SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
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, NY 14150
(Address of Principal Executive Offices)
(716) 693-4550
(Registrant's telephone number, including area code)
Name of each
Title of each class exchange on which registered
Common stock $1 par value Boston Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ( )
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 __.
At March 15, 2000 the aggregate market value of the publicly traded
voting stock held by non-affiliates of the Registrant was
$1,870,000 based upon the closing price of the Registrant's Common
Stock on that date as reported by the Boston Stock Exchange.
Solely for the purposes of this calculation all persons who are or
may be Officers or Directors of the Registrant and all persons or
groups that have filed Schedules 13D with respect to the
Registrant's stock have been deemed to be affiliates.
As of March 15, 2000, the Registrant had outstanding 481,995 shares
of $1 par value Common Stock.
Documents Incorporated by Reference
None.
PART I
Item 1. Business
EXOLON-ESK COMPANY
(a) General Development of the Business
The Exolon Company was founded in 1914 as a Massachusetts
corporation and reincorporated as a Delaware corporation in 1976.
On April 27, 1984, ESK Corporation merged into the Exolon Company
and the resulting company was renamed Exolon-ESK Company. (As used
herein, the Company refers to Exolon-ESK Company and its wholly
owned Canadian Subsidiary.) The Company issued 499,219 shares of
its Class A Common Stock and 31,523 shares of its Series B
Convertible Preferred Stock to Wacker Chemical Corporation as a
result of the merger. Wacker Chemical Corporation subsequently
transferred all of its Company stock to Wacker Chemicals (USA),
Inc., and during 1999, Wacker Chemicals (USA), Inc. changed its
name to Wacker Engineered Ceramics, Inc. ( Wacker Ceramics ).
The Company is engaged in the business of manufacturing and
selling product, which are used principally for abrasive,
refractory and metallurgical applications. The primary products of
the Company are fused aluminum oxide and silicon carbide. Other
product lines include fused specialty products sold to the
refractory industry.
Effective at the time of the merger, the Company entered into
a Restated Patent License Agreement with Elektroschmelzwerk Kempten
GmbH ("Kempten"). Both Kempten and Wacker Ceramics are wholly
owned subsidiaries of Wacker Chemie GmbH. At the time of the
merger, the Company also entered into an exclusive distributorship
and sales representation agreement with Kempten for the United
States and Canada relating to silicon carbide products, which was
set to expire on December 31, 1997. In July 1997, Kempten and the
Company entered into a new two-year distributorship and sales
representation agreement for silicon carbide products for the years
1998 and 1999. In addition, the Company represented Kempten as a
distributor of boron carbide grains to selected markets.
(b) Financial Information about Industry Segments
The Company has only one business segment, the manufacture of
abrasive materials and products for abrasive, metallurgical and
refractory uses. The Company regards its principal business as
being in a single industry segment.
(c) Narrative Description of Business
The Company's crude silicon carbide is produced at the
Company's plant in Hennepin, Illinois. The Company produces crude
aluminum oxide and certain other products at its plant in Thorold,
Canada owned by The Exolon-ESK Company of Canada, Ltd. ("Exolon
Ltd."), its wholly owned subsidiary. Some of the crude products
are sold directly to customers, but most of the crude products are
shipped to the Company's plant in Tonawanda, New York, where the
Company crushes, grades and formulates the crude products into
granular products for sale to customers.
Methods of distribution. While most of the Company's products
are sold directly to its customers by sales representatives
employed by the Company, a portion of the sales are made through
industrial distributors located throughout the United States and
Canada. Export sales are made on a direct basis and through
agents.
Raw materials. The principal raw materials used by the
Company are abrasive grade bauxite, petroleum coke, silica sand and
cast iron borings.
The Company purchases many other products such as fiber drums,
wood pallets, bags, oil, natural gas, chemicals, electrodes and
carbon products.
The abrasive grade bauxite used by the Company presently comes
from the Republic of Guinea in West Africa, Australia and The
People's Republic of China. Petroleum coke and silica sand
originate from United States sources.
Large quantities of electric power are purchased from Ontario
Hydro for use by the Company's Canadian furnace plant and from the
Illinois Power Company for use in its Hennepin plant. The Company
believes that adequate supplies of power will continue to be
available. Adequate supplies of raw materials have in general been
available to the Company at competitive prices.
Employees. As of December 31, 1999, the Company had 200
employees.
Major Customers. Sales to no one customer accounted for 10%
or more of consolidated net sales of the Company for the years
ended December 31, 1999, 1998 and 1997. In management's opinion,
the loss of any one customer would not have a material adverse
effect on the Company.
Competition. The industry in which the Company is engaged is
highly competitive. Principal North American competition is from
three well-established North American companies. In addition,
substantial quantities of grain are imported and sold in North
America by foreign based producers of abrasive grain. Each of the
North American competitors, in addition to the Company, have
silicon carbide grain processing facilities. Two of the three also
have aluminum oxide crude and grain production operations, and one
has silicon carbide crude production facilities.
Competition in the industry is based upon pricing, service,
and product performance. The Company's products are sold to other
manufacturers and, as a result, the distribution to the industry
markets is highly competitive. Major customers are continually
striving to remain competitive by controlling the costs for raw
materials purchased from the Company. In order to meet customer
demand and for competitive purposes, the Company maintains
substantial inventories. In addition, it has been Company policy
to confine its primary operations to the electric furnace
production and processing of grain products.
Backlog. As of December 31, 1999, the Company had a
consolidated backlog of $3,856,000 as compared to $4,560,000 a year
earlier. The decrease in the Company's backlog in 1999 is
primarily due to the decrease in demand experienced in the fourth
quarter. All backlog is expected to be shipped in 2000.
Seasonal Effect. The Company's business is generally not
seasonal. However, vacation shutdowns by a number of its customers
can influence third quarter sales.
Pollution Control. The Company is involved in operations in
which there is a continued risk that the environment could be
adversely affected. The Company is in frequent contact with the
various environmental agencies in the jurisdictions in which it
operates in an attempt to maintain environmental compliance.
Reference is made to Note 13 of the Notes to Consolidated
Financial Statements beginning on page 28, which is incorporated
herein by reference.
Management believes all necessary pollution control equipment at
the Company's plants in Tonawanda, New York and Thorold, Ontario are
in place, and all current pollution control requirements are being met
at both plants.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Company's wholly owned subsidiary, Norsk Exolon AS, is a
limited partner in a Norwegian partnership, Orkla Exolon KS. See
information contained in Note 1 (c) of the Notes to Financial
Statements on page 18. The Company's interest in the Norwegian
partnership is subject to the usual risks of foreign investment,
including currency fluctuations.
Currency fluctuation is also a risk associated with the Company's
Canadian plant operations.
Item 2. Properties
The Company's main office and grain processing plant are located
in Tonawanda, New York. The plant and office buildings, which are
owned by the Company, contain 273,000 square feet of space, and occupy
6 of 34 acres owned by the Company at this site. The facilities were
originally completed in 1943, and substantial additions to the plant
have been made since that date.
The Company has an electric furnace plant situated in Thorold,
Ontario, Canada. The Company owns all plant and office buildings, as
well as, the 43 acres of land on which the facilities are located. In
total, the buildings consist of 251,000 square feet of space. The
plant was originally built in 1914. Substantial additions have been
made in subsequent years, including the construction of a new furnace
in 1996.
The Company's Hennepin, Illinois plant includes four outdoor
furnace groups and buildings of 47,800 square feet, located on a 78
acre site which is owned by the Company. Construction began in late
1977 and was completed in the spring of 1979 for three furnace groups.
The expansion to a fourth furnace group was completed in 1989. The
Company purchased an additional 20 acre parcel adjacent its property
in 1995 and has completed construction of a desulfurization facility
as outlined in Note 13(a)(i) on page 28.
The Company has operations in Norway conducted through a joint
venture, as outlined in Note 1(c) on page 18. The office and plant of
the Norwegian joint venture are located in Gjolme, Norway. The plant
and office building, and the land upon which it is situated, are owned
by the joint venture. In total, the plant and office consist of
154,000 square feet of space, on 88 acres of land. The plant and
office were constructed from 1961-1963, with substantial additions
made thereafter.
The Company believes that all of these plants are in good
condition and suited for the purposes for which they are operated.
Item 3. Legal Proceedings
Reference is made to the information included in Note 13 to the
Consolidated Financial Statements beginning on page 28, which is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock is traded on the Boston Stock
Exchange. The quarterly Common Stock price ranges are as follows:
Price Range of Common Stock Boston Stock Exchange
Quarter
1 2 3 4
----------- ----------- ----------- -----------
High-Low 1999 $30 1/8-$21 $21 1/4-$18 $19-$16 1/2 $18-$16 1/4
High-Low 1998 $33 1/2-$38 $38-$35 1/2 $36 1/2-$28 $33-$29 1/2
Information concerning limitations on the payment of dividends on
the Company's Common Stock is hereby incorporated by reference to
Notes 7 and 9 to Notes to Consolidated Financial Statements beginning
on pages 22 and 24, respectively.
The number of stockholder accounts of record of the Company's
Common Stock, $1 par value, was 154 as of March 15, 2000. The Company
did not pay any dividends on its Common Stock in 1999 or 1998.
The shares of the Company's Class A Common Stock, all of which
are owned by Wacker Engineered Ceramics, Inc., are not publicly
traded.
