-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HWYHRqo4E5Dfvx7tBnUNqEIx5RWcxOS8YWtxIEAl3b9T79c1CVakdPOZS1qDh2zA pM/TkYst7XpmPaYOORq0MA== 0000950134-98-007793.txt : 19980929 0000950134-98-007793.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950134-98-007793 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELCOR CORP CENTRAL INDEX KEY: 0000032017 STANDARD INDUSTRIAL CLASSIFICATION: ASPHALT PAVING & ROOFING MATERIALS [2950] IRS NUMBER: 751217920 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05341 FILM NUMBER: 98715819 BUSINESS ADDRESS: STREET 1: 14643 DALLAS PKWY STE 1000 STREET 2: WELLINGTON CTR CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2148510500 MAIL ADDRESS: STREET 1: WELLINGTON CENTRE STE 1000 STREET 2: 14643 DALLAS PKWY CITY: DALLAS STATE: TX ZIP: 75240-8871 FORMER COMPANY: FORMER CONFORMED NAME: ELCOR CHEMICAL CORP DATE OF NAME CHANGE: 19761119 10-K 1 FORM 10-K FOR FISCAL YEAR END JUNE 30, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K --------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 1-5341 ELCOR CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 75-1217920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14643 DALLAS PARKWAY WELLINGTON CENTRE, SUITE 1000 DALLAS, TEXAS 75240-8871 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 851-0500 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock Par Value $1 Per Share The New York Stock Exchange Rights to Purchase Series A Preferred Stock The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE ---------------- (Title of Class)
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 the 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 [ ] The aggregate market value of Common Stock held by nonaffiliates as of September 1, 1998, was $232,040,462. This amount is based on the closing price of the Registrant's Common Stock on the New York Stock Exchange on September 1, 1998. Shares of stock held by directors and officers of the Registrant as well as shares allocated to such persons under the Employee Stock Ownership Plan of the Registrant were not included in the above computation; however, the Registrant has made no determination that such entities are "Affiliates" within the meaning of Rule 405 under the Securities Act of 1993, as amended. As of the close of business on September 1, 1998, the Registrant had 13,133,621 shares of Common Stock outstanding. Documents incorporated by reference. Listed below are the documents, any portion of which are incorporated by reference and the parts of this report into which such portions are incorporated: PROXY STATEMENT DATED SEPTEMBER 18, 1998 PART III OF FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I Item 1. Business Elcor Corporation (Registrant), incorporated in 1965 as a Delaware corporation, is a publicly held corporation headquartered in Dallas, Texas. Shares of the Registrant's common stock are traded on the New York Stock Exchange with the ticker symbol - ELK. Lines of Business Roofing Products The Registrant, through Elk Corporation of Dallas and its subsidiaries (Elk), is engaged in the manufacture and sale of premium laminated fiberglass asphalt residential roofing shingles and accessory products. Elk also manufactures and sells nonwoven fiberglass roofing mats for use in manufacturing asphalt roofing products, and nonwoven mats for use in other industrial applications. Elk's premium laminated fiberglass asphalt shingle manufacturing plants are located in Tuscaloosa, Alabama, Ennis, Texas, and Shafter, California. The major products manufactured at Elk's roofing plants are premium laminated fiberglass asphalt shingles sold under its brand names: Prestique(R) Plus, Prestique(R) I, Prestique(R) II and Capstone(R). In fiscal 1995, Elk introduced Prestique premium laminated fiberglass asphalt shingle product lines with the patented Enhanced High Definition(R) and Raised Profile(TM) look. In addition, Elk also manufactures premium fiberglass asphalt hip and ridge products: Seal-a-Ridge(R) and Z(R) ridge brands. Premium laminated asphalt shingles account for approximately 30% of the residential sloped asphalt shingle roofing market. About 80% of asphalt shingles are used in reroofing and remodeling and 20% are used in new construction. Elk's roofing products are sold by employee sales personnel primarily to roofing wholesale distributors, delivery being made by common carrier or by customer vehicles from the manufacturing plants or warehouses. Elk's products are distributed nationwide with Texas, California and Florida representing the largest market areas. The Roofing Products segment accounted for approximately 86% of consolidated sales of the Registrant in fiscal 1998. For the past several years, the building materials distribution industry has consolidated at a rapid pace with many smaller independent distributors being acquired by emerging larger national building products distributors. One customer, ABC Supply Co. Inc., the largest roofing wholesale distributor in the United States, accounted for 16% of consolidated sales in fiscal 1998, 14% of consolidated sales in fiscal 1997, and 13% of consolidated sales in fiscal 1996. The company's new nonwoven fiberglass roofing mat facility at its Ennis, Texas plant achieved its performance test level of operations effective April 1, 1997. The new facility operates in parallel to the original fiberglass mat manufacturing facility at the Ennis, Texas plant and produces nonwoven fiberglass roofing mats and other mats for a variety of industrial uses. The new plant was designed to more than triple Elk's previous manufacturing capacity for nonwoven fiberglass mats. 1 3 Elk's nonwoven fiberglass roofing mat facilities supply all of its internal fiberglass roofing mat needs. In addition, roofing mats are sold by employee sales personnel to other asphalt roofing products manufacturers. Nonwoven mats are also sold to manufacturers of construction and industrial products which use such mats in their products, and to distributors of industrial filtration products. Elk's nonwoven mats are shipped by common carrier to its other roofing plants and to its customers' locations. Industrial Products The Registrant, through Chromium Corporation (Chromium), is engaged in two business lines. Chromium's Reciprocating Engine Components Division is engaged in the remanufacture of diesel engine cylinder liners, including hard chrome plating of cylinder bores and tin plating of pistons, primarily for the railroad, marine, and stationary power industries; and hard chrome plating of original equipment cylinder liners and tin plating of pistons for major domestic locomotive manufacturers and stationary power equipment manufacturers. Chromium's Conductive Coatings Division (CCD) is engaged in electroless shielding of plastic enclosures for digital cellular phones, telecommunications and other electronic equipment. Electroless shielding is designed to control the level of electromagnetic and radio frequency interference (EMI/RFI) emissions generated by electronic components. During fiscal 1998, CCD broadened its product offerings to include dispense conductive gaskets which are formed in place. Sales are generated by employee sales personnel, with delivery made primarily by common carrier. To keep pace with rapidly growing demand, CCD completed two expansions at its Lufkin, Texas facility in fiscal 1998, and a third expansion is currently in progress. In fiscal 1999, CCD will be developing plans for a second manufacturing location. In fiscal 1998, net sales for Chromium Corporation were 11% of consolidated net sales. Another unit of the Registrant, OEL, LTD, d/b/a Ortloff Engineers, LTD (Ortloff) is engaged in providing technology licensing and engineering support services and in providing engineering consulting services to the oil and gas production, gas processing and sulfur recovery industries. Ortloff licenses technology covered by and related to ten patents owned by the Registrant for use in new or redesigned natural gas and refinery gas processing facilities, and utilizes technology licensed from others and its own expertise in the performance of consulting and engineering assignments. Although one important patent will expire in fiscal 1999, Ortloff continues to develop and patent improved processes for natural gas processing. Moreover, Ortloff offers significant expertise and other nonpatented technology associated with its processes that is difficult for customers to obtain on a cost effective basis from others. Three patents are currently pending and two new patent applications are being written. These efforts reflect Ortloff's commitment to continually update and advance its technological position. Ortloff was also successful in expanding its markets into several parts of Latin America during fiscal 1998. Patent license fees are calculated by standard formulas that take into account both specific project criteria and market conditions, adjusted for special conditions that exist in a project. Engineering consulting assignments are performed under consulting services agreements at negotiated rates. 2 4 Information as to Industry Segments For Financial Information by Company Segments, see the table on page 39 of this Annual Report on Form 10-K. Accounting Change In fiscal 1998, the Registrant changed its method of accounting for inventories from the LIFO method to the FIFO method. All prior period financial information, including industry segment information, has been restated to reflect this accounting change. See the Inventories footnote on page 28 of this Annual Report of Form 10-K for additional information regarding this accounting change. Competitive Conditions Roofing Products Even though the asphalt roofing products manufacturing business is highly competitive, the Registrant believes that Elk is a leading manufacturer of premium laminated fiberglass asphalt shingles. Elk has been able to compete successfully with its competitors, some of which are larger in size and have greater financial resources. There are a number of major national and regional manufacturers marketing their products in a portion or all of the market areas served by the Registrant's plants. The Registrant competes primarily on the basis of product quality, design and service. Typically, the Registrant is able to sell its roofing products at higher prices than its competitors receive for similar type products. Industrial Products The Registrant believes that Chromium is the leading remanufacturer of diesel engine cylinder liners and pistons for the railroad and marine transportation industries and is the primary supplier of hard chrome plated finishes for original equipment diesel engine cylinder liners to all of the major domestic locomotive manufacturers. The Registrant believes it has smaller competitors in the locomotive diesel engine cylinder liner remanufacturing market. The Registrant also believes that Chromium is one of the leading hard chrome platers of recycled and original equipment large bore cylinder liners for stationary power applications. Chromium has achieved a leading position in these markets through competition on the basis of product performance, quality, service and price. The Registrant, through the Conductive Coatings Division of Chromium, is engaged in electroless shielding of plastic enclosures for digital cellular phones, telecommunications, and other electronic equipment. The Registrant believes the success of Chromium's Conductive Coatings Division in becoming a qualified supplier for and obtaining significant orders from major digital cellular phone manufacturers, together with telecommunications and other electronic equipment manufacturers, has enabled it to become a market leader. 3 5 The Registrant believes that it holds significant state-of-the-art patents covering some of the most competitive processes for the cryogenic processing of refinery and natural gas streams to remove the higher value components, such as ethane and propane, which are primarily used as petrochemical feedstocks. The Registrant believes that Ortloff has widely recognized expertise in the design and operation of facilities for natural gas and refinery gas processing and sulfur recovery. Backlog Backlog was not significant, nor is it material, in the Registrant's operations. Raw Materials Roofing Products In the asphalt roofing products manufacturing business, the significant raw materials are ceramic coated granules, asphalt, glass fibers, resins and mineral filler. All of these materials are presently available from several sources and are in adequate supply. Historically, the Registrant has been able to pass some of the higher raw material and transportation costs through to the customer. Industrial Products In the Registrant's business of hard chrome plating and remanufacturing diesel engine cylinder liners and large bore cylinder liners, chromic acid is a significant raw material which is presently available from a number of domestic suppliers. The Registrant believes these domestic suppliers obtain the ore for manufacturing chromic acid principally from sources outside the United States, some of which may be subject to political uncertainty. The Registrant has been advised by its suppliers that they maintain substantial inventories of chromic acid in order to minimize the potential effects of foreign interruption in ore supply. In the electroless shielding business, copper and nickel are the significant raw materials. These materials are presently available and are in adequate supply. No raw materials are utilized in the Registrant's engineering consulting and technology licensing business. Patents, Licenses, Franchises and Concessions The Registrant holds certain patents, particularly in its engineering consulting and licensing business, which are significant to its operations. However, the Registrant does not believe that the loss of any one of these patents or of any license, franchise or concession would have a material adverse effect on the Registrant's overall business operations. The Registrant, through its subsidiary, Elk Corporation of Dallas, is involved in patent litigation against GAF Building Materials Corporation and related GAF entities concerning design and utility patents covering certain aspects of Elk's High Definition shingles. Refer to Item 3 "Legal Proceedings" for a more detailed discussion of this matter. 4 6 Environmental Matters The Registrant and its subsidiaries are subject to federal, state and local requirements regulating the discharge of materials into the environment, the handling and disposal of solid and hazardous wastes, and protection of the public health and the environment generally (collectively, Environmental Laws). Certain facilities of the Registrant's subsidiaries ship waste products to various waste management facilities for treatment or disposal. Governmental authorities have the power to require compliance with these Environmental Laws, and violators may be subject to civil or criminal penalties, injunctions or both. Third parties may also have the right to sue for damages and/or to enforce compliance and to require remediation of contamination. The Registrant and its subsidiaries are also subject to Environmental Laws that impose liability for the costs of cleaning up contamination resulting from past spills, disposal, and other releases of hazardous substances. In particular, an entity may be subject to liability under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) and similar state laws that impose liability -- without a showing of fault, negligence, or regulatory violations -- for the generation, transportation or disposal of hazardous substances that have caused or may cause, environmental contamination. In addition, an entity could be liable for cleanup of property it owns or operates even if it did not contribute to the contamination of such property. From time to time, the Registrant or its subsidiaries may incur such remediation and related costs at the company owned plants and certain offsite locations. The Registrant anticipates that its subsidiaries will incur costs to comply with Environmental Laws, including correcting existing non-compliance with such laws and achieving compliance with anticipated future standards for air emissions and reduction of waste streams. Such subsidiaries expend funds to minimize the discharge of materials into the environment and to comply with governmental regulations relating to the protection of the environment. Neither these expenditures nor other activities initiated to comply with Environmental Laws is expected to have a material impact on the consolidated financial position, net earnings or liquidity of the Registrant. Persons Employed At June 30, 1998, the Registrant and its subsidiaries had 867 employees. Extended Payment Terms In some years, the Registrant's roofing products business grants extended payment terms to certain customers for some product shipments during the winter and early spring months, with payment generally due during the summer months. As of June 30, 1998, $6,299,000 in receivables relating to such shipments were outstanding, the majority of which are due in the first four months of fiscal 1999. As of August 31, 1998, $3,647,000 of these receivables have been collected. Seasonal Business The Registrant's industrial products businesses are substantially nonseasonal. The Registrant's roofing products manufacturing business is seasonal to the extent that cold, wet or icy weather conditions during the late fall and winter months in its marketing areas typically limit the 5 7 installation of residential roofing products which causes sales to be slower during such periods. Damage to roofs from extreme weather such as severe wind, hurricanes and hail storms can result in higher demand for periods up to eighteen months depending upon the extent of roof damage. Working capital requirements and related borrowings fluctuate during the year because of seasonality. Generally, working capital requirements and borrowings are higher in the spring and summer months, and lower in the fall and winter months. Item 2. Properties All significant facilities are owned and unencumbered by liens in favor of nonaffiliates except as discussed herein. Roofing Products Asphalt roofing products are manufactured at plants located at Tuscaloosa, Alabama, Ennis, Texas and Shafter, California. Fiberglass roofing mat, nonwoven industrial, reinforcement and filtration products are manufactured on two production lines located at Ennis, Texas. Corporate headquarters and administrative offices for the asphalt roofing products operations are located in the same leased facility as the Registrant's corporate offices in Dallas, Texas. Industrial Products Plants for the hard chrome plating of original equipment and remanufactured diesel engine cylinder liners and related equipment are located in Cleveland, Ohio and Lufkin, Texas. The Conductive Coatings Division's (CCD) EMI/RFI shielding facility is located at the Lufkin, Texas plant. During fiscal 1998, CCD completed two expansions and a third expansion is currently in progress. Corporate headquarters and administrative offices are located in the same leased facility as the Registrant's corporate offices in Dallas, Texas. The Ortloff engineering and process licensing group is located in leased offices in Midland, Texas. Corporate Offices The Registrant's corporate headquarters is located in leased offices in Dallas, Texas. In addition, one of the Registrant's subsidiaries owns land and buildings in Waco, Texas, formerly used in the discontinued solid waste handling equipment manufacturing business. This facility is currently subject to a lease/purchase agreement. 