-----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, EEm9P6LXXy7d/j4KKmKQeyqQj7OfotKrdA1W4XnEK3W1ssczc+IJYLzdt8U/XLim S4sO/tPdZFfr8656U0+xjg== 0000034046-01-000005.txt : 20010409 0000034046-01-000005.hdr.sgml : 20010409 ACCESSION NUMBER: 0000034046-01-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXOLON ESK CO CENTRAL INDEX KEY: 0000034046 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 160427000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07276 FILM NUMBER: 1590459 BUSINESS ADDRESS: STREET 1: 1000 E NIAGARA ST STREET 2: P O BOX 590 CITY: TONAWANDA STATE: NY ZIP: 14150 BUSINESS PHONE: 7166934550 MAIL ADDRESS: STREET 1: 1000 E NIAGARA STREET STREET 2: P O BOX 590 CITY: TONAWANDA STATE: NY ZIP: 14150 FORMER COMPANY: FORMER CONFORMED NAME: EXOLON CO DATE OF NAME CHANGE: 19840517 10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from To Commission file number 1-7276 EXOLON-ESK COMPANY ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 16-0427000 ---------------------------- ---------------- (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 1000 East Niagara Street, Tonawanda, NY 14150 --------------------------------------------- (Address of Principal Executive Offices) (716) 693-4550 ---------------------------------------------------- (Registrant's telephone number, including area code) Name of each exchange on Title of each class which registered ------------------------- ------------------------ Common Stock $1 par value Boston Stock Exchange Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. At March 16, 2001 the aggregate market value of the publicly traded voting stock held by non-affiliates of the Registrant was $1,340,000 based upon the closing price of the Registrant's Common Stock on that date as reported by the Boston Stock Exchange. Solely for the purposes of this calculation all persons who are or may be Officers or Directors of the Registrant and all persons or groups that have filed Schedules 13D with respect to the Registrant's stock have been deemed to be affiliates. As of March 16, 2001, the Registrant had outstanding 481,995 shares of $1 par value Common Stock. Documents Incorporated by Reference: Portions of the Registrant's Form 8-K Current Report regarding the announcement of a Merger Agreement entered into by the Company and Form 14C Preliminary Information Statement outlining the details of the Merger are incorporated by reference into Part I of this Form 10-K. -1- PART I Item 1. Business EXOLON-ESK COMPANY (a) General Development of the Business The Exolon Company was founded in 1914 as a Massachusetts corporation and reincorporated as a Delaware corporation in 1976. On April 27, 1984, ESK Corporation merged into the Exolon Company and the resulting company was renamed Exolon-ESK Company ( ESK Merger ). As used herein, the Company refers to Exolon-ESK Company and its wholly owned Canadian Subsidiary. The Company issued 499,219 shares of its Class A Common Stock ("Class A Common Stock") and 31,523 shares of its Series B Preferred Stock ("Series B Preferred Stock") to Wacker Chemical Corporation as a result of the merger. Wacker Chemical Corporation subsequently converted 12,159 shares of Series B Preferred Stock into 13,678 shares of Class A Common Stock in 1998 and transferred all of its Company shares to Wacker Chemicals (USA), Inc. During 1999, Wacker Chemicals (USA), Inc. changed its name to Wacker Engineered Ceramics, Inc. ("Wacker Ceramics"). The Company is engaged in the business of manufacturing and selling product, which are used principally for abrasive, refractory and metallurgical applications. The primary products of the Company are fused aluminum oxide and silicon carbide. Other product lines include fused specialty products sold to the refractory industry. Effective at the time of the ESK Merger, the Company entered into a Restated Patent License Agreement with Elektroschmelzwerk Kempten GmbH ("Kempten"). Both Kempten and Wacker Ceramics are wholly owned subsidiaries of Wacker Chemie GmbH. At the time of the merger, the Company also entered into an exclusive distributorship and sales representation agreement with Kempten for the United States and Canada relating to silicon carbide products, which was set to expire on December 31, 1997. In July 1997, Kempten and the Company entered into a new two-year distributorship and sales representation agreement for silicon carbide products for the years 1998 and 1999. In June 1999, the Company entered into a distributorship agreement with ESK-SiC GmbH, effective January 1, 2000, relating to SiC microgrits. On March 14, 2001,the Board of Directors of the Company approved an Agreement and Plan of Merger ("Merger Agreement"), among the Company, Washington Mills Company, Inc. ("Washington Mills"), and a newly formed subsidiary of Washington Mills, EXL Acquisition Corp. ("EXL"), which was created solely for the purpose of merging into the Company (the "Washington Mills Merger"). As a result of the Washington Mills Merger, the Company will become a wholly owned subsidiary of Washington Mills, and all of the common and preferred stock of the Company owned by our existing stockholders will be cancelled. The Washington Mills Merger shall become effective at such time as the Certificate of Merger, accompanied by payment of the filing fee (as provided in Section 391 of the Delaware General Corporation Law), has been examined by and received the endorsed approval of the Secretary of State of Delaware (the "Effective Time"). Under the Merger Agreement, at the Effective Time of the Washington Mills Merger, each outstanding Common Stock ("Common Stock") and Series A Preferred Stock ("Series A Preferred Stock") of Company (other than Stock held by Washington Mills, EXL, Company treasury Stock or Stock as to which appraisal rights have been properly exercised), will be converted into the right to receive $13.24 in cash for each Common Stock and $19.00 in cash for each Series A Preferred Stock. Wacker Ceramics, the holder of all of the Company's Class A Common Stock, $1.00 par value and all of the Company's Series B Preferred Stock, no par value, will receive $12.44 in cash for each of the Class A Common Stock and $19.00 in cash for each of the Series B Preferred Stock. Pursuant to the Company's Restated Certificate of Incorporation, the Washington Mills Merger must be approved by holders of not less than two-thirds of the aggregate number (1) of Common Stock and Series A Preferred Stock voting as one class and (2) of Class A Common Stock and Series B Preferred Stock voting as a second class. Stockholders owning approximately 69.5% of the outstanding Common Stock and approximately 95% of the outstanding Series A Preferred Stock (collectively referred to as the "Principal Stockholders") and Wacker Ceramics, the sole stockholder of all outstanding Class A Common share and the Series B Preferred share, have agreed to consent to the adoption of the Merger Agreement and approval of the Washington Mills -2- Merger. The Principal Stockholders and Wacker Ceramics have entered into Stockholder's Agreements committing their shares to be cashed out at the Effective Time. Inasmuch as the holders of shares of stock sufficient to approve and adopt the Washington Mills Merger and the Merger Agreement have agreed to consent, we are not requesting a consent from the remaining stockholders. (b) Financial Information about Industry Segments The Company has only one business segment, the manufacture of abrasive materials and products for abrasive, metallurgical and refractory uses. The Company regards its principal business as being in a single industry segment. (c) Narrative Description of Business The Company's crude silicon carbide is produced at the Company's plant in Hennepin, Illinois. The Company produces crude aluminum oxide and certain other products at its plant in Thorold, Canada owned by The Exolon-ESK Company of Canada, Ltd. ("Exolon Ltd."), its wholly owned subsidiary. Some of the crude products are sold directly to customers, but most of the crude products are shipped to the Company's plant in Tonawanda, New York, where the Company crushes, grades and formulates the crude products into granular products for sale to customers. Methods of distribution. While most of the Company's products are sold directly to its customers by sales representatives employed by the Company, a portion of the sales are made through industrial distributors located throughout the United States and Canada. Export sales are made on a direct basis and through agents. Raw materials. The principal raw materials used by the Company are abrasive grade bauxite, petroleum coke, silica sand and cast iron borings. The Company purchases many other products such as fiber drums, wood pallets, bags, oil, natural gas, chemicals, electrodes and carbon products. The abrasive grade bauxite used by the Company presently comes from the Republic of Guinea in West Africa, Australia and The People's Republic of China. Petroleum coke and silica sand originate from United States sources. Large quantities of electric power are purchased from Ontario Hydro for use by the Company's Canadian furnace plant and from the Illinois Power Company for use in its Hennepin plant. The Company believes that adequate supplies of power will continue to be available. Adequate supplies of raw materials have in general been available to the Company at competitive prices. Employees. As of December 31, 2000, the Company had 222 employees. Major Customers. Sales to no one customer accounted for 10% or more of consolidated net sales of the Company for the years ended December 31, 2000, 1999 and 1998. In management's opinion, the loss of any one customer would not have a material adverse effect on the Company. Competition. The industry in which the Company is engaged is highly competitive. Principal North American competition is from three well-established North American companies. In addition, substantial quantities of grain are imported and sold in North America by foreign based producers of abrasive grain. Each of the North American competitors, in addition to the Company, have silicon carbide grain processing facilities. Two of the three also have aluminum oxide crude and grain production operations, and one has silicon carbide crude production facilities. Competition in the industry is based upon pricing, service, and product performance. The Company's products are sold to other manufacturers and, as a result, the distribution to the industry markets is highly competitive. Major customers are continually striving to remain competitive by controlling the costs for raw -3- materials purchased from the Company. In order to meet customer demand and for competitive purposes, the Company maintains substantial inventories. In addition, it has been Company policy to confine its primary operations to the electric furnace production and processing of grain products. Backlog. As of December 31, 2000, the Company had a consolidated backlog of $5,862,000 as compared to $3,856,000 a year earlier. The increase in the Company's backlog in 2000 is primarily due to the increase in demand experienced in the fourth quarter. All backlog is expected to be shipped in 2001. Seasonal Effect. The Company's business is generally not seasonal. However, vacation shutdowns by a number of its customers can influence third quarter sales. Pollution Control. The Company is involved in operations in which there is a continued risk that the environment could be adversely affected. The Company is in frequent contact with the various environmental agencies in the jurisdictions in which it operates in an attempt to maintain environmental compliance. Reference is made to Note 15 of the Notes to Consolidated Financial Statements beginning on page 26, which is incorporated herein by reference. Management believes all necessary pollution control equipment at the Company's plants in Tonawanda, New York and Thorold, Ontario are in place, and all current pollution control