other Income
(Expense) (329) 4 (213) (258)
----- ----- ----- -----
(Loss) Earnings before income
taxes (740) 1,428 (607) 3,345
Income tax benefit (expense) 287 (597) 231 (1,317)
----- ----- ----- -------
Net (Loss) Earnings ($453) $831 ($376) $2,028
====== ===== ====== =======
Earnings Per Common Share:
Basic ($0.48) $0.85 ($0.41) $2.08
Diluted ($0.48) $0.82 ($0.41) $2.01
Earnings Per Class A Common
Share:
Basic ($0.45) $0.80 ($0.39) $1.96
Diluted ($0.45) $0.78 ($0.39) $1.90
The accompanying notes are an integral part of these
statements.
Exolon-ESK Company
Consolidated Condensed Statements of Cash Flows
Unaudited
(in thousands)
Six Months Ended
June 30,
1999 1998
----- -----
Net cash provided by operating activities $5,215 $4,367
------ ------
Cash Flow from Investing Activities:
Capital expenditures (730) (2,971)
------ -------
Cash Flow from Financing Activities:
Repayments on debt (4,368) 517
Payments to bond sinking fund (510) -
Dividends paid (33) (33)
------- -------
Net Cash Provided by Financing Activities (4,911) 484
Net increase in cash 426 1,880
Cash at beginning of period 5,289 2,503
------ ------
Cash at end of period $4,863 $4,383
====== ======
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 of Exolon-ESK Company (the
Company ) 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 June 30, 1999 are not necessarily
indicative of the results that may be expected for the
year ending December 31, 1999.
For further information, refer to the financial
statements and footnotes thereto for the year ended
December 31, 1998 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 June 30, 1999 and December 31, 1998:
June 30, December 31,
1999 1998
(Unaudited)
----------- -----------
Raw Materials $1,188 $1,669
Semi-Finished and
Finished Goods 19,593 20,822
Supplies and Other 1,226 965
------- ------
22,007 23,456
Less: LIFO Reserve (3,237) (3,237)
------- -------
$18,770 $20,219
======= =======
NOTE 3 Contingencies
a. Environmental issues
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. Based upon
currently known information the Company estimates the
future costs associated with achieving compliance with
these limits would approximate $2 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 ultimate liability, if any, that could
result from these lawsuits cannot presently be
determined, although the Company believes that it has
meritorious defenses to the allegations, and it intends
to vigorously defend against the charges.
(ii) The Exolon-ESK Company of Canada, Ltd.
On June 7, 1999, The Exolon-ESK Company of Canada,
Ltd.( Exolon-Canada ) and certain employees were
charged by the Ministry of Labor for violations of the
Occupational Health and Safety Act resulting from a
June 18, 1998 furnace accident. The ultimate
liability, if any, that could result from these charges
is presently not determinable. Although Exolon-Canada
believes it has a meritous defense to these
allegations, it intends to vigorously defend these
charges.
In June 1993, Exolon-Canada commenced a civil legal
action in Ontario, Canada Court (General Division)
against one of its former officers and certain former
employees ( the "Defendants") on various charges
related to allegations that they defrauded the Company
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. On May 12, 1999
damages were awarded against Michael Perrotto in excess
of $750,000 and against Michael Perrotto and Paul
Perrotto, jointly and severally, in excess of $190,000.
Costs of $124,545 were also awarded against both
parties. The action remains ongoing against various
other Defendants.
NOTE 4 Comprehensive Income
During the three months and six months ended June 30,
1999 and 1998, total comprehensive income, which was
comprised of net income and foreign currency
translation adjustments, equaled net income.
