UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
One) SECURITIES EXCHANGE ACT OF 1934
[X]
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7276
EXOLON-ESK COMPANY
(Exact name of registrant as specified in its charter)
Delaware 16-0427000
--------------- -----------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1000 East Niagara Street, Tonawanda, New York
14150
--------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(716) 693-4550
-------------------------------------------
(Registrant's telephone number, including
area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
As of October 31, 2000 the registrant had outstanding 481,995
shares of $1 par value Common Stock and 512,897 shares of $1
par value Class A Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Exolon-ESK Company
Consolidated Condensed Balance Sheet
(in thousands except share amounts)
(Unaudited)
ASSETS Sept. 30, December 31,
2000 1999
---------- ------------
Current assets:
Cash $5,160 $ 5,328
Accounts receivable (less allowance
for doubtful accounts of 5,905 6,109
$136 in 2000 and $150 in 1999)
Income Taxes Recoverable 77 759
Inventories 15,732 16,929
Prepaid expenses 236 237
Deferred income taxes 248 249
-------- --------
Total Current Assets 27,358 29,611
Investment in Norwegian joint venture 5,366 5,464
Property, plant and equipment, at cost 77,429 76,633
Accumulated depreciation (54,170) (51,564)
-------- --------
Net property, plant and equipment 23,259 25,069
Bond sinking fund 4,217 3,335
Other assets 1,545 1,609
-------- --------
Total Assets $61,745 $65,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ - $ 1,436
Current maturities of long-term debt 967 967
Accounts payable 3,442 3,754
Accrued expenses 1,315 1,550
-------- --------
Total Current Liabilities 5,724 7,707
Deferred income taxes 2,345 2,342
Long-term debt excluding current portions 19,833 19,833
Other long-term liabilities 1,909 2,296
-------- --------
Total Liabilities 29,811 32,178
-------- --------
Stockholders' equity:
Preferred stock - Series A - 19,364 276 276
shares issued
Preferred stock - Series B - 19,364 166 166
shares issued
Common stock, $1 par value - Auth. 513 513
600,000 shares, 512,897 issued
Class A common stock, $1 par value - 513 513
Auth. 600,000, 512,897 issued
Additional paid-in capital 4,345 4,345
Retained earnings 27,817 28,793
Accumulated other comprehensive (1,328) (1,328)
income
Treasury stock, at cost (368) (368)
------- -------
Total Stockholders' Equity 31,934 32,910
------- -------
Total Liabilities and Stockholders' $61,745 $65,088
Equity ======= =======
The accompanying notes are an integral part of these statements.
Exolon-ESK Company
Consolidated Condensed Statements of Operations
Unaudited
(in thousands except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
------ ----- ------ -----
Net sales $12,435 $12,603 $38,543 $39,643
Cost of goods sold 10,990 10,073 33,027 33,100
------ ------ ------- -------
Gross Profit 1,445 2,530 5,516 6,543
------ ------ ------- ------
Operating Expenses
Depreciation 890 915 2,670 2,745
Selling, general & administrative 1,043 1,082 3,132 3,629
expenses
Research and development 1 7 20 36
------ ------ ------ ------
Total Operating Expenses 1,934 2,004 5,822 6,410
------ ------ ------ ------
Operating (Loss) Income (489) 526 (306) 133
------ ------ ------ ------
Other Income (Expense):
Equity in (Loss) Earnings
before income taxes of (20) 187 (99) (12)
Norwegian Jt. venture
Interest expense (262) (358) (882) (1,168)
Miscellaneous income (expense) 50 (81) (35) 714
----- ------ ------ -------
Total Other Income (Expense) (232) (252) (1,016) (466)
------ ------ ------- -------
(Loss) Earnings before income taxes (721) 274 (1,322) (333)
Income tax benefit (expense) 242 (111) 367 120
Net (Loss) Earnings ($479) $163 ($955) ($213)
====== ===== ====== ======
Earnings Per Common Share:
Basic ($0.51) $0.16 ($1.03) ($0.26)
Diluted ($0.51) $0.16 ($1.03) ($0.26)
Earnings Per Class A Common Share:
Basic ($0.48) $0.15 ($0.96) ($0.24)
Diluted ($0.48) $0.15 ($0.96) ($0.24)
The accompanying notes are an integral part of these statements.