requirements are being met at both plants. (d) Financial Information about Foreign and Domestic Operations and Export Sales The Company's wholly owned subsidiary, Norsk Exolon AS, is a limited partner in a Norwegian partnership, Orkla Exolon KS. See information contained in Note 1 (c) of the Notes to Financial Statements on page 16. The Company's interest in the Norwegian partnership is subject to the usual risks of foreign investment, including currency fluctuations. Currency fluctuation is also a risk associated with the Company's Canadian plant operations. Item 2. Properties The Company's main office and grain processing plant are located in Tonawanda, New York. The plant and office buildings, which are owned by the Company, contain 273,000 square feet of space, and occupy 6 of 34 acres owned by the Company at this site. The facilities were originally completed in 1943, and substantial additions to the plant have been made since that date. The Company has an electric furnace plant situated in Thorold, Ontario, Canada. The Company owns all plant and office buildings, as well as, the 43 acres of land on which the facilities are located. In total, the buildings consist of 251,000 square feet of space. The plant was originally built in 1914. Substantial additions have been made in subsequent years, including the construction of a new furnace in 1996. The Company's Hennepin, Illinois plant includes four outdoor furnace groups and buildings of 47,800 square feet, located on a 78 acre site which is owned by the Company. Construction began in late 1977 and was completed in the spring of 1979 for three furnace groups. The expansion to a fourth furnace group was completed in 1989. The Company purchased an additional 20 acre parcel adjacent its property in 1995 and has completed construction of a desulfurization facility as outlined in Note 15(a)(i) on page 26. The Company has operations in Norway conducted through a joint venture, as outlined in Note 1(c) on page 16. The office and plant of the Norwegian joint venture are located in Gjolme, Norway. The plant and office building, and the land upon which it is situated, are owned by the joint venture. In total, the plant and office consist of 154,000 square feet of space, on 88 acres of land. The plant and office were constructed from 1961-1963, with substantial additions made thereafter. The Company believes that all of these plants are in good condition and suited for the purposes for which they are operated. -4- Item 3. Legal Proceedings Reference is made to the information included in Note 15 to the Consolidated Financial Statements beginning on page 26, which is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The Company's Common Stock is traded on the Boston Stock Exchange. The quarterly Common Stock price ranges are as follows: Price Range of Common Stock on Boston Stock Exchange Quarter 1 2 3 4 ---------- ---------- ---------- --------- High-Low 2000 $16 1/8-$14 $15 1/4-$11 $15-$10 1/2 $14-$8 1/4 High-Low 1999 $30 1/8-$21 $21 1/4-$18 $19-$16 1/2 $18-$16 1/4 Information concerning limitations on the payment of dividends on the Company's Common Stock is hereby incorporated by reference to Notes 8 and 11 to Notes to Consolidated Financial Statements beginning on pages 19 and 22, respectively. The number of stockholder accounts of record of the Company's Common Stock, $1 par value, was 140 as of March 16, 2001. The Company did not pay any dividends on its Common Stock in 2000 or 1999. The shares of the Company's Class A Common Stock and Series B Preferred Stock, all of which are owned by Wacker Ceramics, are not publicly traded. Item 6. Selected Financial Data Selected Financial Years Ended December 31, Information 2000 1999 1998 1997 1996 ----- ----- ----- ----- ------ (thousands of dollars except shares amounts) Statement of Operations: Net Sales $50,482 $51,219 $65,578 $78,096 $77,459 Gross profit before 6,560 9,138 10,961 17,286 17,839 depreciation Operating (Loss) Income (1,066) 1,327 2,124 9,355 9,358 Net (Loss) Income $ (2,026) $ 649 $ 22 $ 5,254 $ 6,080 ========= ====== ====== ======= ======= Basic (Loss) Earnings per share of Common Stock: Net Income (Loss) $ (2.15) $ 0.63 $(0.02) $ 5.41 $ 6.27 per share ======== ====== ======= ======= ======= Basic (Loss) Earnings per share of Class A Common Stock: Net (Loss) Income per $ (2.02) $ 0.59 $(0.02) $ 5.08 $ 5.90 share ======== ====== ======= ======= ======= -5- Selected Financial Years Ended December 31, Information Continued 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (thousands of dollars except share amounts) Diluted (Loss) Earnings per share of Common Stock: Net(Loss) Income per $(2.15) $ 0.63 $(0.02) $ 5.21 $ 6.03 share ======= ====== ======= ====== ====== Diluted (Loss) Earnings per share of Class A Common Stock: Net(Loss) Income per $(2.02) $ 0.59 $(0.02) $ 4.91 $ 5.69 share ======= ====== ======= ====== ====== Dividends per share: Series A Preferred $0.5625 $1.1250 $1.1250 $1.1250 $0.8437 Stock Series B Preferred $0.5625 $1.1250 $1.1250 $1.1250 $0.8437 Stock Common Stock - - - - - Class A Common Stock - - - - - Summary Balance Sheet December 31, Information: 2000 1999 1998 1997 1996 ----- ----- ------ ----- ------- (thousands of dollars) Current Assets $24,957 $29,611 $34,594 $29,260 $28,301 Current Liabilities 24,629 7,707 6,728 6,082 8,818 ------- ------- ------- ------- ------- Working Capital 328 21,904 27,866 23,178 19,483 Total Assets 58,530 65,088 71,286 63,277 61,483 Debt in Default 20,700 - - - - Long-Term Debt - 19,833 27,643 20,033 20,433 Stockholders' Equity 30,386 32,910 32,576 32,789 28,258 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Statements included in this Management Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written statements may be made by the Company from time to time, and such statements may be included in documents filed with the Securities and Exchange Commission. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Such factors include economic slowdowns and recessions; the availability and pricing of raw materials used in the manufacture of the Company's products; the reliable operation of the Company's manufacturing facilities and equipment; the Company's ability to effectively compete in the industries in which it does business; the Company's ability to successfully negotiate new labor agreements and otherwise maintain favorable relations with its employees, a majority of whom are unionized; and the Company's ability to comply with existing and future environmental laws and regulations, the accuracy of its current estimates of existing environmental liabilities and the possibility that currently unknown environmental liabilities may be discovered. -6- The table presented below sets forth the following: (i) percentages which certain items presented in the financial statements bear to net sales of the Company and (ii) change of such items as compared to the indicated prior year. Period to Period (Increase) Decrease in Relationship to Relationship to Net Sales Net Sales Years Ended December 31, Years Ended ------------------------ ------------------- 2000 1999 1998 1999-00 1998-99 ----- ------ ------ ------- ------- Net Sales 100.0 % 100.0 % 100.0 % 0 % 0% Cost of Goods Sold, 87.0 82.2 83.3 (4.8) 1.1 excluding Depreciation Depreciation 7.0 7.0 5.0 0.0 (2.0) Selling, General 8.1 8.1 8.3 0.0 0.2 and Administrative Expense Research and 0.1 0.1 0.2 0.0 0.1 Development ----- ----- ------ ------ ------- 102.2 97.4 96.8 (4.8) (0.6) ----- ----- ------ ------ ------- Operating (Loss) (2.2) 2.6 3.2 (4.8) (0.6) Income Other Income (Expense): Equity in (0.1) 0.3 0.6 (0.4) 0.3 Income(Loss) of Norwegian Joint Venture Interest Expense (2.2) (2.9) (1.8) 0.7 1.1 Other (0.5) 1.6 (1.3) (2.1) (2.9) ----- ----- ----- ----- ------ (2.8) (1.0) (2.5) (1.8) (1.5) ----- ----- ----- ----- ----- Income Tax (1.0) 0.3 0.7 1.3 0.4 (Benefit)Expense ----- ----- ----- ----- ----- Net Income (4.0) % 1.3 % 0.0 % (5.3) % (1.3)% ===== ===== ===== ====== ===== The following discussion and analysis reviews certain factors, which produced significant changes in the Company's results of operations during the three years ended December 31, 2000. Results of Operations 2000 Compared to 1999 In 2000, the Company's net sales decreased $737,000 to $50,482,000, a decrease of 1% compared to net sales of $51,219,000 in 1999. The decline in sales was due to volume decreases caused by a decrease in demand combined with an increase in foreign competition. Consolidated net loss was $2,026,000 for the year ended December 31, 2000. This compares to consolidated net income of $649,000 for 1999. The decrease in net income is primarily due lower sales and lower margins on the products it sold in 2000. In 1999, the Company received one time payments of approximately $797,000 for an insurance settlement related to the furnace accident that occurred at Exolon- Canada in June 1998 and a legal settlement from its carbon graphite suppliers that were involved in a lawsuit for price fixing. Cost of sales, excluding depreciation, as a percentage of sales increased to 87% in 2000, compared to 82% in 1999 primarily as a result of increased manufacturing costs due to lower sales volumes and unfavorable product mix sales. Total operating expenses including depreciation were $7,626,000 during 2000 versus $7,811,000 during 1999. The 2000 decrease in operating expenses is primarily a result of a decrease in selling, general and administrative expenses. Depreciation, as a percent of sales, was 7.0% for 2000 and 1999. The 2000 depreciation expense includes a full year's depreciation expense for the pollution abatement facility in Illinois as was the case in 1999. -7- Selling, general and administrative expenses decreased by $120,000 in 2000, due primarily to decreased selling costs for advertising, travel and outside selling commissions. Interest expense decreased to $1,135,000 in 2000 versus $1,506,000 in 1999. The decrease in interest expense is primarily due to paying off the Company's line of credit in September 2000. The Company's 50% share of the pre-tax (loss) earnings of its Norwegian joint venture, Orkla Exolon KS, was $(63,000) for 2000 versus $172,000 for 1999. The joint venture's gross margin, prior to depreciation, was 15% and 17% for 2000 and 1999, respectively. The 2000 income tax provision was a benefit of $484,000, representing an effective rate benefit of 19%. The 1999 income tax provision was $183,000, which represented an effective rate of 22%. See Note 10 to the financial statements for further information on the income tax provision. Results of Operations 1999 Compared to 1998 In 1999, the Company's net sales decreased $14,359,000 to $51,219,000, a decrease of 22% compared to net sales of $65,578,000 in 1998. The decline in sales was due to volume decreases caused by a decrease in demand combined with an increase in foreign competition. Consolidated net income was $649,000 for the year ended December 31, 1999. This compares to consolidated net income of $22,000 for 1998. The increase in net income is primarily due two miscellaneous income items that were received during the year. The Company received payments for an insurance settlement related to the furnace accident that occurred at Exolon-Canada in June 1998 and a legal settlement from its carbon graphite suppliers that were involved in a lawsuit for price fixing. Cost of sales, excluding depreciation, as a percentage of sales decreased to 82% in 1999, compared to 83% in 1998 primarily as a result of increased effort to control costs at all production facilities. The Company used off peak lower cost electric power to run its furnace plants during the year and reduced the manufacturing workforce in order to reduce costs. Total operating expenses including depreciation were $7,811,000 during 1999 versus $8,837,000 during 1998. The 1999 decrease in operating expenses is primarily a result of a decrease in selling, general and administrative expenses. Depreciation, as a percent of sales, was 