Item 6. Selected Financial Data
Selected Financial Years Ended December 31,
Information
1999 1998 1997 1996 1995
(thousands of dollars except share amounts)
-------------------------------------------
Statement of Operations:
Net Sales $ 51,219 $ 65,578 $ 78,096 $ 77,459 $ 68,592
Gross profit before
depreciation 9,138 10,961 17,286 17,839 15,380
Operating Income 1,327 2,124 9,355 9,358 7,527
Income before Cumulative
Effective of Accounting
Change 649 22 5,254 6,080 3,964
Cumulative Effect of Accounting
Change -
Net of Income Tax Benefit - - - - (502)
------- -------- -------- -------- --------
Net Income $ 649 $ 22 $ 5,254 $ 6,080 $ 3,462
======= ======== ======== ======== ========
Basic Earnings (Loss) per share of
Common Stock:
Income before
Cumulative Effect
of Accounting Change $ 0.63 $ (0.02) $ 5.41 $ 6.27 $ 4.06
Cumulative Effect of Accounting
Change -
Net of Tax Benefit - - - - (0.52)
-------- -------- -------- -------- --------
Net Income (Loss)
per share $ 0.63 $ (0.02) $ 5.41 $ 6.27 $ 3.54
======== ======== ======== ======== ========
Basic Earnings (Loss) per share of
Class A Common Stock:
Income before Cumulative
Effect of Accounting $ 0.59 $ (0.02) $ 5.08 $ 5.90 $ 3.81
Change
Cumulative Effect of
Accounting Change -
Net of Tax Benefit - - - - (0.49)
------- ------- -------- ------- -------
Net Income (Loss) per
share $ 0.59 $ (0.02) $ 5.08 $ 5.90 $ 3.32
======== ======== ======== ======== ========
Selected Financial Information Years Ended December 31,
- Continued
1999 1998 1997 1996 1995
(thousands of dollars
except share amounts)
Diluted Earnings per share of
Common Stock:
Income before Cumulative
Effect of Accounting $ 0.63 $(0.02) $ 5.21 $6.03 $ 3.93
Change
Cumulative Effect of Accounting
Change -
Net of Tax Benefit - - - - $(0.49)
------ ------- ------ ------ ------
Net Income per share $ 0.63 $(0.02) $ 5.21 $ 6.03 $ 3.44
====== ======= ====== ====== ======
Diluted Earnings per share of
Class A Common Stock:
Income before Cumulative
Effect of Accounting
Change $ 0.59 $(0.02) $ 4.91 $ 5.69 $ 3.71
Cumulative Effect of
Accounting Change -
Net of Tax Benefit - - - - $(0.47)
------ ------- ------ ------ ------
Net Income per share $ 0.59 $(0.02) $ 4.91 $ 5.69 $3.24
====== ======= ====== ====== =====
Dividends per share:
Series A Cumulative
Preferred Stock $1.1250 $1.1250 $1.1250 $0.8437 $1.1250
Series B Cumulative
Preferred Stock $1.1250 $1.1250 $1.1250 $0.8437 $1.1250
Common Stock - - - - -
Class A Common Stock - - - - -
Summary Balance Sheet December 31,
Information:
1999 1998 1997 1996 1995
(thousands of dollars)
Current Assets $29,611 $34,594 $29,260 $28,301 $29,395
Current Liabilities 7,707 6,728 6,082 8,818 7,981
Working Capital 21,904 27,866 23,178 19,483 21,414
Total Assets 65,088 71,286 63,277 61,483 50,215
Long-Term Debt 19,833 27,643 20,033 20,433 15,350
Stockholders' Equity 32,910 32,576 32,789 28,258 22,298
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Statements included in this Management Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this
document that do not relate to present or historical conditions are
"forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section
21F of the Securities Exchange Act of 1934, as amended. Additional
oral or written statements may be made by the Company from time to
time, and such statements may be included in documents filed with the
Securities and Exchange Commission. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the
Company to be materially different from those expressed or implied by
such forward-looking statements. Such factors include economic
slowdowns and recessions; the availability and pricing of raw
materials used in the manufacture of the Company's products; the
reliable operation of the Company's manufacturing facilities and
equipment; the Company's ability to effectively compete in the
industries in which it does business; the Company's ability to
successfully negotiate new labor agreements and otherwise maintain
favorable relations with its employees, a majority of whom are
unionized; and the Company's ability to comply with existing and
future environmental laws and regulations, the accuracy of its current
estimates of existing environmental liabilities and the possibility
that currently unknown environmental liabilities may be discovered.
The table presented below sets forth the following: (i)
percentages which certain items presented in the financial statements
bear to net sales of the Company and (ii) change of such items as
compared to the indicated prior year.
Period to Period
(Increase)
Decrease
in Relationship
Relationship to Net to
Sales Net Sales
Years Ended December 31, Years Ended
1999 1998 1997 1998-99 1997-98
--------------------------------------------
Net Sales 100.0 %100.0 % 100.0 % 0 % 0 %
Cost of Goods Sold,
Excluding
Depreciation 82.2 83.3 77.9 1.1 (5.4)
Depreciation 7.0 5.0 3.5 (2.0) (1.5)
Selling, General
And Administrative
Expense 8.1 8.3 6.6 0.2 (1.8)
Research and
Development 0.1 0.2 - 0.1 (0.2)
----------------------------------------
97.4 96.8 88.0 (0.6) (8.8)
----------------------------------------
Operating Income 2.6 3.2 12.0 0.6 8.8
Other Income
(Expense):
Equity in
Income(Loss)
of Norwegian Joint
Venture 0.3 0.6 0.6 0.3 0.0
Interest Expense (2.9) (1.8) (1.2) 1.1 0.6
Other 1.6 (1.3) (0.3) (2.9) 1.0
-----------------------------------------
(1.0) (2.5) (0.9) (1.5) 1.6
Income Before
Income Taxes 1.6 0.7 11.1 (0.9) 10.4
Income Tax Expense 0.3 0.7 4.4 0.4 3.7
---------------------------------------
Net Income 1.3 % 0.0 % 6.7 % (1.3) % 6.7 %
=======================================
The following discussion and analysis reviews certain factors,
which produced significant changes in the Company's results of
operations during the three years ended December 31, 1999.
Results of Operations 1999 Compared to 1998
In 1999, the Company's net sales decreased $14,359,000 to
$51,219,000, a decrease of 22% compared to net sales of $65,578,000 in
1998. The decline in sales was due to volume decreases caused by a
decrease in demand combined with an increase in foreign competition.
Consolidated net income was $649,000 for the year ended December
31, 1999. This compares to consolidated net income of $22,000 for
1998. The increase in net income is primarily due two miscellaneous
income items that were received during the year. The Company received
payments for an insurance settlement related to the furnace accident
that occurred at Exolon-Canada in June 1998 and a legal settlement
from its carbon graphite suppliers that were involved in a lawsuit for
price fixing.
Cost of sales, excluding depreciation, as a percentage of sales
decreased to 82% in 1999, compared to 83% in 1998 primarily as a
result of increased effort to control costs at all production
facilities. The Company used off peak lower cost electric power to run
its furnace plants during the year and reduced the manufacturing
workforce in order to reduce costs.
Total operating expenses including depreciation were $7,811,000
during 1999 versus $8,837,000 during 1998. The 1999 decrease in
operating expenses is primarily a result of a decrease in selling,
general and administrative expenses.
Depreciation, as a percent of sales, was 7.0% for 1999 compared
to 5.0% for 1998. The 1999 increase was due to having a full year's
depreciation expense for the pollution abatement facility in Illinois.
Selling, general and administrative expenses decreased by
$1,280,000 in 1999, due primarily to decreased selling costs for
advertising, travel and outside selling commissions.
Interest expense increased to $1,506,000 in 1999 versus
$1,179,000 in 1998. The increase in interest expense is primarily due
to having a full year's interest costs incurred relative to the
startup of the pollution abatement facility in July 1998.
The Company's 50% share of the pre-tax earnings of its Norwegian
joint venture, Orkla Exolon KS, was $172,000 for 1999 versus $385,000
for 1998. The joint venture's gross margin, prior to depreciation,
was 17% and 19% for 1999 and 1998, respectively.
The 1999 income tax provision was $183,000, representing an
effective rate of 22%. The 1998 income tax provision was $430,000,
which represented an effective rate of 95%. This was due to $662,000
of foreign currency translation losses, which are not deductible for
income tax calculations. Net of these losses the income tax provision
would represent 38.5% of taxable income.
Results of Operations 1998 Compared to 1997
In 1998, the Company's net sales decreased $12,518,000 to
$65,578,000, a decrease of 16% compared to net sales of $78,096,000 in
1997. The decline in sales was due to volume decreases caused by a
decrease in demand combined with an increase in foreign competition.
Consolidated net income was $22,000 for the year ended December
31, 1998. This compares to consolidated net income of $5,254,000 for
1997. The decrease in net income is primarily due to the loss in
sales volume and increased manufacturing costs.
Cost of sales, excluding depreciation, as a percentage of sales
increased to 83% in 1998, when compared to 78% in 1997 primarily as a
result of increased costs in silicon carbide production related to the
startup of our pollution abatement facility in Illinois.
Total operating expenses including depreciation were $8,837,000
during 1998 versus $7,931,000 during 1997. The 1998 increase in
operating expenses is primarily a result of increased depreciation
expense related to the startup of the pollution abatement facility in
Illinois and increased general and administrative expenses related to
year 2000 compliance efforts.
Depreciation, as a percent of sales, was 5.0% for 1998 compared
to 3.5% for 1997. The 1998 increase was due to the mid-year startup
of the pollution abatement facility in Illinois.
Selling, general and administrative expenses increased by
$331,000 in 1998, due primarily to increased expenditures related to
year 2000 compliance efforts and increased selling costs.
Interest expense from continuing operations increased to
$1,179,000 in 1998 versus $938,000 in 1997. The increase in interest
expense is primarily due to the interest costs incurred relative to
the startup of the pollution abatement facility in July.
The Company's 50% share of the pre-tax earnings of its Norwegian
joint venture, Orkla Exolon KS, was $385,000 for 1998 versus $437,000
for 1997. The joint venture's gross margin, prior to depreciation,
was 19% for both 1998 and 1997.
The 1998 income tax provision was $430,000, representing an
effective rate of 95%. This is due to $662,000 of foreign currency
translation losses, which are not deductible for income tax
calculations. Net of these losses the income tax provision would
represent 38.5% of taxable income. The 1997 income tax provision was
$3,432,000, which represented an effective rate of 39.5%.
Liquidity and Capital Resources
As of December 31, 1999, working capital (current assets less
current liabilities) decreased to $21,904,000, when compared to
$27,866,000 as of December 31, 1998. Accounts receivable decreased by
$1,216,000 as of December 31, 1999 versus December 31, 1998.
Inventory decreased by $3,290,000 at December 31, 1999 when compared
to December 31, 1998. Accounts payable increased $641,000 as of
December 31, 1999 versus December 31, 1998. Long-term debt decreased
by $7,810,000 versus December 31, 1998.
For the year ended December 31, 1999, net cash provided by
operating activities was $9,459,000. Overall outstanding bank
indebtedness decreased by $6,877,000 at December 31, 1999 compared to
December 31, 1998. Payments to the bond sinking fund were $913,000
for 1999. Capital expenditures of $1,607,000 were funded by
operations.
The Company's current ratio decreased to 3.8 to 1.0 at December
31, 1999 from 5.1 to 1.0 as of December 31, 1998. The ratio of total
liabilities to stockholder's equity was 1.0 to 1.0 as of December 31,
1999 and 1.1 to 1.0 as of December 31, 1998.