Exolon-ESK Company
Consolidated Condensed Statements of Cash Flows
Unaudited
(in thousands)
Nine Months
Ended
September 30,
2000 1999
------ ------
Net cash provided by operating activities $2,965 $7,608
------ ------
Cash Flow from Investing Activities:
Gain on disposal of fixed assets 3 -
Capital expenditures (796) (1,227)
----- -------
Net Cash Used in Investing Activities (793) (1,227)
----- -------
Cash Flow from Financing Activities:
Repayments on debt (1,436) (5,088)
Payments to bond sinking fund (882) (758)
Dividends paid (22) (33)
------- -------
Net Cash Used in Financing Activities (2,340) (5,879)
------- -------
Net (decrease)increase in cash (168) 502
Cash at beginning of period 5,328 5,289
------ ------
Cash at end of period $5,160 $5,791
====== ======
The accompanying notes are an integral part of these
statements.
EXOLON-ESK COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 The accompanying unaudited consolidated condensed
financial statements of Exolon-ESK Company (the
Company ) have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a
fair presentation have been included. Results for the
period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the
year ending December 31, 2000.
For further information, refer to the financial
statements and footnotes thereto for the year ended
December 31, 1999 included in the Company's Annual
Report on Form 10-K filed with the Securities and
Exchange Commission.
NOTE 2 The following are the major classes of inventories (in
thousands) as of September 30, 2000 and December 31,
1999:
Sept. 30, December 31,
2000 1999
(Unaudited)
----------- -----------
Raw Materials $781 $1,092
Semi-Finished and 16,837 17,713
Finished Goods
Supplies and Other 1,176 1,186
------- -------
18,794 19,991
Less: LIFO Reserve (3,062) (3,062)
------- -------
$15,732 $16,929
======= =======
NOTE 3 Contingencies
a. Environmental issues
(i) Hennepin, Illinois Plant
On October 6, 1994, the Company entered into a Consent
Order (the Consent Order ) with the Illinois Attorney
General and the Illinois 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.
In Spring 2001, the Company will proceed with the
replacement of the liner on lagoon 1 and related pond
matters. Discussions are ongoing with IEPA. The existing
construction permit 1998-EO-0706, which will expire in July
2001, will be used to complete the project.
(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. A settlement has been offered to the Company
in the amount of $150,000. Alternatively, the Company can
remain a working defendant at the site. The Board of
Directors are considering the alternatives and expect to
make a final decision by January, 2001.
(iii) Norwegian Joint Venture
The Government of Norway continues to hold 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 on Sulfur Dioxide emissions that apply to all
Norwegian silicon carbide producers. In addition, a new tax
has been imposed on the purchase of coke as part of the
limits for gaseous emissions. The Company's joint venture
is currently evaluating strategies to address the increase
the tax will have on its manufacturing. 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.
Discovery was completed in January, 2000. On Oct. 4 , 2000
a decision and order was filed in the case denying the
Norton Company's motion to dismiss. 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.
NOTE 4 Comprehensive Income
During the three months and nine months ended September
30, 2000 and 1999, total comprehensive income, which was
comprised of net income and foreign currency translation
adjustments, equaled net income.
NOTE 5 Earnings Per Share
The following table sets forth the computation of basic
and diluted earnings per share (in thousands except share
information):
Three Months Nine Months
Ended Sept. 30, Ended Sept.