7.0% for 1999 compared to 5.0% for 1998. The 1999 increase was due to having a full year's depreciation expense for the pollution abatement facility in Illinois. Selling, general and administrative expenses decreased by $1,280,000 in 1999, due primarily to decreased selling costs for advertising, travel and outside selling commissions. Interest expense increased to $1,506,000 in 1999 versus $1,179,000 in 1998. The increase in interest expense is primarily due to having a full year's interest costs incurred relative to the startup of the pollution abatement facility in July 1998. The Company's 50% share of the pre-tax earnings of its Norwegian joint venture, Orkla Exolon KS, was $172,000 for 1999 versus $385,000 for 1998. The joint venture's gross margin, prior to depreciation, was 17% and 19% for 1999 and 1998, respectively. The 1999 income tax provision was $183,000, representing an effective rate of 22%. The 1998 income tax provision was $430,000, which represented an effective rate of 95%. This was due to $662,000 of foreign currency translation losses, which are not deductible for income tax calculations. Net of these losses the income tax provision would represent 38.5% of taxable income. -8- Liquidity and Capital Resources As of December 31, 2000, the Company was in violation of two financial covenants related to bonds issued in the amount of $20.7 million. In addition, the Company's bank letter of credit in support of certain debt expires on December 15, 2001. The Company has been unable to obtain waivers of the covenant violations or renew its letter of credit with the bank. The current default renders the debt callable and as a result, the debt has been classified as a current liability on the balance sheet. No commitment for alternate financing has been received, and there can be no assurance that the Company will be successful in negotiating such a commitment or satisfying the debt if called. As such, there is doubt about the Company's ability to continue to operate as a going concern. The Industrial Revenue Bonds with an outstanding principal balance of $20,700,000 at December 31, 2000 ("Bonds") was reclassified to current liabilities. The Bonds are classified as debt in default in the current liability section of the balance sheet because the Company has been unable to cure the violations. As of December 31, 2000, working capital (current assets less current liabilities) decreased to 328,000, when compared to $21,904,000 as of December 31, 1999 due to the classification of the Bonds, with an outstanding principal balance of $20,700,000 at December 31, 2000, to a current liability. The Bonds are classified as debt in default in the current liability section of the balance sheet because the Company has been unable to cure the violations. Accounts receivable decreased by $733,000 as of December 31, 2000 versus December 31, 1999. Inventory decreased by $2,809,000 at December 31, 2000 when compared to December 31, 1999. Accounts payable decreased $1,415,000 as of December 31, 2000 versus December 31, 1999. In December 2000, the Company repatriated $2,412,000 USD, net of tax, from its Canadian Subsidiary and the funds are available for normal operations. For the year ended December 31, 2000, net cash provided by operating activities was $3,408,000. Overall outstanding indebtedness decreased by $2,620,000 at December 31, 2000 compared to December 31, 1999. Payments to the bond sinking fund were $1,084,000 for 2000. Capital expenditures of $1,004,000 were funded by operations. The Company's current ratio decreased to 1.0 to 1.0 at December 31, 2000 from 3.8 to 1.0 as of December 31, 1999 due to the reclassification of the Bonds in default as a current liability at December 31, 2000. The ratio of total liabilities to stockholder's equity improved to .9 to 1.0 at December 31, 2000 compared to 1.0 to 1.0 at December 31, 1999. The Company in its long-term cash planning normally covers capital expenditures with funds generated internally. Where abnormally large capital expenditure programs are involved, long-term financing vehicles are sometimes used. Total capital expenditures for 2001 are forecasted at $500,000 to maintain and upgrade production facilities. The Company believes that funds generated internally should be sufficient to finance normal capital expenditure requirements in 2001. Reference is made to the information included in Note 15, Contingencies to the Consolidated Financial Statements beginning on page 26, which is incorporated herein by reference. During the first quarter of 2001, the Company retained Empire Valuation Services, Inc. ("Empire") as its financial advisor. As part of the engagement, the Company requested that Empire consider whether the cash consideration to be received by holders of the Common Stock and Series A Preferred Stock pursuant to the Washington Mills Merger was fair, from a financial point of view, to such stockholders. Empire was not requested to render an opinion as to the fairness of the price to be received by Wacker Ceramics for the Class A Common Stock and the Series B Preferred Stock held by Wacker Ceramics. There were no limitations placed on the scope of Empire's review. As discussed further in Note 3 to the accompanying financial statements, in March 2001, the Company entered into a Merger Agreement under which the Company will become a wholly owned subsidiary of Washington Mills. Under the Merger Agreement, upon the Washington Mills Merger, each outstanding Common Sock and Series A Preferred Stock of Company (other than shares held by Washington Mills, EXL, Company treasury shares or -9- shares as to which appraisal rights have been properly exercised), will be converted into the right to receive $13.24 in cash for each Common Stock and $19.00 in cash for each Series A Preferred Stock. Wacker Ceramics, the holder of all of the Company's Class A Common Stock, $1.00 par value and all of the Company's Series B Preferred Stock no par value, will receive $12.44 in cash for each of the Class A Common Stock and $19.00 in cash for each of the Series B Preferred Stock. Inasmuch as the holders of shares of stock sufficient to approve and adopt the Washington Mills Merger and the Merger Agreement pursuant to the Company's Certificate of Incorporation have agreed to consent, it is not necessary to request consent from the remaining stockholders Employees As of December 31, 2000, the Company employed 222 persons. Of these, approximately 159 (or 72%) work under three collective bargaining agreements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company has entered into financial instruments to manage and reduce the impact of changes in interest rates. A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions, principally Canada and Norway. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between U.S. dollar and the Canadian dollar and between the U.S. dollar and the Norwegian Krone. The Company has indebtedness outstanding at December 31, 2000. The interest impact of an increase in interest rates of 100 basis points (1%) would be as follows (in thousands): Instrument Interest Rate Impact on Earnings Line of credit Variable $ - Village of Hennepin, Fixed - Illinois Industrial Revenue Bonds Upper Illinois River Variable (a) (13) Valley Development ---- Authority Industrial Revenue Bonds Net income reduction (13) before tax Less tax benefit 5 ---- Net income reduction $ (8) ===== (a) The Company has entered into interest rate swap agreements to manage its interest rate market risk exposure with respect to this financial instrument. Under the swap agreement, the Company has effectively fixed the interest rate on the related obligations at a weighted average of 4.85% and either pays to, or receives from a counter-party an amount equal to the difference between the fixed rate and the current variable rate. The weighted average variable rate at December 31, 2000 was 5.27%. The interest rate swap agreements mature in December 2001. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements, together with the report thereon of Ernst & Young LLP dated January 12, 2001, appear on pages 11 through 30 to follow. -10- Report of Independent Auditors Board of Directors Exolon-ESK Company We have audited the accompanying consolidated balance sheets of Exolon-ESK Company and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Exolon-ESK Company and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Exolon-ESK Company will continue as a going concern. As more fully described in Note 2, the Company is in violation of certain restrictive debt covenants and, to date, has been unable to cure the related events of default. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /S/ Ernst & Young LLP Buffalo, New York January 12, 2001, except for Note 3, as to which the date is March 14, 2001 -11- Exolon-ESK Company and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2000 1999 1998 ------ ------ ------- Net Sales $ 50,482 $ 51,219 $ 65,578 Cost of Goods Sold 43,922 42,081 54,617 ------ ------- ------- Gross Profit Before Depreciation 6,560 9,138 10,961 ------ ------- ------- Operating Expenses: Depreciation and Amortization 3,517 3,576 3,252 Selling, General & Administrative 4,079 4,199 5,479 Expenses Research and Development 30 36 106 ------ ------ ------ Total Operating Expenses 7,626 7,811 8,837 ------ ------ ------ Operating (Loss)Income (1,066) 1,327 2,124 ------- ------ ------ Other Income (Expense): Interest Expense (1,135) (1,506) (1,179) Equity in (Loss)Income of (63) 172 385 Norwegian Joint Venture Abandoned Acquisition Costs - - (408) Insurance Settlement - 298 - Vendor Litigation Settlement - 499 - Other (246) 42 (470) ------- -------- ------- Total Other Income (Expense) (1,444) (495) 1,672 ------- -------- ------- (Loss)Income before Income Taxes (2,510) 832 452 Income Tax Benefit(Expense) 484 (183) (430) ------- ------- ------- Net(Loss)Income $ (2,026) $ 649 $ 22 ======= ======= ======= Basic and Diluted (Loss) Income Per Share: Per Common Stock $ (2.15) $ 0.63 $(0.02) ======== ======= ====== Per Class A Common Stock $(2.02) $ 0.59 $(0.02) ======== ======= ====== See accompanying notes to the consolidated financial statements. -12- Exolon-ESK Company and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) December 31, Assets 2000 1999 ------- -------- Current assets: Cash $ 5,093 $ 5,328 Accounts receivable (less allowance for doubtful 5,376 6,109 Income taxes recoverable - 759 Inventories 14,120 16,929 Prepaid expenses 81 237 Deferred income taxes 287 249 ------ ------ Total Current Assets 24,957 29,611 Investment in Norwegian joint venture 4,864 5,464 Property, plant and equipment 22,641 25,069 Bond sinking fund 4,420 3,335 Other assets 1,648 1,609 ------- ------ Total Assets $ 58,530 $ 65,088 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Debt in Default $ 20,700 $ - Note payable - 1,436 Current maturities of long-term debt - 967 and sinking fund requirements Accounts payable 2,339 3,754 Accrued expenses 1,212 1,550 Income taxes payable 378 - ------- ----- Total Current Liabilities 24,629 7,707 Deferred income taxes 1,744 2,342 Long-term debt - 19,833 Other long-term liabilities 1,771 2,296 ------- ------- Total liabilities 28,144 32,178 ------- ------- Commitments and Contingencies Stockholders' equity: Preferred Stock Series A (liquidation preference - 276 276 $484) Series B (liquidation preference - 166 166 $484) Common Stock, issued 512,897, 513 513 outstanding 481,995 ($1 par value) Class A Common Stock, issued/outstanding 513 513 512,897 ($1 par value) Additional paid-in capital 4,345 4,345 Retained earnings 26,745 28,793 Accumulated other comprehensive (1,804) (1,328) income(loss) Treasury stock, at cost (368) (368) ------- ------- Total Stockholders' Equity 30,386 32,910 ------- ------- Total Liabilities and Stockholders' Equity $ 58,530 $ 65,088 ======= ======== See accompanying notes to the consolidated financial statements. -13- Exolon-ESK Company and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2000 