6 8 Item 3. Legal Proceedings GAF Patent Litigation On February 8, 1994, a wholly owned subsidiary, Elk Corporation of Dallas (Elk) was granted a design patent covering the ornamental aspects of certain Elk shingles. On December 6, 1994, Elk was granted a utility patent on the functional aspects of certain Elk shingles. Elk has sued GAF Building Materials Corporation and related GAF entities (collectively GAF) in federal court for infringement of these patents and trade dress. In the design patent case, Elk seeks to recover as damages the total profit that GAF has made from the infringing shingles. In the utility patent case, Elk seeks to recover as damages a reasonable royalty on GAF's sales of infringing shingles and certain lost profits. GAF seeks a declaratory judgment that the Elk patents are not infringed and are either invalid or unenforceable. GAF has also asserted claims for unfair competition, Lanham Act violations based on alleged false advertising, and common law fraud, generally praying for damages of not less than $25 million including actual and punitive damages, plus interest, costs, and reasonable attorney fees. Elk disputes GAF's claims, and management intends vigorously to defend them and to enforce its intellectual property rights. In April, 1998, the District Court for the Northern District of Texas entered a partial final judgment against Elk in the design patent case based on an inequitable conduct ruling and certified the case for appeal. Elk has contested that judgment in an appeal which it has filed with the United States Court of Appeals for the Federal Circuit. Elk expects its appeal to be decided by the Court of Appeals in 1999. In the interim, trial on the trade dress claim and certain other matters in the design patent case and trial in the utility patent cases are unscheduled but pending. While management can give no assurances regarding the ultimate outcome of the litigation, outside counsel believe that Elk will prevail on its patent and trade dress claims and that Elk will defeat GAF's counterclaims. Even if the outcome were to be adverse to Elk, it is not expected to have a material effect on the Registrant's financial position or liquidity. Gibraltar Tort Litigation In December 1995 through August 1996, Chromium Corporation was sued in four separate tort lawsuits brought by the same attorneys on behalf of plaintiffs who allege unspecified personal injuries and property damages associated with the former operation of a licensed hazardous waste treatment, storage and disposal facility in Smith County, Texas known as the Gibraltar facility. The four suits were brought against or expanded to include the current and former owners and operators of the facility, and more than fifty other defendants, including Chromium and several Fortune 500 companies, as generators of waste sent to the facility (as named in a particular lawsuit,"Generator Defendants"). The plaintiffs have non-suited or dismissed the Generator Defendants from two of the cases. In another case, Williams, et al. v. Akzo Nobel Chemicals, Inc., et al., the Smith County (Texas) District Court has dismissed Chromium and certain other Generator Defendants. Plaintiffs' appeal of this decision is pending. 7 9 Chromium remains a defendant in the fourth case, Adams v. American Ecology Environmental Services Corporation, pending in Tarrant County (Texas) District Court since August 1996, when approximately 650 plaintiffs filed it. On July 30, 1998, the court issued a ruling denying the Generator Defendants' motions for a discovery management order and lifted the stay on discovery in the case. Discovery has recommenced and is ongoing. No trial date has been set for Adams as yet. In connection with these cases, Chromium has entered into joint defense agreements with more than twenty other Generator Defendants. Chromium also has demanded a defense and indemnity from the facility owners pursuant to the waste disposal contract and from Chromium's insurers. To date, the facility owners have not responded and the insurers have declined or failed to accept the defense and indemnity obligation. Chromium intends to pursue its defenses vigorously. Management believes that the claims brought against Chromium in these cases are without merit. While management can give no assurances regarding the ultimate outcome of this litigation, it believes that it will not have a material adverse effect on the consolidated results of operations, financial position or liquidity of the Registrant. Chromium/TWC Settlement In May 1993, Chromium entered into an Agreed Order with the Texas Water Commission (TWC) in settlement of an enforcement proceeding. Pursuant to the Agreed Order, the TWC assessed $60,000 in penalties and agreed to defer and forgive $74,800 in penalties contingent on Chromium's completion of certain technical and remedial activities at the Lufkin facility ("Technical Recommendations"). Chromium has paid the assessed penalties, and completed the Technical Recommendations. On August 31, 1998, the Texas Natural Resource Conservation Commission, TWC's successor, issued a letter stating that it considered all of the actions required under the Agreed Order to have been fulfilled and completed. Frontier Chemical Site In May 1993, Chromium received a Notification Letter from the United States Environmental Protection Agency (USEPA) informing Chromium that USEPA had reason to believe that Chromium was a Potentially Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act at the Frontier Chemical Royal Avenue Site (Site), a former state-permitted waste processing and management facility in Niagara Falls, New York. In September 1993, Chromium entered into an Administrative Order on Consent with USEPA under which Chromium and other PRPs agreed to perform Phase I response activities at the Site and to reimburse USEPA for response costs incurred by USEPA at the Site. 8 10 All of the Phase I work was concluded in May 1994. Chromium was assessed a total of $109,250 of the $4 million cost estimate assessed to all Phase I PRPs. Chromium has not been and does not expect to be named as a PRP in Phase II or any subsequent phases of cleanup. Certain Phase I and Phase II PRPs intervened in a suit brought by the New York Attorney General seeking recovery of approximately $1.2 million in proceeds from a closure bond relating to the Site. If such intervention is successful, participating Phase I and Phase II PRPs will share in any recovery with the State of New York. In February 1998, a court denied the motion for summary judgment of the PRPs, including Chromium, in the suit, and granted the New York Attorney General's opposing motion. Appeal from the ruling is pending. In March 1997, the USEPA issued its demand for future costs pursuant to the Administrative Order on Consent. The PRPs have objected to this cost demand and have demanded an accounting. Resolution of this dispute still is pending, but even if the USEPA demand remains at the current amount, no further assessments from Chromium will be necessary to meet it; moreover, Chromium received a refund of a small portion of its original assessment on the basis of the existing demand. Chromium's final assessment in this matter net of all recoveries cannot be calculated until its PRP group determines which assessments are uncollectible, and the closure bond action and USEPA cost reimbursement are resolved. Management of the Registrant believes that the final disposition of this matter will not have a material adverse effect on the consolidated results of operations, financial position, or liquidity of the Registrant. Other There are various other lawsuits and claims pending against the Registrant and its subsidiaries arising in the ordinary course of their businesses. In the opinion of the Registrant's management based in part on advice of counsel, none of these actions should have a material adverse effect on the Registrant's consolidated results of operations, financial position, or liquidity. Item 4. Submission of Matters to a Vote of Security Holders Inapplicable. 9 11 Executive Officers of the Registrant Certain information concerning the Registrant's executive officers is set forth below:
Period Age as of Served Sept. 1, Name Title As Officer 1998 - ------------------------ -------------------------- ---------- ---------- Harold K. Work Chairman of the Board, 16 years 65 Chief Executive Officer and President of Elcor Corporation; Chief Executive Officer, President and Director of Elk Corporation of Dallas, a subsidiary, and Chief Executive Officer, President and Director of its subsidiaries Richard J. Rosebery Vice Chairman, 23 years 63 Chief Financial and Administrative Officer, and Treasurer of Elcor Corporation; Officer and Director of all subsidiaries and Chairman and/or President of certain subsidiaries Leonard R. Harral Vice President and Chief 5 years 46 Accounting Officer of Elcor Corporation; Director of one subsidiary Raul G. Holguin Vice President Information Systems 1 year 41 of Elcor Corporation; Vice President of Chromium Corporation, and General Manager of Chromium's Conductive Coatings Division David G. Sisler Vice President, General Counsel and 3 years 40 Secretary of Elcor Corporation; Officer of all subsidiaries; Director of one subsidiary James J. Waibel Vice President Administration 5 years 54 of Elcor Corporation
10 12 All of the executive officers except Mr. Sisler have been employed by the Registrant or its subsidiaries in responsible management positions for more than the past five years. In October 1993, Mr. Rosebery and Mr. Work were elected as Executive Vice Presidents of the Registrant. Previously Mr. Rosebery was Vice President, Treasurer and Chief Administrative and Financial Officer. Mr. Work was Vice President. In July 1996, Mr. Rosebery and Mr. Work were appointed as Directors of the Registrant. On August 18, 1997, Mr. Work and Mr. Rosebery were each elected as Vice Chairman. On August 26, 1997, Mr. Work was elected as Chairman of the Board, President and Chief Executive Officer of the Registrant following the death on August 22, 1997 of Mr. Roy E. Campbell, who previously held those positions. In October 1993, Mr. Harral and Mr. Waibel were elected as Vice Presidents. Previously Mr. Harral was Chief Accounting Officer and Mr. Waibel was Assistant Vice President, Administration. In June 1997, Mr. Holguin was elected as Vice President, Information Systems. Previously Mr. Holguin was Assistant Vice President, Information Systems. On August 14, 1995, Mr. Sisler was appointed by the Board of Directors as Vice President, General Counsel and Secretary of the Registrant. Mr. Sisler was employed by Central and South West Corporation from 1991 to 1995, most recently as a Senior Attorney. From 1989 to 1991, Mr. Sisler was employed by Johnson & Gibbs, a private law firm. Mr. Sisler has practiced law for more than fourteen years and his responsibilities have included corporate, securities and other business legal matters in several industries. Officers are elected annually by the Board of Directors. 11 13 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The principal market on which the Registrant's Common Stock is traded is the New York Stock Exchange. The Boston, Midwest, Philadelphia and Toronto Stock Exchanges have granted unlisted trading privileges for the Registrant's Common Stock. There were 992 holders of record of the Registrant's Common Stock at September 1, 1998. The quarterly dividend declared per share and the high and low prices in dollars per share on Registrant's Common Stock for each quarter during fiscal year 1998 and fiscal year 1997, adjusted for a three-for-two stock split in November 1997, are set forth in the following tables:
Period Dividend High Low ------ -------- -------- ------- Fiscal 1998 First Quarter $ .06 21 11/16 18 1/2 Second Quarter $ .06 24 1/2 21 1/16 Third Quarter $ .06 27 7/16 20 1/2 Fourth Quarter $ .06 28 1/4 24 3/4 Fiscal 1997 First Quarter $ .0467 13 1/16 11 Second Quarter $ .0467 15 1/16 12 5/16 Third Quarter $ .0467 17 5/16 13 13/16 Fourth Quarter $ .0467 18 15/16 16 1/4
The Registrant's Board of Directors has authorized the purchase of up to $10,000,000 of the Registrant's common shares from time to time on the open market to be used for general corporate purposes. As of June 30, 1998, 327,850 shares with cumulative cost of $5,466,000 had been repurchased under this program. In September 1995, the Board of Directors reinstated the Registrant's regular quarterly cash dividend. In September 1997, the regular quarterly cash dividend was increased to six cents per common share (after giving effect to a stock split) and a three-for-two stock split payable in the form of a stock dividend was declared, to be distributed on November 12, 1997 to shareholders of record on October 16, 1997. The limitations affecting the future payment of dividends by Registrant imposed as a part of the Registrant's revolving credit agreement are discussed under the caption "Notes to Consolidated Financial Statements" under the heading "Long-Term Debt" on page 30 of this Annual Report on Form 10-K. 12 14 Item 6. Selected Financial Data The following selected consolidated financial data for each of the five years in the period ended June 30, 1998 have been derived from the audited consolidated financial statements of the Registrant included herein. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this report. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------ ($ In thousands, except per share data) Year Ended June 30, - ------------------------------------------------------------------------------------------------------ 1998 1997(1) 1996(1)(2) 1995(1) 1994(1)(3) - ------------------------------------------------------------------------------------------------------ Sales $ 268,178 $ 230,756 $ 196,462 $ 159,061 $ 157,031 ========= ========= ========= ========= ========= Income: From continuing operations $ 18,324 $ 12,276 $ 10,676 $ 10,076 $ 15,184 From discontinued operations -- -- -- -- (1,494) --------- --------- --------- --------- --------- Before cumulative effect of accounting change for taxes 18,324 12,276 10,676 10,076 13,690 Cumulative effect of accounting change for taxes -- -- -- -- 668 --------- --------- --------- --------- --------- Net Income $ 18,324 $ 12,276 $ 10,676 $ 10,076 $ 14,358 ========= ========= ========= ========= ========= Net Income Per Share - Basic $ 1.38 $ .93 $ .81 $ .77 $ 1.08 ========= ========= ========= ========= ========= Net Income Per Share - Diluted $ 1.36 $ .92 $ .80 $ .76 $ 1.07 ========= ========= ========= ========= ========= Total Assets $ 217,044 $ 206,449 $ 192,060 $ 136,673 $ 107,255 ========= ========= ========= ========= ========= Long-Term Debt $ 48,000 $ 52,600 $ 53,000 $ 18,400 $ -- ========= ========= ========= ========= ========= Shareholders' Equity $ 125,956 $ 111,986 $ 102,130 $ 93,156 $ 84,251 ========= ========= ========= ========= ========= Cash Dividends Per Share $ .24 $ .19 $ .16 $ -- $ -- ========= ========= ========= ========= =========
(1) Restated for a change in accounting for inventories and adjusted for a three-for-two stock split in November 1997. (2) 1996 results include $1,595 in pretax charges in connection with a provision for the adoption of SFAS No. 121 and a previous reduction in value of certain other assets. (3) 1994 results include $1,706 in pretax charges in connection with the closed Chromium Chicago plant, and $82 in losses, net of tax, on the disposal of a discontinued operation. 13 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS FISCAL 1998 COMPARED TO FISCAL 1997 During the fiscal year ended June 30, 1998, sales increased 16% to $268,178,000 from the $230,756,000 reported in fiscal 1997. Net income in fiscal 1998 increased 49% to $18,324,000 from $12,276,000 in the prior fiscal year. Both the Roofing Products and Industrial Products Groups generated significant increases in sales. The Roofing Products Group reported better operating results in fiscal 1998 as compared to the prior fiscal year. However, the substantial increase in net income was primarily attributable to increased demand and dramatically improved operating results in each of the Industrial Products Group's principal operations of: (1) conductive coatings used in digital cellular phones and in other electronic equipment; (2) remanufactured diesel engine components used in the transportation industry; and (3) technology licensing and consulting services for the natural gas processing industry. In fiscal 1998, the company changed its method of accounting for inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Accordingly, fiscal 1997 amounts have been restated to reflect the accounting change. Had the company not made this change, net income would have been lower by $130,000 in fiscal 1998. Sales for the Roofing Products Group increased 11% in fiscal 1998 to $229,475,000 from $207,017,000 in fiscal 1997. The Western United States produced very strong demand for Elk Prestique premium laminated shingles. However, shipments on the West Coast were limited during much of the second half of fiscal 1998 by El Nino's impact, as many roofing contractors could not replace leaking roofs during extended periods of heavy rainfall. Demand was also higher in the Southeast, Midwest and North regions. Only in the Southwestern region was demand lower than in the previous fiscal year. Average selling prices were about the same in fiscal 1998 compared to fiscal 1997. Elk's roofing mat operations achieved significantly higher sales and operating profit, primarily as a result of growing demand for its high quality roofing mats and specialty industrial products. Operating income for the Roofing Products Group increased 18% in fiscal 1998 to $24,885,000 from $21,052,000 in fiscal 1997. Each of Elk's three roofing plants and its roofing mat operation were very profitable in fiscal 1998, although the Ennis, Texas roofing plant's operating results were lower in fiscal 1998 as a result of lower demand in the Southwestern region. The impact of high winds and heavy rainfall in much of the nation this past winter has increased the level of demand during the latter months of fiscal 1998 and early fiscal 1999. The company currently anticipates sharply higher demand for its premium laminated fiberglass asphalt shingles and mat products in fiscal 1999. Sales for the Industrial Products Group increased 64% in fiscal 1998 to $38,586,000 from $23,542,000 in fiscal 1997. Operating income for this Group increased to $10,780,000 in fiscal 1998 from $3,498,000 in fiscal 1997. Each of the three principal operations in this business segment reported significantly higher sales and operating income in fiscal 1998. Chromium Corporation continued to benefit from strong demand for its Compushield(R) conductive coatings and dispense 14 16 conductive gasketing used in digital cellular phones and in other electronic equipment. Chromium also experienced higher sales and significantly improved margins in plating certain proprietary finishes for large diesel engine components during fiscal 1998. Further, Ortloff Engineers' revenues from its technology licensing and consulting services for the natural gas processing industry about doubled in fiscal 1998 as compared to fiscal 1997. This resulted in a tripling of operating income for this business activity in fiscal 1998. However, management expects that Ortloff Engineers' sales and operating profit will decline in fiscal 1999 as a result of lower oil prices, which may cause some potential customers to defer planned projects until economic conditions are more favorable. Selling, general and administrative (SG&A) costs in fiscal 1998 increased 12.9% from fiscal 1997 primarily as a result of increased business activity. As a percentage of sales, SG&A costs declined to 13.0% of sales in fiscal 1998 from 13.4% of sales in fiscal 1997. Interest expense in fiscal 1998 was $2,577,000 compared to $1,136,000 in fiscal 1997. In fiscal 1997, $1,784,000 of interest was capitalized in connection with the company's major facilities expansion program. In fiscal 1998, the company capitalized $160,000 in interest costs in connection with its existing plant expansion program. FISCAL 1997 COMPARED TO FISCAL 1996 During the fiscal year ended June 30, 1997, sales grew to $230,756,000, a 17% increase over fiscal 1996 sales of $196,462,000. Both the Roofing Products and Industrial Products Groups contributed to the increase in sales. Net income in fiscal 1997 increased 15% to $12,276,000 from the $10,676,000 achieved in fiscal 1996. Higher net income was primarily attributable to the Industrial Products Group, which achieved substantially improved operating results in fiscal 1997. In addition, in fiscal 1996 the Company incurred $1,595,000 in pretax charges in connection with a provision for the adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the reduction in value of certain other assets during that fiscal year. Fiscal 1997 and 1996 amounts have been restated to reflect the accounting change for inventories adopted in fiscal 1998. Sales for the Roofing Products Group increased 16% in fiscal 1997 to $207,017,000 from $178,378,000 in fiscal 1996. The Roofing Products Group accounted for 90% of consolidated sales in fiscal 1997 and 91% in fiscal 1996. Higher sales were primarily due to an increase in shipments of premium laminated fiberglass asphalt shingles. Sales from the new plant in Shafter, California accounted for a significant part of the increased shipments. Average selling prices were about the same in fiscal 1997 compared to fiscal 1996. Operating profit for the Roofing Products Group decreased to $21,052,000 in fiscal 1997 from $22,675,000 in fiscal 1996. The Shafter, California plant achieved profitable operations in fiscal 1997 after incurring a significant operating loss in the prior fiscal year. Although both of the other roofing plants were very profitable, operating income at these facilities was lower in fiscal 1997, primarily as a result of higher freight rates, higher raw materials costs and costs of implementing a fourth shift operation at the Tuscaloosa, Alabama roofing plant to increase that facility's production capacity. 