Current financial resources including the availability of the
line of credit financing and anticipated funds from operations are
expected to be adequate to meet normal requirements for the year
ahead. The Company currently has lines of credit with borrowing
capacities of $2,500,000 in the U.S. and $1,000,000 (Canadian funds)
in Canada.
The Company in its long-term cash planning normally covers
capital expenditures with funds generated internally. Where
abnormally large capital expenditure programs are involved, long-term
financing vehicles are sometimes used. Total capital expenditures for
2000 are forecasted at $1,500,000 to maintain and upgrade production
facilities. The Company believes that funds generated internally
should be sufficient to finance normal capital expenditure
requirements in 2000.
Reference is made to the information included in Note 13 to the
Consolidated Financial Statements beginning on page 28, which is
incorporated herein by reference.
Employees
As of December 31, 1999, the Company employed 200 persons. Of
these, approximately 137 (or 68%) work under three collective
bargaining agreements.
Impact of the Year 2000
In prior years, the Company discussed the nature and progress of
its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of
those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company
expensed approximately $16,243 during 1999 in connection with
remediating its systems.
The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or
the products and services of third parties. The Company will continue
to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes
in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and
prices, such as foreign currency exchange and interest rates. The
Company does not enter into derivatives or other financial instruments
for trading or speculative purposes. The Company has entered into
financial instruments to manage and reduce the impact of changes in
interest rates.
A portion of the Company's operations consists of manufacturing
and sales activities in foreign jurisdictions, principally Canada and
Norway. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. The Company's operating
results are exposed to changes in exchange rates between U.S. dollar
and the Canadian dollar and between the U.S. dollar and the Norwegian
Krone. Had the U.S. dollar been 10% stronger relative to the Canadian
dollar and the Norwegian Krone during 1998, net income would have been
lower by $1.2 million.
The Company has long-term indebtedness outstanding at December
31, 1999. The interest impact of an increase in interest rates of 100
basis points (1%) would be as follows (in thousands):
Impact
Interest on
Instrument Rate Earnings
------------------------------------------------------------
Line of credit Variable $ -
Village of Hennepin, Illinois Fixed -
Industrial Revenue Bonds
Upper Illinois River Valley Variable (a) (13)
Development Authority ----
Industrial Revenue Bonds
Net income reduction before tax (13)
Less tax benefit 5
---
Net income reduction $ (8)
=====
(a) The Company has entered into interest rate swap agreements to
manage its interest rate market risk exposure with respect to
this financial instrument. Under the swap agreement, the Company
has effectively fixed the interest rate on the related
obligations at a weighted average of 4.85% and either pays to, or
receives from a counter-party an amount equal to the difference
between the fixed rate and the current variable rate. The
weighted average variable rate at December 31, 1999 was 5.21%.
The interest rate swap agreements mature in December 2001.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements, together with the report
thereon of Ernst & Young LLP dated January 14, 2000, appear on pages
13 through 32 to follow.
Report of Independent Auditors
Board of Directors
Exolon-ESK Company
We have audited the accompanying consolidated balance sheets of
Exolon-ESK Company and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Exolon-ESK Company and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
S/ Ernst & Young LLP
Buffalo, New York
January 14, 2000
Exolon-ESK Company and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended December 31,
1999 1998 1997
--------------------------
Net Sales $ 51,219 $ 65,578 $ 78,096
Cost of Goods Sold 42,081 54,617 60,810
--------------------------
Gross Profit Before Depreciation 9,138 10,961 17,286
--------------------------
Operating Expenses:
Depreciation 3,576 3,252 2,734
Selling, General &
Administrative Expenses 4,199 5,479 5,148
Research and Development 36 106 49
-------------------------
Total Operating Expenses 7,811 8,837 7,931
-------------------------
Operating Income 1,327 2,124 9,355
-------------------------
Other Income (Expense):
Interest Expense (1,506) (1,179) (938)
Equity in Income of Norwegian
Joint Venture 172 385 437
Abandoned Acquisition Costs - (408) -
Insurance Settlement 298 - -
Vendor Litigation Settlement 499 - -
Other 42 (470) (168)
--------------------------
Total Other Income (Expense) (495) 1,672 (669)
--------------------------
Income before Income Taxes 832 452 8,686
Income Tax Expense 183 430 3,432
Net Income $ 649 $ 22 $ 5,254
==========================
Basic Income (Loss) Per Share:
Per Common Share $ 0.63 $ (0.02) $ 5.41
==========================
Per Class A Common Share $ 0.59 $ (0.02) $ 5.08
==========================
Diluted Income (Loss) Per Share:
Per Common Share $ 0.63 $ (0.02) $ 5.21
==========================
Per Class A Common $ 0.59 $ (0.02) $ 4.91
==========================
See accompanying notes to the consolidated financial statements.
Exolon-ESK Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
Assets 1999 1998
Current assets: ---------------
Cash $ 5,328 $ 5,289
Accounts receivable (less allowance for
Doubtful Accounts of $150 in 1999 and
$249 in 1998) 6,109 7,325
Income taxes recoverable 759 1,124
Inventories 16,929 20,219
Prepaid expenses 237 96
Deferred income taxes 249 541
------ ------
Total Current Assets 29,611 34,594
Investment in Norwegian joint venture 5,464 5,594
Property, plant and equipment 25,069 27,078
Bond sinking fund 3,335 2,422
Other assets 1,609 1,598
------ ------
Total Assets $65,088 $ 71,286
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $1,436 $ 503
Current maturities of long-term debt
And sinking fund requirements 967 967
Accounts payable 3,754 3,113
Accrued expenses 1,550 2,145
----- -----
Total Current Liabilities 7,707 6,728
Deferred income taxes 2,342 1,979
Long-term debt 19,833 27,643
Other long-term liabilities 2,296 2,360
------ ------
Total liabilities 32,178 38,710
------ ------
Commitments and Contingencies
Stockholders' equity:
Preferred stock
Series A (liquidation
preference - $484) 276 276
Series B (liquidation
preference - 484) 166 166
Common stock, issued 512,897,
outstanding 481,995 ($1 par value) 513 513
Class A common stock, issued/outstanding
512,897 ($1 par value) 513 513
Additional paid-in capital 4,345 4,345
Retained earnings 28,793 28,188
Accumulated other comprehensive income (1,328) (1,057)
Treasury stock, at cost (368) (368)
------- -------
Total Stockholders' Equity 32,910 32,576
------- -------
Total Liabilities and Stockholders' Equity $65,088 $ 71,286
======= ========
See accompanying notes to the consolidated financial statements.
Exolon-ESK Company and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
1999 1998 1997
-------------------
Cash Flow from Operating Activities:
Net income $ 649 $ 22 $ 5,254
Adjustments to reconcile net income
To cash provided by operating
Activities:
Depreciation 3,576 3,252 2,734
Amortization 20 - -
Equity in income of Norwegian (172) (385) (437)
joint venture
Gain on fixed asset disposals (3) - (23)
Deferred income taxes 655 (40) 47
Foreign currency adjustments 31 104 10
Change in Assets and Liabilities:
Accounts receivable 1,216 2,257 (521)
Income taxes recoverable 365 (1,124) -
Inventories 3,290 (3,583) 1,803
Prepaid expenses (141) 87 343
Other assets (94) (261) (37)
Cash overdraft - - (1,413)
Accounts payable 641 452 (562)
Accrued expenses (595) 287 78
Income taxes payable - (196) (270)
Other long-term liabilities (64) (179) 1
Other 85 - -
--------------------
Net Cash Provided by Operating Activities 9,459 693 7,007
--------------------
Cash Flow from Investing Activities:
Capital expenditures (1,607) (4,040)(10,617)
Proceeds from restricted
cash equivalents - - 7,996
Proceeds from fixed asset disposals 21 - 1
-----------------------
Net Cash Used for Investing Activities (1,586) (4,040) (2,620)
-----------------------
Cash Flow from Financing Activities:
Payments to bond sinking fund (913) (1,537) (867)
Net payments of long-term debt (7,810) 7,210 (700)
Deferred financing fees - - (329)
Net proceeds from (payments of)
Notes payable 933 503 (219)
Dividends paid (44) (43) (44)
----------------------
Net Cash Provided by (Used for)
Financing Activities (7,834) 6,133 (2,159)
----------------------
Net Increase in Cash 39 2,786 2,228
Cash at Beginning of Year 5,289 2,503 275
----------------------
Cash at End of Year $ 5,328 $5,289 $ 2,503
======================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $1,535 $1,399 $1,261
Income Taxes $ 9 $1,789 $3,710
See accompanying notes to the consolidated financial statements.
Exolon-ESK Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except share amount)
Add.
Series Paid-
A/B in Retain- Other
Pref. Common Cap- ed Compr. Treas.
Stock Stock ital Earnings Income Stock Total
Balance -
Jan. 1, 1997 $442 $1,026 $4,345 $22,999 $(186) $(368) $28,258
Net income - - - 5,254 - - 5,254
Foreign
Currency
Translation
Adjustment - - - - (679) - (679)
Comprehensive -----
Income - - - - - - 4,575
Preferred -----
Stock
Dividends
$1.125/share - - - (44) - - (44)
-------------------------------------------------------
Balance
Dec. 31, 1997 442 1,026 4,345 28,209 (865) (368) 32,789
Net income - - - 22 - - 22
Foreign
Currency
Translation
Adjustment - - - - (192) - (192)
Comprehensive -----
Loss - - - - - - (170)
Preferred -----
Stock
Dividends
$1.125/share - - - (43) - - (43)
-------------------------------------------------------
Balance -
Dec. 31, 1998 442 1,026 4,345 28,188 (1,057) (368) 32,576
Net income - - - 649 - - 649
Foreign
Currency
Translation
Adjustment - - - - (271) - (271)
Comprehensive -----
Income - - - - - - 378
Preferred -----
Stock
Dividends
$1.125/share - - - (44) - - (44)
-------------------------------------------------------
Balance -
Dec. 31, 1999 $442 $1,026 $4,345 $ 28,793 $(1,328) $(368) $32,910
=======================================================
See accompanying notes to the consolidated financial statements.