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 Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------
Numerator: Net income (loss)
attributable to common
stockholders after
preferred stock dividends ($464) $ 820 ($398) $ 2,006
====== ===== ====== =======
Numerator for basic earnings per
share:
Common stockholders
(50%) (232) 410 (199) 1,003
Class A common
Stockholders (50%) (232) 410 (199) 1,003
----- --- ----- -----
(464) 820 (398) 2,006
Effect of Dilutive
Securities- Preferred
Stock Dividends - 11 - 22
---- --- ----- -----
Net income (loss)
attributable to common
stockholders after assumed
conversion of preferred
stock ($464) $831 ($398) $2,028
====== ==== ====== ======
Numerator for diluted
earnings per share:
Common stockholders
(50%) (232) 416 (199) 1,014
Class A common
stockholders (50%) (232) 415 (199) 1,014
------ ----- ------ ------
($464) $ 831 ($398) $2,028
====== ===== ====== ======
NOTE 5 Earnings Per Share -
Con't
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
------- ------- ------ --------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 481,995 503,780 481,995 503,780
======= ======= ======= =======
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
------- ------- ------- -------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 512,897 534,682 512,897 534,682
======= ======= ======= =======
Basic Earnings Per Share:
Common Stock ($0.48) $0.85 ($0.41) $2.08
Class A Common Stock ($0.45) $0.80 ($0.39) $1.96
Dilutive Earnings Per Share:
Common Stock ($0.48) $0.82 ($0.41) $2.01
Class A Common Stock ($0.45) $0.78 ($0.39) $1.90
The effect of the convertible preferred stock was not considered
for 1999 because the effect would have been anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Comparison of the Six Months Ended June 30, 1999 with the Six
Months Ended June 30, 1998.
NET SALES. Total net sales decreased by 29% to $27,040,000
during the six months ended June 30, 1999 from $38,069,000 in the
first six months of 1998 primarily due to decreased demand and
increased foreign competition.
GROSS PROFIT. Gross profit before depreciation expense was
$4,013,000 in the first six months of 1999 compared to
$7,958,000 in the first six months of 1998. As a percent of net
sales, gross margins were 15% in the first six months of 1999
compared to 21% in the same period of 1998. The decrease in
gross profit as a percent of net sales from the first six months
of 1999 can be attributed to an increase in manufacturing costs
compared to the same period in 1998 and the decrease in overall
sales volume.
OPERATING EXPENSES. Total operating expenses increased to
$4,407,000 in the six months ended June 30, 1999 from $4,355,000
in the same period of 1998. Operating expenses as a percent of
sales increased to 16% in the first six months of 1999 versus 11%
for the same period in 1998. The primary reason for the increase
as a percent of sales is the decreased sales volume in the first
six months of 1999 as compared to the same period in 1998.
Selling, general and administrative expense decreased to
$2,548,000 in the first six months of 1999 compared to $2,857,000
for the same period in 1998. The primary reasons for the
decrease include lower selling expenses related to travel costs
and lower outside commission expense.
OPERATING INCOME. Operating income decreased by 111% to a
loss of ($394,000) in the six months ended June 30, 1999 from
$3,603,000 in the six months ended June 30, 1998 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 (loss) of its Norwegian joint venture, Orkla
Exolon A/S, was a loss of ($199,000) for the six months ended
June 30, 1999 versus a profit of $324,000 in the six months ended
June 30, 1998.
INTEREST AND MISCELLANEOUS EXPENSE. Interest expense
increased in the first six months of 1999 to $810,000 from
$418,000 in the first six months of 1998. The primary reason for
this increase is the interest costs related to the Company's
construction of a desulpherization plant mandated by the State of
Illinois Environmental Protection Agency. 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 income (expense) was $796,000 in the first six
months of 1999 compared to ($164,000) in the six months ended
June 30, 1998. The Company received $494,000 from suppliers as
settlement in two antitrust litigation claims and $298,000 for a
business interruption insurance claim resulting from a furnace
accident at The Exolon-ESK Company of Canada, Ltd. in the first
six months of 1999.
INCOME TAX. The Company's effective tax rate was 38% for
the six months ended June 30, 1999 as compared to 39% for the six
months ended June 30, 1998.
Comparison of the three months ended June 30, 1999 with the three
months ended June 30, 1998.
NET SALES. Net sales decreased $4,901,000 to $12,817,000 in
the three months ended June 30, 1999, a decrease of 28% compared
to net sales of $17,718,000 in the three months ended June 30,
1998. The decline in sales was due to a decrease in volume and
increased pressure on prices resulting from a decrease in demand
combined with an increase in foreign competition.
GROSS PROFIT. Gross profit before depreciation expense was
$1,831,000 in the three months ended June 30, 1999 compared to
$3,564,000 in the three months ended June 30, 1998. As a percent
of sales, gross margins were 14% in the three months ended June
30, 1999 compared to 20% in the three months ended June 30, 1998.
The decrease in gross profit as a percent of net sales was
attributed to increases in cost of goods sold caused by lower
volumes and a decrease in the prices received for products due to
competitive pressures.