15 17 The company's new nonwoven fiberglass roofing mat plant at its Ennis, Texas facility achieved its performance test level of operations effective April 1, 1997. Although overall mat plant operations were profitable in fiscal 1997, operating income from mat plant operations was significantly lower in fiscal 1997 compared to fiscal 1996 due primarily to higher costs associated with the new plant in its start-up year of operations. Sales for the Industrial Products Group increased 31% in fiscal 1997 to $23,542,000 from $17,930,000 in fiscal 1996. Operating income for this business segment increased to $3,498,000 in fiscal 1997 compared to an operating loss of $224,000 in fiscal 1996. Chromium Corporation achieved significantly higher revenues and operating results relating to conductive coatings of plastic enclosures for electronic equipment. Improved operating conditions in this area more than offset decreased demand for Chromium's hard chrome plated diesel engine cylinder liners for the railroad, marine and stationary power industries. In addition, in fiscal 1996, Chromium recorded $1,037,000 in charges relating to a reduction in value of assets at its Cleveland, Ohio plant upon the adoption of SFAS No. 121. Ortloff Engineers achieved much higher revenues in fiscal 1997 from licensing the company's process technology for construction of both new natural gas processing plants and retrofits to upgrade existing gas processing plants. Selling, general and administrative costs as a percentage of sales were 13.4% for fiscal 1997 compared to 14.8% in fiscal 1996. In fiscal 1995, the company established a larger sales organization to better serve growing market areas. During fiscal 1997, this larger organization was able to service the increase in sales orders without a proportionate increase in overall selling costs. Interest expense was higher in fiscal 1997 as a result of the company's completion of its three-year major facilities expansion program which was completed in March 1997. Subsequent to that date, all interest was expensed as incurred. LIQUIDITY AND CAPITAL RESOURCES The company generated cash flows from operating activities of $23,207,000 in fiscal 1998, despite a $10,115,000 increase in working capital. The increase in working capital was primarily the result of higher trade receivables, which increased $13,272,000 during fiscal 1998. Receivables increased primarily as a result of higher sales in fiscal 1998, together with a higher level of deferred payment term receivables. At June 30, 1998, deferred payment term receivables from promotional programs to certain customers were $6,299,000 compared to $2,139,000 at June 30, 1997. Deferred receivables outstanding at June 30, 1998, are primarily due during the first four months of fiscal 1999. The increase in receivables was partially offset by lower inventories and prepaid expenses. The current ratio at June 30, 1998 was 3.5 to 1 compared to 3.0 to 1 at June 30, 1997. Historically, working capital requirements and associated borrowings fluctuate during the year because of seasonality in some market areas. Generally, working capital requirements and borrowings are higher in the spring and summer, and lower in the fall and winter. 16 18 The company used $12,614,000 for investing activities in fiscal 1998. The majority of investing expenditures were for additions to property, plant and equipment. Most capital expenditures in fiscal 1998 were for productivity, capacity, and cost improvement projects at the current roofing plants and for the development of new computer systems. In addition, the company expanded its capacity in the Chromium Corporation Conductive Coatings operation to meet rapidly growing demand for its Compushield process. Capital expenditures are expected to be about $24,000,000 in fiscal 1999. The majority of currently planned fiscal 1999 capital expenditures are a continuation of productivity, capacity and cost improvement projects at its existing roofing plants, continued capacity expansion of the Conductive Coatings operation, and capital costs associated with developing new computer systems. The company expects to invest about $100 million over the next three years to expand capacity and improve productivity at existing plants and to build new plants in both the Roofing Products and Industrial Products segments. Cash flows used for financing activities were $8,954,000 in fiscal 1998, primarily resulting from dividend payments, a $4,600,000 decrease in long-term debt, and purchases of treasury shares. Long-term debt represented 28% of the $173,956,000 of invested capital (long-term debt plus shareholders' equity) at June 30, 1998. In December 1997, the company increased its unsecured revolving line of credit to $100,000,000 and extended the term to December 15, 2002. As of June 30, 1998, $50,210,000 was available under this facility. The company's Board of Directors has authorized the purchase of up to $10,000,000 of the company's common shares on the open market to be used for general corporate purposes. As of June 30, 1998, 327,850 shares with cumulative cost of $5,466,000 had been repurchased. In September 1997, the Board of Directors increased the regular quarterly cash dividend to six cents per common share (after giving effect to a stock split) and declared a three-for-two stock split payable in the form of a stock dividend distributed on November 12, 1997 to shareholders of record on October 16, 1997. Management believes that current cash and cash equivalents, cash flows from operations and its unsecured revolving credit facility should be sufficient during fiscal 1999 and beyond to fund its planned capital expenditures, working capital needs, dividends, stock repurchases and other cash requirements. However, management believes it could secure additional capital at favorable rates, if needed, to support its capital expansion program. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards of reporting of comprehensive income and its components in the consolidated financial statements. The company will adopt SFAS No. 130 in fiscal 1999, but does not expect the adoption of SFAS No. 130 to impact the company's financial position or results of operations. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires public companies to disclose, among other things, certain interim and annual financial information about the enterprise using a new management approach. This approach requires segment information to be reported based on how management evaluates the operating performance of its business units or segments. The company 17 19 will adopt SFAS No. 131 in fiscal 1999 and does not currently anticipate significant changes in its reportable segments. In April 1998, the Accounting Standards Executive Committee (AcSec) of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," requiring, among other things, companies to expense on a current basis previously capitalized start-up costs. At June 30, 1998, the company had $6,682,000 of unamortized capitalized start-up costs. This Statement of Position is effective for financial statements for fiscal years beginning after December 15, 1998, unless adopted earlier. The company plans to adopt this new accounting standard in fiscal 1999 at which time all remaining unamortized capitalized start-up costs will be expensed and reflected in the Consolidated Statement of Operations as a cumulative change in accounting principle. YEAR 2000 ISSUE The company is currently developing a new information system for its critical financial, distribution and manufacturing applications. The system is scheduled for completion and full implementation in the summer of 1999 at an estimated total cost of about $10 million. While the primary purpose of this new information system is to modernize and improve the company's operations, it is also expected to resolve the Year 2000 issues in these critical computer systems. Costs to develop this new information system are being capitalized in accordance with SOP 98-1. Costs to implement the new information system and other costs relating to Year 2000 readiness are being expensed as incurred. As of June 30, 1998, the company's expenditures for its new information system have been $3.7 million and its expenditures for Year 2000 readiness projects have been less than $200,000. At this time, other than the cost of developing and implementing its new information system, the company does not believe that the costs of addressing the Year 2000 issue will be material. The company does not believe that other critical information systems work has been deferred due to its Year 2000 efforts. The company also has teams of employees and consultants who are reviewing other computer applications and systems not included in the scope of the new information system, including systems other than information systems that have embedded technology, and its interaction with its suppliers, customers and other business partners for Year 2000 readiness. The company is close to completing the process of taking relevant inventory, assessing risk, assigning priorities to various tasks and performing limited internal tests. The company has completed its initial remedial programming for its mainframe computer system and is ready to begin testing this system. The company has developed contingency plans for its critical information system which primarily consist of making its existing information system Year 2000 compliant in the event the new system is not completed by its scheduled date. Contingency plans for other aspects of Year 2000 readiness are currently being developed. The company expects to have fully developed action and contingency plans by the end of calendar 1998, and to have completed integrated testing and any remediation before January 1, 2000. The company believes the Year 2000 readiness project is on schedule for timely completion. Based on a current assessment of risks relating to its Year 2000 readiness, the company does not believe that this issue will result in uncertainty that is reasonably likely to materially affect future financial results or operating performance. 18 20 FORWARD - LOOKING STATEMENTS In an effort to give investors a well-rounded view of the company's current condition and future opportunities, management's discussion and analysis of the results of operations and financial condition and other sections of this Form 10-K contain "forward-looking statements" about its prospects for the future. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to the following: 1. The company's roofing products business is cyclical and is affected by weather and some of the same economic factors that affect the housing and home improvement industries generally, including interest rates, the availability of financing and general economic conditions. In addition, the asphalt roofing products manufacturing business is highly competitive. Actions of competitors, including changes in pricing, or slowing demand for asphalt roofing products due to general or industry economic conditions or the amount of inclement weather could result in decreased demand for the company's products, lower prices received or reduced utilization of plant facilities. Further, changes in building codes and other standards from time to time can cause changes in demand, or increases in costs that may not be passed through to customers. 2. In the asphalt roofing products business, the significant raw materials are ceramic coated granules, asphalt, glass fibers, resins and mineral filler. Increased costs of raw materials can result in reduced margins, as can higher trucking and rail costs. Historically, the company has been able to pass some of the higher raw material and transportation costs through to the customer. Should the company be unable to recover higher raw material and transportation costs from price increases of its products, operating results could be lower than projected. 3. During fiscal 1997, the company completed the construction of a plant at the company's Ennis, Texas facility to manufacture nonwoven fiberglass roofing mats and other mats for a variety of industrial uses. The company also expects to make up to $100 million in new investments to expand capacity and improve productivity at existing plants and to build new plants over the next three years. Progress in achieving anticipated operating efficiencies and financial results is difficult to predict for new plant facilities. If such progress is slower than anticipated, if substantial cost overruns occur in building new plants, or if demand for products produced at new plants does not meet current expectations, operating results could be adversely affected. 4. Certain facilities of the company's industrial products subsidiaries must utilize hazardous materials in their production process. As a result, the company could incur costs for remediation activities at its facilities or off-site, and other related exposures from time to time in excess of established reserves for such activities. 19 21 5. The company's litigation, including its patent infringement suits against GAF Building Materials Corporation and certain affiliates, is subject to inherent and case-specific uncertainty. The outcome of such litigation depends on numerous interrelated factors, many of which cannot be predicted. 6. Even with fully developed action and contingency plans for Year 2000 readiness, it is possible that the company will not achieve full internal readiness. Further, the company's business may be adversely affected by external Year 2000 disruption that the company is not in position to control, including but not limited to potential disruptions in power and other energy supplies, telecommunications or other infrastructure, potential disruptions in transportation and the supply of raw materials, and potential disruptions in financial and banking systems. Year 2000 problems therefore could result in unanticipated expenses or liabilities, production or disruption delays or other adverse effects on the company. 7. Although the company currently anticipates that most of its needs for new capital in the near future will be met with internally generated funds, significant increases in interest rates could substantially affect its borrowing costs under its existing loan facility, or its cost of alternative sources of capital. 8. Each of the company's businesses, especially its Conductive Coatings Division's business, is subject to the risks of technological changes that could affect the demand for or the relative cost of the company's products and services, or the method and profitability of the method of distribution or delivery of such products and services. In addition, the company's businesses each could suffer significant setbacks in revenues and operating income if it lost one or more of its largest customers. 9. Although the company insures itself against physical loss to its manufacturing facilities, including business interruption losses, natural or other disasters and accidents, including but not limited to fire, earthquake, damaging winds and explosions, operating results could be adversely affected if any of its manufacturing facilities became inoperable for an extended period of time due to such events. Parties are cautioned not to rely on any such forward-looking beliefs or judgments in making investment decisions. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Inapplicable. 20 22 Item 8. Financial Statements and Supplemental Data Index to Financial Statements and Financial Statement Schedule
Financial Statements: Page --------------------- ---- Independent Auditors' Report 22 Consolidated Balance Sheet at June 30, 1998 and 1997 23 Consolidated Statement of Operations for the years ended June 30, 1998, 1997, and 1996 24 Consolidated Statement of Cash Flows for the years ended June 30, 1998, 1997, and 1996 25 Consolidated Statement of Shareholders' Equity for the years ended June 30, 1998, 1997, and 1996 26 Notes to Consolidated Financial Statements 27 Financial Statement Schedule: Independent Auditors' Report 40 Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves 41
All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto. 21 23 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors, Elcor Corporation We have audited the accompanying consolidated balance sheets of Elcor Corporation (a Delaware corporation) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elcor Corporation and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. As discussed in the Summary of Significant Accounting Policies, the company has given retroactive effect to the change in the method of accounting for inventories from the last-in, first-out method to the first-in, first-out method in fiscal 1998. As discussed in the Summary of Significant Accounting Policies, the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in fiscal 1996. /s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP Dallas, Texas August 17, 1998 22 24