Exolon-ESK Company and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
a. Revenue recognition
The Company recognizes revenue at the time of shipment to the
customer. Provision is made for anticipated losses at the time the
loss is known.
b. Principles of consolidation
The accompanying consolidated financial statements include the
accounts of the Exolon-ESK Company and its wholly-owned subsidiaries
Exolon-ESK Company of Canada, Ltd., Norsk Exolon AS, and Exolon-ESK
International Sales Corporation (the "Company"). All significant
intercompany balances and transactions have been eliminated.
c. Investment in Norwegian joint venture
The Company's wholly-owned subsidiary, Norsk Exolon AS is a
limited partner in a Norwegian partnership, Orkla Exolon KS (the
"Partnership"), which is engaged in the manufacture and sale of
silicon carbide crude and grain products. Norsk Exolon AS has a 50%
interest in the Partnership, with another Norwegian company, Orkla AS,
owning the balance. The investment is stated at cost plus the
Company's share of undistributed earnings and translation adjustments
since acquisition. The earnings of the joint venture are reportable
for Norwegian tax purposes by the partners. Taxes attributable to
Norsk Exolon AS's share of earnings from the joint venture are
included as a component of income taxes (Note 8).
d. Inventories
Inventories are stated at the lower of cost or market.
Approximately 75% and 65% of the dollar value of inventories is stated
at last-in, first-out (LIFO) cost at December 31, 1999 and 1998, with
the balance being stated at average cost.
e. Property, plant and equipment
Property, plant and equipment is stated at cost. Maintenance and
repairs are charged to expense as incurred and renewals and
betterments are capitalized. Depreciation is computed for financial
reporting purposes using straight-line and declining balance methods
over the estimated useful lives of the assets as follows: buildings,
15-50 years; machinery and equipment, 3-20 years.
f. Deferred financing fees
Deferred financing fees are being amortized on a straight-line
basis over the life of the related debt.
g. Foreign currency translation
The Company has determined that the United States dollar is the
functional currency of the Canadian subsidiary and that the Norwegian
krone is the functional currency of the Norwegian subsidiary and the
joint venture.
Inventories and property, plant and equipment of the Canadian
subsidiary are translated at historical exchange rates and all other
assets and liabilities are translated at year-end exchange rates.
Income statements of the Canadian subsidiary are translated at average
rates for the year, except for depreciation, which is translated at
historical rates. Gains and losses arising as a result of the
translation of the financial statements of the Canadian subsidiary are
reflected directly in the results of operations.
Assets and liabilities of the Norwegian subsidiary and joint
venture are translated at year-end exchange rates and the income
statements are translated at the average exchange rates for the year.
Resulting translation adjustments are recorded as a separate component
of equity.
Net gains (losses) arising as a result of the remeasurement of
the Canadian subsidiary's financial statements into the United States
dollar and from other foreign currency transactions amounted to
$363,000, ($662,000), and ($317,000) in 1999, 1998, and 1997,
respectively.
h. Income taxes
Deferred income taxes are determined based on differences between
financial reporting and tax bases of assets and liabilities as
measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
The Company does not provide U.S. Federal income taxes on a
portion of the undistributed earnings of foreign subsidiaries as these
earnings are considered permanently reinvested. At December 31, 1999,
undistributed earnings of the Canadian and Norwegian foreign
subsidiaries combined were $13,155,000 and deferred taxes were not
provided on $10,115,000 of such undistributed earnings.
Investment tax credits are accounted for using the flow-through
method.
i. Currency forward contracts
From time to time, the Company enters into currency forward
contracts in management of foreign currency transaction exposure.
Forward foreign currency exchange contracts are purchased to reduce
the impact of foreign currency fluctuations on operating results.
Realized and unrealized gains and losses on these contracts are
recorded in net income currently, with the exception of gains and
losses on contracts designated to hedge specific foreign currency
commitments which are deferred and recognized in net income in the
period of the commitment transaction. The discount or premium of the
forward contract is recognized over the life of the contract.
j. Environmental remediation and compliance
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to
an existing condition caused by past operations, and which do not
contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the cost can be reasonably
estimated.
k. Long-lived assets
The Company reviews asset carrying amounts whenever events or
circumstances indicate that such carrying amounts may not be
recoverable. When considered impaired, the carrying amount of the
asset is reduced by a charge to income, to its current fair value.
l. Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
2. Inventories
The following are the major classes of inventories as of December
31 (in thousands):
1999 1998
--------------
Raw Materials $ 1,092 $ 1,669
Semi-Finished and Finished Goods 17,713 20,822
Supplies and Other 1,186 965
------------------
19,991 23,456
Less: LIFO Reserve (3,062) (3,237)
------------------
$ 16,929 $ 20,219
==================
3. Property, Plant and Equipment
Property, plant and equipment consists of (in thousands):
1999 1998
-------------
Land $ 283 $ 283
Buildings 8,702 8,668
Machinery & equipment 66,333 65,587
Construction in progress 1,315 729
---------------
76,633 75,267
Less - accumulated depreciation 51,564 48,189
---------------
$25,069 $27,078
================
During 1998, the Company capitalized interest costs totaling
$262,000.
4. Business Segment Information
The Company manufactures abrasive materials and products for
abrasive, metallurgical and refractory uses. The Company regards its
principal business as being in a single industry segment. The Company
conducts operations through its manufacturing facilities in the United
States and Canada, and its equity interest in a Norwegian joint
venture.
No one customer accounted for 10% or more of net sales in 1999,
1998 and 1997.
5. Investment in Norwegian Joint Venture
The Company's 50% share of the results of operations of the
Norwegian joint venture has been determined after adjustments to
reflect the application of United States generally accepted accounting
principles relating principally to the recording of depreciation and
pension expenses and adjustments to the carrying values of the
venture's year-end inventories.
The Company's share of the venture's assets, liabilities, and
results of operations is set forth in the following condensed
financial information (in thousands):
December 31,
Balance Sheet Data 1999 1998
-------------
Current assets $4,441 $4,521
Non-current assets 2,741 3,095
Current liabilities 1,352 1,503
Non-current liabilities 166 207
Statement of Operations Data 1999 1998 1997
--------------------
Net sales $7,303 $7,498 $8,037
Gross profit 1,242 1,483 1,551
Income before income taxes 172 385 437
The Company does not provide U.S. Federal income taxes on the
undistributed earnings of the Norwegian joint venture as these
earnings are permanently reinvested. At December 31, 1999 and 1998,
undistributed earnings of the joint venture were $5,531,000 and
$5,334,000, respectively.
Notes Payable
Effective January 3, 2000, the Company amended its U.S. Credit
Agreement dated December 22, 1992 with a U.S. bank to provide a line
of credit facility with an available balance in the amount of
$2,500,000. Borrowings under the line of credit bear interest at the
prime rate plus 1.75% and the agreement expires on December 31, 2000.
The balance of the revolving credit facility of $1,436,000 was
included as a note payable at December 31, 1999. On January 3, 2000
the outstanding balance of the revolving credit facility was rolled
into the new line of credit. The Company must pay a commitment fee
equal to 0.25% per annum on the unused portion of the line of credit
facility.
The U.S. Credit Agreement requires the Company to maintain
certain financial covenants. In addition, the agreement sets forth
limits on capital expenditures and dividends and contains certain
other covenants including restriction on mergers, consolidations and
sales of assets. The Company is precluded from paying or declaring
any dividends or other distributions on its Common Stock without
written consent from its U.S. bank. The Company may declare Preferred
Stock dividends not to exceed $100,000 in the aggregate in any fiscal
year.
As collateral for the U.S. Credit Agreement, the bank has
security interest in all U.S. accounts receivable and inventory as
well as certain additional assets of the Tonawanda, New York facility.
The Company's Canadian subsidiary has a $1,000,000 Canadian
($680,000 US equivalent) operating demand loan available as part of a
credit facility provided by a Canadian bank. The demand loan was
utilized at December 31, 1998 and had a balance of $503,000 US. There
was no outstanding balance on this demand loan at the end of 1999 or
1997.
The Canadian agreement requires the subsidiary to maintain
specified financial ratios and minimum net worth levels. The
maintenance of financial covenants may preclude the Canadian
subsidiary's transfer of funds, by dividend or otherwise, to the U.S.
parent company. All borrowings under the Canadian agreement are
guaranteed by the Company and the Canadian bank has a security
interest in the Canadian accounts receivable, inventory and machinery
and equipment. Interest on the borrowings is based upon the Canadian
prime rate.
7. Long-Term Debt
Long-term debt consists of (in thousands):
1999 1998
-------------
Revolving credit and term loan
agreement with a U.S. Bank. Interest
at prime rate plus 1/4% or LIBOR plus
2-1/2 % (7-3/4% at December 31, 1998). $ - $7,610
Industrial revenue bond held by an
insurance company. Interest is at a
fixed rate of 8.875%. Bond maturity
is January 1, 2018. 7,800 8,000
Industrial revenue bond. Interest is
variable (5.77% and 4.90% at December
31, 1999 and 1998, respectively). The
bonds are payable annually through
December 1, 2021. 13,000 13,000
---------------
$20,800 $28,610
Less current maturities 967 967
----------------
$19,833 $27,643
================
U.S. Credit Agreement
The Company's Credit Agreement dated December 22, 1992 with a
U.S. bank provided for borrowings of up to $10,000,000 under a
revolving credit facility and expired January 2, 2000. The agreement
has been amended to have the amount outstanding on that date converted
into line of credit (See Note 6).
Industrial Revenue Bonds
The Company is liable for making payments with respect to
$8,000,000 of Industrial Revenue Bonds issued by the Village of
Hennepin, Illinois and purchased by an insurance company. The bonds
bear interest, payable to a bank as trustee at a fixed rate of 8.875%.
The bonds are payable in annual installments that increase
periodically through maturity in the year 2018. The bond agreement
contains certain restrictive covenants, which are consistent with the
covenants contained in the U.S. Credit Agreement.
The Company is also liable for making payments with respect to
$13,000,000 of Industrial Revenue Bonds issued by the Upper Illinois
River Valley Development Authority for the construction of a
desulfurization plant at the Company's Hennepin, Illinois facility.
Bonds totaling $8,405,000 are tax-enhanced and mature December 1,
2021. The remaining bonds mature December 1, 2011. The bonds bear
interest, which is payable periodically, in arrears, to a bank as
trustee, at a variable rate determined by market rates for similar
instruments at the time of adjustment. The bond agreement contains
certain restrictive covenants, which are consistent with the covenants
contained in the U.S. Credit Agreement.
