UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
One) THE SECURITIES EXCHANGE ACT OF 1934
[X]
For the quarterly period ended March 31, 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 April 30, 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 March 31, December 31,
1999 1998
-----------------------
Current assets:
Cash $5,546 $ 5,289
Accounts receivable (less allowance
for doubtful accounts of $250
in 1999 and $250 in 1998) 7,528 7,325
Income Taxes Recoverable 267 1,124
Inventories 18,898 20,219
Prepaid expenses 489 96
Deferred income taxes 542 541
------------------
Total Current Assets 33,270 34,594
Investment in Norwegian joint venture 5,519 5,594
Property, plant and equipment, at cost 75,464 75,267
Accumulated depreciation (48,955) (48,189)
------------------
Net property, plant and equipment 26,509 27,078
Bond sinking fund 2,684 2,422
Other assets 1,577 1,598
------------------
Total Assets $69,559 $71,286
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ - $ 503
Current maturities of long-term debt 967 967
Accounts payable 2,405 3,113
Accrued expenses 2,323 2,145
------------------
Total Current Liabilities 5,695 6,728
Deferred income taxes 1,978 1,979
Long-term debt excluding current portions 26,854 27,643
Other long-term liabilities 2,379 2,360
------------------
Total Liabilities 36,906 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 28,265 28,188
Accumulated other comprehensive
income (1,057) (1,057)
Treasury stock, at cost (368) (368)
-------------------
Total Stockholders' Equity 32,653 32,576
-------------------
Total Liabilities and Stockholders' Equity $69,559 $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 March 31,
1999 1998
---------------
Net sales $14,223 $20,351
Cost of goods sold 12,041 15,957
---------------
Gross Profit 2,182 4,394
---------------
Operating Expenses
Depreciation 915 733
Selling, general & administrative expenses 1,232 1,448
Research and development 17 34
---------------
Total Operating Expenses 2,164 2,215
---------------
Operating (Loss) Income 18 2,179
---------------
Other Income (Expense):
Equity in (Loss)Earnings before
income taxes of Norwegian Jt. venture (74) 56
Interest expense (399) (213)
Miscellaneous income(expense) 588 (105)
---------------
Total Other Income(Expense) 115 (262)
---------------
Earnings before income taxes 133 1,917
Income tax benefit (expense) (56) (720)
---------------
Net Earnings $77 $1,197
===============
Earnings Per Common Share:
Basic $0.07 $1.23
Diluted $0.07 $1.19
Earnings Per Class A Common Share:
Basic $0.06 $1.16
Diluted $0.06 $1.12
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,
1999 1998
---------------
Net cash provided by operating activities $2,220 $2,322
---------------
Cash Flow from Investing Activities:
Capital expenditures (409) (1,256)
---------------
Cash Flow from Financing Activities:
Repayments on debt (1,292) (400)
Payments to bond sinking fund (262) (217)
Dividends paid - (11)
----------------
Net Cash Provided by Financing Activities(1,554) (628)
----------------
Net increase in cash 257 438
Cash at beginning of period 5,289 2,503
----------------
Cash at end of period $5,546 $2,941
================
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, 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 March 31, 1999 and December 31, 1998:
March 31, December 31,
1999 1998
(Unaudited)
--------------------------
Raw Materials $732 $1,669
Semi-Finished and
Finished Goods 20,013 20,822
Supplies and Other 1,390 965
--------------------------
22,135 19,987
Less: LIFO Reserve (3,237) (3,237)
--------------------------
$18,898 $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) 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 alleged that
the Thorold, Ontario facility was in the possession of
technology that was provided in 1990 to Exolon-ESK
Company to produce MagChrome and Fused Magnesium Oxide
and had refused to pay further royalty payments.
International Oxide Fusion Inc. claimed damages for
loss of royalty payments from the number 4 furnace. A
Settlement and Full Release was reached by the parties
in March 1999 for $500,000 Cdn.
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 scheduled for May 1999. The action
remains ongoing against various other Defendants.