OPERATING EXPENSES. Operating expenses including
depreciation, were $2,242,000 during the three months ended June
30, 1999 versus $2,140,000 during the three months ended June 30,
1998. The increase in operating expenses of $102,000 is a result
of increased depreciation expense of $182,000 primarily related
to the startup of the pollution abatement facility in Illinois,
offset, in part, spending reductions of $94,000 in selling and
general and administrative expenses. Depreciation as a percent
of sales was 7% in the three months ended June 30, 1999 compared
to 4% for the three months ended June 30, 1998.
OPERATING INCOME. Operating income (loss) was a loss of
($411,000) in the three months ended June 30, 1999 compared to
$1,424,000 in the three months ended June 30, 1998. The decrease
in operating income is primarily due to the decrease in sales
volume combined with increased costs of production.
NORWEGIAN JOINT VENTURE. The company's 50% share of the
pre-tax earnings of its Norwegian joint venture, Orkla Exolon A/S
was a loss of ($125,000) for the three months ended June 30, 1999
versus a profit of $268,000 in the three months ended June 30,
1998.
INTEREST AND MISCELLANEOUS INCOME. Interest expense
increased to $411,000 in the three months ended June 30, 1999
versus $205,000 in the three months ended June 30, 1998. The
increase in interest expense is primarily due to the interest
costs incurred relative to the startup of the pollution abatement
facility in July of 1998. Miscellaneous income of $207,000 was
received in the three months ended June 30, 1999 versus
miscellaneous expense of $59,000 incurred in the three months
ended June 30, 1998. The increase in miscellaneous income was
due to settlements of two antitrust litigation claims from
suppliers of materials to Exolon-ESK.
INCOME TAX. The Company's effective tax rate for the three
months ended June 30, 1999 was 39% versus an effective tax rate
of 42% for the three months ended June 30, 1998.
Liquidity and Capital Resources
As of June 30, 1999, working capital (current assets
less current liabilities) has decreased by $3,390,000 to
$24,476,000 when compared to $27,866,000 as of December 31, 1998.
Inventories have decreased by $1,449,000 from $20,219,000 as of
December 31, 1998 to $18,770,000 as of June 30, 1999.
For the six months ended June 30, 1999, net cash
provided by operating activities was $5,215,000. Cash reserves
decreased by $426,000 as of June 30, 1999 compared to December
31, 1998. Net cash provided by operating activities was used to
reduce net outstanding debt by $4,878,000 and to fund capital
expenditures of $730,000.
The Company's current ratio decreased to 4.6 to 1.0 at
June 30, 1999 from 5.1 to 1.0 as of December 31, 1998. The ratio
of total liabilities to shareholders' equity decreased to 1.08 to
1.0 as of June 30, 1999 as compared to 1.19 to 1.0 as of December
31, 1998. 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 Notes to
the Consolidated Condensed Financial Statements of the Company,
which is hereby incorporated herein by reference.
Impact of the Year 2000
The Year 2000 (Y2K) 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.
The Company's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation,
testing/reassessment, 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 were two manufacturing
systems also affected. It was determined that there is little,
if any, risk associated with the remaining 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. This process is completed
to the extent that both critical and daily processing is active
and is Y2K compliant.
Of the two manufacturing systems affected, only one (a
control room) represents a significant concern. Upgrade of the
affected technology has been assessed, a specific solution
specified, and the project approved. Completion of this project
is to occur in the Fall of 1999. The other system is a mix
station and is non-critical with respect to compliance. This
equipment is not required until December 2000. An assessment and
action plan has been developed but will not be implemented until
first Quarter, 2000.
Secondary systems have been evaluated and are either
currently in compliance or expected to be in compliance by August
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 has, and will continue to 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 $1,935,000,
which includes $723,000 for the purchase of new software and
hardware that will be capitalized, $985,000 for the control room,
and $227,000 that will be expensed and incurred. To date, the
Company has incurred approximately $900,000 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 is developing contingency plans to be
put in place in the event it, its customers, or vendors, do not
complete all phases of the Year 2000 program. Currently the plan
has addressed staffing, to ensure technical, support, and
managerial staff into January 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the information included in Note 3 to
the Consolidated Condensed Financial Statements of the Company
included under Part I, Item 1 of 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 accepted the
resignation of Michael H. Bieger, as Vice President Finance and
Chief Financial Officer, as of June 25, 1999. Michael G. Pagano,
CPA, former Tonawanda Plant Controller, has been promoted to
Acting Vice President Finance and Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
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
J. Fred Silver
President and Chief Executive Officer
/s/Michael G. Pagano
Michael G. Pagano
Acting Vice President Finance and
Chief Financial Officer
Date: August 3, 1999
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