1999 1998 ------- ------- -------- Cash Flow from Operating Activities: Net (loss)income $ (2,026) $ 649 $ 22 Adjustments to reconcile net income to cash Provided by operating activities: Depreciation 3,433 3,556 3,252 Amortization 84 20 - Equity in loss(income) of 63 (172) (385) Norwegian joint venture Gain on fixed asset disposals (3) (3) - Deferred income taxes (637) 655 (40) Foreign currency adjustments 61 31 104 Change in Assets and Liabilities: Accounts receivable 733 1,216 2,257 Income taxes recoverable 759 365 (1,124) Inventories 2,809 3,290 (3,583) Prepaid expenses 157 (141) 87 Other assets (125) (94) (261) Accounts payable (1,415) 641 452 Accrued expenses (338) (595) 287 Income taxes payable 378 - (196) Other long-term liabilities (525) (64) (179) Other - 105 - -------- ------- -------- Net Cash Provided by Operating Activities 3,408 9,459 693 -------- ------- -------- Cash Flow from Investing Activities: Capital expenditures (1,004) (1,607) (4,040) Proceeds from fixed asset disposals 3 21 - -------- ------- -------- Net Cash Used for Investing Activities (1,001) (1,586) (4,040) -------- ------- -------- Cash Flow from Financing Activities: Payments to bond sinking fund (1,084) (913) (1,537) Net payments of long-term debt (100) (7,810) 7,210 Net proceeds from (payments of) (1,436) 933 503 notes payable Dividends paid (22) (44) (43) -------- ------- -------- Net Cash Provided by (Used for) Financing (2,642) (7,834) 6,133 Activities -------- ------- -------- Net (Decrease) Increase in Cash (235) 39 2,786 Cash at Beginning of Year 5,328 5,289 2,503 Cash at End of Year $ 5,093 $ 5,328 $ 5,289 ======= ======= ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $1,100 $1,535 $1,399 Income Taxes $ 76 $ 9 $1,789 See accompanying notes to the consolidated financial statements. -14- Exolon-ESK Company and Subsidiaries Consolidated Statements of Stockholders' Equity (In thousands, except share amount) Addi- tional Series Paid- Re- A/B in tained Other Pref. Common Cap- Earn- Compr. Treas. Stock Stock ital ings Income Stock Total ------ ------ ------ ------ ------- ------ ------- Balance - Jan. 1, 1998 $442 $1,026 $4,345 $28,209 $ (865) $(368) $32,789 Net income - - - 22 - - 22 Foreign - - - - (192) - (192) currency Translation adjustment ------- Comprehensive - - - - - - (170) loss ------- Preferred - - - (43) - - (43) stock dividends - $1.125/share ---- ------ ------ ------- -------- ------ ------- Balance - Dec. 31, 1998 442 1,026 4,345 28,188 (1,057) (368) 32,576 Net income - - - 649 - - 649 Foreign - - - - (271) - (271) currency Translation adjustment ------- Comprehensive - - - - - - 378 income ------- Preferred - - - (44) - - (44) stock dividends - $1.125/share ---- ------ ------ ------- -------- ------ ------- Balance - Dec. 31, 1999 442 1,026 4,345 28,793 (1,328) (368) 32,910 Net loss - - - (2,026) - - (2,026) Foreign - - - - (476) - (476) currency Translation adjustment ------- Comprehensive - - - - - - (2,502) loss ------- Preferred - - - (22) - - (22) stock dividends - $0.5625/share ---- ------ ------ ------- ------- ------ ------- Balance - Dec. 31, 2000 $442 $1,026 $4,345 $26,745 $(1,804) $(368) $30,386 ==== ====== ====== ======= ======== ====== ======= See accompanying notes to the consolidated financial statements. -15- Exolon-ESK Company and Subsidiaries Notes To Consolidated Financial Statements December 31, 2000, 1999 and 1998 1. Summary of Significant Accounting Policies a. Revenue recognition The Company recognizes revenue when title has transferred to the buyer, which is generally at the time of shipment. Provision is made for anticipated losses at the time the loss is known. Shipping and handling costs are expensed as incurred and are included in cost of goods sold. b. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Exolon-ESK Company and its wholly-owned subsidiaries Exolon-ESK Company of Canada, Ltd., Norsk Exolon AS, and Exolon-ESK International Sales Corporation. All significant inter-company balances and transactions have been eliminated. c. Investment in Norwegian joint venture The Company's wholly-owned subsidiary, Norsk Exolon AS is a limited partner in a Norwegian partnership, Orkla Exolon KS (the "Partnership"), which is engaged in the manufacture and sale of silicon carbide crude and grain products. Norsk Exolon AS has a 50% interest in the Partnership, with another Norwegian company, Orkla AS, owning the balance. The investment is stated at cost plus the Company's share of undistributed earnings and translation adjustments since acquisition. The earnings of the joint venture are reportable for Norwegian tax purposes by the partners. Taxes attributable to Norsk Exolon AS's share of earnings from the joint venture are included as a component of income taxes (Note 8). d. Inventories Inventories are stated at the lower of cost or market. Approximately 82% and 75% of the dollar value of inventories is stated at last-in, first-out (LIFO) cost at December 31, 2000 and 1999, with the balance being stated at average cost. e. Property, plant and equipment Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and renewals and betterments are capitalized. Depreciation is computed for financial reporting purposes using straight-line and declining balance methods over the estimated useful lives of the assets as follows: buildings, 15-50 years; machinery and equipment, 3-20 years. f. Deferred financing fees Deferred financing fees are being amortized on a straight-line basis over the life of the related debt. g. Foreign currency translation The Company has determined that the United States dollar is the functional currency of the Canadian subsidiary and that the Norwegian krone is the functional currency of the Norwegian subsidiary and the joint venture. Inventories and property, plant and equipment of the Canadian subsidiary are translated at historical exchange rates and all other assets and liabilities are translated at year-end exchange rates. Income statements of the Canadian subsidiary are translated at average rates for the year, except for depreciation, which is translated at -16- historical rates. Gains and losses arising as a result of the translation of the financial statements of the Canadian subsidiary are reflected directly in the results of operations. Assets and liabilities of the Norwegian subsidiary and joint venture are translated at year-end exchange rates and the income statements are translated at the average exchange rates for the year. Resulting translation adjustments are recorded as a separate component of equity. Net gains (losses) arising as a result of the remeasurement of the Canadian subsidiary's financial statements into the United States dollar and from other foreign currency transactions amounted to ($340,000), $363,000, and ($662,000) in 2000, 1999 and 1998, respectively. h. Income taxes Deferred income taxes are determined based on differences between financial reporting and tax bases of assets and liabilities as measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Investment tax credits are accounted for using the flow-through method. The Company does not provide U.S. federal income taxes on a portion of the undistributed earnings of foreign subsidiaries as these earnings are considered permanently reinvested. At December 31, 2000, undistributed earnings of the Canadian and Norwegian foreign subsidiaries combined were $13,942,000. i. Currency forward contracts From time to time, the Company enters into currency forward contracts in management of foreign currency transaction exposure. Forward foreign currency exchange contracts are purchased to reduce the impact of foreign currency fluctuations on operating results. Realized and unrealized gains and losses on these contracts are recorded in net income currently, with the exception of gains and losses on contracts designated to hedge specific foreign currency commitments which are deferred and recognized in net income in the period of the commitment transaction. The discount or premium of the forward contract is recognized over the life of the contract. j. Environmental remediation and compliance Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. k. Long-lived assets The Company reviews carrying amounts for assets whenever events or circumstances indicate that such carrying amounts may not be recoverable. When considered impaired, the carrying amount of the asset is reduced by a charge to income, to its current fair value. l. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. -17- 2. Going Concern of the Company As of December 31, 2000, the Company was in violation of two financial covenants related to the Bonds issued in the total amount of $20.7 million. In addition, the Company's bank letter of credit in support of certain debt expires on December 15, 2001. The Company did not obtain waivers of the covenant violations or renew its letter of credit with the bank because of the Merger Agreement entered by the Company as indicated in Note 3. The current default renders the debt callable and as a result, the debt has been classified as a current liability on the balance sheet. Management did not pursue alternate financing with other lending institutions due to their negotiating a potential sale of the Company to Washington Mills, a company with sufficient independent financial resources to finance these same obligations. There can be no assurance that the Company would have been successful in negotiating such a commitment or satisfying the debt if called. In the absence of the Merger Agreement as indicated in Note 3 and the discontinued attempts to obtain alternate financing, there would be doubt about the Company's ability to continue to operate as a going concern. Subsequent Event - Merger Agreement On March 14, 2001,the Board of Directors of the Company approved an Agreement and Plan of Merger ("Merger Agreement"), among the Company, Washington Mills Company, Inc. ( Washington Mills ), and a newly formed subsidiary of Washington Mills, EXL Acquisition Corp. ( EXL ), which was created solely for the purpose of merging into our Company (the "Washington Mills Merger"). As a result of the Washington Mills Merger, the Company will become a wholly owned subsidiary of Washington Mills, and all of the common and preferred stock of the Company owned by our existing stockholders will be cancelled. Under the Merger Agreement, each outstanding Common Stock and Series A Preferred Stock of Company (other than shares held by Washington Mills, EXL, Company treasury shares or shares as to which appraisal rights have been properly exercised), will be converted into the right to receive $13.24 in cash for each Common Stock and $19.00 in cash for each Series A Preferred Stock. Wacker Ceramics, the holder of all of the Company's Class A Common Stock, $1.00 par value and all of the Company's $1.12-1/2 Series B Preferred Stock no par value, will receive $12.44 in cash for each of the Class A Common Stock and $19.00 in cash for each of the Series B Preferred Stock. The Washington Mills Merger is subject to several conditions. However, inasmuch as the holders of shares of stock sufficient to approve and adopt the Washington Mills Merger and the Merger Agreement have agreed to consent, we are not requesting a consent from the remaining stockholders. 4. Inventories The following are the major classes of inventories as of December 31 (in thousands): 2000 1999 ------- -------- Raw Materials $ 1,041 $ 1,092 Semi-Finished and Finished Goods 15,223 17,713 Supplies and Other 918 1,186 -------- -------- 17,182 19,991 Less: LIFO Reserve (3,062) (3,062) -------- -------- $ 14,120 $ 16,929 ======== ======== 5. Property, Plant and Equipment consists of (in thousands): 2000 1999 ------- ------- Land $ 283 $ 283 Buildings 8,815 8,702 Machinery & equipment 68,408 66,333 Construction in progress 131 1,315 ------- ------- 77,637 76,633 Less accumulated depreciation 54,996 51,564 ------- ------- $22,641 $25,069 ======= ======= -18- 6. Business Segment Information The Company manufactures abrasive materials and products for abrasive, metallurgical and refractory uses. The Company regards its principal business as being in a single industry segment. The Company conducts operations through its manufacturing facilities in the United States and Canada, and its equity interest in a Norwegian joint venture. No one customer accounted for 10% or more of net sales in 2000, 1999 and 1998. 