10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE One) SECURITIES EXCHANGE ACT OF 1934 [X] For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7276 EXOLON-ESK COMPANY (Exact name of registrant as specified in its charter) Delaware 16-0427000 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 1000 East Niagara Street, Tonawanda, New York 14150 ---------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (716) 693-4550 ------------------------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ As of July 31, 2000 the registrant had outstanding 481,995 shares of $1 par value Common Stock and 512,897 shares of $1 par value Class A Common Stock. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Exolon-ESK Company Consolidated Condensed Balance Sheet (in thousands except share amounts) (Unaudited) ASSETS June 30, December 31, 2000 1999 -------- ------------ Current assets: Cash $5,201 $ 5,328 Accounts receivable (less allowance for doubtful accounts of 5,995 6,109 $150 in 2000 and $150 in 1999) Income Taxes Recoverable - 759 Inventories 15,208 16,929 Prepaid expenses 299 237 Deferred income taxes 249 249 -------- -------- Total Current Assets 26,952 29,611 Investment in Norwegian joint venture 5,386 5,464 Property, plant and equipment, at cost 77,325 76,633 Accumulated depreciation (53,301) (51,564) -------- -------- Net property, plant and equipment 24,024 25,069 Bond sinking fund 3,916 3,335 Other assets 1,565 1,609 -------- -------- Total Assets $61,843 $65,088 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable $ 159 $ 1,436 Current maturities of long-term debt 967 967 Accounts payable 2,691 3,754 Accrued expenses 1,442 1,550 Income taxes payable 59 - -------- -------- Total Current Liabilities 5,318 7,707 -------- -------- Deferred income taxes 2,343 2,342 Long-term debt excluding current portions 19,833 19,833 Other long-term liabilities 1,926 2,296 -------- -------- Total Liabilities 29,420 32,178 -------- -------- Stockholders' equity: Preferred stock - Series A - 276 276 19,364 shares issued Preferred stock - Series B - 166 166 19,364 shares issued Common stock, $1 par value - Auth. 513 513 600,000 shares, 512,897 issued Class A common stock, $1 par value - 513 513 Auth. 600,000, 512,897 issued Additional paid-in capital 4,345 4,345 Retained earnings 28,306 28,793 Accumulated other comprehensive (1,328) (1,328) income Treasury stock, at cost (368) (368) -------- -------- Total Stockholders' Equity 32,423 32,910 -------- -------- Total Liabilities and Stockholders' $61,843 $65,088 Equity ======== ======== The accompanying notes are an integral part of these statements. Exolon-ESK Company Consolidated Condensed Statements of Operations Unaudited (in thousands except per share amounts) Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 2000 1999 2000 1999 ------- ------ ------- ------- Net sales $12,574 $12,817 $26,108 $27,040 Cost of goods sold 10,862 10,986 22,037 23,027 ------- ------- ------- ------- Gross Profit 1,712 1,831 4,071 4,013 -------- ------ ------- ------- Operating Expenses Depreciation 890 915 1,780 1,830 Selling, general & administrative expenses 971 1,315 2,089 2,548 Research and development 2 12 19 29 -------- ------ ------- ------- Total Operating Expenses 1,863 2,242 3,888 4,407 -------- ------ ------- ------- Operating (Loss) Income (151) (411) 183 (394) ------- ------- ------- ------- Other Income (Expense): Equity in (Loss) Earnings before income taxes of Norwegian Jt. venture 69 (125) (79) (199) Interest expense (297) (411) (620) (810) Miscellaneous income (expense) (77) 207 (85) 796 ------- ------- ------- ------- Total Other Income (Expense) (305) (329) (784) (213) ------- ------- ------- ------- (Loss) Earnings before income taxes (456) (740) (601) (607) Income tax benefit (expense) 11 287 125 231 ------- ------- ------- ------- Net (Loss) Earnings ($340) ($453) ($476) ($376) ======= ======= ======= ======= Earnings Per Common Share: Basic ($0.36) ($0.48) ($0.52) ($0.41) Diluted ($0.36) ($0.48) ($0.52) ($0.41) Earnings Per Class A Common Share: Basic ($0.34) ($0.45) ($0.49) ($0.39) Diluted ($0.34) ($0.45) ($0.49) ($0.39) The accompanying notes are an integral part of these statements. Exolon-ESK Company Consolidated Condensed Statements of Cash Flows Unaudited (in thousands) Six Months Ended June 30, 2000 1999 -------------- Net cash provided by operating activities $2,431 $5,215 ------ ------ Cash Flow from Investing Activities: Gain on disposal of fixed assets 3 - Capital expenditures (692) (730) ------ ------- Net Cash Used in Investing Activities (689) (730) ------ ------- Cash Flow from Financing Activities: Repayments on debt (1,277) (4,368) Payments to bond sinking fund (581) (510) Dividends paid (11) (33) ------- ------- Net Cash Used in Financing Activities (1,869) (4,911) ------- ------- Net increase in cash (127) 426 Cash at beginning of period 5,328 5,289 ------- ------- Cash at end of period $5,201 $4,863 ======= ======= The accompanying notes are an integral part of these statements. EXOLON-ESK COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE 1 The accompanying unaudited consolidated condensed financial statements of Exolon-ESK Company (the Company ) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. NOTE 2 The following are the major classes of inventories (in thousands) as of June 30, 2000 and December 31, 1999: June 30, December 31, 2000 1999 (Unaudited) ------------ ------------ Raw Materials $802 $1,092 Semi-Finished and Finished Goods 16,347 17,713 Supplies and Other 1,121 1,186 ------- ------- 18,270 19,991 Less: LIFO Reserve (3,062) (3,062) ------- ------- $15,208 $16,929 ======= ======= NOTE 3 Contingencies a. Environmental issues (i) Hennepin, Illinois Plant On October 6, 1994, the Company entered into a Consent Order (the Consent Order ) with the Illinois Attorney General and the Illinois Attorney General and the Illinois Environmental Protection Agency ( IEPA ) in complete settlement of a complaint brought by them, which alleged that the Company had violated certain air quality requirements in the operating permit for its Hennepin, Illinois plant. The Consent Order provided a schedule for the Company to install a Continuous Emissions Monitoring System ( CEMS ) and to implement the required Best Available Control Technology ( BACT ) for air emissions, pursuant to an IEPA approved construction and operating permit. During 1998, the Company completed installation of the CEMS and implementation of the BACT as required by the Consent Order. A revised construction permit was received on December 27, 1999, verifying that the project was in compliance with all applicable Board emissions and utilized BACT for sulfur dioxide. The air quality analysis showed compliance with the allowable sulfur dioxide increment. In Spring 2001, the Company will proceed with the replacement of the liner on lagoon 1 and related pond matters. Discussions are ongoing with IEPA. The existing construction permit 1998-EO-0706, which will expire in July 2001, will be used to complete the project. (ii) Superfund Site A special Notice of Liability was received by the Company from the US EPA for the Remedial Design/Remedial Action Phase of the Lenz Oil Services, Inc. Superfund Site. The Company is one of over seventy potentially responsible parties. The Notice alleges joint and several liability based upon the premise that the soil and ground water were contaminated with oil and solvent waste containing hazardous constituents. The ultimate liability that could result from this Site and Notice is presently being determined. A settlement between $125,000 and $175,000 is probable by the end of 2000, as a result of current negotiations. (iii)Norwegian Joint Venture The Government of Norway continues to hold discussions with certain Norwegian industries including the abrasive industry concerning the implementation of reduced gaseous emission standards. The Company's joint venture is participating in these discussions to help achieve the Norwegian Government's objectives as well as assuring long term economic viability for the joint venture. The Norwegian State Pollution Control Authority has issued limits on Sulfur Dioxide emissions that apply to all Norwegian silicon carbide producers. In addition, a new tax has been imposed on the purchase of coke as part of the limits for gaseous emissions. The Company's joint venture is currently evaluating strategies to address the increase the tax will have on its manufacturing. The joint venture has met the sulfur requirements with changes in production techniques and raw material procurement including low sulfur coke. b. Legal Matters (i) Federal Proceedings and Related Matters On October 18, 1994, a lawsuit was commenced in the U.S. District Court for the Eastern District of Pennsylvania (No. 94-CV-6332) under the title "General Refractories Company v. Washington Mills Electro Minerals Corporation and Exolon-ESK Company." The suit purports to be a class action seeking treble damages from the defendants for allegedly conspiring with unnamed co-conspirators during the period from January 1, 1985 through the date of the complaint to fix, raise, maintain and stabilize the price of artificial abrasive grains and to allocate among themselves their major customers or accounts for purchases of artificial grains. The plaintiffs allegedly paid more for abrasive grain products than they would have paid in the absence of such anti-trust violations and were allegedly damaged in an amount that they are presently unable to determine. On or about July 17, 1995, a lawsuit captioned Arden Architectural Specialties, Inc. v. Washington Mills Electro Minerals Corporation and Exolon-ESK Company, (95-CV- 05745(m)), was commenced in the United States District Court for the Western District of New York. The Arden Architectural Specialties complaint purports to be a class action that is based on the same matters alleged in the General Refractories complaint. In October 1997, the Norton Company was named an additional defendant in both cases. The ultimate liability, if any, that could result from these lawsuits cannot presently be determined, although