30,
2000 1999 2000 1999
------ ----- ----- -----
Numerator: Net income (loss)
attributable to common
stockholders after ($490) $152 ($988) ($246)
preferred stock dividends ====== ==== ====== ======
Numerator for basic earnings
per share:
Common stockholders (50%) (245) 76 (494) (123)
Class A common (245) 76 (494) (123)
stockholders (50%) ----- ---- ----- -----
(490) 152 (988) (246)
Effect of Dilutive
Securities-Preferred Stock - - - -
Dividends ----- ---- ----- ----
Net income (loss)
attributable to common
stockholders after
assumed conversion of ($490) $152 ($988) ($246)
preferred stock ====== ==== ====== ======
Numerator for diluted
earnings per share:
Common stockholders (50%) (245) 76 (494) (123)
Class A common (245) 76 (494) (123)
stockholders (50%) ----- ---- ----- -----
($490) $152 ($988) ($246)
====== ==== ====== ======
NOTE 5 Earnings Per
Share - Con't
Denominator: Common stock
Denominator for basic
earnings per share - 481,995 481,995 481,995 481,995
weighted average shares
Effect of dilutive
securities -convertible
preferred stock - - - -
------- ------ ------ ------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 481,995 481,995 481,995 481,995
======= ======= ======= =======
Class A common stock:
Denominator for basic
earnings per share - 512,897 512,897 512,897 512,897
weighted average shares
Effect of dilutive
securities -
convertible preferred
stock - - - -
------ ------- ------ -------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 512,897 512,897 512,897 512,897
======= ======= ======= =======
Basic Earnings Per Share:
Common Stock ($0.51) $0.16 ($1.03)($0.26)
Class A Common Stock ($0.48) $0.15 ($0.96)($0.24)
Dilutive Earnings Per Share:
Common Stock ($0.51) $0.16 ($1.03)($0.26)
Class A Common Stock ($0.48) $0.15 ($0.96)($0.24)
The effect of the convertible preferred stock was not considered
for 2000 and1999 because the effect would have been anti-
dilutive.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Comparison of the Nine Months Ended September 30, 2000 with the
Nine Months Ended September 30, 1999.
Net Sales. Total net sales decreased by 3 % to $38,543,000
during the nine months ended September 30, 2000 from $39,643,000
in the first nine months of 1999 primarily due to decreased
demand and increased foreign competition.
Gross Profit. Gross profit before depreciation expense was
$5,516,000 in the first nine months of 2000 compared to
$6,543,000 in the first nine months of 1999. As a percent of net
sales, gross margins were 14.3% in the first nine months of 2000
compared to 16.5% in the same period of 1999. The decrease in
gross profit as a percent of net sales from the first nine months
of 2000 can be attributed to an increase in manufacturing costs
and the decrease in overall sales volume compared to the same
period for 1999.
Operating Expenses. Total operating expenses decreased to
$5,822,000 in the nine months ended September 30, 2000 from
$6,410,000 in the same period of 1999. Operating expenses as a
percent of sales decreased to 15% in the first nine months of
2000 versus 16% for the same period in 1999. The primary reason
for the decrease as a percent of sales is the decrease in
selling, general and administrative expenses as compared to the
same period in 1999. Specifically, general and administrative
expenses decreased to $3,132,000 in the first nine months of 2000
compared to $3,629,000 for the same period in 1999. The primary
reasons for the decrease include lower expenses related to legal
fees, salaries and office administration.
Operating Income. Operating income decreased by 330% to a
loss of $306,000 in the nine months ended September 30, 2000 from
an income of $133,000 in the nine months ended September 30, 1999
primarily due to an increase in cost of goods sold and decreases
in sales prices.
Norwegian Joint Venture. The Company's 50% share of the
pre-tax earnings (loss) of its Norwegian joint venture, Orkla
Exolon A/S, was a loss of $99,000 for the nine months ended
September 30, 2000 versus a loss of $12,000 in the nine months
ended September 30, 1999.
Interest and Miscellaneous Expense. Interest expense
decreased in the first nine months of 2000 to $882,000 from
$1,168,000 in the first nine months of 1999. The primary reason
for this decrease is the interest costs related to the Company's
line of credit, which decreased from $2,981,000 as of September
30, 1999 to a zero balance as of September 30, 2000.
Miscellaneous income (expense) was an expense of $35,000 in
the first nine months of 2000 compared to income of $714,000 in
the nine months ended September 30, 1999. In the first nine
months of 1999, the Company received $494,000 from suppliers as
settlement in two antitrust litigation claims and $298,000 for a
business interruption insurance claim resulting from a furnace
accident at The Exolon-ESK Company of Canada, Ltd.
Income Tax. The Company's effective tax rate was 28% for
the nine months ended September 30, 2000 as compared to 36% for
the nine months ended September 30, 1999.
Comparison of the three months ended September 30, 2000 with the
three months ended September 30, 1999.
Net Sales. Net sales decreased $168,000 to
$12,435,000 in the three months ended September 30, 2000, a
decrease of 1% compared to net sales of $12,603,000 in the three
months ended September 30, 1999. The decline in sales was due to
a decrease in volume and increased pressure on prices resulting
from a decrease in demand combined with an increase in foreign
competition.