7. Investment in Norwegian Joint Venture The Company's 50% share of the results of operations of the Norwegian joint venture has been determined after adjustments to reflect the application of United States generally accepted accounting principles relating principally to the recording of depreciation and pension expenses and adjustments to the carrying values of the venture's year-end inventories. The Company's share of the venture's assets, liabilities, and results of operations is set forth in the following condensed financial information (in thousands): December 31, Balance Sheet Data 2000 1999 ------ ------ Current assets $3,754 $4,441 Non-current assets 2,856 2,741 Current liabilities 1,442 1,352 Non-current liabilities 123 166 Statement of Operations Data 2000 1999 1998 ------ ------ ------ Net sales $6,938 $7,303 $7,498 Gross profit 1,042 1,242 1,483 (Loss)Income before income taxes (63) 172 385 The Company does not provide U.S. federal income taxes on the undistributed earnings of the Norwegian joint venture as these earnings are permanently reinvested. At December 31, 2000 and 1999, undistributed earnings of the joint venture were $5,540,000 and $5,531,000, respectively. Notes Payable Effective January 3, 2000, the Company amended its U.S. Credit Agreement dated December 22, 1992 with a U.S. bank. The new agreement provided for a line of credit facility with an available balance in the amount of $500,000 and expired on December 31, 2000. The balance of the line of credit/revolving credit facility was $0 and $1,436,000 was at December 31, 2000 and 1999, respectively. On January 3, 2000 the outstanding balance of the revolving credit facility was rolled into the new line of credit. The U.S. Credit Agreement requires the Company to maintain certain financial covenants. In addition, the agreement sets forth limits on capital expenditures and dividends and contains certain other covenants including restriction on mergers, consolidations and sales of assets. The Company is precluded from paying or declaring any dividends or other distributions on its Common Stock without written consent from its U.S. bank. The Company may declare preferred stock dividends not to exceed $100,000 in the aggregate in any fiscal year. As previously mentioned in Note 2, the Company is in default of two financial covenants and has not been able to obtain new financing or obtain waivers for these same violations. As such, the debt has been reclassified to current liabilities and there is substantial doubt about the Company's ability to continue as a going concern. As collateral for the U.S. Credit Agreement, the bank has security interest in all U.S. accounts receivable and inventory, as well as certain additional assets of the Tonawanda, New York facility. -19- The Company's Canadian subsidiary has a $250,000 Canadian ($165,000 U.S. equivalent) operating demand loan available as part of a credit facility provided by a Canadian bank. There was no outstanding balance on this demand loan at the end of 2000 or 1999. The Canadian agreement requires the subsidiary to maintain specified financial ratios and minimum net worth levels. The maintenance of financial covenants may preclude the Canadian subsidiary's transfer of funds, by dividend or otherwise, to the U.S. Company. All borrowings under the Canadian agreement are guaranteed by the Company and the Canadian bank has a security interest in the Canadian accounts receivable, inventory and machinery and equipment. Interest on the borrowings is based upon the Canadian prime rate. 9. Debt in Default Debt in Default consists of (in thousands): 2000 1999 -------- -------- Industrial revenue bond held by an $ 7,700 $7,800 insurance company. Interest is at a fixed rate of 8.875%. Bond maturity is January 1, 2018. Industrial revenue bond. Interest is 13,000 13,000 variable (5.27% and 5.77% at December 31, 2000 and 1999, respectively). The bonds are payable annually through December 1, 2021. -------- -------- 20,700 20,800 Less current maturities - 967 Less debt in default 20,700 -------- -------- $ 0 $19,833 ======== ======== U.S. Credit Agreement At December 31, 2000 the Company was in violation of certain restrictive debt covenants. As the Company has been unable to cure the related events of default, the debt has been classified as debt in default in the current liabilities section of the financial statements. Industrial Revenue Bonds The Company is liable for making payments with respect to $8,000,000 of Industrial Revenue Bonds issued by the Village of Hennepin, Illinois and purchased by an insurance company. The bonds bear interest, payable to a bank as trustee at a fixed rate of 8.875% absent default, the bonds are payable in annual installments that increase periodically through maturity in the year 2018. The bond agreement contains certain restrictive covenants, which are consistent with the covenants contained in the U.S. Credit Agreement, certain of which are in default. The Company is also liable for making payments with respect to $13,000,000 of Industrial Revenue Bonds issued by the Upper Illinois River Valley Development Authority for the construction of a desulfurization plant at the Company's Hennepin, Illinois facility. Bonds totaling $8,405,000 are tax-enhanced and mature absent default December 1, 2021. The remaining bonds mature, absent default December 1, 2021. The bonds bear interest, which is payable periodically, in arrears, to a bank as trustee, at a variable rate determined by market rates for similar instruments at the time of adjustment. The bond agreement contains certain restrictive covenants, which are consistent with the covenants contained in the U.S. Credit Agreement. In support of the $13,000,000 bond issue, the Company obtained a $13,000,000 letter of credit from its principal U.S. bank for the benefit of the trustee of the bonds. A letter of credit fee equal to 4% per annum is payable to the bank periodically, in arrears. The letter of credit expires December 15, 2001 and is renewable annually thereafter. The letter of credit agreement requires the Company to make voluntary quarterly contributions to a sinking fund in an amount that would be sufficient to provide for the redemption of all of the -20- bonds within 15 years. The letter of credit agreement also requires the Company to contribute to the sinking fund, an amount equal to the Company's excess cash flow, up to a maximum of $4,333,333 in the aggregate. At December 31, 2000 and 1999, the Company was not required to contribute an amount under this provision. The bond sinking fund had a balance of $4,420,000 and $3,335,000 at December 31, 2000 and 1999, respectively. The sinking fund monies are invested in certificates of deposit with the principal U.S. bank. 10. Income Taxes The components of (loss) income before income taxes are as follows (in thousands): 2000 1999 1998 -------- -------- -------- Domestic $ (3,444) $ 776 $ 250 Foreign 934 56 202 -------- -------- -------- Total $ (2,510) $ 832 $ 452 ======== ======== ======== The components of income tax expense are as follows (in thousands): 2000 1999 1998 -------- ------- -------- Current provision (benefit): United States Federal $ 44 $ (480) $ 171 State 6 (27) 16 Foreign 62 1 281 -------- -------- ------- Total Current $ 112 $ (506) $ 468 -------- -------- ------- Deferred provision (benefit): United States Federal $ (625) $ 687 $ (84) State (56) 117 (9) Foreign 85 (115) 55 ------- ------- -------- Total Deferred $ (596) $ 689 $ (38) ------- ------- -------- Total $ (484) $ 183 $ 430 ======= ======= ======== -21- The actual tax expense differs from the expected tax expense computed by applying the U.S. Federal corporate tax rate of 34% to earnings before income taxes as follows (in thousands): 2000 1999 1998 ------- ------- ------- Computed expected tax $ (853) $ 283 $ 154 expense(benefit) Effect of differing tax rates applicable to foreign Subsidiary income (119) (70) (14) Effect of permanent differences 8 (19) 9 State and provincial taxes, net of (21) 21 127 federal benefit Effect of foreign currency 175 (80) 146 remeasurement Tax on Repatriation 249 - - Other 77 48 8 -------- ------- ------- Total income tax expense $ (484) $ 183 $ 430 ======== ======= ======= Effective tax rate 19.3% 22.0% 95.1% ======== ======= ======= Deferred income tax liabilities and assets include the following (in thousands): 2000 1999 ------- --------- Deferred tax liabilities: Excess tax depreciation $ 2,272 $ 2,171 Taxes on foreign earnings expected - 571 to be repatriated Pension and payroll accruals 312 258 Inventory accounting methods 48 75 Other - 46 ------ ------- Gross deferred tax liabilities 2,632 3,121 ------ ------- Deferred tax assets: Tax benefit of NOL Carryforward (281) - Accounts receivable and other (54) (45) asset reserves Post retirement accrual (721) (926) Other, net (119) (57) ------- ------- Gross deferred tax assets (1,175) (1,028) ------- ------- Net deferred tax liability at $ 1,457 $ 2,093 end of year ======= ======= 11. Capital Stock The Company has two classes of common stock. At December 31, 2000 there were 600,000 shares of $1 par value Common Stock authorized, of which 512,897 shares were issued and 481,995 shares were outstanding. At the same date there were 600,000 shares of $1 par value Class A Common Stock, of which 512,897 shares were issued and outstanding. Additionally, there were 100,000 shares of no par value preferred stock authorized. At December 31, 2000 there were 19,364 shares of Series A and 19,364 shares of Series B Preferred Stock outstanding. At December 31, 2000, the shares of Series A and Series B Preferred Stock are entitled to receive, when declared by the Board of Directors, cumulative annual cash dividends at the rate of $1.125 per share. For 2000, preferred stock dividends of $22,000 went undeclared and when declared will be paid at a later date. The Series A Preferred Stock and Series B Preferred Stock have a preference upon liquidation of $25.00 each per share. Each share of Series A Preferred Stock and Series B Preferred Stock is convertible into 1.125 shares of Common Stock and Class A Common Stock, respectively. The shares of Common Stock, voting with the shares of the Series A Preferred Stock, have the right to elect one-half of the members of the Board of Directors and the shares of Class A Common Stock voting with the Series B Preferred Stock, owned by Wacker Ceramics, have the right to elect the remaining one-half of the members of the Board of Directors. -22- 12. Pension and Other Retirement Benefits The Company sponsors contributory and non-contributory pension plans in the United States and Canada covering substantially all hourly and salaried employees with the exception of union employees at the Company's Hennepin plant, who are covered by a union-sponsored pension plan. The Company's U.S. defined contribution plan, which covers all of its domestic salaried employees, and its Canadian defined contribution plan covering substantially all Canadian employees, provide for the Company to make regular contributions based on salaries of eligible employees. Payments upon retirement or termination of employment are based on vested amounts credited to individual accounts. Contributions to the U.S. defined contribution plan totaled $185,000 in 2000, and $199,000 in 1999, and $204,000 in 1998. Contributions to the Canadian defined contribution plan were $38,000 in 2000, $40,000 in 1999, and $62,000 in 1998. The Company also provides a defined benefit plan for hourly employees at the Tonawanda plant. Benefits are based