NOTE 4 Comprehensive Income
During the three months ended March 31, 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
Ended March 31,
1999 1998
-------------
Numerator: Net income available to
common stockholders after preferred
stock dividends $ 66 $1,186
=============
Numerator for basic earnings per share:
Common stockholders (50%) 33 593
Class A common stockholders (50%) 33 593
-------------
66 1,186
Effect of Dilutive Securities-Preferred
Stock Dividends - 11
-------------
Net income available to common
stockholders after assumed conversion
of preferred stock $66 $1,197
=============
Numerator for diluted earnings per share:
Common stockholders (50%) 33 598
Class A common stockholders (50%) 33 599
-------------
$ 66 $1,197
=============
NOTE 5 Earnings Per Share - Con't
Denominator: Common stock
Denominator for basic earnings
per share - weighted average shares 481,995 481,995
Effect of dilutive securities -
convertible preferred stock - 21,785
---------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 481,995 503,780
===============
Class A common stock:
Denominator for basic earnings
per share - weighted average shares 512,897 512,897
Effect of dilutive securities -
convertible preferred stock - 21,785
---------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversions 512,897 534,682
===============
Basic Earnings Per Share:
Common Stock $0.07 $1.23
Class A Common Stock $0.06 $1.16
Dilutive Earnings Per Share:
Common Stock $0.07 $1.19
Class A Common Stock $0.06 $1.12
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 three months ended March 31, 1999 with the
three months ended March 31, 1998.
Net Sales. Net sales decreased $6,128,000 to
$14,223,000 in the first three months of 1999, a decrease of 30%
compared to net sales of $20,351,000 in the first three months of
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 $2,182,000 in the first three months of 1999 compared to
$4,394,000 in the first three months of 1998. As a percent of
sales, gross margins were 15.3% in the first three months of 1999
compared to 21.6% in the first three months of 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 the
activation of the Company's desulfurization facility and a
decrease in the prices received for products due to competitive
pressures.
Operating Expenses. Operating expenses including
depreciation, were $2,164,000 during the first three months of
1999 versus $2,215,000 during the first three months of 1998.
The decrease in operating expenses is a result of spending
reductions of $218,000 in selling and general and administrative
expenses, offset, in part, by increased depreciation expense of
$183,000 primarily related to the startup of the pollution
abatement facility in Illinois. Depreciation as a percent of
sales was 6.4% in the first three months of 1999 compared to 3.6%
for the first three months of 1998. The depreciation increase as
a percent of sales was due to the 1998 mid-year startup of the
pollution abatement facility in Illinois combined with the
decrease in sales volume.
Operating Income. Operating income was $18,000 in the
first three months of 1999 compared to $2,179,000 in the first
three months of 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 $74,000 for the first three months of 1999
versus a profit of $56,000 in the first three months of 1998.
The Company's share in the venture's net sales was $1,676,795 for
the three months ended March 31, 1999 versus $1,860,000 in the
three months ended March 31, 1998.
Interest and Miscellaneous Income. Interest
expense increased to $399,000 in the first three months of 1999
versus $213,000 in the first three months of 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 $588,000 was
received in the first three months of 1999 versus miscellaneous
expense of $105,000 incurred in the first three months of 1998.
The increase in miscellaneous income was due to the settlement of
a business interruption claim in Thorold related to an incident
in 1998 and class action settlements of two antitrust litigation
claims from suppliers of materials to Exolon-ESK.
Income Tax. The Company's effective tax rate
for the first three months of 1999 was 42% versus an effective
tax rate of 38% for the first three months of 1998.
Liquidity and Capital Resources
As of March 31, 1999, working capital (current
assets less current liabilities) has decreased by $291,000 to
$27,575,000 when compared to $27,866,000 as of December 31, 1998.
Inventories have decreased by $1,321,000 from $20,219,000 as of
December 31, 1998 to $18,898,000 as of March 31, 1999.
For the three months ended March 31, 1999, net
cash provided by operating activities was $2,220,000. Cash
reserves increased by $257,000 as of March 31, 1999 compared to
December 31, 1998. Net cash provided by operating activities was
used to reduce outstanding debt by $1,554,000 and to fund capital
expenditures of $409,000.
The Company's current ratio increased to 5.8 to 1.0
at March 31, 1999 from 5.1 to 1.0 as of December 31, 1998. The
ratio of total liabilities to shareholders' equity decreased to
1.1 to 1.0 as of March 31, 1999 as compared to 1.2 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 Note 3(b)
to the Notes to Consolidated Condensed Financial Statements under
the caption "Legal Matters", 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 was 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 room0 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 July
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
None
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 Bieger
Michael Bieger
Vice President Finance and
Chief Financial Officer
Date: April 30, 1999
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