In support of the $13,000,000 bond issue, the Company obtained a
$13,000,000 letter of credit from its principal U.S. bank for the
benefit of the trustee of the bonds. A letter of credit fee equal to
2% per annum is payable to the bank periodically, in arrears. The
letter of credit expires in December, 2001 and is renewable annually
thereafter. The letter of credit agreement requires the Company to
make voluntary quarterly contributions to a sinking fund in an amount
that would be sufficient to provide for the redemption of all of the
bonds within 15 years. The letter of credit agreement also requires
the Company to contribute to the sinking fund, an amount equal to the
Company's excess cash flow, up to a maximum of $4,333,333 in the
aggregate. At December 31, 1999 and 1998, the Company was not
required to contribute an amount under this provision.
The bond sinking fund had a balance of $3,335,000 and $2,422,000 at
December 31, 1999 and 1998, respectively. The sinking fund monies are
invested in certificates of deposit with the bond trustee.
Aggregate annual maturities of long-term debt and scheduled
sinking fund requirements are as follows:
2000 $ 967,000
2001 $ 967,000
2002 $ 967,000
2003 $ 967,000
2004 $ 967,000
Thereafter $12,867,000
8. Income Taxes
The components of income before income taxes are as follows (in
thousands):
1999 1998 1997
---------------------------
Domestic $ 776 $ 250 $ 5,142
Foreign 56 202 3,544
----- ----- -------
Total $ 832 $ 452 $ 8,686
===== ===== =======
The components of income tax expense are as follows (in
thousands):
1999 1998 1997
---------------------------
Current provision
(benefit):
United States
Federal $ (480) $ 171 $ 1,540
State (27) 16 339
Foreign 1 281 1,506
-----------------------------
Total Current $ (506) $ 468 $ 3,385
-----------------------------
Deferred provision
(benefit):
United States
Federal $ 687 $ (84) $ 13
State 117 (9) 7
Foreign (115) 55 27
----------------------------
Total Deferred $ 689 $ (38) $ 47
----------------------------
Total $ 183 $ 430 $ 3,432
============================
The actual tax expense differs from the expected tax expense
computed by applying the U.S. Federal corporate tax rate of 34% to
earnings before income taxes as follows (in thousands):
1999 1998 1997
---------------------
Computed expected tax expense $ 283 $ 154 $ 2,954
Effect of differing tax rates
applicable to foreign
Subsidiary income (70) (14) (317)
Effect of permanent differences (19) 9 15
State and Provincial taxes, net of 21 127 797
Federal benefit
Effect of foreign currency (80) 146 70
remeasurement
Other 48 8 (87)
-------------------------
Total income tax expense $ 183 $ 430 $ 3,432
=========================
Effective tax rate 22.0% 95.1% 39.5%
=========================
Deferred income tax liabilities and assets include the following
(in thousands):
1999 1998
---------------
Deferred tax liabilities:
Excess tax depreciation $ 2,171 $ 1,804
Taxes on foreign earnings expected 571 571
to be repatriated
Pension and payroll accruals 258 191
Inventory accounting methods 75 -
Other 46 50
----------------
Gross deferred tax liabilities 3,121 2,616
----------------
Deferred tax assets:
Inventory accounting methods - (24)
Accounts receivable and other asset
reserves (45) 76)
Post retirement accrual (926) (935)
Other, net (57) (143)
------------------
Gross deferred tax assets (1,028) (1,178)
------------------
Net deferred tax liability at end
of year $ 2,093 $ 1,438
==================
9. Capital Stock
The Company has two classes of Common Stock. At December 31,
1999 there were 600,000 shares of $1 par value Common Stock
authorized, of which 512,897 shares were issued and 481,995 shares
were outstanding. At the same date there were 600,000 shares of $1
par value Class A Common Stock, of which 512,897 shares were issued
and outstanding.
Additionally, there were 100,000 shares of no par value Preferred
Stock authorized. At December 31, 1999 there were 19,364 shares of
Series A and 19,364 shares of Series B Preferred Stock outstanding.
At December 31, 1999, the shares of Series A and Series B
Preferred Stock are entitled to receive, when declared by the Board of
Directors, cumulative annual cash dividends at the rate of $1.125 per
share. The Series A and Series B Preferred Stock have a preference
upon liquidation of $25.00 each per share. Each share of Series A and
Series B Preferred Stock is convertible into 1.125 shares of Common
Stock and Class A Common Stock, respectively. The shares of Common
Stock, voting with the shares of the Series A Preferred Stock, have
the right to elect one-half of the members of the Board of Directors
and the shares of Class A Common Stock voting with the Series B
Preferred Stock, owned by Wacker Engineered Ceramics (USA), Inc.
("Wacker USA"), have the right to elect the remaining one-half of the
members of the Board of Directors.
10. Pension and Other Retirement Benefits
The Company sponsors contributory and non-contributory pension
plans in the United States and Canada covering substantially all
hourly and salaried employees with the exception of union employees at
the Company's Hennepin plant, who are covered by a union-sponsored
pension plan. The Company's U.S. defined contribution plan, which
covers all of its domestic salaried employees, and its Canadian
defined contribution plan covering substantially all Canadian
employees, provide for the Company to make regular contributions based
on salaries of eligible employees. Payments upon retirement or
termination of employment are based on vested amounts credited to
individual accounts. Contributions to the U.S. defined contribution
plan totaled $199,000 in 1999, and $204,000 in 1998, and $200,000 in
1997. Contributions to the Canadian defined contribution plan were
$40,000 in 1999, $62,000 in 1998, and $56,000 in 1997. The Company
also provides a defined benefit plan for hourly employees at the
Tonawanda plant. Benefits are based primarily on years of service.
The Company's policy for this plan is to contribute annually at least
the minimum amount required by the Employee Retirement Income Security
Act of 1974, as amended.
The Company also participates in a collectively bargained, union-
sponsored multiemployer pension plan which benefits employees of the
Company's Hennepin, Illinois facility who are union members. Company
contributions to this plan were $163,000, $180,000 and $180,000 for
1999, 1998 and 1997, respectively. This plan is not administered by
the Company. Contributions are determined in accordance with the
provisions of the negotiated labor contract.
Total pension expense for all plans amounted to $344,000,
$400,000, and $454,000 in 1999, 1998 and 1997, respectively.
The following tables summarize certain information with respect
to the Company's Tonawanda hourly employees defined benefit plan:
December 31,
Change in Benefit Obligation 1999 1998
-----------------
Benefit obligation at $ 2,162 $ 1,658
Beginning of year
Service cost 83 60
Interest cost 151 132
Plan amendments - 259
Actuarial loss 120 309
Benefits paid (148) (256)
-----------------
Benefit obligation at end 2,368 2,162
of year -----------------
Change in Plan Assets
Fair value of plan assets at
beginning of year 3,499 3,082
Actual return on plan assets 853 673
Benefits paid (148) (256)
-----------------
Fair value of plan assets at
end of year 4,204 3,499
-----------------
Funded status 1,836 1,337
Unrecognized net loss at
transition, being amortized
over approximately 17 years 69 86
Unrecognized prior service cost 357 385
Unrecognized actuarial gains (1,650) (1,254)
-------------------
Prepaid pension cost $ 612 $ 554
===================
Components of Net Periodic Pension 1999 1998 1997
------------------------------
Cost
Service cost $ 83 $ 60 $ 59
Interest cost 151 132 123
Expected return on plan assets (279) (215) (169)
Amortization of transition
obligation 17 17 17
Amortization of prior service
cost 28 12 12
Recognized net actuarial gains 58 (49) (24)
--------------------------------
Net periodic pension expense $ 58 $ (43) $ 18
================================
Weighted Average Assumptions
as of December 31
Discount rate 7% 8% 8%
Expected return on plan assets 8% 7% 7%
Unrecognized gains and prior service costs are amortized on a
straight-line basis over a period approximating the average remaining
service period for active employees.
In addition to providing pension benefits, the Company provides
certain health care and life insurance benefits to eligible retired
employees and their spouses. Participants generally become eligible
for these benefits after achieving certain age and years of service
requirements. For certain retirees, these benefits are subject to
deductibles, co-payment provisions and other limitations. The Company
may amend or change the plan periodically. The Company's policy is to
fund these benefits on a pay-as-you-go basis.
The following tables summarize certain information with respect
to the Company's post retirement benefit plans:
December 31,
1999 1998
----------------
Change in Benefit Obligation
Benefit obligation at beginning
of year $ 2,421 $ 2,551
Service cost 29 26
Interest cost 163 194
Actuarial gain 293 (72)
Benefits paid (240) (210)
Effect of changes in foreign
currency exchange rates 45 (68)
----------------
Benefit obligation at end of year 2,711 2,421
Unrecognized prior service cost (20) (21)
Unrecognized actuarial gains(losses) (191) 111
----------------
Accrued postretirement benefit
obligation $ 2,500 $ 2,511
====================
1999 1998 1997
--------------------------
Components of Net Periodic
Post Retirement Benefit Cost
Service cost $ 29 $ 26 $ 33
Interest cost 163 194 210
Amortization of prior service cost 2 2 2
Recognized net actuarial losses
(gains) - 7 20
--------------------------
Net periodic post retirement
benefit cost $ 194 $ 229 $ 265
==========================
Weighted Average Assumptions as of
December 31
Discount Rate 7% 8% 8%
Unrecognized gains and losses and prior service costs are
amortized on a straight-line basis over a period approximating the
average remaining service period for active employees.
For measuring the post retirement benefit obligation as of
December 31, 1999 an 8% annual rate of increase in health care rates
was assumed, decreasing to 6% per year in 2002 and thereafter. It was
also assumed that reimbursable expenses for post-1990 U.S. retirees
would be at least equal to the dollar reimbursement limitation.
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A one percentage
point change in assumed health care cost trend rates would have the
following effect:
One One
Percentage Percentage
Point Point
Increase Decrease
Effect on total of service and
interest cost components $ 16 $ (13)
Effect on post retirement 158 (138)
11. Related Party Transactions
The Company purchased combined totals of $2,445,000, $2,854,000
and $3,130,000 of products from its affiliates, Elektroschmelzwerk
Kempten GmbH, and its Norwegian joint venture during 1999, 1998 and
1997, respectively.
The Company has a royalty agreement with an affiliate of a
shareholder of the Company as described in Note 12(b).