the Company believes that it has meritorious defenses to the allegations, and it intends to vigorously defend against the charges. NOTE 4 Comprehensive Income During the three months and six months ended June 30, 2000 and 1999, total comprehensive income, which was comprised of net income and foreign currency translation adjustments, equaled net income. NOTE 5 Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands except share information): Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 ------ ------ ------ ------ Numerator: Net income (loss) attributable to common stockholders after preferred ($351) ($464) ($498) ($398) stock dividends ====== ====== ====== ====== Numerator for basic earnings per share: Common stockholders (50%) (175) (232) (249) (199) Class A common stockholders (50%) (176) (232) (249) (199) ------ ------ ------ ------ (351) (464) (498) (398) Effect of Dilutive Securities- - - - - Preferred Stock Dividends ------ ------ ------ ------ Net income (loss) attributable to common stockholders after assumed conversion of preferred ($351) ($464) ($498) ($398) stock ====== ====== ====== ====== Numerator for diluted earnings per share: Common stockholders (50%) (175) (232) (249) (199) Class A common (176) (232) (249) (199) stockholders (50%) ------ ------ ------ ------ ($351) ($464) ($498) ($398) ====== ====== ====== ====== NOTE 5 Earnings Per Share - Con't Denominator: Common stock Denominator for basic earnings per share - weighted average shares 481,995 481,995 481,995 481,995 Effect of dilutive securities - convertible preferred stock - - - - ------- ------- ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 481,995 481,995 481,995 481,995 ======= ======= ======= ======= Class A common stock: Denominator for basic earnings per share - weighted average shares 512,897 512,897 512,897 512,897 Effect of dilutive securities - convertible preferred stock - - - - ------- ------- ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 512,897 512,897 512,897 512,897 ======= ======= ======= ======= Basic Earnings Per Share: Common Stock ($0.36) ($0.48)($0.52) ($0.41) Class A Common Stock ($0.34) ($0.45)($0.49) ($0.39) Dilutive Earnings Per Share: Common Stock ($0.36) ($0.48)($0.52) ($0.41) Class A Common Stock ($0.34) ($0.45)($0.49) ($0.39) The effect of the convertible preferred stock was not considered for 2000 and 1999 because the effect would have been anti- dilutive. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Comparison of the Six Months Ended June 30, 2000 with the Six Months Ended June 30, 1999. Net Sales. Total net sales decreased by 3% to $26,108,000 during the six months ended June 30, 2000 from $27,040,000 in the first six months of 1999 primarily due to decreased demand and increased foreign competition. Gross Profit. Gross profit before depreciation expense was $4,071,000 in the first six months of 2000 compared to $4,013,000 in the first six months of 1999. As a percent of net sales, gross margins were 15.6% in the first six months of 2000 compared to 14.8% in the same period of 1999. The increase in gross profit as a percent of net sales from the first six months of 2000 can be attributed to a Company wide effort to contain manufacturing costs. Operating Expenses. Total operating expenses decreased to $3,888,000 in the six months ended June 30, 2000 from $4,407,000 in the same period of 1999. Operating expenses as a percent of sales decreased to 15% in the first six months of 2000 versus 16% for the same period in 1999. The primary reason for the decrease as a percent of sales is the decrease in selling, general and administrative expenses as compared to the same period in 1999. Specifically, general and administrative expenses decreased to $1,351,000 in the first six months of 2000 compared to $1,722,000 for the same period in 1999. The primary reasons for the decrease include lower expenses related to legal fees, salaries and office administration. Operating Income. Operating income increased by 146% to $183,000 in the six months ended June 30, 2000 from a loss of ($394,000) in the six months ended June 30, 1999 primarily due to the decrease in operating expenses. Norwegian Joint Venture. The Company's 50% share of the pre-tax earnings (loss) of its Norwegian joint venture, Orkla Exolon A/S, was a loss of ($79,000) for the six months ended June 30, 2000 versus a loss of ($199,000) in the six months ended June 30, 1999. Interest and Miscellaneous Expense. Interest expense decreased in the first six months of 2000 to $620,000 from $810,000 in the first six months of 1999. The primary reason for this decrease is the interest costs related to the Company's line of credit, which decreased from $3,745,000 as of June 30, 1999 to $159,000 as of June 30, 2000. Miscellaneous income (expense) was an expense of $85,000 in the first six months of 2000 compared to income of $796,000 in the six months ended June 30, 1999. In the first six months of 1999, the Company received $494,000 from suppliers as settlement in two antitrust litigation claims and $298,000 for a business interruption