primarily on years of service. The Company's policy for this plan is to contribute annually at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. The Company also participates in a collectively bargained, union- sponsored multi-employer pension plan which benefits employees of the Company's Hennepin, Illinois facility who are union members. Company contributions to this plan were $171,000, $163,000 and $180,000 for 2000, 1999, and 1998, respectively. This plan is not administered by the Company. Contributions are determined in accordance with the provisions of the negotiated labor contract. Total pension expense for all plans amounted to $269,000, $344,000, and $400,000 in 2000, 1999 and 1998, respectively. -23- The following tables summarize certain information with respect to the Company's Tonawanda hourly employees defined benefit plan: December 31, Change in Benefit Obligation 2000 1999 ------ ------- Benefit obligation at beginning $ 2,368 $ 2,162 of year Service cost 81 83 Interest cost 165 151 Actuarial (gain)loss (12) 120 Benefits paid (29) (148) ------- ------- Benefit obligation at end 2,573 2,368 of year ------- ------- Change in Plan Assets Fair value of plan assets at 4,204 3,499 beginning of year Actual return on plan assets 543 853 Benefits paid (29) (148) ------ ------- Fair value of plan assets at 4,718 4,204 end of year ------ ------- Funded status 2,144 1,836 Unrecognized net loss at 52 69 transition, being amortized Over approximately 17 years Unrecognized prior service cost 329 357 Unrecognized actuarial gains (1,789) (1,650) ------- ------- Prepaid pension cost $ 736 $ 612 ======= ======= Components of Net Periodic Pension Cost 2000 1999 1998 --------- --------- -------- Service cost $ 81 $ 83 $ 60 Interest cost 165 151 132 Expected return on plan assets (335) (279) (215) Amortization of transition 17 17 17 obligation Amortization of prior service 28 28 12 cost Recognized net actuarial gains (80) 58 (49) -------- -------- -------- Net periodic pension expense $ (124) $ 58 $ (43) ======== ======== ======== Weighted Average Assumptions as of December 31 Discount rate 7% 7% 8% Expected return on plan assets 8% 8% 7% Unrecognized gains and prior service costs are amortized on a straight-line basis over a period approximating the average remaining service period for active employees. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits to eligible retired employees and their spouses. Participants generally become eligible for these benefits after achieving certain age and years of service requirements. For certain retirees, these benefits are subject to deductibles, co-payment provisions and other limitations. The Company may amend or change the plan periodically. The Company's policy is to fund these benefits on a pay-as-you-go basis. -24- The following tables summarize certain information with respect to the Company's post retirement benefit plans: December 31, 2000 1999 -------- --------- Change in Benefit Obligation Benefit obligation at beginning $ 2,711 $ 2,421 of year Service cost 13 29 Interest cost 123 163 Actuarial gain 274 293 Benefits paid (209) (240) Plan Settlements (864) - Effect of changes in foreign currency Exchange rates (18) 45 -------- -------- Benefit obligation at end of year 2,030 2,711 Unrecognized prior service cost (18) (20) Unrecognized actuarial gains(losses) (94) (191) Accrued post-retirement benefit $ 1,918$ 2,500 obligation ========= ======== 2000 1999 1998 --------- -------- -------- Components of Net Periodic Post Retirement Benefit Cost Service cost $ 13 $ 29 $ 26 Interest cost 123 163 194 Amortization of prior service cost 2 2 2 Recognized net actuarial losses (2) - 7 (gains) --------- -------- -------- Net periodic post retirement $ 136 $ 194 $ 229 benefit cost ========= ======== ======== Weighted Average Assumptions as of December 31 Discount Rate 7% 7% 8% Unrecognized gains and losses and prior service costs are amortized on a straight-line basis over a period approximating the average remaining service period for active employees. During 2000, the Company recognized $864,000 U.S.D. settlement on an obligation for benefits under the Plan for Canadian employees. The entire amount was recognized during 2000 and the benefit will be provided and covered for Canadian employees under a government sponsored benefit plan. For measuring the post retirement benefit obligation as of December 31, 2000 an 8% annual rate of increase in health care rates was assumed, decreasing to 6% per year in 2003 and thereafter. It was also assumed that reimbursable expenses for post-1990 U.S. retirees would be at least equal to the dollar reimbursement limitation. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effect: One One Percentage Percentage Point Point Increase Decrease ----------- ------------ Effect on total of service and $ 5 $ (4) interest cost components Effect on post retirement benefit 64 (59) obligation -25- 13. Related Party Transactions The Company purchased combined totals of $2,154,000, $2,445,000 and $2,854,000 of products from its affiliates, Elektroschmelzwerk Kempten GmbH, and its Norwegian joint venture during 2000, 1999 and 1998, respectively. The Company has a royalty agreement with an affiliate of a stockholder of the Company as described in Note 14(b). 14. Commitments a. Lease agreements The Company leases certain machinery and equipment under operating leases. Amounts charged to expense for the years ended December 31, 2000, 1999 and 1998 were $71,000, $173,000, and $295,000, respectively. There are no minimum lease payments payable under operating leases in future years. b. Royalty agreements The Company was party to a Royalty Agreement, which covered production of specialty product for the refractory market, and expires April 30, 2001. Royalty expense amounted to $125,000, $170,000, and $73,000 in years ended December 31, 2000, 1999 and 1998, respectively. During 1999, the Company terminated the Royalty Agreement for $333,000. This royalty buy-out is being amortized over the remaining royalty term. 15. Contingencies a. Environmental issues (i) Hennepin, Illinois Plant On October 6, 1994, the Company entered into a Consent Order (the Consent Order ) with the Illinois Attorney General and the Illinois Environmental Protection Agency ( IEPA ) in complete settlement of a complaint brought by them, which alleged that the Company had violated certain air quality requirements in the operating permit for its Hennepin, Illinois plant. The Consent Order provided a schedule for the Company to install a Continuous Emissions Monitoring System ( CEMS ) and to implement the required Best Available Control Technology ( BACT ) for air emissions, pursuant to an IEPA approved construction and operating permit. During 1998, the Company completed installation of the CEMS and implementation of the BACT as required by the Consent Order. A revised construction permit was received on December 27, 1999, verifying that the project was in compliance with all applicable Board emissions and utilized BACT for sulfur dioxide. The air quality analysis showed compliance with the allowable sulfur dioxide increment. In January 2001, an additional one-year temporary permit was approved by the IEPA to permit the Company additional time to test a recently installed heater designed to improve the H2S removal efficiency. A Title V permit is anticipated to be applied for in year 2002. In the summer of 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. -26- (ii) Superfund Site A Special Notice of Liability was received by the Company from the U.S. EPA for the Remedial Design/Remedial Action Phase of the Lenz Oil Services, Inc. Superfund Site. The Company was one of over seventy potentially responsible parties. The Notice alleged 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 Company entered into a Consent Decree with the U.S. EPA in February 2001 and settled the claim for approximately $165,000. (iii) Norwegian Joint Venture The Government of Norway held discussions with certain Norwegian industries including the abrasive industry concerning the implementation of reduced gaseous emission standards. The Company's joint venture is participating in these discussions to help achieve the Norwegian Government's objectives as well as assuring long-term economic viability for the joint venture. The Norwegian State Pollution Control Authority has issued limits regarding dust emissions and Sulfur Dioxide emissions that will apply to all Norwegian silicon carbide producers. In addition, a new tax was imposed on the purchase of coke as part of the limit 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 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. Discovery was completed in January 2000. On October 4, 2000 a decision and order was filed in the case denying the Norton Company's motion to dismiss. -27- 16. Fair Value of Financial Instruments At December 31, 2000 and 1999, the carrying amount and the fair value of the Company's financial instruments were as follows (in thousands). Bracketed amounts in the carrying amount column represent liabilities for potential cash outflows. Bracketed amounts in the fair value column represent estimated cash outflows required to currently settle the financial instrument at current market rates. December 31, 2000 1999 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Assets: Cash $5,093 $5,093 $5,328 $5,328 Liabilities: Note Payable - - (1,436) (1,436) Revolving credit and - - - - term loan agreement Variable rate (13,000) (13,000) (13,000) (13,000) industrial revenue bonds Fixed rate industrial (7,700) (10,090) (7,800) (9,643) revenue bonds Interest rate swap agreement - (27) - 217 The following methods and assumptions were used by the Company in estimating the fair values of their financial instruments. The carrying amount reported in the balance sheet for cash approximates fair value. The fair value of the Company's note payable, revolving credit and term loan agreement, and variable rate industrial revenue bonds approximate carrying amounts, as the underlying debt instruments are comprised of notes that are re-priced on a short-term basis. The fair value of the fixed rate industrial revenue bonds has been estimated using the discounted cash flow method. During 1998, the Company entered into an interest rate swap agreement with a bank to manage its exposure to interest rate movements by effectively fixing the interest rates on its variable rate industrial revenue bonds ($13,000,000 face amount) through December 17, 2001. The fixed interest payments are at a weighted average 4.85%. Interest rate differentials paid or received under these agreements are recognized as adjustments to interest expense in the period paid or received. 17. The Effect of New Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities." in June of 1998. The FASB issued SFAS No. 137 in June of 1999, which defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Statement No. 133 establishes accounting and reporting standards for derivatives and hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Adoption of Statement No. 13 is not expected to have a material impact on the Company's results of operations, financial position, or cash flows. -28- 18. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands except share and per share information): Numerator: 2000 1999 1998 -------- ------- ------- Net (loss) income $(2,026) $ 649 $ 22 Preferred stock dividends (44) (44) (44) -------- ------- ------- Net (loss) income available to $(2,070) $ 605 $ (22) Common Stockholders ======== ======= ======= Numerator for basic earnings per share: Common Stockholders (50%) $(1,035) $ 303 $ (11) Class A Common Stockholders (50%) (1,035) 302 (11) -------- ------- ------- (2,070) 605 (22) Effect of diluted securities - - - - preferred stock dividends -------- ------- ------- Net (loss) income available to Common $(2,070) $ 605 $ (22) Stockholders after assumed conversion of preferred stock ======== ======= ======= Numerator for diluted earnings per share: Common Stockholders (50%) $(1,035) $ 303 $ (11) Class A Common Stockholders (50%) (1,035) 302 (11) -------- ------- ------- $(2,070) $ 605 $ (22) ======== ======= ======= Denominator: Common Stock: Denominator for basic earnings per 481,995 481,995 481,995 share weighted average share Effect of dilutive securities - - - - convertible preferred stock -------- ------- ------- Denominator for diluted earnings 481,995 481,995 481,995 per share adjusted weighted average share and assumed conversions ======== ======= ======= Class A Common Stock: Denominator for basic earnings per 512,897 512,897 512,897 share weighted average share Effect of dilutive securities - - - - convertible preferred stock -------- ------- ------- Denominator for diluted earnings per 512,897 512,897 512,897 share adjusted weighted average share and assumed conversions ======= ======= ======= Basic and Diluted (Loss) Income per ($2.15) $0.63 ($0.02) share: Common Stock Class A Common Stock ($2.02) $0.59 ($0.02) The effect of the convertible preferred stock was not considered for 2000, 1999 and 1998 because the effect would have been antidilutive. -29- 19. Quarterly Financial Data (unaudited) Summarized quarterly financial data for 2000, 1999 and 1998 is as follows: Quarter (thousands of dollars except per share amounts) First Second Third Fourth ------------------------------ ------ ------- ------- ------- Year Ended December 31, 2000 ----------------------------- Net Sales $13,534 $12,574 $12,435 $11,939 Gross Profit(Loss) Before 2,359 1,712 1,445 (1,044) Depreciation Net Income (Loss) (136) (340) (479) (1,071) Basic Earnings Per Common (0.15) (0.36) (0.51) (1.13) Stock Basic Earnings Per Class A (0.15) (0.34) (0.48) (1.05) Common Stock ---------------------------- Year Ended December 31, 1999 ---------------------------- Net Sales $14,223 $12,817 $12,603 $11,576 Gross Profit Before 2,182 1,831 2,530 2,595 Depreciation Insurance Settlement 298 - - - Vendor Litigation Settlement 314 157 23 5 Net Income (Loss) 77 (453) 163 862 Basic Earnings Per Common 0.07 (0.48) 0.16 0.88 Stock Basic Earnings Per Class A 0.06 (0.45) 0.15 0.83 Common Stock ----------------------------- Year Ended December 31, 1998 ----------------------------- Net Sales $20,351 $17,718 $14,598 $12,911 Gross Profit Before 4,394 3,564 1,941 1,062 Depreciation Abandoned Acquisition Costs - - (408) - Net Income (Loss) 1,197 831 (774) (1,232) Basic Earnings Per Common 1.23 0.85 (0.83) (1.27) Stock Basic Earnings Per Class A 1.16 0.80 (0.78) (1.20) Common Stock Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -30- PART III Item 10. Directors and Executive Officers of the Registrant The Board of Directors consists of six members, three of whom are elected by the outstanding shares of Common Stock and Series A Preferred Stock voting as a class, and three of whom are elected by the outstanding shares of Class A Common Stock and Series B Preferred Stock voting as a class. The Directors currently elected by the shares of Common Stock and of the Series A Preferred Stock are Brent D. Baird, Theodore E. Dann, Jr. and Patrick W.E. Hodgson, such persons are hereinafter referred to as Common Directors, and the individuals currently elected by the shares of Class A Common Stock and Series B Preferred Stock are hereinafter referred to as Wacker Directors . The Wacker Directors are Paul Lindblad, Dr. Matthias Wolfgruber, and Dr. Fritz Petersen. The following table contains information relating to the Company's Directors. Such information and the information with regard to beneficial ownership of securities have been furnished to the Company by the respective directors. -31- Shares of the Shares of Company's the Series A Company's Preferred Common Stock Owned Year Stock Owned Bene- First Bene- ficially Name and Became ficially as of Principal Di- as of Feb. % of Feb. 1, % of Occupation Age rector 1, 2000 Class 2000 Class ------------------- --- ------ ---------- ----- -------- ----- Theodore E. Dann, Jr. 47 1986 90,800(1) 18.8 -- -- Chairman of the Company's Board of Directors since June 1, 1992; Corporate Secretary of the Company from January 1, 1987 through June 1, 1992; Chairman of Buffalo Technologies Corp., from April 11, 1994 to Present; President of Buffalo Technologies Corp. since June 1997; Secretary/Treasurer, Director and Corporate Attorney for Ferro Alloys Services, Inc., since 1985; Director of First Carolina Investors, Inc. ------------------- --- ------ ---------- ----- --------- Brent D Baird 62 1994 104,500(2) 21.7 -- Private investor; Director of First Carolina Investors, Inc., Allied Health Products, Inc., M&T Bancorp (bank holding company), Merchants Group, Inc., Todd Shipyards Corporation; and Ecology and Environment, Inc. Prior to 1992 was a limited partner of Trubee, Collins & Co., a member of the New York Stock Exchange, Inc. (1) See footnote (3) under table of more than 5% stockholders, under Item 12 (2) See footnote (2) under table of more than 5% stockholders, under Item 12. Includes 1,300 Shares owned by Mr. Baird, 14,000 Shares owned by Aries Hill Corp., 18,800 Shares owned by members of Mr. Baird's immediate family who share his household but as to which he has no voting or investment power, 5,700 Shares owned by The Cameron Baird Foundation and 64,700 Shares owned by First Carolina Investors, Inc. -32- Shares of the Shares of Company's the Series A Company's Preferred Common Stock Stock Owned Year Owned Bene- First Beneficially ficially Became as of as of Name and Principal Di- Feb. 1, % of Feb. 1, % of Occupation Age rector 2000 Class 2000 Class -------------------- --- ------ --------- ----- --------- ----- Patrick W.E. Hodgson 60 1991 78,370(3) 16.3 18,445 95.2 President, Cinnamon Investments, Ltd., London, Ontario, investment firm, since 1981; Chairman of Todd Shipyards, Inc., since Feb. 1993; Director, First Carolina Investors, Inc., and M&T Bancorp. -------------------- --- ----- -------- ----- --------- ----- Dr. Matthias 47 2000 -- -- -- -- Wolfgruber President and CEO of, Wacker Silicones Corporation and President of Wacker Chemical Holding Corporation since October 1, 2000. Global Business Unit Manager and Vice President Silicones Division of Wacker Chemie from September 1996 to September 2000. Chairman of Wacker Quimica do Brasil Ltda., Wacker Mexicana, Kelmar Industries and Polymer Systems, Inc., Director of various Wacker Subsidiaries. (3) Includes 78,370 Shares owned by Cinnamon Investments, Ltd., of which Mr. Hodgson is a director. See footnote (2) under table of more than 5% stockholders, under Item 12. -33- Shares of Shares of the the Company's Company's Series A Common Preferred Stock Stock Year Owned Owned First Bene- Bene- Be- ficially ficially came as of as of Name and Principal Di- Feb. 1, % of Feb. 1, % of Occupation Age rector 2000 Class 2000 Class -------------------- --- ------ --------- ----- -------- ----- Dr. Fritz Petersen 56 1999 -- -- -- -- Managing Director ESK-SiC GmbH since April 1, 1998. Head of the Business Unit SiC of ESK-GmbH from January 4, 1994 to September 30, 1998. Managing Director of CASIL-Carbureto de Silicio S.A. in Brazil from April 1, 1987 to December 31, 1993. -------------------- -- ---- --- --- ---- ---- Paul Lindblad Managing Director 34 2000 -- -- -- -- of Elektroschmelzwerk Kempten GmbH since March 1, 1999, Managing Director Wacker Chemicals (South Asia) Pte. Ltd. January 1, 1997 through February 28, 1999, Chairman of the Board, Wacker Engineered Ceramics Corp., Chairman of the Board ESK France. Item 11. Executive Compensation The Company's directors, other than the Chairman, receive from the Company an annual retainer fee of $5,000, and $1,500 for each meeting of the Board or meeting of a committee of the Board they attend, but not to exceed $1,500 for any one day. Director fees payable to Wacker Directors for 2000 were paid to Wacker Ceramics. The Chairman, Mr. Dann, receives an annual retainer fee of $50,000, plus the meeting fees received by the other directors. Compliance with Section 16 of the Securities Exchange Act Under Section 16 of the Securities Exchange Act of 1934, as amended, directors, executive officers and persons who own more than 10% of the Company's Common Stock are required to report their ownership of equity securities of the Company, and any changes in that ownership to the Securities Exchange Commission and to the Company. Based solely upon a review of reports furnished to the Company (the "Section 16(a) Reports") by such persons on Forms 3, 4 or 5 for the year ended December 31, 2000, there were no omissions from or late filings of Section 16(a) Reports. -34- Executive Officers The executive officers of Exolon-ESK Company are as follows: J. Fred Silver President and Chief Executive Officer Michael G. Pagano Chief Financial Officer and Vice President-Finance Kersi Dordi Vice President Aluminum Oxide & Specialty Products Armand Ladage Vice President Silicon Carbide John L. Redshaw Vice President of Sales & Marketing Nancy E. Gates Secretary/General Counsel The business backgrounds of the Company's executive officers are as follows: Mr. Silver, age 55 has been the President and Chief Executive Officer since February 1996 with a one-year break from 8/97-9/98. From April 1995 to February 1996 he was a member of the Company's Board of Directors. He served as President of Carborundum Abrasives Co. from 1981 through 1992 and as President of Time Release Sciences, Inc., a foam manufacturer from January 1993 through February 1996, and again from August 1997 through September 1998. Mr. Pagano, age 35, served as Acting Vice President of Finance/Chief Financial Officer from July 1999 through December 1999. In January 2000 he was promoted to Chief Financial Officer. From January 1994 to December 1997, he worked as a Senior Financial Analyst at a food manufacturer, Rich Products Corporation, located in Buffalo, New York. Mr. Dordi, age 52, has served as a Vice President of Aluminum Oxide & Specialty Products Manufacturing since October 1995 and has served as the General Manager of the Company's Canadian subsidiary, Exolon-ESK Company of Canada, Ltd., since September 1992. In January 1995, he became a member of the Company's Operating Committee and in March 1995 was appointed as an executive officer on the Operating Committee. From November 1990 to September 1992, he served as the Plant Manager for the Company's Thorold, Ontario plant, and from 1986 to November of 1990, he served the Company in various technical and managerial capacities. Mr. Ladage, age 47, has served as a Vice President Silicon Carbide since October 1995. In January 1995, he became a member of the Company's Operating Committee and in March 1995 was appointed as an executive officer on the Operating Committee. He has served as the Plant Manager of the Company's Hennepin, Illinois operations since 1978. Mr. Redshaw, age 46, has served as Vice President of Sales and Marketing since October 1995. In January 1995, he became a member of the Company's Operating Committee, and in March 1995 was appointed as an executive officer on the Operating Committee. He has served as Metallurgical Sales and Marketing Manager for the Company since 1989. Ms. Gates, age 36, has been the General Corporate Secretary since February 29, 1996. Since February 29, 1996, she has been employed as the Company's General Counsel. From 1990 to 1996, Ms. Gates was a corporate attorney at the law firm of Magavern, Magavern, & Grimm, LLP, Buffalo, New York. -35- Compensation of Executive Officers The following Summary Compensation Table sets forth information concerning compensation for services in all capacities for the Company and its subsidiaries for the fiscal years ended December 31, 2000, 1999, and 1998 of those persons who were, at December 31, 2000, (i) the chief executive officer of the Company and (ii) executive officers of the Company and its subsidiaries during 2000 whose annual base salary and bonus compensation exceeded $100,000, (collectively, the "Named