CONSOLIDATED BALANCE SHEET - ----------------------------------------------------------------------------------- ($ In thousands) June 30, - ----------------------------------------------------------------------------------- ASSETS 1998 1997 - ----------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 5,240 $ 3,601 Trade receivables, less allowance of $580 and $545 56,450 43,178 Inventories 28,822 32,206 Prepaid expenses and other 1,789 3,572 Deferred income taxes 2,228 2,935 --------- --------- Total current assets 94,529 85,492 --------- --------- PROPERTY, PLANT AND EQUIPMENT, AT COST Land 2,194 2,065 Buildings 35,835 30,873 Machinery and equipment 149,369 145,881 Construction in progress 6,735 1,296 --------- --------- 194,133 180,115 Less - Accumulated depreciation (73,401) (62,648) --------- --------- Property, plant and equipment, net 120,732 117,467 --------- --------- OTHER ASSETS 1,783 3,490 --------- --------- $ 217,044 $ 206,449 ========= ========= - ----------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 14,579 $ 15,899 Accrued liabilities 12,628 12,386 --------- --------- Total current liabilities 27,207 28,285 --------- --------- LONG-TERM DEBT 48,000 52,600 --------- --------- DEFERRED INCOME TAXES 15,881 13,578 --------- --------- COMMITMENTS AND CONTINGENCIES (See Note) SHAREHOLDERS' EQUITY Common stock ($1 par, 13,325,569 and 13,221,119 shares issued) 13,326 13,221 Paid-in capital 67,862 66,943 Retained earnings 47,394 32,245 --------- --------- 128,582 112,409 Less - Treasury stock (100,423 and 26,250 shares at cost) (2,626) (423) --------- --------- Total shareholders' equity 125,956 111,986 --------- --------- $ 217,044 $ 206,449 ========= ========= - -----------------------------------------------------------------------------------
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are an integral part of this statement. 23 25 CONSOLIDATED STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------- ($ In thousands, except per share data) Year Ended June 30, - ----------------------------------------------------------------------------------- 1998 1997 1996 --------- --------- --------- SALES $ 268,178 $ 230,756 $ 196,462 --------- --------- --------- COSTS AND EXPENSES Cost of goods sold 202,627 179,381 148,451 Selling, general and administrative 34,962 30,969 29,121 Reduction in value of assets -- -- 1,595 --------- --------- --------- INCOME FROM OPERATIONS 30,589 20,406 17,295 --------- --------- --------- OTHER INCOME (EXPENSE) Interest expense (2,577) (1,136) (394) Other income 446 215 211 --------- --------- --------- INCOME BEFORE INCOME TAXES 28,458 19,485 17,112 Provision for income taxes 10,134 7,209 6,436 --------- --------- --------- NET INCOME $ 18,324 $ 12,276 $ 10,676 ========= ========= ========= NET INCOME PER SHARE - BASIC $ 1.38 $ .93 $ .81 ========= ========= ========= NET INCOME PER SHARE - DILUTED $ 1.36 $ .92 $ .80 ========= ========= ========= - -----------------------------------------------------------------------------------
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are an integral part of this statement. 24 26 CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------- ($ In thousands) Year June 30, - -------------------------------------------------------------------------------------------------------- 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 18,324 $ 12,276 $ 10,676 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 11,056 8,664 4,689 Reduction in value of assets - - 1,595 Deferred income taxes 3,010 5,042 4,255 Changes in assets and liabilities: Trade receivables (13,272) (696) (9,572) Inventories 3,384 (5,527) (15,676) Prepaid expenses and other 1,783 (1,616) 975 Accounts payable (1,320) 396 4,654 Accrued liabilities 242 (705) 2,043 -------- -------- -------- Net cash provided by operating activities 23,207 17,834 3,639 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (14,288) (15,896) (40,669) Proceeds from sales of discontinued assets 1,492 848 4,233 Other, net 182 (109) (88) -------- -------- -------- Net cash used for investing activities (12,614) (15,157) (36,524) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings (repayments) (4,600) (400) 34,600 Dividends paid on common stock (3,175) (2,462) (2,101) Treasury stock transactions and exercises of stock options, net (1,179) 42 399 -------- -------- -------- Net cash provided by (used for) financing activities (8,954) (2,820) 32,898 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,639 (143) 13 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,601 3,744 3,731 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,240 $ 3,601 $ 3,744 ======== ======== ======== - --------------------------------------------------------------------------------------------------------
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are in integral part of this statement. 25 27 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------ ($ In thousands, except per share data) - ------------------------------------------------------------------------------------------------------ Total Common Paid-in Retained Treasury Shareholders' Stock Capital Earnings Stock Equity - ------------------------------------------------------------------------------------------------------ BALANCE, June 30, 1995 $ 13,203 $ 67,279 $ 13,856 $ (1,182) $ 93,156 Net income -- -- 10,676 -- 10,676 Treasury stock transactions and exercises of stock options, net -- (125) -- 524 399 Dividends, $.16 per share -- -- (2,101) -- (2,101) - ------------------------------------------------------------------------------------------------------ BALANCE, June 30, 1996 13,203 67,154 22,431 (658) 102,130 Net income -- -- 12,276 -- 12,276 Treasury stock transactions and exercises of stock options, net 18 (211) -- 235 42 Dividends, $.19 per share -- -- (2,462) -- (2,462) - ------------------------------------------------------------------------------------------------------ BALANCE, June 30, 1997 13,221 66,943 32,245 (423) 111,986 Net income -- -- 18,324 -- 18,324 Treasury stock transactions and exercises of stock options, net 105 919 -- (2,203) (1,179) Dividends, $.24 per share -- -- (3,175) -- (3,175) - ------------------------------------------------------------------------------------------------------ BALANCE, June 30, 1998 $ 13,326 $ 67,862 $ 47,394 $ (2,626) $ 125,956 ========= ========= ========= ========= =========== - ------------------------------------------------------------------------------------------------------
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are an integral part of this statement. 26 28 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Elcor Corporation (the company), through subsidiaries, is engaged in two lines of business: Roofing Products and Industrial Products. The Roofing Products segment, which accounts for 86% of consolidated sales, manufactures and sells premium laminated fiberglass asphalt residential roofing products, together with nonwoven mats used in manufacturing asphalt roofing products and various industrial applications. The Industrial Products group of companies is engaged in the shielding of plastic enclosures used in digital cellular phones and in other industries from electromagnetic and radio frequency interference, the plating of proprietary finishes for large diesel engine cylinder liners and pistons, and engineering consulting services and licensing of certain patented technologies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and all subsidiaries after elimination of significant intercompany balances and transactions. Service revenues and related expenses are not disaggregated in the Consolidated Statement of Operations due to immateriality. Certain prior year information has been restated as a result of a change in accounting for inventories as discussed in the Inventories section, and the three-for-two stock split in November 1997. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The majority of the company's sales are in the Roofing Products segment and its primary customers are building materials distributors. For the past several years, the building materials distribution industry has consolidated at a rapid pace with many smaller independent distributors being acquired by emerging larger national building products distributors. One customer accounted for 16%, 14% and 13% of consolidated sales in fiscal years 1998, 1997 and 1996, respectively. The company performs ongoing credit evaluations and maintains reserves for potential credit losses. REVENUE RECOGNITION Revenue is recognized at the time products are shipped to the customer or at the time services are rendered. 27 29 INVENTORIES Inventories are stated at the lower of cost (including direct materials, labor, and applicable overhead) or market, using the first-in, first-out (FIFO) method. Inventories were comprised of:
(In thousands) June 30, ---------------------- 1998 1997 -------- -------- Raw Materials $ 7,827 $ 6,334 Work-In-Process 446 419 Finished Goods 20,549 25,453 -------- -------- $ 28,822 $ 32,206 ======== ========
In fiscal 1998, the company changed its method of accounting for inventories from the LIFO method to the FIFO method. Management believes that as a result of productivity improvements and the declining cost of raw materials since the adoption of the LIFO method in fiscal 1985, the FIFO method provides a better measurement of operating results. In accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes," prior period financial statements have been restated to reflect this accounting change. The effect on net income by year of this accounting change is summarized as follows (in thousands, except per share amounts):
Effect on Net Pretax Income Reported By Difference Income Per ------------------------- ---------- Basic and Fiscal Year LIFO Method FIFO Method Pretax Income Net Income Diluted Share - ----------- ----------- ----------- ------------- ---------- ------------- 1994 $ 24,940 $ 24,318 $ (622) $ (387) $ (.03) 1995 15,281 16,110 829 518 .04 1996 16,483 17,112 629 392 .03 1997 20,637 19,485 (1,152) (726) (.06) 1998 28,256 28,458 202 130 .01
Further, as of July 1, 1993, inventories were reduced $905,000, deferred taxes reduced $314,000 and retained earnings reduced $591,000 to reflect this accounting change on reported beginning balances. 28 30 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Useful lives for property and equipment are as follows: Buildings and improvements 10 - 40 years Machinery and equipment 5 - 20 years Computer equipment 3 - 6 years Office furniture and equipment 5 - 12 years
The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in income. Historically, preoperating and start-up costs incurred in connection with the construction of major new manufacturing facilities were capitalized until such facilities became operational. These costs were then amortized over a five-year period. Capitalized preoperating and start-up costs included in capital expenditures were $977,000 and $4,772,000 in fiscal years 1997 and 1996 respectively. Effective in fiscal 1999, preoperating and start-up costs will be expensed as incurred in accordance with AcSec Statement of Position 98-5, as described more fully in the New Accounting Standards section of these financial statements. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. In 1998, 1997 and 1996, $160,000, $1,784,000 and $1,459,000 of interest cost was capitalized, respectively. INCOME TAXES Deferred income taxes are provided to reflect temporary differences between the financial reporting basis and the tax basis of the company's assets and liabilities using presently enacted tax rates. IMPAIRMENT OF LONG-LIVED ASSETS During the fourth quarter of fiscal 1996, the company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The company recorded a provision of $1,037,000 to reduce the assets of Chromium Corporation's Cleveland plant and provide for related environmental remediation in the Industrial Products segment relating to the new accounting standard. The company had previously reduced the value of certain equipment in the Roofing Products segment by $558,000. 29 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS PER SHARE In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year, adjusted for the three-for-two stock split in November 1997. The reconciliation of basic earnings per share to diluted earnings per share is shown in the following table.
(In thousands, except per share data) 1998 1997 1996 ------- ------- ------- Net income $18,324 $12,276 $10,676 ======= ======= ======= Denominator for basic earnings per share -weighted average shares outstanding 13,245 13,175 13,122 Effect of dilutive securities: Employee stock options 268 131 163 ------- ------- ------- Denominator for dilutive earnings per share - adjusted weighted average shares and assumed issuance of shares purchased under the incentive stock option plan using the treasury stock method 13,513 13,306 13,285 ======= ======= ======= Basic earnings per share $ 1.38 $ .93 $ .81 ======= ======= ======= Diluted earnings per share $ 1.36 $ .92 $ .80 ======= ======= =======
LONG-TERM DEBT Effective December 15, 1997, the company increased its unsecured revolving credit facility (Facility) to $100,000,000 of primary credit, including up to a maximum of $5,000,000 in letters of credit, through December 15, 2002. At June 30, 1998, letters of credit totaling $1,790,000 were outstanding. Borrowings under the Facility bear interest at (1) the higher of the federal funds rate plus .5% or the lender's prime rate, or (2) at the company's option, LIBOR, in each case plus specified basis points based on the ratio of the company's total indebtedness to total capital. The Facility also provides for a commitment fee on the average unused portion of the line and is also based on the ratio of the company's total indebtedness to total capital. Based on financial ratios at June 30, 1998, the LIBOR borrowing rate was LIBOR plus .5% and the commitment fee was .175% of the average unused portion of the line. The average interest rate paid on indebtedness in fiscal 1998 was 6.4%. 30 32 The loan agreement, among other things, limits the sale or pledging of assets of subsidiaries involved in manufacturing asphalt roofing products, and requires maintenance of specified current ratios, capitalization ratios and cash flow levels. Dividend payments and stock repurchases are limited to certain specified levels providing no default or event of default would occur. At June 30, 1998, total cumulative dividend payments and stock repurchased since July 1, 1993 were subject to a $32,765,000 limitation. Actual expenditures for these items as of June 30, 1998 have been $13,204,000. SHAREHOLDERS' EQUITY Authorized common stock, par value $1.00, is 50,000,000 shares, of which 13,325,569 shares were issued at June 30, 1998 and 13,221,119 shares were issued at June 30, 1997. The Board of Directors is authorized to issue up to 1,000,000 shares of preferred stock, without par value, in one or more series and to determine the rights, preferences, and restrictions applicable to each series. No preferred stock has been issued. In September 1997, the Board of Directors declared a three-for-two stock split payable in the form of a stock dividend which was distributed on November 12, 1997. An amount equal to the par value of the common shares issued in connection with the split was transferred from paid-in capital to the common stock account. Appropriate references to number of shares and to per share information in the Consolidated Financial Statements have been adjusted to reflect the stock split on a retroactive basis. SHAREHOLDER RIGHTS PLAN On May 26, 1998, the company's Board of Directors adopted a new Shareholder Rights Plan which took effect when the existing rights plan expired on July 8, 1998. Under the new plan, rights were constructively distributed as a dividend at the rate of one right for each share of common stock of the company held by the shareholders of record as of the close of business on July 8, 1998. Until the occurrence of certain events, the rights are represented by and traded in tandem with common stock. Each right will separate and entitle shareholders to buy stock upon an occurrence of certain takeover or stock accumulation events. Should any person or group (Related Person) acquire beneficial ownership of 15% or more of the company's common stock other than certain bona fide institutional investors to whom a 20% threshold applies, all rights not held by the Related Person become rights to purchase one one-hundredth of a share of preferred stock for $165 or $165 of Elcor common stock at a 50% discount. If after such an event the company merges, consolidates or engages in a similar transaction in which it does not survive, each holder has a "flip over" right to buy discounted stock in a surviving entity. Under certain circumstances, the rights are redeemable at a price of $0.01 per right. Further, upon defined stock accumulation events, the Board of Directors has the option to exchange one share of common stock per right. The rights will expire by their terms on July 8, 2008. 31 33 EMPLOYEE BENEFIT PLANS The company's Incentive Stock Option Plan provides for the granting of incentive and non-qualified stock options to directors, officers and key employees of the company for purchase of the company's common stock. Information relating to options is as follows:
Weighted Number Option Price Average Option of Shares Range per Share Price per Share --------- --------------- --------------- Outstanding at June 30, 1995 476,758 $ 4.67 - $16.09 $ 8.91 Granted 110,627 $14.33 - $14.92 $ 14.64 Cancelled (10,365) $ 4.67 - $16.09 $ 12.25 Exercised (65,850) $ 4.67 - $16.09 $ 6.47 --------- Outstanding at June 30, 1996 511,170 $ 4.67 - $16.09 $ 10.40 Granted 152,625 $11.33 - $12.67 $ 12.45 Cancelled (3,978) $ 5.83 - $16.09 $ 12.36 Exercised (73,640) $ 4.67 - $13.25 $ 5.72 --------- Outstanding at June 30, 1997 586,177 $ 4.67 - $16.09 $ 11.51 Granted 149,845 $20.00 - $27.63 $ 22.36 Cancelled (2,638) $ 8.08 - $16.09 $ 9.76 Exercised (149,856) $ 4.67 - $20.00 $ 10.38 --------- Outstanding at June 30, 1998 583,528 $ 4.67 - $27.63 $ 14.58 =========
The following table summarizes information about options outstanding at June 30, 1998:
Options Outstanding Options Exercisable -------------------------------------------------------------------------------------- Weighted-Average Number ---------------------------- Number Weighted Range of Outstanding at Remaining Exercise Exercisable Average Exercise Prices 6/30/98 Contractual Life Price at 6/30/98 Exercise Price --------------- -------------- ----------------- -------- ----------- -------------- $ 4.67 - $ 9.94 113,896 1.49 yrs. $ 6.58 99,789 $ 6.37 $10.00 - $14.94 267,096 6.99 yrs. $13.33 61,752 $13.02 $15.00 - $19.94 53,051 5.17 yrs. $16.08 30,272 $16.08 $20.00 - $27.63 149,485 9.28 yrs. $22.37 18,000 $24.10
At June 30, 1998, 1997 and 1996, 209,813, 218,231 and 173,694 shares were exercisable, respectively. A total of 250,064, 397,271 and 547,274 shares were reserved for future grants at June 30, 1998, 1997 and 1996, respectively. Beginning in fiscal 1997, the company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized with respect to the company's stock option plan. Pro forma information regarding net income and income per share set forth below has been determined as if the company had accounted for its stock options under the fair value methodology prescribed by SFAS No. 123. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model 32 34 with the following weighted-average assumptions for fiscal 1998, 1997 and 1996; dividend yields of 1.1%, 1.5% and 1.1%; risk-free interest rates of 6.2%, 6.5% and 6.2%; expected market price volatility of .413, .429 and .450; and expected lives of options of 8.5, 6.9 and 7.5 years. Based on this model, the weighted average fair value of stock options granted in fiscal 1998, 1997 and 1996 was $11.63, $5.78 and $7.48, respectively.