12. Commitments
a. Lease agreements
The Company leases certain machinery and equipment under
operating leases. Amounts charged to expense for the years ended
December 31, 1999, 1998 and 1997 were $173,000, $295,000, and
$366,000, respectively. Total minimum lease payments, at December 31,
1999, under operating leases are summarized as follows:
Year 2000 $ 15,000
b. Royalty agreements
The Company was party to a royalty agreement which expired in
1996 and covered production of crude aluminum oxide at its Thorold,
Ontario plant using process technology acquired as part of the
construction and completion of a new furnace plant. The Company was
also party to a separate Royalty Agreement, which covered production
of specialty product for the refractory market, and expires April 30,
2001. Royalty expense amounted to $170,000, $73,000 and $0, in years
ended December 31, 1999, 1998 and 1997, respectively. During 1999, the
Company terminated the Royalty Agreement for $333,000. This royalty
buy-out is being amortized over the remaining royalty term.
13. 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 provided 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.
During 1998, the Company completed installation of the CEMS
and implementation of the BACT as required by the Consent Order.
A revised construction permit was received on December 27, 1999,
verifying that the project was in compliance with all applicable
Board emissions and utilized BACT for sulfur dioxide. The air
quality analysis showed compliance with the allowable sulfur
dioxide increment.
(ii) Superfund Site
A Special Notice of Liability was received by the Company
from the US EPA for the Remedial Design/Remedial Action Phase of
the Lenz Oil Services, Inc. Superfund Site. The Company is one
of over seventy potentially responsible parties. The Notice
alleges joint and several liability based upon the premise that
the soil and ground water were contaminated with oil and solvent
waste containing hazardous constituents. The ultimate liability
that could result from this Site and Notice cannot be presently
determined. A period of negotiations is scheduled to occur
during 2000.
(iii) 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 have been tightly controlled as a result of various
alternatives presently being considered by the Norwegian joint
venture. The joint venture has met the sulfur requirements with
changes in production techniques and raw material procurement
including low sulfur coke.
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. A
settlement was reached in December, 1999 whereby Exolon-Canada
paid a $100,000 (Canadian) fine plus a 20% court surcharge and
pleaded guilty to one count of the information.
14. Fair Value of Financial Instruments
At December 31, 1999 and 1998, the carrying amount and the fair
value of the Company's financial instruments were as follows (in
thousands). Bracketed amounts in the carrying amount column represent
liabilities for potential cash outflows. Bracketed amounts in the fair
value column represent estimated cash outflows required to currently
settle the financial instrument at current market rates.
December 31,
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------
Assets:
Cash $5,328 $5,328 $5,289 $5,289
Liabilities:
Note Payable (1,436) (1,436) (503) (503)
Revolving credit and term
loan agreement - - (7,610) (7,610)
Variable rate industrial
revenue bonds (13,000) (13,000) (13,000) (13,000)
Fixed rate industrial
revenue bonds (7,800) (9,643) (8,000) (10,793)
Interest rate swap agreement - 217 - (104)
The following methods and assumptions were used by the Company in
estimating the fair values of their financial instruments. The
carrying amount reported in the balance sheet for cash approximates
fair value. The fair value of the Company's note payable, revolving
credit and term loan agreement, and variable rate industrial revenue
bonds approximate carrying amounts, as the underlying debt instruments
are comprised of notes that are re-priced on a short-term basis. The
fair value of the fixed rate industrial revenue bonds has been
estimated using the discounted cash flow method.
During 1998, the Company entered into an interest rate swap
agreement with a bank to manage its exposure to interest rate
movements by effectively fixing the interest rates on its variable
rate industrial revenue bonds ($13,000,000 face amount) through
December 17, 2001. The fixed interest payments are at a weighted
average 4.85%. Interest rate differentials paid or received under
these agreements are recognized as adjustments to interest expense in
the period paid or received.
15. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share (in thousands except share and per share
information):
Numerator:
1999 1998 1997
-----------------------
Net income $649 $22 $ 5,254
Preferred stock dividends (44) (44) (44)
-----------------------
Net income available to common
stockholders $605 $ (22) $ 5,210
=======================
Numerator for basic earnings per share:
Common stockholders (50%) $303 $ (11) $ 2,605
Class A common stockholders (50%) 302 (11) 2,605
-----------------------
605 (22) 5,210
Effect of diluted securities
preferred stock dividends - - 44
-----------------------
Net income available to common
stockholders after assumed
conversion of preferred stock $605 $ (22) $ 5,254
=======================
Numerator for diluted earnings per share:
Common stockholders (50%) $303 $(11) $ 2,627
Class A common stockholders (50%) 302 (11) 2,627
----------------------
$605 $(22) $ 5,254
=======================
Denominator:
Common stock:
Denominator for basic earnings per
share weighted average shares 481,995 481,995 481,995
Effect of dilutive securities
convertible preferred stock - - 21,785
-------------------------
Denominator for diluted earnings per
share adjusted weighted average
shares and assumed conversions 481,995 481,995 503,780
=========================
Class A common stock:
Denominator for basic earnings per
share weighted average shares 512,897 512,897 512,897
Effect of dilutive securities
convertible preferred stock - - 21,785
-------------------------
Denominator for diluted earnings per
share adjusted weighted average
shares and assumed conversions 512,897 512,897 534,682
=========================
Basic earnings per share:
Common stock $0.63 ($0.02) $5.41
Class A common stock $0.59 ($0.02) $5.08
Diluted earnings per share:
Common stock $0.63 ($0.02) $5.21
Class A common stock $0.59 ($0.02) $4.91
The effect of the convertible preferred stock was not considered
for 1999 and 1998 because the effect would have been antidilutive.
16. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 1999, 1998 and 1997 is as
follows:
Quarter
(thousands of dollars except First Second Third Fourth
per share amounts) ---------------------------------
Year Ended December 31, 1999
----------------------------
Net Sales $14,223 $12,817 $12,603 $11,576
Gross Profit Before
Depreciation 2,182 1,831 2,530 2,595
Insurance Settlement 298 - - -
Vendor Litigation Settlement 314 157 23 5
Net Income (Loss) 77 (453) 163 862
Basic Earnings Per Common Share 0.07 (0.48) 0.16 0.88
Basic Earnings Per Class A
Common Share 0.06 (0.45) 0.15 0.83
Year Ended December 31, 1998
----------------------------
Net Sales $20,351 $17,718 $14,598 $12,911
Gross Profit Before
Depreciation 4,394 3,564 1,941 1,062
Abandoned Acquisition Costs - - (408) -
Net Income (Loss) 1,197 831 (774) (1,232)
Basic Earnings Per Common Share 1.23 0.85 (0.83) (1.27)
Basic Earnings Per Class A 1.16 0.80 (0.78) (1.20)
Common Share
Year Ended December 31, 1997
----------------------------
Net Sales $20,193 $20,034 $19,166 $18,703
Gross Profit Before
Depreciation 4,583 4,889 4,549 3,265
Net Income (Loss) 1,348 1,492 1,378 1,036
Basic Earnings Per Common Share 1.39 1.54 1.42 1.06
Basic Earnings Per Class A
Common Share 1.30 1.45 1.33 1.00
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Board of Directors consists of six members, three of whom are
elected by the outstanding shares of Common Stock and Series A
Preferred Stock voting as a class, and three of whom are elected by
the outstanding shares of Class A Common Stock and Series B Preferred
Stock voting as a class.
The Directors currently elected by the shares of Common Stock and
of the Series A Preferred Stock are Brent D. Baird, Theodore E. Dann,
Jr. and Patrick W.E. Hodgson (such persons are hereinafter referred to
as Common Directors, and the individuals currently elected by the
shares of Class A Common Stock and Series B Preferred Stock are
hereinafter referred to as Wacker Directors . The Wacker Directors
are Craig A. Rogerson, David S. Shellabarger and Dr. Fritz Petersen.
The following table contains information relating to the
Company's Directors. Such information and the information with regard
to beneficial ownership of securities have been furnished to the
Company by the respective directors.
Shares of
Shares of the
the Company's
Company's Series A
Common Preferred
Stock Stock
Owned Owned
Year Bene- Bene-
First ficially ficially
Name and Became As of as of
Principal Direct- Feb. 1, % of Feb. 1, % of
Occupation Age or 2000 Class 2000 Class
---------------------------------------------------------------------
Theodore E. Dann, 46 1986 90,800(1) 18.8 -- --
Jr.
Chairman of the
Company's Board of
Directors since
June 1, 1992;
Corporate
Secretary of the
Company from
January 1, 1987
through June 1,
1992; Chairman of
Buffalo
Technologies
Corp., from April
11, 1994 to
Present; President
of Buffalo
Technologies Corp.
since June 1997;
Secretary/Treasure
r, Director and
Corporate Attorney
for Ferro Alloys
Services, Inc.,
since 1985;
Director of First
Carolina
Investors, Inc.
Brent D Baird 61 1994 104,500(2) 21.7 -- --
Private
investor, Chairman
of First Carolina
Investors, Inc.;
Director of M&T
Bancorp (bank
holding company),
Merchants Group,
Inc., Ecology &
Environment,
Marine Transport
Corporation,
Allied Healthcare
Products, Inc. and
Todd Shipyards
Corporation; Prior
to 1992 was a
limited partner of
Trubee, Collins &
Co., a member of
the New York Stock
Exchange, Inc.
(1) See footnote (3) under table of more than 5%
stockholders, under Item 12.
(2) See footnote (2) under table of more than 5%
stockholders, under Item 12. Includes 1,300
shares owned by Mr. Baird, 14,000 shares owned
by Aries Hill Corp., 18,800 shares owned by
members of Mr. Baird's immediate family who
share his household but as to which he has no
voting or investment power, 5,700 shares owned
by The Cameron Baird Foundation and 64,700
shares owned by First Carolina Investors, Inc.
Shares of
the
Company's
Shares of Series A
the Preferred
Company's Stock
Common Owned
Year Stock Bene-
First Owned ficially
Became Bene- as of
Name and Principal Direct- ficially % of Feb. 1, % of
Occupation Age or as of Feb. Class 2000 Class
1, 2000
----------------------------------------------------------------------
Patrick W.E. 59 1991 78,370(3) 16.3 18,334 94.7
Hodgson
President,
Cinnamon
Investments,
London, Ontario,
investment firm,
since 1989;
Chairman of Todd
Shipyards, Inc.,
since Feb. 1993;
Chairman Scotts
Hospitality 1994-
1996; Director,
M&T Bancorp, First
Carolina
Investors, Inc.,
and Versacold,
Inc.