Gross Profit. Gross profit before depreciation expense
was $1,445,000 in the three months ended September 30, 2000
compared to $2,530,000 in the three months ended September 30,
1999. As a percent of sales, gross margins were 11.6% in the
three months ended September 30, 2000 compared to 20.1% in the
three months ended September 30, 1999. The decrease in gross
profit as a percent of net sales was attributed to increases in
cost of goods sold caused by lower volumes and a decrease in the
prices received for products due to competitive pressures.
Operating Expenses. Operating expenses including
depreciation, were $1,934,000 during the three months ended
September 30, 2000 versus $2,004,000 during the three months
ended September 30, 1999. The small decrease in operating
expenses of $70,000 is a result of spending reductions of $39,000
in selling and general and administrative expenses. Depreciation
as a percent of sales was 7.2% in the three months ended
September 30, 2000 and September 30, 1999.
Operating Income. Operating income (loss) was a loss
of $489,000 in the three months ended September 30, 2000 compared
to income $526,000 in the three months ended September 30, 1999.
Norwegian Joint Venture. The company's 50% share of
the pre-tax earnings of its Norwegian joint venture, Orkla Exolon
A/S was a loss of $20,000 for the three months ended September
30, 2000 versus an income of $187,000 in the three months ended
September 30, 1999.
Interest and Miscellaneous Income. Interest
expense decreased to $262,000 in the three months ended September
30, 2000 versus $358,000 in the three months ended September 30,
1999. The decrease in interest expense is primarily due to the
reduction in interest costs on the Company's line of credit,
which was reduced to a zero balance in September 2000.
Miscellaneous (expense) income was an income of $50,000 in the
three months ended September 30, 2000 versus miscellaneous
expense of $81,000 incurred in the three months ended September
30, 1999.
Income Tax. The Company's effective tax rate
for the three months ended September 30, 2000 was 34% versus an
effective tax rate of 41% for the three months ended September
30, 1999.
Liquidity and Capital Resources
As of September 30, 2000, working capital
(current assets less current liabilities) has decreased by
$270,000 to $21,634,000 when compared to $21,904,000 as of
December 31, 1999. Inventories have decreased by $1,197,000 to
$15,732,000 as of September 30, 2000 from $16,929,000 as of
December 31, 1999.
For the nine months ended September 30, 2000, net
cash provided by operating activities was $2,965,000. Cash
reserves decreased by $168,000 as of September 30, 2000 compared
to December 31, 1999. Net cash provided by operating activities
was used to reduce net outstanding debt by $2,318,000, pay
preferred dividends of $22,000 and to fund capital expenditures
of $796,000.
The Company's current ratio increased to 4.8 to 1.0
at September 30, 2000 from 3.8 to 1.0 as of December 31, 1999.
The ratio of total liabilities to shareholders' equity remained
at 1.0 to 1.0 as of September 30, 2000 and December 31, 1999.
Management believes that the cash provided by operations and
long-term borrowing arrangements will provide adequate funds for
current commitments and other requirements in the near future.
As of the date of this report, the Company is in violation
of two financial covenants under its Credit Agreement.
Management has informed the financial institutions of these
covenant violations and is currently in the process of obtaining
waivers for the violations. The Company has continued to
classify the related debt as long-term, as management expects,
based upon its discussions with its financial institutions, that
waivers will be granted.
Reference is made to the information included in Notes to the
Consolidated Condensed Financial Statements of the Company, which
is hereby incorporated herein by reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the information included in Note 3(b)
to the Consolidated Condensed Financial Statements of the Company
included under Part I, Item 1 of this Form 10-Q, which is hereby
incorporated herein by reference.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Board of Directors of Exolon-ESK Company accepted the
resignation of Craig A. Rogerson and David Shellabarger as a
members of the Board of Directors. Their replacements are
Dr.Matthias L. Wolfgruber, President and Chief Executive
Officer of Wacker Silicones Corporation and Paul Lindblad,
Managing Director of Elektroschmelwerk GmbH.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
EXOLON-ESK COMPANY
s/J. Fred Silver
----------------
J. Fred Silver
President and Chief Executive Officer
s/Michael G. Pagano
-------------------
Michael G. Pagano
Vice President Finance and
Chief Financial Officer
Date: November 1, 2000