(In thousands, except per share data) 1998 1997 1996 ---------------------- ------- ------- ------- Net income, as reported $18,324 $12,276 $10,676 Net income, pro forma $17,651 $11,945 $10,366 Income per share - basic, as reported $ 1.38 $ .93 $ .81 Income per share - basic, pro forma $ 1.33 $ .91 $ .79 Income per share - diluted, as reported $ 1.36 $ .92 $ .80 Income per share - diluted, pro forma $ 1.31 $ .90 $ .78
The pro forma amounts presented above may not be representative of the effects on reported net income for future years. The company's Employee Stock Ownership Plan (ESOP) became effective January 1, 1981. Under the plan, the company contributes a percentage of each participant's annual compensation into a trust, either as treasury stock contributions or cash, which is then used to purchase Elcor common stock. Employees vest 20% after three years of employment and 20% per year thereafter, with the stock distributed at retirement, death, disability, or as authorized by the Plan Administrative Committee. Effective January 1, 1990, the company established an Employee Savings Plan under Internal Revenue Code section 401(k). All employees, except those covered by plans established through collective bargaining, are eligible for participation. Under this Plan, the company contributes a percentage of each participant's annual compensation into a Plan to be invested among various defined alternatives at the participants' direction. Vesting of company contributions is in accordance with the same schedule as that of the ESOP. The Board of Directors authorized total contributions of 5.0% in fiscal 1998, 4.6% in fiscal 1997 and 4.6% in fiscal 1996, of each participant's annual compensation, as defined, including forfeitures, split equally between the ESOP and 401(k) Plans. In addition, on January 1, 1998, the company began contributing an additional $.50 for every $1.00 of employee contributions into the 401(k) Plan, limited to a maximum matching of 2% of an employee's compensation. Total contributions charged to expense for these plans were $1,722,000, $1,245,000 and $1,120,000, in 1998, 1997 and 1996, respectively. The company has a Stock/Loan Plan which allows certain key employees to borrow an amount, based on a percentage of their salaries and the performance of their operating units, for the purpose of purchasing the company's common stock. Under the Stock/Loan Plan, the loans, which are unsecured, and any accrued interest are forgiven and amortized as compensation over five years of continuing service with the company. If employment is terminated for any reason except death, disability or retirement, the balance of the loan becomes due and payable. Loans outstanding at June 30, 1998 and 1997 totaling $1,074,000 and $1,078,000, respectively, are included in Other Assets. 33 35 COMMITMENTS AND CONTINGENCIES The company and its subsidiaries lease certain office space, facilities, and equipment under operating leases, expiring on various dates through 2004. Total rental expense was $1,505,000 in 1998, $1,295,000 in 1997 and $1,167,000 in 1996. At June 30, 1998, future minimum rental commitments under noncancellable operating leases, payable over the remaining lives of the leases, are:
(In thousands) Minimum Rental Fiscal Year Commitments ----------- -------------- 1999 $1,364 2000 1,240 2001 1,077 2002 932 2003 897 Thereafter 641 ------ Total $6,151 ======
The company's subsidiaries provide certain warranties for their products which are generally limited to being free from defect in materials or workmanship affecting performance or meeting specified manufacturing and material specifications. During 1998, 1997 and 1996, the company recorded to expense approximately $1,681,000, $1,566,000 and $1,637,000, respectively, in warranty claim settlements and reserves. The company has established reserves for estimated probable future claims in accordance with SFAS No. 5, "Accounting for Contingencies." On February 8, 1994, a wholly owned subsidiary, Elk Corporation of Dallas (Elk) was granted a design patent covering the ornamental aspects of certain Elk shingles. On December 6, 1994, Elk was granted a utility patent on the functional aspects of certain Elk shingles. Elk has sued GAF Building Materials Corporation and related GAF entities (collectively GAF) in federal court for infringement of these patents and trade dress. In the design patent case, Elk seeks to recover as damages the total profit that GAF has made from the infringing shingles. In the utility patent case, Elk seeks to recover as damages a reasonable royalty on GAF's sales of infringing shingles and certain lost profits. GAF seeks a declaratory judgment that the Elk patents are not infringed and are either invalid or unenforceable. GAF has also asserted claims for unfair competition, Lanham Act violations based on alleged false advertising, and common law fraud, generally praying for damages of not less than $25 million including actual and punitive damages, plus interest, costs, and reasonable attorney fees. Elk disputes GAF's claims, and management intends vigorously to defend them and to enforce its intellectual property rights. In April, 1998, the District Court for the Northern District of Texas entered a partial final judgement against Elk in the design patent case based on an inequitable conduct ruling and certified the case for appeal. Elk has contested that judgment in an appeal which it has filed with the United States Court of Appeals for the Federal Circuit. Elk expects its appeal to be decided by the Court of Appeals in 1999. In the interim, trial on the trade dress claim and 34 36 certain other matters in the design patent case and trial in the utility patent cases are unscheduled but pending. While management can give no assurances regarding the ultimate outcome of the litigation, outside counsel believe that Elk will prevail on its patent and trade dress claims and that Elk will defeat GAF's counterclaims. Even if the outcome were to be adverse to Elk, it is not expected to have a material effect on the company's financial position or liquidity. The company and its subsidiaries are involved in other legal actions and claims arising in the ordinary course of business. Based on advice from legal counsel, management believes such litigation and claims will be resolved without material adverse effect on the consolidated financial statements. On December 1, 1985, the company became self-insured for its products and completed operations liability exposure because the cost of insurance for such risks was believed to be excessive for the coverage to be provided. Reserves for estimated potential losses of this type have been established. The company's operations are subject to extensive federal, state and local laws and regulations relating to environmental matters. Although the company does not believe it will be required to expend amounts which will have a material adverse effect on the company's consolidated financial position or results of operations by reason of environmental laws and regulations, such laws and regulations are frequently changed and could result in significantly increased cost of compliance. Further, certain of the company's industrial products operations utilize hazardous materials in their production processes. As a result, the company incurs costs for remediation activities at its facilities and off-site from time to time. The company establishes and maintains reserves for such remediation activities, when appropriate, in accordance with SFAS No. 5, "Accounting for Contingencies." ACCRUED LIABILITIES Accrued liabilities consist of the following:
(In thousands) June 30, ------------------- 1998 1997 ------- ------- Product warranty reserves $ 1,699 $ 1,968 Self-insurance reserves 919 1,531 Compensation and employee benefits 4,303 3,291 All other 5,707 5,596 ------- ------- $12,628 $12,386 ======= =======
35 37 SUPPLEMENTAL CASH FLOWS The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Supplemental cash flow amounts were as follows:
(In thousands) June 30, ---------------------------- 1998 1997 1996 ------ ------ ------ Interest paid $2,803 $2,951 $1,739 Income taxes paid $4,780 $3,115 $1,105
NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards of reporting of comprehensive income and its components in the consolidated financial statements. The company will adopt SFAS No. 130 in fiscal 1999, but does not expect the adoption to impact the company's financial position or results of operations. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires public companies to disclose, among other things, certain interim and annual financial information about the enterprise using a new management approach. The management approach requires segment information to be reported based on how management evaluates the operating performance of its business units or segments. The company will adopt SFAS No. 131 in fiscal 1999 and does not currently anticipate significant changes in its reportable segments. In April 1998, the Accounting Standards Executive Committee (AcSec) of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," requiring, among other things, companies to expense on a current basis previously capitalized start-up costs. At June 30, 1998, the company had $6,682,000 of unamortized capitalized start-up costs. This Statement of Position is effective for financial statements for fiscal years beginning after December 15, 1998, unless adopted earlier. The company plans to adopt this new accounting standard in fiscal 1999 at which time all remaining unamortized capitalized start-up costs will be expensed and reflected in the Consolidated Statement of Operations as a cumulative change in accounting principle. 36 38 INCOME TAXES The company's effective tax rate was 35.6% in 1998, 37.0% in 1997 and 37.6% in 1996. The difference between the federal statutory tax rate and the effective tax rate is reconciled as follows:
1998 1997 1996 ------ ------ ------ Federal statutory tax rate 35.0% 35.0% 35.0% Change in tax rate resulting from: State income taxes, net of federal tax effect .9% 1.6% 2.1% Miscellaneous items (.3%) .4% .5% ------ ------ ------ 35.6% 37.0% 37.6% ====== ====== ======
Components of the income tax provisions consist of the following:
(In thousands) 1998 1997 1996 ------- ------ ------ Federal: Current $ 6,722 $1,709 $1,826 Deferred, net 3,010 5,001 4,071 State 402 499 539 ------- ------ ------ $10,134 $7,209 $6,436 ======= ====== ======
The significant components of the company's deferred tax assets and liabilities are summarized below:
(In thousands) 1998 1997 1996 -------- -------- -------- Deferred tax assets: Accrued liabilities, difference in expense recognition $ 1,786 $ 2,269 $ 2,314 Receivables, bad debt reserve 203 191 246 Inventories, difference in capitalization 239 475 (62) Discontinued asset reductions -- -- 292 -------- -------- -------- 2,228 2,935 2,790 -------- -------- -------- Deferred tax liabilities: Fixed assets, primarily depreciation method differences and deferred preoperating costs (15,881) (13,578) (8,629) -------- -------- -------- (15,881) (13,578) (8,629) -------- -------- -------- Net deferred tax liability $(13,653) $(10,643) $ (5,839) ======== ======== ========
37 39 QUARTERLY SUMMARY OF OPERATIONS (Unaudited, $ in thousands, except per share amounts adjusted for a three-for-two stock split in November, 1997)
Fiscal 1998 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- SALES $73,516 $60,965 $59,225 $74,472 GROSS PROFIT 18,115 13,664 14,000 19,772 NET INCOME 5,394 2,948 3,369 6,613 NET INCOME PER SHARE BASIC .41 .22 .25 .50 DILUTED .40 .22 .25 .49
Fiscal 1997 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- SALES $64,536 $50,636 $57,120 $58,464 GROSS PROFIT 14,012 11,394 11,773 14,196 NET INCOME 3,768 2,309 2,612 3,587 NET INCOME PER SHARE BASIC .29 .18 .20 .27 DILUTED .29 .17 .19 .27
38 40 FINANCIAL INFORMATION BY COMPANY SEGMENTS
(In thousands) 1998 1997 1996 --------- --------- --------- SALES Roofing products $ 229,475 $ 207,017 $ 178,378 Industrial products 38,586 23,542 17,930 Corporate and eliminations 117 197 154 --------- --------- --------- $ 268,178 $ 230,756 $ 196,462 ========= ========= ========= OPERATING PROFIT Roofing products $ 24,885 $ 21,052 $ 22,675 Industrial products(1) 10,780 3,498 (224) Corporate and other (5,076) (4,144) (5,156) --------- --------- --------- 30,589 20,406 17,295 Interest and other income (expense), net (2,131) (921) (183) --------- --------- --------- Income before income taxes $ 28,458 $ 19,485 $ 17,112 ========= ========= ========= IDENTIFIABLE ASSETS(2) Roofing products $ 187,770 $ 184,138 $ 174,027 Industrial products 14,931 9,248 6,340 Corporate 13,739 10,968 8,751 Discontinued operations 604 2,095 2,942 --------- --------- --------- $ 217,044 $ 206,449 $ 192,060 ========= ========= ========= DEPRECIATION AND AMORTIZATION Roofing products $ 10,025 $ 7,704 $ 3,554 Industrial products 833 727 927 Corporate 198 233 208 --------- --------- --------- $ 11,056 $ 8,664 $ 4,689 ========= ========= ========= CAPITAL EXPENDITURES Roofing products $ 6,745 $ 14,222 $ 40,046 Industrial products 4,245 1,400 507 Corporate 3,298 274 116 --------- --------- --------- $ 14,288 $ 15,896 $ 40,669 ========= ========= =========
(1) In fiscal 1998, operating profit from the company's technology licensing and consulting services business exceeded 10% of consolidated operating profit. This business has not historically met the 10% reporting test nor is it typically expected to in the future. No separate segment is reflected in fiscal 1998 for this business unit. (2) Consists principally of cash and cash equivalents, trade receivables, inventories, and net property, plant and equipment. 39 41 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE To the Shareholders and Board of Directors of Elcor Corporation: We have audited in accordance with generally accepted auditing standards, the accompanying consolidated financial statements of Elcor Corporation and have issued our report thereon dated August 17, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The Supplemental Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth herein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP Dallas, Texas August 17, 1998 40 42 SCHEDULE II (In thousands) ELCOR CORPORATION AND SUBSIDIARIES SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Column A Column B Column C Column D Column E -------- ---------- -------------------------- ---------------- ---------- Additions Deductions -------------------------- ---------------- Balance at Charged to For Purposes For Balance at Beginning Costs and Which Reserves End Description of Period Expenses Other Were Created of Period ----------- ---------- ---------- --------- ---------------- ---------- YEAR ENDED JUNE 30, 1998 CONSOLIDATED: Allowance for doubtful accounts $ 545 $ 210 $ -- $ (175) $ 580 ======= ======== ========= ======= ======= Allowance for inventory obsolescence $ 201 $ 25 $ -- $ (101) $ 125 ======= ======== ========= ======= ======= YEAR ENDED JUNE 30, 1997 CONSOLIDATED: Allowance for doubtful accounts $ 477 $ 78 $ -- $ (10) $ 545 ======= ======== ========= ======= ======= Allowance for inventory obsolescence $ 673 $ 47 $ -- $ (519) $ 201 ======= ======== ========= ======= ======= YEAR ENDED JUNE 30, 1996 CONSOLIDATED: Allowance for doubtful accounts $ 306 $ 201 $ -- $ (30) $ 477 ======= ======== ========= ======= ======= Allowance for inventory obsolescence $ 356 $ 317 $ -- $ -- $ 673 ======= ======== ========= ======= =======
41 43 Item 9. Disagreements on Accounting and Financial Disclosure. The Registrant has retained its independent public accountants for over 30 years. There have been no disagreements with the independent public accountants on accounting or financial disclosure matters. PART III Item 10. Directors and Executive Officers of the Registrant. Information concerning the Directors of the Registrant required by this item is incorporated herein by reference to the material under the caption "Election of Directors" on pages 5 and 6 of the Registrant's Proxy Statement dated September 18, 1998. Information concerning the Executive Officers of the Registrant is contained in Item 1 of this report under the caption "Executive Officers of the Registrant" on pages 10 and 11 of this Annual Report on Form 10-K. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference to the information under the caption "Executive Compensation" on pages 7 through 16 of the Registrant's Proxy Statement dated September 18, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference to the information under the caption "Stock Ownership" on pages 2 and 3 of the Registrant's Proxy Statement dated September 18, 1998. The referenced information was provided as of September 1, 1998. Registrant is aware of no material change since such date in the beneficial ownership of any officer, director or beneficial owner of five percent of any class of its voting stock except that Registrant was informed after the company's Proxy Statement had been printed that Reich & Tang Capital Management Group has increased its beneficial ownership to 682,900 shares, or approximately 5.2% of shares outstanding. Item 13. Certain Relationships and Related Transactions. There are no reportable transactions, business relationships or indebtedness between the Registrant and any covered party. 42 44 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K. (a) 1. Financial Statements The following financial statements of Elcor Corporation are set forth in Item 8 of this Annual Report on Form 10-K: Financial Statements: Independent Auditors' Report Consolidated Balance Sheet at June 30, 1998, and 1997 Consolidated Statement Operations for the years ended June 30, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the years ended June 30, 1998, 1997, and 1996 Consolidated Statement of Shareholders' Equity for the years ended June 30, 1998, 1997, and 1996 Notes to Consolidated Financial Statements Financial Statement Schedule: Independent Auditors' Report Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto. (b) Reports on Form 8-K The Registrant filed a Form 8-K on April 16, 1998 relating to a press release containing "forward-looking statements" about its prospects for the future. The Registrant also filed a Form 8-K on May 29, 1998 relating to the adoption of a new Shareholder Rights Plan to take effect when the current rights plan expires on July 8, 1998. (c) Exhibits **3.1 The Articles of Incorporation of the Registrant, filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994 (File No. 1-5341). 43 45 **3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit 3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1981 and as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1988 originally filed with the Securities and Exchange Commission on February 11, 1989 (File No. 1-5341). **4.1 Form of Rights Agreement dated as of July 7, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibits B and C thereto the Form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock, respectively (filed as Exhibit 4.1 to the company's Current Report on Form 8-K dated May 26, 1998 (File No.1-5341). **4.6 Loan Agreement dated September 19, 1993 among Elcor Corporation, Certain Lenders, NationsBank of Texas, N.A., as Issuer, and NationsBank of Texas, N.A., as Administrative Lender, filed as Exhibit 4.6 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-5341). **4.7 First Amendment dated October 31, 1994 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, and NationsBank of Texas, N.A. as Administrative Lender, filed as Exhibit 4.7 in the Registrant's Quarterly Report on Form 10-Q for this quarter ended September 30, 1994 (File No. 1-5341). **4.8 Second Amendment dated December 15, 1995 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., As Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A. and Comerica Bank - Texas as Lenders, filed as Exhibit 4.8 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 (File No. 1-5341). **4.9 Third Amendment dated October 31, 1996 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., As Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A. and Comerica Bank - Texas as Lenders, filed as Exhibit 4.9 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-5341). **4.10 Fourth Amendment dated December 15, 1997 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A., Comerica Bank - Texas, and the Bank of Tokyo - Mitsubishi, Ltd. As Lenders, filed as Exhibit 4.10 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (File No. 1-5341). *10.1 Form of Executive Agreement *10.2 Amended and Restated Elcor Corporation Employee Stock/Loan Plan. *18 Letter Re: Change in Accounting Principle. *21 Subsidiaries of the Registrant. *23 Consent of Independent Public Accountants. *27 Financial Data Schedule (EDGAR submission only). 44 46 - ---------------------- * Filed herewith. ** Incorporated by reference. 45 47 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. ELCOR CORPORATION By /s/ RICHARD J. ROSEBERY ----------------------------------- Richard J. Rosebery Vice Chairman, Chief Financial and Administrative Officer, and Treasurer By /s/ LEONARD R. HARRAL ----------------------------------- Leonard R. Harral Vice President and Chief Accounting Officer 46 48 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below in multiple counterparts by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date -------------------------- ---------------------- ------------------ /s/ HAROLD K. WORK Chairman of the Board, September 28, 1998 -------------------------- President, Chief Harold K. Work Executive Officer /s/ RICHARD J. ROSEBERY Vice Chairman, Chief September 28, 1998 ------------------------- Financial and Administrative Richard J. Rosebery Officer, and Treasurer /s/ LEONARD R. HARRAL Vice President and September 28, 1998 ------------------------- Chief Accounting Leonard R. Harral Officer /s/ JAMES E. HALL Director September 28, 1998 ------------------------- James E. Hall /s/ DALE V. KESLER Director September 28, 1998 ------------------------- Dale V. Kesler /s/ ROBERT M. LEIBROCK Director September 28, 1998 ------------------------- Robert M. Leibrock /s/ W.F. ORTLOFF Director September 28, 1998 ------------------------- W.F. Ortloff /s/ DAVID W. QUINN Director September 28, 1998 ------------------------- David W. Quinn
47 49 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- **3.1 The Articles of Incorporation of the Registrant, filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994 (File No. 1-5341). **3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit 3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1981 and as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1988 originally filed with the Securities and Exchange Commission on February 11, 1989 (File No. 1-5341). **4.1 Form of Rights Agreement dated as of July 7, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibits B and C thereto the Form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock, respectively Exhibit 4.1 to the company's Current Report on Form 8-K dated May 26, 1998 (File No. 1-5341). **4.6 Loan Agreement dated September 19, 1993 among Elcor Corporation, Certain Lenders, NationsBank of Texas, N.A., as Issuer, and NationsBank of Texas, N.A., as Administrative Lender, filed as Exhibit 4.6 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-5341). **4.7 First Amendment dated October 31, 1994 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, and NationsBank of Texas, N.A. as Administrative Lender, filed as Exhibit 4.7 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 1-5341). **4.8 Second Amendment dated December 15, 1995 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., As Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A. and Comerica Bank - Texas as Lenders, filed as Exhibit 4.8 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 (File No. 1-5341). **4.9 Third Amendment dated October 31, 1996 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., As Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A. and Comerica Bank - Texas as Lenders, flied as Exhibit 4.9 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-5341). **4.10 Fourth Amendment dated December 15, 1997 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A., Comerica Bank - Texas, and the Bank of Tokyo - Mitsubishi, Ltd. As Lenders, filed as Exhibit 4.10 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (File No. 1-5341). *10.1 Form of Executive Agreement *10.2 Amended and Restated Elcor Corporation Employee Stock/Loan Plan. *18 Letter Re: Change in Accounting Principle. *21 Subsidiaries of the Registrant. *23 Consent of Independent Public Accountants. *27 Financial Data Schedule (EDGAR submission only).