insurance claim resulting from a furnace accident at The Exolon-ESK Company of Canada, Ltd. Income Tax. The Company's effective tax rate was 21% for the six months ended June 30, 2000 as compared to 38% for the six months ended June 30, 1999. Comparison of the three months ended June 30, 2000 with the three months ended June 30, 1999. Net Sales. Net sales decreased $243,000 to $12,574,000 in the three months ended June 30, 2000, a decrease of 2% compared to net sales of $12,817,000 in the three months ended June 30, 1999. The decline in sales was due to a decrease in volume and increased pressure on prices resulting from a decrease in demand combined with an increase in foreign competition. Gross Profit. Gross profit before depreciation expense was $1,712,000 in the three months ended June 30, 2000 compared to $1,831,000 in the three months ended June 30, 1999. As a percent of sales, gross margins were 13.6% in the three months ended June 30, 2000 compared to 14.3% in the three months ended June 30, 1999. The decrease in gross profit as a percent of net sales was attributed to increases in cost of goods sold caused by lower volumes and a decrease in the prices received for products due to competitive pressures. Operating Expenses. Operating expenses including depreciation, were $1,863,000 during the three months ended June 30, 2000 versus $2,242,000 during the three months ended June 30, 1999. The decrease in operating expenses of $379,000 is a result of spending reductions of $344,000 in selling and general and administrative expenses. Depreciation as a percent of sales was 7.1% in the three months ended June 30, 2000 and June 30, 1999. Operating Income. Operating income (loss) was a loss of ($151,000) in the three months ended June 30, 2000 compared to a loss ($411,000) in the three months ended June 30, 1999. Norwegian Joint Venture. The company's 50% share of the pre-tax earnings of its Norwegian joint venture, Orkla Exolon A/S was income of $69,000 for the three months ended June 30, 2000 versus a loss of ($125,000) in the three months ended June 30, 1999. Interest and Miscellaneous Income. Interest expense decreased to $297,000 in the three months ended June 30, 2000 versus $411,000 in the three months ended June 30, 1999. The decrease in interest expense is primarily due to the interest costs incurred relative to the startup of the pollution abatement facility in July of 1998. Miscellaneous (expense)income was an expense of $77,000 in the three months ended June 30, 2000 versus miscellaneous expense of $207,000 incurred in the three months ended June 30, 1999. The decrease in miscellaneous income from 1999 was due to settlement and receipt of two antitrust litigation claims from suppliers of materials to Exolon-ESK. Income Tax. The Company's effective tax rate for the three months ended June 30, 2000 was 25% versus an effective tax rate of 39% for the three months ended June 30, 1999. Liquidity and Capital Resources As of June 30, 2000, working capital (current assets less current liabilities) has decreased by $270,000 to $21,635,000 when compared to $21,904,000 as of December 31, 1999. Inventories have decreased by $1,721,000 from $16,929,000 as of December 31, 1999 to $15,208,000 as of June 30, 2000. For the six months ended June 30, 1999, net cash provided by operating activities was $2,431,000. Cash reserves decreased by $127,000 as of June 30, 2000 compared to December 31, 1999. Net cash provided by operating activities was used to reduce net outstanding debt by $1,858,000 and to fund capital expenditures of $692,000. The Company's current ratio increased to 5.1 to 1.0 at June 30, 2000 from 3.8 to 1.0 as of December 31, 1999. The ratio of total liabilities to shareholders' equity remained at 1.0 to 1.0 as of June 30, 2000 and December 31, 1999. Management believes that the cash provided by operations and long-term borrowing arrangements will provide adequate funds for current commitments and other requirements in the near future. Reference is made to the information included in Notes to the Consolidated Condensed Financial Statements of the Company, which is hereby incorporated herein by reference. PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to the information included in Note 3 to the Consolidated Condensed Financial Statements of the Company included under Part I, Item 1 of this Form 10-Q, which is hereby incorporated herein by reference. Item 2. Change in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information The Board of Directors of Exolon-ESK Company accepted the resignation of Craig A. Rogerson, as a member of the Board of Directors in April 2000. No replacement has been named to the position as of the date of this report. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are included herein: 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXOLON-ESK COMPANY s/J. Fred Silver ---------------- J. Fred Silver President and Chief Executive Officer s/Michael G. Pagano -------------------- Michael G. Pagano Vice President Finance and Chief Financial Officer Date: August 2, 2000