Craig A. Rogerson 43 1997 -- -- -- --
President,
Wacker Silicones
Corporation since
April 1997; Vice
President and
General Manager of
Fibers Division,
Hercules Chemical
Specialties
Company, Hercules,
Inc. from 1996-
1997; Sales
Director,
Americas, for the
Paper Technology
Division of the
Hercules Chemical
Specialties Co.
from 1995-1996;
Business Director,
Absorbents &
Textile Products
Group from 1992-
1995; Operations
Director,
Absorbents &
Textile Products
Group from 1991-
1992. Director,
Wacker Silicones
Corp., Wacker
Chemical Holding
Corp., Wacker
Engineered
Ceramics Inc., and
Wacker Biochem
Co., Wacker
Polymer Systems
Corp., Wacker
Mexico, Kelmar
Industries and
Precision
Silicones, Inc.
(3) Includes 78,370 shares owned by Cinnamon Investments which Mr.
Hodgson is a director. See footnote (2) under table of more than
5% stockholders, under Item 12.
Shares
Shares of the
of the Company's
Company's Series A
Common Preferred
Stock Stock
Owned Owned
Year Bene- Bene-
First ficially ficially
Became as of as of
Name and Principal Direct- Feb. 1, % of Feb. 1, % of
Occupation Age or 2000 Class 2000 Class
---------------------------------------------------------------------
Dr. Fritz Petersen 55 1999 -- -- -- --
Managing Director
ESK-SiC GmbH since
April 1, 1998. Head
of the Business Unit
SiC of ESK-GmbH from
January 4, 1994 to
September 30, 1998.
Managing Director of
CASIL-Carbureto de
Silicio S.A. in Brazil
from April 1, 1987 to
December 31, 1993.
David S. Shellabarger 41 1999 -- -- -- --
Controller of Wacker
Silicones Corporation
since 1989.
Item 11. Executive Compensation
The Company's directors, other than the Chairman, receive from
the Company an annual retainer fee of $5,000, and $1,500 for each
meeting of the Board or meeting of a committee of the Board they
attend, but not to exceed $1,500 for any one day. Director fees
payable to Wacker Directors for 1999 were paid to Wacker Engineered
Ceramics, Inc. The Chairman, Mr. Dann, receives an annual retainer
fee of $50,000, plus the meeting fees received by the other directors.
Compliance with Section 16 of the Securities Exchange Act
Under Section 16 of the Securities Exchange Act of 1934, as
amended, directors, executive officers and persons who own more than
10% of the Company's Common Stock are required to report their
ownership of equity securities of the Company, and any changes in that
ownership to the Securities Exchange Commission and to the Company.
Based solely upon a review of reports furnished to the Company (the
"Section 16(a) Reports") by such persons on Forms 3, 4 or 5 for the
year ended December 31, 1999, there were no omissions from or late
filings of Section 16(a) Reports.
Executive Officers
The executive officers of Exolon-ESK Company are as follows:
J. Fred Silver President and Chief Executive Officer
Michael G. Pagano Chief Financial Officer and Vice
President-Finance
Kersi Dordi Vice President Aluminum Oxide &
Specialty Products
Armand Ladage Vice President Silicon Carbide
John L. Redshaw Vice President of Sales & Marketing
Nancy E. Gates Secretary/General Counsel
The business backgrounds of the Company's executive officers are
as follows:
Mr. Silver, age 54 has been the President and Chief Executive
Officer since February 1996 with a one-year break from 8/97-9/98.
From April 1995 to February 1996 he was a member of the Company's
Board of Directors. He served as President of Carborundum Abrasives
Co. from 1981 through 1992 and as President of Time Release Sciences,
Inc., a foam manufacturer from January 1993 through February 1996, and
again from August 1997 through September 1998.
Mr. Pagano, age 34, served as Acting Vice President of
Finance/Chief Financial Officer from July 1999 through December 1999.
In January 2000 he was promoted to Chief Financial Officer. From
January 1994 to December 1997, he worked as a Senior Financial Analyst
at a food manufacturer, Rich Products Corporation, located in Buffalo,
New York.
Mr. Dordi, age 51, has served as a Vice President of Aluminum
Oxide & Specialty Products Manufacturing since October 1995 and has
served as the General Manager of the Company's Canadian subsidiary,
Exolon-ESK Company of Canada, Ltd., since September 1992. In January
1995, he became a member of the Company's Operating Committee and in
March 1995 was appointed as an executive officer on the Operating
Committee. From November 1990 to September 1992, he served as the
Plant Manager for the Company's Thorold, Ontario plant, and from 1986
to November of 1990, he served the Company in various technical and
managerial capacities.
Mr. Ladage, age 46, has served as a Vice President Silicon
Carbide since October 1995. In January 1995, he became a member of
the Company's Operating Committee and in March 1995 was appointed as
an executive officer on the Operating Committee. He has served as the
Plant Manager of the Company's Hennepin, Illinois operations since
1978.
Mr. Redshaw, age 45, has served as Vice President of Sales and
Marketing since October 1995. In January 1995, he became a member of
the Company's Operating Committee, and in March 1995 was appointed as
an executive officer on the Operating Committee. He has served as
Metallurgical Sales and Marketing Manager for the Company since 1989.
Ms. Gates, age 35, has been the General Corporate Secretary since
February 29, 1996. Since February 29, 1996, she has been employed as
the Company's General Counsel. From 1990 to 1996, Ms. Gates was a
corporate attorney at the law firm of Magavern, Magavern, & Grimm,
LLP, Buffalo, New York.
Compensation of Executive Officers
The following Summary Compensation Table sets forth information
concerning compensation for services in all capacities for the Company
and its subsidiaries for the fiscal years ended December 31, 1999,
1998, and 1997 of those persons who were, at December 31, 1999, (i)
the chief executive officer of the Company and (ii) executive officers
of the Company and its subsidiaries during 1999 whose annual base
salary and bonus compensation exceeded $100,000, (collectively, the
"Named Officers").
Summary Compensation Table
Annual Compensation
All Other
Name and Principal Compensation
Position Year Salary Bonus (1)
-----------------------------------------------------------------------
J. Fred Silver 1999 $168,000 $18,480 $20,331
President and 1998 $53,462 $8,374 $3,575
Chief Executive 1997 $103,000 $76,125 $11,543
Officer
Kersi Dordi 1999 $110,700 $12,174 $16,499
Vice President 1998 $108,000 $16,200 $15,871
Aluminum Oxide & 1997 $97,000 $47,530 $15,270
Specialty
Fusions
Armand Ladage 1999 $110,700 $12,174 $16,396
Vice President 1998 $108,000 20,520 $15,731
Silicon Carbide 1997 $90,000 $45,000 $15,085
John L. Redshaw 1999 $110,700 $12,174 $16,243
Vice President 1998 $108,000 13,500 15,450
Sales & 1997 $97,000 $48,500 $14,531
Marketing
(1) Includes matching contributions made by the Company under
the Company's Savings Plan for U.S. Salaried Employees (the "401(k)
Plan"), premiums paid by the Company on term life insurance, amounts
contributed under the Company's Retirement Plan for U.S. Salaried
Employees and amounts paid under a car allowance policy.
Compensation (Executive) Committee Interlocks and Insider
Participation
Elektroschmelzwerk Kempten GmbH ("Kempten") is a subsidiary of
Wacker Chemie GmbH ("Wacker Chemie"), which is the owner of all of the
outstanding stock of Wacker Engineered Ceramics, Inc. ("Wacker
Ceramics"), and Wacker Ceramics is the owner of all of the Company's
outstanding Class A Common Stock and Series B Preferred Stock. The
Company is the successor to a merger of ESK Corporation (wholly owned
subsidiary of Wacker Chemie) into The Exolon Company which was
effected on April 27, 1984. Pursuant to an exclusive distributorship
and sales representation agreement which was entered into with Kempten
at the time of the merger, the Company purchased $1,555,000 and
$2,699,000 of certain products from Kempten, during 1999 and 1998,
respectively.
The Company and Kempten maintain a joint patent covering certain
technology developed and implemented at the Company's Hennepin
facility and are joint applicants with respect to another such patent.
The patent and patent application relating to joint ownership rights
in the subject technology.
Dr. Fritz Petersen and Craig A. Rogerson, who is the President of
Wacker Silicones Corporation, (another wholly owned subsidiary of
Wacker Chemie), serve on the Executive Committee.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Common Stock and Series A Preferred. The stock ownership of the
only persons known to the Company to be the beneficial owners of more
than 5% of the outstanding shares of the Common Stock and of the
Series A Preferred Stock as of February 1, 2000, and such stock
ownership of all directors and officers of the Company as a group as
of that date are as follows:
Shares of Percent
Shares of Percent Series A of
Common of Preferred Outstand-
Stock Outstand- Stock ing
Name & Address Bene- ing Bene- Series A
Of Beneficial ficially Common ficially Preferred
Owner Owned (1) Stock Owned (1) Stock
-------------------------------------------------------------------------
Patrick W.E. Hodgson, et al 205,130(2) 42.6 18,334 94.7
60 Bedford Road - 2nd Floor
Toronto, Ont., Canada M5R 2K2
Ferro Alloys Services, Inc. 90,800(3) 18.8 --- ---
Suite 463
Carborundum Center
Niagara Falls, NY 14303
William J. Burke,III, 30,370(4) 6.3 --- ---
et al.
111 Devonshire Street
Boston, MA 02109
Woobourne Partners, L.P. 31,000 6.4 --- ---
200 N. Broadway, Suite 825
S. Louis, MO 63102
All Directors and Officers 294,330(5) 61.1 18,334 94.7
as a group.
(12 persons)
(1) The beneficial ownership information presented is based upon
information furnished by each person or contained in filings made
with the Securities and Exchange Commission.
(2) Beneficially owned by a group composed of: Patrick W.E. Hodgson
(77,270); William J. Magavern II and James L. Magavern, as co-
executors of the Estate of Samuel D. Magavern (15,260); Brent D.
Baird (1,300); Aries Hill Corp. (a private holding company whose
controlling shareholders include Brent D. Baird, Bruce C. Baird,
Brian D. Baird and Bridget B. Baird) (14,000); Bridget B. Baird,
as trustee of a family trust (9,800); Jane D. Baird (9,000); The
Cameron Baird Foundation (a charitable foundation whose trustees
include Jane D. Baird, Bridget B. Baird, Brian D. Baird, Bruce C.
Baird and Brenda B. Senturia) (5,700); First Carolina Investors,
Inc. (a Delaware corporation whose directors include Brent D.