- ---------------------- * Filed herewith. ** Incorporated by reference. EX-10.1 2 FORM OF EXECUTIVE AGREEMENT 1 EXHIBIT 10.1 FORM OF EXECUTIVE AGREEMENT , 199 --------------- -- - ------------------------- - ------------------------- Dear : -------------- Elcor Corporation (the "Company") considers it essential to its best interests to foster the continuous employment of key management personnel and their objective pursuit of what is in the best interests of the Company and its shareholders. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist at some time in the future. That possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company and its shareholders, whether or not the change of control actually comes to fruition. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued objectivity and dedication to corporate objectives of key members of the management of the Company and its subsidiaries, including you, in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. Furthermore, the Board believes that appropriate incentives should be provided to key management personnel to assist in the transition of the Company upon any change in control. This letter agreement ("Agreement") is intended to reduce or eliminate your personal loss from any change in control transaction and thereby ensure your objective pursuit or performance of corporate strategy and your strong commitment to the best interests of the Company and its shareholders before and after any such transaction. In order to induce you to remain in the employ of the Company during any threatened change in control, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Company and you agree as follows: 1. Term and Nature of Agreement. This Agreement will commence on the date hereof and will continue in effect through the second anniversary of this Agreement; provided, however, that commencing on such anniversary and each second anniversary thereafter, the term of this Agreement will automatically be extended for two additional years unless, not later than 30 days prior to the end of the term in that year, either party has given notice to the other party that it does not wish to extend this Agreement; provided, further, that, subject to Section 3(i), this Agreement will terminate upon the termination of your employment with the Company or its subsidiary for any reason prior to any Change in Control, and no payments or benefits will be due hereunder if this Agreement has terminated or expired in accordance with this Section 1 prior to a Change in Control. This Agreement is not an employment agreement and is independent of the at-will employment relationship 2 M --. ----------------------- , 199 - ---------------------- --- Page 2 between the Company or its subsidiary and you. No term of this Agreement will be deemed or interpreted to construe or confer rights outside of the specific contractual relationship established by this Agreement, whether to establish a course of dealing between the parties, to confer implied terms of employment, to alter the status quo that you are strictly an employee-at-will of the Company or its subsidiary, or otherwise. 2. Payments and Benefits. (i) Payable Only Upon a Change in Control. No bonus or other payments or benefits will be payable pursuant to this Agreement unless there has been a Change in Control of the Company. (ii) Separation Payment. If your employment with the Company or its subsidiary is terminated at any time within three (3) years following the Change in Control, (A) by the Company or its subsidiary without Cause, or (B) by you for Good Reason, then the Company will pay you a separation payment (the "Separation Payment"). Subject to Section 4(vii), the Separation Payment will be a lump-sum cash payment equal to ________ (___) times your Annual Compensation. If, however, your employment with the Company or its subsidiary is terminated at any time (subject to Section 3(i)) prior to a Change in Control, or is terminated after the Change in Control (A) by the Company or its subsidiary for Cause, (B) by you without Good Reason, or (C) because of your death or Disability, then no Separation Payment under this Agreement will be due to you from the Company. The Company will pay you, or cause the Escrow Agent or L/C Issuer under Section 2(vi) to pay you upon your presentation of documents contemplated thereby, any Separation Payment to which you are entitled under this Section 2(ii) within ten (10) days after the effective date of the termination of your employment with the Company. If you are terminated for any reason at any time, whether before or after any Change in Control, nothing in this Agreement will prevent the Company or its subsidiary, as the case may be, from awarding you reasonable severance compensation to which you have no contractual entitlement under this Agreement, if in its sole discretion, it determines to do so, but nothing in this Agreement will be construed to mean that the Company or its subsidiary will or is obligated to do so. (iii) No Offsets. Any Separation Payment paid to you will not act to reduce any other compensation, bonuses or other benefits to which you are or may otherwise become entitled, including without limitation accrued vacation pay, or salary or bonus that is accrued but unpaid as of the effective date of termination of employment. The Company will not have any rights of offset against Separation Payments due to you hereunder, except for any tax withholding or garnishment required under applicable law. (iv) Employee Welfare Benefits. If upon a Change in Control you are employed by the Company or its subsidiary, then for at least ________ (___) years following the Change in Control, you and your dependents will receive the same or substantially the same group medical, disability and life insurance coverage through the Company as you did immediately prior to such Change in Control 3 M --. ----------------------- , 199 - ---------------------- --- Page 3 at no more than one-hundred twenty percent (120%) of your pre-Change in Control employee cost; provided, however, that if your employment with the Company or its subsidiary is terminated during such _____-year period (A) because of your death or Disability, (B) by the Company or its subsidiary for Cause, or (C) by you without Good Reason, then as of the effective date of your termination of employment, you will no longer be entitled to such coverage, but you or your representative and dependents may be entitled to elect continued coverage under the employee health plan(s) then offered by the Company only to the extent, if any, mandated under the Consolidated Omnibus Budget Reconciliation Act of 1985, as it may be amended or superseded ("COBRA"). If your employment with the Company or its subsidiary is terminated within _____ (___) years following the Change in Control (A) by the Company or its subsidiary without Cause, or (B) by you with Good Reason, then you and your dependents will be entitled, to the extent permitted under the plans and applicable law, to receive the same or substantially the same group medical, disability and life insurance coverage as you did immediately prior to the Change in Control, including comparable coverage of conditions existing at the time of reference, at the same or substantially the same cost to you as your pre-Change in Control employee cost, for the balance of the _____-year period following the Change in Control, and after the end of such period, you or your representative or dependents, as the case may be, may elect continued coverage for you and your dependents under health plans then offered by the Company or its subsidiary only for the time and upon the terms, if any, mandated under COBRA. Notwithstanding the foregoing provision of Section 2(iv), if after the termination of your employment, the Company or its subsidiary is unable under applicable law or for any other reason to provide the same or substantially the same benefits to you as specified above, you and the Company will negotiate in good faith for the Company's payment or provision to you of an adequate substitute that provides you the economic equivalent of the above benefits and the opportunity for reasonable protection from the risks against which the above benefits would otherwise insure. Subject to Section 3(i), if your employment with the Company or its subsidiary is terminated for any reason prior to a Change in Control, or after the _____-year period following a Change in Control, your entitlement to continued benefits will be limited to mandated health benefits under COBRA, unless otherwise agreed by the Company or as otherwise provided in any employee benefit plan of the Company or any subsidiary. (v) Credited Service - Stock/Loan Plan. If within three (3) years following a Change in Control your employment with the Company or its subsidiary is terminated (A) by the Company or its subsidiary without Cause, or (B) by you with Good Reason, then the Company or such subsidiary, as the case may be, will provide you and accrue the Supplemental Credited Service. "Supplemental Credited Service" means service credits, for purposes of forgiveness of then outstanding loans to you under the Company's Stock/Loan Plan, sufficient to render all of your outstanding Stock/Loans from the Company forgiven in full. (vi) Escrow of Funds. Immediately prior to a Change in Control, the Company will deposit into an insured, interest bearing escrow account (the "Escrow Account") funds equal to the maximum Separation Payment and Gross-Up Payment potentially payable to you pursuant to Sections 2(ii) and 4 M --. ----------------------- , 199 - ---------------------- --- Page 4 5(i) under the facts and circumstances at that time (the "Maximum Payment"). The Escrow Account will be held pursuant to an escrow agreement with a federally insured depository institution having net capital and surplus in excess of $100,000,000.00 (the "Escrow Agent"). Such escrow agreement will provide that immediately upon your presentation of an affidavit that all conditions to payment of such funds to you have been met, the Escrow Agent will pay you funds equal to any amount, up to the Maximum Payment, sworn to be due. All amounts in excess of any amounts due to you, including interest accruing on funds on deposit and potentially payable amounts that ultimately are not due under the Agreement, will revert to the Company. At the Company's option, in lieu of the foregoing escrow securing payment to you, immediately prior to the Change in Control the Company will provide you with an irrevocable letter of credit from a federally insured depository institution (the "L/C Issuer") having net capital and surplus in excess of $100,000,000.00. Such letter of credit will have a term extending to or beyond the third annual anniversary of the Change in Control, and will be in an amount equal to the Maximum Payment. The terms of the letter of credit will require the L/C Issuer to pay or honor one or more drafts drawn by you under the letter of credit upon your presentation of draft(s) in any amount up to the Maximum Payment along with your sworn, notarized affidavit stating that all conditions to payment of such amount have been satisfied. You will be entitled to provide the sworn affidavit that the Separation Payment and Gross-Up Payment are due at the respective times provided for such payments under Section 2(ii) and 5(ii) of this Agreement. The escrow agreement or letter of credit reimbursement agreement between the Company and the Escrow Agent or L/C Issuer, as the case may be, will provide such financial institution with indemnities and exculpation from liability as is reasonable and sufficient to permit it to perform its duties in accordance with Section 2(vi) without threat of liability except for such institution's willful misconduct. 3. Other Agreements. (i) No Circumvention of Agreement. Any termination of your employment without Cause by the Company, and any reduction of compensation, including a reduction of benefits under a material employee compensation, benefit, or welfare plan, or other action which would constitute Good Reason if it occurred after a Change in Control, if made prior to the Change in Control but during the term of this Agreement, or any notice of termination or expiration of this Agreement given by the Company in accordance with Section 1, which is at the instance, request, suggestion or because of the influence or upon the suggestion of another party to the transaction resulting in the Change in Control, or its affiliate or associate, or any other transaction designed to circumvent the intent and purposes of this Agreement, upon the Change of Control will be treated, solely for purposes of the Company's payment and other obligations to you under this Agreement, as a termination of your employment by the Company without Cause, immediately after the effective time of the Change in Control. (ii) No Obligation to Mitigate. You will not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor 5 M --. ----------------------- , 199 - ---------------------- --- Page 5 will the amount of any payment or benefit provided for in this Agreement be reduced by any compensation or benefit earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company or its subsidiary, or otherwise; provided, that payments by the Company or its subsidiary designated as payments under this Agreement will be credited against the obligations under this Agreement whether or not the payor entity is the Company; and provided, further, that if you are reemployed while covered by the welfare benefits set forth in Section 2(iv), and become covered under your new employer's employee welfare plans, your entitlement to the benefits set forth in Section 2(iv) thereupon will cease, except to any extent mandated otherwise by COBRA. You will provide the Company with immediate notice of such reemployment and coverage, and to the extent that you fail to do so, you will be obligated to reimburse the Company or its subsidiary for its costs of providing you non- mandatory benefits under Section 2(iv) subsequent to your reemployment date, with interest at a rate of twelve percent (12%) per annum, compounded monthly. 4. Certain Definitions. For purposes of this Agreement, the following terms denoted by capitalization of initial letters will have the definitions below: (i) Annual Compensation. "Annual Compensation" means the highest annual total of base salary, bonuses (including without limitation amounts paid under the applicable Incentive Cash Bonus Plan) and commissions paid to you by the Company and/or any of its affiliates, without reduction for any deductions, withholding, reductions or deferrals, in the three calendar years ending before the date of the Change in Control. For purposes of the preceding definition, only years in which you were employed by the Company or its subsidiary are included in the calculation of Annual Compensation, and compensation will be annualized for any partial years of such employment within the three calendar years ending before the date of the Change in Control. (ii) Beneficial Owner. "Beneficial Owner" and its derivatives means any Person (as defined in Section 4(viii)) who, directly or indirectly, through any contract, trust, power of attorney, pooling or other arrangement, understanding, relationship or otherwise has or shares voting power, which includes the power to vote or direct the voting of a security, and/or investment power, which includes the power to dispose or direct the disposition of such security; provided however that for purposes of this Agreement, Beneficial Ownership will not be deemed to result solely by virtue of a Person's right to acquire a security under any agreement, arrangement or understanding, including without limitation any option, conversion or exchange rights, warrants or option, until such rights are actually exercised or asserted, as the case may be; and provided, further, that no Person will be deemed to be a Beneficial Owner of securities solely as a result of acting as a member of the proxy committee appointed by the Board, or by virtue of a revocable proxy given in response to a public proxy or consent solicitation made in accordance with the Exchange Act; and, provided further, that no Person ordinarily engaged in business as an underwriter of securities will be deemed a Beneficial Owner of any securities acquired through such person's participation in good faith in a firm commitment 6 M --. ----------------------- , 199 - ---------------------- --- Page 6 underwriting until the expiration of forty days after the date of such acquisition and then only if such securities continue to be owned by such Person at the end of such forty day period. (iii) Cause. Termination by the Company or its subsidiaries of your employment for "Cause" means termination upon (A) your willful and continued failure to substantially perform your duties with the Company or its subsidiary (other than any such failure resulting from your incapacity due to physical or mental illness, or any actual or anticipated failure of your performance after the Company's issuance of a notice of termination or your issuance of a notice of termination for Good Reason), after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, (B) your willful conduct which is demonstrably and materially injurious to the Company or its subsidiary, monetarily or otherwise, or (C) your felony conviction for a violation of a criminal law. For purposes of this Section 4(iii), no act, or failure to act, on your part will be deemed "willful" unless done, or omitted to be done, by you without good faith and without reasonable belief that your action or omission was in or not opposed to the best interests of the Company. Not in limitation of the foregoing, "Cause" does not include (W) acts or omissions attributable to bad judgment or gross negligence unless due to willful, habitual and continued bad judgment or gross negligence, (X) any act or omission in respect of which a determination could properly be made that you met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the Certificate of Incorporation and Bylaws of the Company, the laws of the State of Delaware, or the directors' and officers' liability insurance of the Company, in each case as in effect at the time of such act or omission, (Y) an act or omission which occurred more than twelve (12) calendar months prior to your having been given notice of the termination of your employment for such act or omission, unless the commission of such act or such omission could not at the time of such commission or omission have been known to a member of the Board (other than you, if you are then a member of the Board), until less than twelve (12) calendar months before such notice is given, or (Z) a continuing course of action which commenced and was or could reasonably have been known to a member of the Board (other than you, if applicable) more than twelve (12) calendar months prior to notice having been given to you of the termination of your employment. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the chief executive officer or chief administrative officer of the Company or based upon the advice of counsel for the Company will be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. Furthermore, notwithstanding anything to the contrary, you will not be deemed to have been terminated for Cause unless and until there will have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board (other than you, if you are then a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct constituting "Cause" pursuant to this Section 4(iii) and specifying the particulars thereof. 7 M --. ----------------------- , 199 - ---------------------- --- Page 7 (iv) Change in Control. "Change in Control" means the consummation of a transaction or series of transactions having the effect of changing possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the Company or its successor through the Beneficial Ownership of voting securities of the Company or its successor, by contract or otherwise; provided, that, without limitation, such a Change in Control will conclusively be deemed to have occurred if: (A) any Person is or becomes the Beneficial Owner of voting securities of the Company representing forty (40%) or more of the combined voting power of the Company's then outstanding voting securities; or (B) a merger or consolidation of the Company with any other entity becomes effective, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires forty percent (40%), or more of the combined voting power of the Company's then outstanding securities; or (C) the shareholders of the Company approve a plan of complete liquidation of the Company or the shareholders of the Company or Board approve an agreement or plan for the sale or disposition by the Company in one transaction or a series of transactions resulting in the acquisition by any Person of operating assets or earning power constituting more than sixty-seven percent (67%) of the fair market value of all operating assets or earning power of the Company and its subsidiaries, taken as a whole; provided, that no Change in Control will be deemed to have occurred solely by virtue of changes of the composition of the Board, without changes in Beneficial Ownership of the Company or its successor. (v) Continuing Director. "Continuing Director" will mean (A) any member of the Board as of the date of this Agreement (a "Current Director"), (B) any person who subsequently becomes a member of the Board if such Person's election or nomination for election to the Board is recommended or approved by a majority of directors who are Current Directors (an "Approved Director"), or (C) any person who subsequently becomes a member of the Board if such Person's election or nomination for election to the Board is approved by a majority of any and all Current Directors and Approved Directors then serving on the Board. 