Baird, Bruce C. Baird, Patrick W.E. Hodgson, Theodore E. Dann,
Jr. and H. Thomas Webb) (57,100); William J. Magavern II (5,000);
and, James L. Magavern (2,000). Members of the group had sole
voting and investment power with respect to 168,706 shares and
shared voting and investment power with respect to 27,724 shares,
and reported that they had agreed to evaluate jointly any
proposal presented to the Company's shareholders pursuant to
which Wacker Chemical Corporation may acquire all or
substantially all of the assets of the Company.
(3) Owned by Ferro Alloys Services, Inc., a corporation of which
Theodore E. Dann, Jr., who is Chairman of the Board of the
Company, is a director, officer and corporate attorney. Includes
2,000 shares held in the name of the Estate of Theodore E. Dann
that are beneficially owned by Ferro Alloys Services, Inc.
(4) Includes 25,500 shares owned by William J. Burke Jr., Marital
Trust, State Street Bank
(5) Except as otherwise indicated above, members of the group have
sole voting and investment power with respect to such shares.
Beneficial Owner of Class A Common Stock and Series B Preferred
Stock. The stock ownership of the only beneficial owner of the
Class A Common Stock and Series B Preferred Stock of the Company as of
February 1, 2000 is as follows:
Shares of
Shares of Series B
Class A Common Preferred
Stock Stock
Beneficially Beneficially
Owned Owned
Name & Address (Percent of (Percent of
of Beneficial Class Class
Owner Outstanding) Outstanding)
----------------------------------------------------------------------
Wacker Engineered Ceramics, Inc. 512,897 (100%) 19,364 (100%)
c/o Wacker Chemical Holding
Corporation
3301 Sutton Road
Adrian, MI 49221-9397
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are filed as part of this
report
Page In Form 10-K
1) Report of Independent Auditors 13
Financial Statements:
Consolidated Statements of 14
Operations, three years
ended December 31, 1999
Consolidated Balance Sheets at 15
December 31, 1999 and 1998
Consolidated Statements of Cash 16
Flows, three years ended
December 31, 1999
Consolidated Statements of 17
Changes in Stockholders'
Equity, three years ended
December 31, 1999
Notes to Consolidated Financial 18
Statements
2) Financial Statement Schedule for
three years ended
December 31, 1999:
II Valuation and qualifying 44
accounts
All other required schedules have
been omitted because they do not
apply to the Company, or the
information is presented in the
consolidated financial statements or
the notes thereto.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (Continued)
(a) (3) Exhibits
Exhibit Description Reference
No.
3A Certificate of Amendment of Exhibit 3A to the Report
Restated Certificate of on Form 10-K for the
Incorporation dated April year ended December 31,
30, 1997 1996*
3A(1) Certificate of Merger Exhibit 3A(1) to the
Report on Form 10-K for
the year ended Dec 31,
1995*
3F Certificate of Amendment of Exhibit 3F to the Report
Restated Certificate of on Form 10-K for the
Incorporation dated April year ended December 31,
23, 1986 1994*
3G Certificate of Amendment of Exhibit 3G to the Report
Restated Certificate of on Form 10-K for the
Incorporation dated May 4, year ended December 31,
1987 1994*
3I Restated Bylaws containing Exhibit 3I to the Report
all previous amendments on Form 10-K for the
adopted year ended Dec 31, 1996*
4 Instruments Defining Rights Articles of
of Security Holders Incorporation, Exhibits
3A, and Exhibits 3F and
3G to the Report on Form
10-K for the year ended
December 31, 1994*
10D(23)A Amendment Credit Agreement Exhibit 10D(23)A to the
dated December 1, 1996 Report on Form 10-K for
the year ended December
31, 1996*
10D(24) Industrial Revenue Bond Exhibit 10D(24) to the
Agreement dated January 1, report on Form 10-K for
1993. the year ended Dec 31,
1997*
10D(25) Industrial Revenue Bond Exhibit 10D(25) to the
Loan Agreement dated Report on Form 10-K for
December 1, 1996 the year ended Dec 31,
1996*
10D(26) Building Loan Agreement Exhibit 10D(26) to the
dated December 1, 1996 Report on Form 10-K for
the year ended Dec 31,
1996*
10F Stockholder's Agreement Exhibit 10F to the
dated as of April 26, 1984 Report on Form 10-K for
between the Registrant and the year ended December
Wacker Chemical Corporation 31, 1995*
10G Restated License Agreement Exhibit 10G to the
dated as of April 26, 1984 Report on Form 10-K for
among Elektroschmelzwerk the year ended December
Kempten GmbH, ESK 31, 1995*
Corporation and the
Registrant
10H Distributorship Agreement Exhibit 10H to the
dated July 30, 1997 between report on Form 10-K for
Elektroschmelzwerk Kempten the year ended December
GmbH, and the Registrant 31, 1997*
10I Indemnification Agreement Exhibit 10I to the
dated as of December 15, Report on Form 10-K for
1984 between Wacker the year ended December
Chemical Corporation and 31, 1995*
the Registrant
22 Subsidiaries of the Exhibit 22
registrant
27 Financial Data Schedule Exhibit 27
(b) Reports on Form 8-K:
None.
(c) All exhibits required by Item 601 of Regulation S-K
are included in Item 14(a)(3).
* Incorporated herein by reference.
Exolon-ESK Company and Subsidiaries
Valuation and Qualifying Accounts
Three Years Ended December 31, 1999
(thousands of dollars)
Additions
Balance Charged
at Be- to Costs Balance
ginning and at End
Description of Year Expenses Adjustments of Year
-----------------------------------------------------------
Deducted from assets
Allowance for
doubtful accounts
Year ended
December 31, 1999 $249 - ($99)(a) $150
Year ended
December 31, 1998 $350 - ($101)(a) $249
Year ended
December 31, 1997 $502 $10 ($162)(a) $350
Allowance for slow-
moving and obsolete
inventory
Year ended
December 31, 1999 $257 $120 - $377
Year ended
December 31, 1998 $196 $120 ($59) $257
Year ended
December 31, 1997 $297 $101 - $196
(a) Uncollectible accounts written off, net of recoveries.
(b) Bad debt recoveries.
Pursuant to the requirements of Section 13 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.
March 15, 2000 EXOLON-ESK COMPANY
By s/J. Fred Silver
----------------------------
J. Fred Silver, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
S/J. Fred Silver S/Michael Pagano
---------------- ----------------
J. Fred Silver, Michael Pagano,
President and Chief Vice President
Executive Officer Finance and
Chief Financial
Officer
S/Theodore E. Dann, Jr.
-----------------------
Theodore E. Dann, Jr. Chairman of the Board March 15, 2000
S/Brent D. Baird
----------------
Brent D. Baird Director March 15, 2000
S/Craig A. Rogerson
-------------------
Craig A. Rogerson Director March 15, 2000
S/Dr. Fritz Petersen
--------------------
Dr. Fritz Petersen Director March 15, 2000
S/David S. Shellabarger
-----------------------
David S. Shellabarger Director March 15, 2000
S/Patrick W.E. Hodgson
-----------------------
Patrick W.E. Hodgson Director March 15, 2000
EXHIBIT INDEX
Exhibit Description Reference
No.
3A Certificate of Amendment of Exhibit 3A to the report
Restated Certificate of on Form 10-K for the
Incorporation dated April year ended December 31,
30, 1997 1996*
3A(1) Certificate of Merger Exhibit 3A(1) to the
report on Form 10-K for
the year ended December
31, 1995*
3F Certificate of Amendment of Exhibit 3F to the report
Restated Certificate of on Form 10-K for the
Incorporation dated April year ended December 31,
23, 1986 1994*
3G Certificate of Amendment of Exhibit 3G to the report
Restated Certificate of on Form 10-K for the
Incorporation dated May 4, year ended December 31,
1987 1994*
3I Restated Bylaws containing Exhibit 3I to the Report
all previous amendments on Form 10-K for the
adopted year ended December 31,
1996*
4 Instruments Defining Rights Articles of
of Security Holders Incorporation, Exhibits
3A, and Exhibits 3F and
3G to the Report on Form
10-K for the year ended
December 31, 1994*
10D(23) Amendment Credit Agreement Exhibit 10D(23)A to the
A dated December 1, 1996 Report on Form 10-K for
the year ended December
31, 1996*
10D(24) Industrial Revenue Bond Exhibit 10D(24) to the
Agreement dated January 1, report on Form 10-K for
1993. the year ended December
31, 1997*
10D(25) Industrial Revenue Bond Loan Exhibit 10D(25) to the
Agreement dated December 1, Report on Form 10-K for
1996 the year ended December
31, 1996*
10D(26) Building Loan Agreement Exhibit 10D(26) to the
dated December 1, 1996 Report on Form 10-K for
the year ended Dec 31,
1996*
10F Stockholder's Agreement Exhibit 10F to the
dated as of April 26, 1984 report on Form 10-K for
between the Registrant and the year ended December
Wacker Chemical Corporation 31, 1995*
10G Restated License Agreement Exhibit 10G to the
dated as of April 26, 1984 report on Form 10-K for
among Elektroschmelzwerk the year ended December
Kempten GmbH, ESK 31, 1995*
Corporation and the
Registrant
10H Distributorship Agreement Exhibit 10H to the
dated July 30, 1997 between report on Form 10-K for
Elektroschmelzwerk Kempten the year ended December
GmbH and the Registrant 31, 1997*
10I Indemnification Agreement Exhibit 10I to the
dated as of December 15, report on Form 10-K for
1984 between Wacker Chemical the year ended December
Corporation and the 31, 1995*
Registrant
22 Subsidiaries of the Exhibit 22
Registrant
27 Financial Data Schedule Submitted electronically
* Incorporated herein by reference.
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
The subsidiaries listed below have been included in the
Consolidated Financial Statements of the Registrant. See Note
1 of Notes to Consolidated Financial Statements.
Place of Percentage
Subsidiaries of the Registrant Incorporation Owned
-------------------------------------------------------------
Exolon-ESK Company of Dominion of 100%
Canada, Ltd. Canada
Norsk Exolon AS Kingdom of Norway 100%
Exolon-ESK International U.S. Virgin 100%
Sales Corp. Islands
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<NAME> EXOLON-ESK COMPANY
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
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<TOTAL-LIABILITY-AND-EQUITY> 65,088
<SALES> 51,219
<TOTAL-REVENUES> 51,219
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<TOTAL-COSTS> 7,775
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<INTEREST-EXPENSE> 1,506
<INCOME-PRETAX> 832
<INCOME-TAX> 183
<INCOME-CONTINUING> 649
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