8 M --. ----------------------- , 199 - ---------------------- --- Page 8 (vi) Disability. "Disability" means your incapacity due to physical or mental illness which results in your absence from the full-time performance of your duties with the Company or its subsidiary for six (6) consecutive months, and within thirty (30) days after written notice of termination is given you have not returned to the full-time performance of your duties. (vii) Good Reason. "Good Reason" means without your express written consent, the occurrence after a Change in Control of the Company of any of the following circumstances: (A) the assignment to you of any duties that you believe in good faith to entail a substantial increase in your exposure to potential personal liability (whether or not indemnifiable by the Company) or a substantial increase in occupational risk to your personal health or safety, or the assignment to you for a period in excess of twelve months of any untitled, reduced or other capacity not reasonably required to accomplish the transition to new control, including but not limited to titled or untitled, advisory or consulting positions; or (B) a reduction by the Company or its subsidiary in your annual base salary or a reduction in the basis on which you participate in any material employee compensation, benefit, or welfare plan of the Company or its subsidiary, as in effect immediately prior to the Change in Control, other than an increase in your employee share of premiums for such a plan which, cumulatively with any other increases post-Change in Control, totals to no more than 20% of your pre-Change in Control employee share of premiums; or (C) the Company's or its subsidiary's requiring you to be based more than fifty (50) miles further from your residence than are the offices at which you were principally employed immediately prior to the date of the Change in Control, except for required travel on the business of the Company or its subsidiary that is no more than is reasonable, for which purpose travel substantially consistent with your present business travel obligations will be conclusively presumed to be reasonable; or (D) the failure by the Company or its subsidiary to pay to you any portion of your salary, bonus, or any other compensation due to you under any deferred compensation program, or benefit under any employee compensation, benefit or welfare plan then in effect, within ten (10) days of the date such compensation or benefit is due; or (E) the failure by the Company or its subsidiary to continue in effect any material employee compensation, benefit or welfare plan in which you participate immediately prior to the Change in Control, unless reasonably equivalent benefits or an equitable arrangement (embodied in an ongoing substitute or alternative plan) have 9 M --. ----------------------- , 199 - ---------------------- --- Page 9 been made with respect to such plan, or the failure by the Company or its subsidiary to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, as to terms of and amount of benefits provided to you, than existed at the time of the Change in Control; or (F) the failure by the Company or its subsidiary to provide you with a substantially equivalent number of paid vacation days (or compensation in lieu thereof) to which you are entitled on the basis of your years of service with the Company or its subsidiaries in accordance with the normal vacation policy applicable to you immediately prior to the Change in Control; or (G) the failure of the Company to obtain a satisfactory agreement from any successor or other party to assume and agree to perform this Agreement as contemplated under Section 6, or the breach by the Company or its subsidiary of this Agreement; provided, however, that none of the circumstances set forth in foregoing clauses (A) - (G) will constitute "Good Reason" unless and until you provide the Company with written notice of the circumstance and thirty (30) days to cure or remedy such circumstance; provided further that if after the Company cures or remedies any such circumstance once and it reoccurs, or if the Company remedies more than three distinct circumstances, recurring or not recurring, no notice and opportunity to cure or remedy will be required before such circumstance constitutes Good Reason. Anything to the contrary in this Agreement notwithstanding, a termination of employment by you for ANY reason during the thirty-day period (the "Thirty-day Window Period") immediately following the first anniversary of the Change in Control will be deemed to be a termination by you with Good Reason for all purposes of this Agreement, provided, however, that any such termination by you during the Thirty-day Window Period for any reason not set forth in the foregoing clauses (A)-(G) will act to reduce the Separation Payment, to which you are then entitled for a termination with Good Reason under Section 2(ii), by one times your Annual Compensation. (viii) Person. "Person" means any person or entity, or group or association of the foregoing, other than (1) the Company, (2) any trustee, investment advisor or other fiduciary holding, voting or otherwise exercising control of securities under the Company's Second Amended and Restated Employee Stock Ownership Plan dated January 1, 1994 (as amended, the "ESOP") or any successor employee plan to the ESOP, (3) any other employee benefit plan or employee compensation arrangement approved by Continuing Directors of the Company, (4) any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions (relative to other shareholders individually and in the aggregate) as their ownership of stock of the Company, or (5) you or any group in which you are a participant, prior to the consummation of the Change in Control, through your beneficial ownership of equity securities; provided, however, that you will not be deemed a participant in any group solely by virtue of being a Beneficial Owner of an investment of $250,000.00 or less of publicly traded securities. 10 M --. ----------------------- , 199 - ---------------------- --- Page 10 5. Certain Tax Impacts. (i) Gross-Up. Anything in this Agreement to the contrary notwithstanding and except as set forth below, if it is determined that any payment or distribution by the Company to or for the benefit of you (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise), but determined without regard to any additional payments required under this Section 5 (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (collectively, the "Excise Tax"), then the Company (or its Escrow Agent or L/C Issuer, as the case may be) will make an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (ii) Certain Tax Determinations. Subject to the provisions of Section 5(iii), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, will be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by you (the "Accounting Firm"). The Accounting Firm will provide detailed supporting calculations both to the Company and you within 15 business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. If the Accounting Firm is serving as consultant, accountant or auditor for the individual, entity or group effecting the Change in Control, you will appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm will then be referred to in this Agreement as the Accounting Firm). All fees and expenses of the Accounting Firm will be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, will be paid by the Company (or its Escrow Agent or L/C Issuer) to you within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm will be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. If the Company exhausts its remedies pursuant to Section 5(iii) and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm will determine the amount of the Underpayment that has occurred and any such Underpayment will be promptly paid by the Company (or its Escrow Agent or L/C Issuer) to you. (iii) Certain Tax Claims. You will notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification will be given as soon as practicable but not later than ten business days 11 M --. ----------------------- , 199 - ---------------------- --- Page 11 after you are informed in writing of such claim and will apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You will not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you will: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company will bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and will indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(iii), the Company will control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company will determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company will advance the amount of such payment to you, on an interest-free basis and will indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 12 M --. ----------------------- , 199 - ---------------------- --- Page 12 (iv) Refunds of Tax Advances. If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(iii), you become entitled to receive any refund with respect to such claim, you will (subject to the Company's complying with the requirements of Section 5(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(iii), a determination is made that you will not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. Successors. If the transaction effecting the Change in Control of the Company would not as a matter of law result in the Company's successor's or other appropriate entity being bound to this Agreement, the Company will require an entity that succeeds in such transaction to at least a majority of the business and/or assets of the Company, or any other involved entity with whom you accept employment, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 7. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement will be in writing and will be deemed to have been duly given when delivered or mailed by personal delivery, confirmed telefacsimile or United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company will be directed to the attention of the Board or Chief Executive Officer with a copy to the General Counsel of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, and no notice will be effective until received. 8. Survival. Any rights and obligations of the Company or you hereunder arising upon a Change in Control during the term of this Agreement will survive the expiration or termination of this Agreement. 9. Legal Expenses; Special Damages; Arbitration. (i) The Company will reimburse all reasonable legal and accounting fees and expenses incurred by you as a result of or in connection with your enforcement of your rights under this Agreement, including all such reasonable fees and expenses, if any, incurred in seeking to obtain or enforce payment under this Agreement or in connection with any tax audit or proceeding to the extent set forth in Section 5. The Company will make such reimbursement payments to you within ten (10) days after any such reasonable fees or expenses are incurred and you have submitted copies of invoices therefor to the Company. 13 M --. ----------------------- , 199 - ---------------------- --- Page 13 (ii) If the Company withholds any material compensation or benefit under this Agreement and it is subsequently determined in an arbitration or judicial proceeding that you were due such amount, then in addition to any compensatory damages you will be entitled to special damages equal to the greater of (a) $25,000.00, or (b) three times your actual damages, but not to exceed $100,000, as the arbitrator or judicial authority will assess in its discretion. (iii) Any dispute or controversy arising under or in connection with this Agreement will be settled exclusively by arbitration conducted before a panel of three arbitrators in Dallas, Texas in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. (iv) Notwithstanding any of the above provisions of Section 9, you will not be entitled to recover any legal fees or expenses (A) incurred by you in connection with any such claim which is determined by arbitration in accordance with Section 9(iii) of this Agreement to be frivolous or entirely without merit, or (B) directly attributable to claims or damages which are not contractual claims or damages for breaches of this Agreement. 10. Applicable Law. Except for matters of corporate governance and the internal affairs of the Company bearing on this Agreement, which will be governed by the laws of the State of Delaware, this Agreement will be construed and enforced according to the laws of the State of Texas and the federal laws of the United States, excluding the laws of those jurisdictions pertaining to the resolution of conflicts of laws with other jurisdictions. Subject to Section 9(iii): (A) the proper venues for all legal proceedings arising out of this Agreement are Dallas County, Texas, in a state court proceeding, and the Northern District of Texas, in a federal court proceeding, and the parties hereby waive any defense, whether asserted by motion or pleading, that such venue is improper, and (B) the parties consent to the personal jurisdiction of both the courts of the State of Texas and the United States District Court for the Northern District of Texas with respect to any litigation arising out of the Agreement. 11. Binding Effect. The obligations of the parties will be binding on and inure to the benefit of their respective heirs, successors, assigns, and affiliates. 12. Integration. This Agreement constitutes the parties' entire agreement containing its subject matter; provided, however, the Company or its subsidiary and you are parties to an Employee Agreement defining certain rights and obligations you have with respect to Company Private Information, Inventions, and certain other matters defined therein, which Employee Agreement will remain in effect in accordance with its terms. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement have been made by either party which are not expressly set forth in this Agreement. Subject to the provisions of Section 1 for automatic term extensions, a waiver, discharge, amendment, modification, or termination of this Agreement or any provision hereof, will be valid and effective only if in writing and executed by both 14 M --. ----------------------- , 199 - ---------------------- --- Page 14 parties hereto. A written waiver of a right, remedy or obligation under a provision of this Agreement will not constitute a waiver of the provision itself, a waiver of any succeeding right, remedy or obligation under the provision, or a waiver of any other right, remedy, or obligation under this Agreement. Any delay or failure by a party in enforcing any obligation or in exercising any right or remedy, including without limitation your delay in exercising your right to terminate your employment for Good Reason during the three-year period following a Change in Control and thereupon receive the benefits specified in this Agreement, will not operate as a waiver of it or affect that party's right later to enforce the obligation or exercise the right or remedy, and a single or partial exercise of a right or remedy by a party does not preclude any further exercise of it or the exercise of any other right or remedy of that party. 13. Severability. If any provision of this Agreement is held by a court, arbitrator or other tribunal of competent jurisdiction to be invalid, void or unenforceable in any respect or with respect to any matter, such provision in all other respects and with respect to all other matters, and the remaining provisions with respect to all matters, will nevertheless continue in full force and effect without being impaired or invalidated and will be enforced to the full extent permitted by law. 14. Construction. Unless the context of this Agreement otherwise requires, (a) words of any gender will be deemed to include each other gender; (b) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular article, section, paragraph, or other subdivision, (c) words using the singular or plural tense will also include the plural or singular tense, respectively; (d) the terms "Section" or "subsection" will refer to the specified Section or subsection of this Agreement; (e) the terms of any provision of COBRA, the Exchange Act, the Code, or any other statute, regulation, form or part thereof will be deemed also to refer to successor provisions to such provisions; (f) the phrase "termination of employment" and equivalent phrases will not include reassignment, without a break in service in excess of two weeks, to another affiliate, division or department of the Company or any of its subsidiaries; (g) the headings of the sections of this Agreement are inserted for convenience only and will not be deemed to constitute part of this Agreement or to affect its construction. [Balance of page intentionally omitted] 15 M --. ----------------------- , 199 - ---------------------- --- Page 15 If you agree to the terms of this Agreement, please sign it where indicated below and send it back to the Company, and it will then constitute our agreement on this subject. We have enclosed a signed duplicate Agreement for your records. Sincerely, ELCOR CORPORATION By: ------------------------------------ Harold K. Work, Chairman of the Board, President and Chief Executive Officer ACCEPTED AND AGREED as of the date above written: - ---------------------------------------- Note: Agreements were entered into with twenty-four offices and employees substantially identical to the Form of Executive Agreement. The information contained under the caption "Change-in-Control and Severence Agreements" on pages 15 and 16 of the Registrant's Proxy Statement dated September 18, 1998 is incorporated by reference. EX-10.2 3 AMENDED/RESTATED ELCOR EMPLOYEE STOCK/LOAN PLAN 1 EXHIBIT 10.2 AMENDED AND RESTATED ELCOR CORPORATION EMPLOYEE STOCK/LOAN PLAN (JUNE 29, 1998) 1. PURPOSE OF THE PLAN The purposes of this Amended and Restated Elcor Corporation Employee Stock/Loan Plan ("Plan") are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to certain Key Employees of the Company and its subsidiaries, and to promote the success of the Company's business. The Plan gives Participants an opportunity to make a long-term investment in the Common Stock of the Company. This Plan is effective June 29, 1998 and is an amendment and restatement of the Elcor Corporation Employee Stock/Loan Plan, dated May 27, 1975 (as amended, the "Prior Plan"). The terms of the Prior Plan shall continue to govern all loans granted or advanced pursuant to it prior to June 29, 1998. The terms of the Plan shall govern all loans granted or advanced on or after June 29, 1998. 2. DEFINITIONS (a) "COMPANY" shall mean Elcor Corporation. (b) "ELCOR STOCK PURCHASE PLAN" shall mean the Company's Employee Stock Purchase Plan, under which any employee of the Company may purchase Stock through ChaseMellon Shareholder Services LLC (or any successor administrative agent) by means of a payroll withholding election. Election can be made under the Plan to use the loan proceeds to purchase stock under the Elcor Stock Purchase Plan. (c) "INCENTIVE BONUS PLAN" shall mean the existing and successor Incentive Bonus Plans of the Company or a Subsidiary, as applicable to a Participant, under which the Participant may become entitled to quarterly cash distributions based on the earnings of the Company or the Subsidiary, as the case may be, as determined in accordance with the terms and provisions of such Incentive Bonus Plan. (d) "KEY EMPLOYEES" shall mean those salaried employees of the Company or any Subsidiary who shall have a significant favorable impact on the profitability of the Company. (e) "LOAN" shall mean an advance of funds pursuant to the Plan by the Company to a Participant for the purchase of Stock and creating an obligation of such Participant to the Company as evidenced by a Promissory Note. 2 (f) "LOAN PERCENTAGE" shall mean a percentage prescribed by the President or his delegate which shall be used in determining the maximum Loan Rights available to a Participant for a particular quarterly period, and which percentage shall be a percentage of the gross distribution to such Participant, if any, for such quarterly period, under an Incentive Bonus Plan. The Loan Rights determined by use of the Loan Percentage shall be in addition to the cash distribution, if any, payable to any Key Employee for such quarter under an Incentive Bonus Plan. (g) "LOAN RIGHTS" shall mean the right, if any, of a participant to apply to the Company for a Loan pursuant to the terms and conditions of the Plan. (h) "NORMAL RETIREMENT AGE" shall mean age 62. (i) "PARTICIPANT" shall mean any Key Employee designated by the President or his delegates as entitled to benefits under this Plan, and which Key Employee actually does participate in the Plan by obtaining a Loan hereunder. (j) "PRESCRIBED EXPIRATION DATE" shall mean the one year anniversary of the notice of the Loan Rights. (k) "PRESIDENT" shall mean the President of the Company. (l) "PROMISSORY NOTE" shall mean a promissory note executed and delivered by a Participant to the Company evidencing a Loan and which Promissory Note shall be in the form and content prescribed by the Company, shall bear interest at a rate that is sufficiently high to avoid unstated or imputed interest under the Internal Revenue Code of 1986 (or its successor), shall not be secured by a pledge of or security interest in the Stock, and shall be subject to repayment according to the terms and conditions specified in such Promissory Note and this Plan. (m) "STOCK" shall mean the Common Stock of the Company, $1.00 par value per share. (n) "SUBSIDIARY" shall mean any entity directly or indirectly controlled by the Company. 3. DESCRIPTION OF THE PLAN The President or his delegate shall designate those employees of the Company and its Subsidiaries qualifying as Key Employees that will be Participants in the Plan, and will determine the Loan Percentage applicable to each Key Employee. The information shall be transmitted to the Controller of the Company who will formulate a list of those of the designated Key Employees who receive a - 2 - 3 quarterly distribution under an Incentive Bonus Plan and shall calculate the Loan Rights of each Key Employee by multiplying the gross quarterly distribution for the Key Employee by the Loan Percentage. Such Key Employees who receive Loan Rights in a quarter will be notified of their respective Loan Rights, which notification shall indicate the period during which the Key Employee may apply to the Company for a Loan, including the Prescribed Expiration Date. If the Key Employee desires to apply for the Loan, on or after, but in no event later than the Prescribed Expiration Date, the Key Employee may make application, on a prescribed form, to the Company for a Loan. Upon such timely application, the Key Employee will be required to execute and deliver a Promissory Note, at which time the Company will either issue its check in the amount of the Loan, or forward the Loan proceeds to ChaseMellon Shareholder Services, or any successor agent, for purchase of Stock through the Employee Stock Purchase Plan, as indicated by the Participant. This Loan shall be used only for the purpose of having the Key Employee (or the Key Employee and his or her spouse) purchase Stock. If the Participant chooses to receive a check, it is his or her responsibility to effect a purchase of the Stock of the Company. Within six months of the disbursement of the Loan, the Participant is further obliged to furnish to the Controller of the Company evidence satisfactory to the Company that such purchase was made. If the Stock is purchased under the Employee Stock Purchase Plan by appropriate election on the Promissory Note then no additional evidence is required to be furnished by the Participant. Any Stock purchased pursuant to this Plan is the sole property of the Participant, the Company having no claim against such Stock as collateral for the Loan or for any other purpose. This Plan shall continue each quarter in which distributions are made under the Incentive Bonus Plan unless and until this Plan is modified or terminated. If a designated Key Employee does not receive any Incentive Bonus Plan distribution in a particular quarter, such Key Employee shall not be entitled to any Loan Rights for that quarter. During periods before their respective Prescribed Expiration Dates, Loan Rights may be accumulated by the Participant and exercised as a whole or in any part. Any Loan Rights not exercised by the Prescribed Expiration Date shall expire. The President may prescribe, in his sole discretion, any reasonable administrative rules for the carrying out of the terms and provisions of the Plan that are consistent with the Plan. 4. REPAYMENT OR SATISFACTION OF LOANS Loans made under the provisions of the Plan shall be repaid or satisfied by the Participant on one of the following bases: (a) The Company will, at the end of 12 months following the date of a Loan, forgive 20 percent of the original principal amount of such Loan, together with all accrued and unpaid interest on all outstanding principal of such Loan, if the Participant has remained continuously in the employ of the Company or a Subsidiary for such year, and the Company shall continue to forgive a like 20 percent of the principal of the Loan together with all accrued and unpaid interest at the expiration of each of the -3- 4 next four years of continuous employment. For the purposes of this provision, each Loan at the end of any quarter shall be treated separately, i.e., if a Participant made a Loan at the end of each quarter during a year, then with continued employment there would be four separate instances of Loan forgiveness at the end of the appropriate quarters in the following year and each subsequent year of continued employment. (b) Upon the date of the Key Employee's retirement at or subsequent to the Normal Retirement Age, or upon his/her termination of employment with the Company by reason of death, or total and permanent disability, as determined by the Social Security Administration, the Company will forgive any amounts not yet forgiven on any Loans outstanding under the Plan, together with all accrued and unpaid interest, so long as the Key Employee has been continuously employed by the Company or a Subsidiary through such date. (c) If the Participant terminates employment with the Company or any Subsidiary without immediate employment by a Subsidiary or the Company, whether as a result of the Participant's or the Company's actions, the Participant shall be obligated to immediately repay to the Company any amounts still outstanding, and not yet forgiven, on all Loans under this Plan, including interest on the principal of such Loan amounts in accordance with this Plan and the applicable Promissory Note. Such repayment shall be made by the Participant no later than the last day of employment with the Company unless specific arrangements are made with the Company to pay at a later date. Any deferral of payment past the last day of employment will cause any balances due under the Loans to bear interest at a rate equal to the greater of (i) the stated interest rate in the Promissory Note and (ii) ten percent (10%) per annum until paid. It is the intent of the Company to use whatever legal means are available to insure that all balances owing the Company by terminating Participants be repaid. 5. PARTICIPANT'S RESPONSIBILITIES A Participant will have unrestricted right and title to any Stock purchased by such Participant with proceeds from a Loan and, subject to any applicable restrictions under the securities laws, may at any time sell the Stock so acquired. It is the intent of the Company under this Plan, however, to provide long-term incentives. Recognizing that a Participant may have the need to sell some of his Stock for personal financial reasons, the Company believes that a Participant's sale of some of the Stock is not so inconsistent with the Company's purposes for this Plan as to frustrate the Company's intent. Accordingly, at such time as any Participant sells a cumulative amount in excess of 25 percent of the Participant's Stock holdings acquired as a result of the Plan, such 25 percent being measured on a cumulative basis, the Company may, depending on the facts and circumstances surrounding cumulative sales of Stock in excess of 25 percent, deny or reduce the amount of the Participant's Loan Rights which would otherwise be granted for one or more quarterly periods in the future. However, the Company -4- 5 will attempt to recognize that needs of children, purchasing a new residence, unusual medical costs or expenses, and other hardship needs may qualify as acceptable reasons for selling in excess of the cumulative 25 percent limitation without affecting future Loan Rights. 6. COMPANY'S RESPONSIBILITIES The Company reserves the right to modify, amend, or terminate this Plan at any time, subject only to the restriction that any Key Employee shall continue to be entitled to exercise any Loan Rights previously granted through the Prescribed Expiration Date of such Loan Rights as provided in the Plan and the Company will not modify the Loan repayment terms applicable to outstanding loans in a manner which would be adverse to a Participant having Loans outstanding without that Participant's consent. 7. FEDERAL TAX IMPLICATIONS The Company or a Subsidiary shall withhold from payments of a Key Employee's compensation payable any and all amounts that are required to be withheld under federal and state law by virtue of any transaction or Loan forgiveness occurring pursuant to this Plan. - 5 - 6 QUESTIONS AND ANSWERS ELCOR KEY EMPLOYEE STOCK/LOAN PLAN (JUNE 29, 1998) The following questions and answers are provided to give Key Employees a better understanding of the operation and administration of the Loan Plan. Q. WHO IS ELIGIBLE TO PARTICIPATE? A. Only those "Key Employees" of Elcor or its subsidiaries who are designated as Participants by the President of Elcor or his delegate. Q. WHAT DOES THE PLAN DO? A. It provides, under certain conditions, the opportunity for periodic loans to Key Employees for the purchase of Elcor Common Stock as a long-term investment. Q. HOW MUCH WILL BE LOANED BY THE COMPANY? A. Different amounts depending on the performance of both the Company and the Participant. Participants will have right to borrow amounts up to a designated percentage of each quarterly Incentive Bonus Plan payment paid to him/her, if any. Q. WILL THERE BE LOANS EACH QUARTER? A. Only in those quarters where a Key Employee receives an Incentive Bonus Plan payment. Q. WHAT ARE THE REPAYMENT TERMS OF THE LOAN? A. In each year of continuous employment, 20 percent of the original principal amount of each Loan, together with all accrued and unpaid interest on such Loan, is forgiven so that five years' continuous service will cause the loan to be satisfied in full. Loans, including principal and accrued interest, to the extent not forgiven, will be due upon a Participant's leaving continuing service with the Company or a related entity. Q. WHAT IF THE PARTICIPANT QUITS OR THEIR EMPLOYMENT IS TERMINATED? A. The loan must be paid in cash by the final employment date. Of course, the amount due will be the balance of the loan, after deducting amounts already forgiven, with interest. - 6 - 7 Q. WHAT IS THE INTEREST RATE ON THE LOAN? A. Interest is charged according to the current "mid-term rate" published by the Internal Revenue Service at the time a loan is made. However, interest on any amounts still owed after leaving employment will accrue at the greater of the rate stated in the Promissory Note or ten percent. You can find the applicable mid-term rate in the Internal Revenue Bulletin published monthly by the Internal Revenue Service or by calling Elcor's Controller. Once the loan is made the rate will be fixed and will be stated on the promissory note evidencing the loan. Q. WHAT IF THE EMPLOYEE RETIRES AFTER REACHING NORMAL RETIREMENT AGE, DIES, OR BECOMES TOTALLY AND PERMANENTLY DISABLED? A. In such instances, any amounts still owed on the loan are forgiven. Q. CAN THERE BE MORE THAN ONE LOAN OUTSTANDING? A. Yes. In fact, it is possible after the Plan has been in operation for a few years to have as many as 19 loans outstanding in various stages of forgiveness. Q. WILL ANY LOAN NEED TO HAVE COLLATERAL OR SOMETHING PUT UP AS SECURITY? A. No. All loans will be made on the employee's signature and general credit. Q. CAN LOANS BE USED FOR PURPOSES OTHER THAN PURCHASING ELCOR STOCK? A. No. Q. WILL THE STOCK BE RESTRICTED IN ANY WAY? A. Generally not. If purchased in an ordinary broker's transaction on the New York Stock Exchange or by ChaseMellon Shareholder Services under the Elcor Employee Stock Purchase Plan, the stock will be unrestricted and generally may be sold at any time. However, at least three considerations may affect the timing and amount of a Participant's sale of Elcor Stock purchased with loans under the Plan. First, the Plan does generally require that each Participant maintain holdings of Elcor Stock equal to at least 75 percent of the total Stock cumulatively purchased under the Plan as a condition to receiving any further Loans. Second, it is unlawful for any employee of Elcor or its subsidiaries to buy or sell Elcor Stock based upon material "inside" information about Elcor (non-public information that would be important to an investor, such as undisclosed earnings, major pending transactions, outcomes of lawsuits, or other corporate information or events that have not been made public). Third, -7- 8 certain Elcor officers are restricted as to the timing, amounts, and manner of sale of shares under Rule 144 and Section 16(b) of the federal securities laws. Q. DOES STOCK IN THE PARTICIPANT'S ESOP ACCOUNT APPLY TOWARDS THE 75 PERCENT HOLDINGS REQUIREMENT? A. No, because stock in the ESOP is purchased with Company, not employee, contributions and is also intended for long-term investment purposes. Q. WHAT HAPPENS IF MORE THAN 25 PERCENT IS SOLD? A. Falling below the 75 percent requirement may cause the Participant to lose future loan rights. Sales in excess of 25 percent of the cumulative Stock purchased under the Plan are not consistent with the purposes for the Plan. However, where the Participant needs to sell more Stock for valid financial needs such as purchasing a home, children's education, serious illness or disability or other similar needs, the Company will consider the continuance of future loans upon application by the employee. This application should be made in the form of a letter to the President of Elcor requesting that the 75 percent maintenance requirement be waived, stating the number of shares by which holdings will fall below 75 percent and the reason for the request. All waivers of the 75 percent requirement must be approved by Elcor's President. Q ONCE A LOAN IS MADE, WHEN MUST THE STOCK BE PURCHASED? A. Participants are responsible to apply the proceeds to purchases of Elcor stock. The timing may vary and may be before or after receipt of the loan. If an individual, after becoming a Participant, has previously purchased Elcor Stock with his or her own funds (and still owns the Stock), then such prior purchases could satisfy all or part of the requirements. Evidence of all purchases must be furnished to Elcor's Controller within six months of the disbursement of the loan to the Participant. Q. WHAT EVIDENCE WILL BE REQUIRED TO SHOW THAT THE STOCK WAS PURCHASED? A. When Stock is purchased from a broker, the broker furnishes the buyer a "confirmation" which is a document showing the number of shares purchased, price, trade date and settlement date. A copy of this document will be required by the Company. If the Stock is acquired under the Elcor Stock Purchase Plan, no additional evidence is required. Q. CAN STOCK BE PURCHASED IN "STREET NAME", I.E., WHERE THE RECORD OWNER OF THE STOCK IS THE BROKER RATHER THAN THE PURCHASER? A. Yes, provided that, if carried in "street name" the Participant signifies in advance his or her intention to do so and furnishes at least quarterly to Elcor's Controller a copy of the monthly -8- 9 statement from a brokerage firm. Additionally, if the Stock is purchased by ChaseMellon Shareholder Services for a Participant under the Elcor Stock Purchase Plan, the Participant may hold the Stock under ChaseMellon's name. Q. WILL COMMISSIONS, BROKER FEES AND TRANSFER FEES COUNT AS PART OF THE COST OF STOCK? A. Yes. Q. CAN STOCK BE PURCHASED JOINTLY WITH EMPLOYEE'S SPOUSE? A. Yes, as long as the employee is shown on the Stock certificate or brokerage statement as one of the owners. Q. CAN STOCK BE PURCHASED OTHER THAN THROUGH A BROKER? A. Yes. However, in these instances, the Company should be contacted to determine what procedures should be followed to provide written support of the purchase. Also, such Stock may be "Restricted" Stock with limitations on its resale. The Stock can also be purchased through ChaseMellon Shareholder Services under the Elcor Stock Purchase Plan. Q. IF AN EMPLOYEE IS ELIGIBLE TO OBTAIN A LOAN EACH QUARTER, IS HE OR SHE REQUIRED TO OBTAIN THE LOAN AND PURCHASE STOCK EACH QUARTER? A. No. The Company recognizes that there may be times where the Participant may wish to defer the purchase of Stock to a later date, for instance if the amount of available loan is small. Each Loan Right has an expiration date one year after the date notice of Loan Rights is given to the employee. Q. ARE THERE ANY FEDERAL INCOME TAX CONSIDERATIONS ON THE LOAN? A. Yes. There are federal (and state and local, where applicable) income taxes and withholding obligations payable when the Company forgives the repayment of principal or interest upon the loan. If the employee had obtained four loans in a year (one each quarter), 20 percent of each loan, along with forgiven accrued interest on the entire outstanding balance of the loan then outstanding, would be taxable in each of the next five years if the employee remains employed by Elcor or a subsidiary. Q. HOW WILL THESE TAXES BE PAID? - 9 - 10 A. The Company will include this income in the employee's Form W-2 at each year end and in the employee's gross earnings (with applicable tax withholdings) during the year as loans are forgiven. Q. WHAT TAXES ARE PAYABLE ON SALE OF THE STOCK? A. Any gain on each sale is taxable as a short-term or long-term gain, as the case may be. The gain portion is generally the total sale proceeds, net of any brokerage commissions, fees and transfer taxes, less the employee's tax basis in the Stock (what the employee paid for the Stock, including commissions, brokerage fees and transfer taxes). The fact that the employee borrowed the money to purchase the Stock has no bearing on his or her tax basis in the Stock for this purpose. Q. HOW IS THE LOAN OBTAINED? A. Each quarter, Elcor's President will send a Loan Rights letter and Promissory Note to each employee eligible to obtain a loan that quarter. This letter will include the amount of the Loan obtainable, the period of time during which the loan can be obtained, and certain conditions with which the employee must comply to receive a Stock/Loan. If the employee wishes to obtain a loan, the Promissory Note accompanying the Loan Rights letter should be signed, dated and returned to Elcor's Controller. Upon receipt of the Promissory Note, the Controller will cause Elcor to issue a check to the Participant, or to send funds to ChaseMellon Shareholder Services for the Elcor Stock Purchase Plan, as the Participant directs. Q. CAN A PARTICIPANT BUY MORE STOCK THAN THE AMOUNT OF THE LOAN? A. Obviously, yes. This Plan is to assist Participants in acquiring Elcor Stock but does not limit the amount of Stock that can be acquired with the employee's own funds. Q. IS THERE ANY RISK TO PARTICIPATING IN THE PLAN? A. Yes. The value of the Stock purchased with a loan could decline after purchase below the amount of the loan. If you lose your employment for reasons other than normal retirement, death or disability, you will be required to immediately repay all outstanding loan amounts with interest. To maintain the integrity of the Plan, the Company may sue for any failure to promptly pay such amounts. - 10 - EX-18 4 LETTER RE: CHANGE IN ACCOUNTING PINCIPLE 1 EXHIBIT 18 LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE August 18, 1998 Elcor Corporation 14643 Dallas Parkway, Suite 1000 Dallas, Texas 75240-8871 Re: Form 10-K Report for the year ended June 30, 1998 Gentlemen: This letter is written to meet requirements of Regulation S-K calling for a letter from a registrant's independent accountants whenever there has been a change in accounting principle or practice. As of June 30, 1998, the company changed from the last-in, first-out method of accounting for inventories to the first-in, first-out method. According to the management of the company, this change was made to provide a better measurement of operating results. A complete coordinated set of financial and reporting standards for determining the preferability of accounting principles among acceptable alternative principles has not been established by the accounting profession. Thus, we cannot make an objective determination of whether the change in accounting described in the preceding paragraph is to a preferable method. However, we have reviewed the pertinent factors, including those related to financial reporting, in this particular case on a subjective basis, and our opinion stated below is based on our determination made in this manner. We are of the opinion that the company's change in method of accounting is to an acceptable alternative method of accounting, which, based upon the reasons stated for the change and our discussions with you, is also preferable under the circumstances in this particular case. In arriving at this opinion, we have relied on the business judgment and business planning of your management. Very truly yours, /s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT 1. Elk Corporation of Dallas, a Delaware corporation, which owns all of the outstanding stock of (a) Elk Corporation of America, a Nevada corporation, (b) Elk Corporation of Alabama, a Delaware corporation, (c) Elk Corporation of Texas, a Nevada corporation, and (d) Elk Corporation of Arkansas, an Arkansas corporation. 2. Chromium Corporation, a Delaware corporation. 3. M Machinery Company (formerly known as Mosley Machinery Company, Incorporated), a Delaware corporation, which owns all of the outstanding stock of M Service Corporation, (formerly known as Mosley Service Corporation), a Delaware corporation. 4. GA Industries Corporation (formerly known as Gory Associated Industries, Inc.), a Delaware corporation. 5. OEL, LTD, d/b/a Ortloff Engineers, LTD, a Nevada corporation. 6. Ortloff de Venezuela, S.A., a Republic of Venezuela corporation. 7. Elcor Management Corporation, a Nevada corporation. 8. NELPA, Inc., a Nevada corporation. 9. Elcor Service Limited Partnership, a Texas limited partnership. EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of reference of our report dated August 17, 1998, included and incorporated by reference in Elcor Corporation's Form 10-K for the year ended June 30, 1998, into Elcor Corporation's previously filed Registration Statement on Form S-8 (File No. 2087437) and For S-3 (File No. 2-87436). /s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP Dallas, Texas September 28, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 5,240 0 57,030 580 28,822 94,529 194,133 73,401 217,044 27,207 48,000 0 0 13,326 112,630 217,044 268,178 268,178 179,381 237,589 0 0 2,577 28,458 10,134 18,324 0 0 0 18,324 1.38 1.36
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