Officers"). Summary Compensation Table (3)Annual Compensation ------------------------- All Other Name and Principal Compensation Position Year Salary Bonus (1) ---------------- ----------- -------- ----------- ------------ J. Fred Silver 2000 $173,040 $ - $20,504 President and 1999 $168,000 $18,480 $20,331 Chief Executive 1998 $53,462 $8,374 $3,575 Officer Kersi Dordi 2000 $114,000 $ - $16,694 Vice President 1999 $110,700 $12,174 $16,499 Aluminum Oxide & 1998 $108,000 $16,200 $15,871 Specialty Fusions Armand Ladage 2000 $114,000 $ - $16,547 Vice President 1999 $110,700 $12,174 $16,396 Silicon Carbide 1998 $108,000 $20,520 $15,731 John L. Redshaw 2000 $114,000 $ - $16,586 Vice President 1999 $110,700 $12,174 $16,243 Sales & Marketing 1998 $108,000 $13,500 $15,450 (1) Includes matching contributions made by the Company under the Company's Savings Plan for U.S. Salaried Employees (the "401(k) Plan"), premiums paid by the Company on term life insurance, amounts contributed under the Company's Retirement Plan for U.S. Salaried Employees and amounts paid under a car allowance policy. -36- Compensation (Executive) Committee Interlocks and Insider Participation Elektroschmelzwerk Kempten GmbH ("Kempten") is a subsidiary of Wacker Chemie GmbH ("Wacker Chemie"), which is the owner of all of the outstanding stock of Wacker Ceramics. Wacker Ceramics is the owner of all of the Company's outstanding Class A Common Stock and Series B Preferred Stock. The Company is the successor to a merger of ESK Corporation (wholly owned subsidiary of Wacker Chemie) into The Exolon Company which was effected on April 27, 1984. Pursuant to an exclusive distributorship and sales representation agreement which was entered into with Kempten at the time of the merger and a distributorship agreement entered into in June 1999, the Company purchased $1,144,000 and $1,555,000 of certain products from Kempten, during 2000 and 1999, respectively. The Company and Kempten maintain a joint patent covering certain technology developed and implemented at the Company's Hennepin facility and are joint applicants with respect to another such patent. The patent and patent application relating to joint ownership rights in the subject technology. Dr. Fritz Petersen and Dr. Matthias Wolfgruber serve on the Executive Committee. Item 12. Security Ownership of Certain Beneficial Owners and Management Common Stock and Series A Preferred. The stock ownership of the only persons known to the Company to be the beneficial owners of more than 5% of the outstanding shares of the Common Stock and of the Series A Preferred Stock as of March 1, 2001, and such stock ownership of all directors and officers of the Company as a group as of that date are as follows: Shares of Percent Shares of Series A of Out- Common Percent Preferred standing Stock of Out- Stock Series A Name & Address Bene- standing Bene- Pre- Of Beneficial ficially Common ficially ferred Owner Owned (1) Stock Owned (1) Stock -------------------------- ---------- -------- --------- -------- Patrick W.E. Hodgson, et al. 205,130(2) 42.6 18,445 95.25 60 Bedford Road - 2nd Floor Toronto, Ont., Canada M5R Ferro Alloys Services, Inc. 90,800(3) 18.8 --- --- Suite 463 Carborundum Center Niagara Falls, NY 14303 William J. Burke, III, et al 30,370(4) 6.3 --- --- 111 Devonshire Street Boston, MA 02109 Woobourne Partners, L.P. 31,000 6.4 --- --- 200 N. Broadway, Suite 825 S. Louis, MO 63102 All Directors and Officers 295,930(5) 61.4 18,445 95.25 as a group. (12 persons) (1) The beneficial ownership information presented is based upon information furnished by each person or contained in filings made with the Securities and Exchange Commission. -37- (2) Beneficially owned by a group composed of: Patrick W.E. Hodgson (77,270); William J. Magavern II and James L. Magavern, as co- executors of the Estate of Samuel D. Magavern (15,260); Brent D. Baird (1,300); Aries Hill Corp. (a private holding company whose controlling stockholders include Brent D. Baird, Bruce C. Baird, Brian D. Baird and Bridget B. Baird) (14,000); Bridget B. Baird, as trustee of a family trust (9,800); Jane D. Baird (9,000); The Cameron Baird Foundation (a charitable foundation whose trustees include Jane D. Baird, Bridget B. Baird, Brian D. Baird, Bruce C. Baird and Brenda B. Senturia) (5,700); First Carolina Investors, Inc. (a Delaware corporation whose directors include Brent D. Baird, Bruce C. Baird, Patrick W.E. Hodgson, Theodore E. Dann, Jr. and H. Thomas Webb) (57,100); William J. Magavern II (5,000); and James L. Magavern (2,000). Members of the group had sole voting and investment power with respect to 168,706 Shares and share voting and investment power with respect to 27,724 Shares, and reported that they had agreed to evaluate jointly any proposal presented to the Company's Stockholders pursuant to which Wacker Chemical Corporation may acquire all or substantially all of the assets of the Company. (3) Owned by Ferro Alloys Services, Inc., a corporation of which Theodore E. Dann, Jr., who is Chairman of the Board of the Company, is a director, officer and corporate attorney. Includes 2,000 Shares held in the name of the Estate of Theodore E. Dann that are beneficially owned by Ferro Alloys Services, Inc. (4) Includes 25,500 Shares owned by William J. Burke Jr., Marital Trust, State Street Bank (5) Except as otherwise indicated above, members of the group have sole voting and investment power with respect to such shares. Beneficial Owner of Class A Common Stock and Series B Preferred Stock. The stock ownership of the only beneficial owner of the Class A Common Stock and Series B Preferred Stock of the Company as of March 1, 2001 is as follows: Shares of Series B Preferred Stock Shares of Bene- Class A Common ficially Stock Owned Beneficially (Percent Name & Address Owned of Class of Beneficial (Percent of Class Out- Owner Outstanding) standing) -------------------------------------- ----------------- ---------- Wacker Engineered Ceramics, Inc. 512,897 (100%) 19,364 c/o Wacker Chemical Holding (100%) Corporation 3301 Sutton Road Adrian, MI 49221-9397 Item 13. Certain Relationships and Related Transactions None. -38- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report Page In Form 10-K 1) Report of Independent Auditors 11 Financial Statements: Consolidated Statements of 12 Operations, three years ended December 31, 2000 Consolidated Balance Sheets at 13 December 31, 2000 and 1999 Consolidated Statements of Cash 14 Flows, three years ended December 31, 2000 Consolidated Statements of 15 Changes in Stockholders' Equity, three years ended December 31, 2000 Notes to Consolidated Financial 16 Statements 2) Financial Statement Schedule for three years ended December 31, 2000: II Valuation and qualifying 41 accounts All other required schedules have been omitted because they do not apply to the Company, or the information is presented in the consolidated financial statements or the notes thereto. -39- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Exhibits Exhibit Description Reference No. 3A Certificate of Amendment of Exhibit 3A to the Report Restated Certificate of on Form 10-K for the Incorporation dated April year ended December 31, 30, 1997 1996* 3A(1) Certificate of Merger Exhibit 3A(1) to the Report on Form 10-K for the year ended Dec 31, 1995* 3F Certificate of Amendment of Exhibit 3F to the Report Restated Certificate of on Form 10-K for the Incorporation dated April year ended December 31, 23, 1986 1994* 3G Certificate of Amendment of Exhibit 3G to the Report Restated Certificate of on Form 10-K for the Incorporation dated May 4, year ended December 31, 1987 1994* 3I Restated Bylaws containing Exhibit 3I to the Report all previous amendments on Form 10-K for the adopted year ended Dec 31, 1996* 4 Instruments Defining Rights Articles of of Security Holders Incorporation, Exhibits 3A, and Exhibits 3F and 3G to the Report on Form 10-K for the year ended December 31, 1994* 10D(23)A Amendment Credit Agreement Exhibit 10D(23)A to the dated December 1, 1996 Report on Form 10-K for the year ended December 31, 1996* 10D(24) Industrial Revenue Bond Exhibit 10D(24) to the Agreement dated January 1, report on Form 10-K for 1993. the year ended Dec 31, 1997* 10D(25) Industrial Revenue Bond Exhibit 10D(25) to the Loan Agreement dated Report on Form 10-K for December 1, 1996 the year ended Dec 31, 1996* 10D(26) Building Loan Agreement Exhibit 10D(26) to the dated December 1, 1996 Report on Form 10-K for the year ended Dec 31, 1996* 10F Stockholder's Agreement Exhibit 10F to the dated as of April 26, 1984 Report on Form 10-K for between the Registrant and the year ended December Wacker Chemical Corporation 31, 1995* 10G Restated License Agreement Exhibit 10G to the dated as of April 26, 1984 Report on Form 10-K for among Elektroschmelzwerk the year ended December Kempten GmbH, ESK 31, 1995* Corporation and the Registrant 10H Distributorship Agreement Exhibit 10H to the dated July 30, 1997 between report on Form 10-K for Elektroschmelzwerk Kempten the year ended December GmbH, and the Registrant 31, 1997* 10I Indemnification Agreement Exhibit 10I to the dated as of December 15, Report on Form 10-K for 1984 between Wacker the year ended December Chemical Corporation and 31, 1995* the Registrant 10J Distributorship Agreement dated June 21, 1999 between ESK-SiC GmbH and the Reg. 10K Agreement and Plan Of * Merger dated as of March 14, 2001among Registrant, Washington Mills, and EXL Acquisition Corp. 10L Stockholder's Agreement * entered into by Wacker Ceramics and Washington Mills 22 Subsidiaries of the Exhibit 22 registrant 27 Financial Data Schedule Exhibit 27 (b) Reports on Form 8-K: Form filed 3/14/01 (c) All exhibits required by Item 601 of Regulation S-K are included in Item 14(a)(3). * Incorporated herein by reference -40- Exolon-ESK Company and Subsidiaries Valuation and Qualifying Accounts Three Years Ended December 31, 2000 (thousands of dollars) ------------------------------------------- Balance Additions at Charged to Balance Beginning Costs and at End Description of Year Expenses Adjustments of Year -------------------- --------- ---------- ------------ --------- Deducted from assets - Allowance for doubtful accounts Year ended $150 - ($22)(a) $128 December 31, 2000 Year ended $249 - ($99)(a) $150 December 31, 1999 Year ended $350 - ($101)(a) $249 December 31, 1998 Allowance for slow- moving and obsolete inventory Year ended $377 $120 - $497 December 31, 2000 Year ended $257 $120 - $377 December 31, 1999 Year ended $196 $120 ($59) $257 December 31, 1998 (a) Uncollectible accounts written off, net of recoveries. (b) Bad debt recoveries. -41- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 16, 2001 EXOLON-ESK COMPANY By /s/ J. Fred Silver ---------------------- J. Fred Silver, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/J. Fred Silver /s/Michael G. Pagano ----------------------- --------------------- J. Fred Silver, President Michael G. Pagano, and Chief Executive Vice President Officer Finance and Chief Financial Officer /s/ Theodore E. Dann, Jr. ------------------------- Theodore E. Dann, Jr. Chairman of the Board March 16, 2001 /s/ Brent D. Baird ------------------------ Brent D. Baird Director March 16, 2001 /s/ Matthias Wolfgruber ----------------------- Matthias Wolfgruber Director March 16, 2001 /s/ Fritz Petersen ----------------------- Dr. Fritz Petersen Director March 16, 2001 /s/ Paul Lindblad ----------------------- Paul Lindblad Director March 16, 2001 /s/ Patrick W.E. Hodgson ------------------------ Patrick W.E. Hodgson Director March 16, 2001 -42- (3)EXHIBIT INDEX Exhibit Description Reference No. 3A Certificate of Amendment of Exhibit 3A to the report Restated Certificate of on Form 10-K for the Incorporation dated April year ended December 31, 30, 1997 1996* 3A(1) Certificate of Merger Exhibit 3A(1) to the report on Form 10-K for the year ended December 31, 1995* 3F Certificate of Amendment of Exhibit 3F to the report Restated Certificate of on Form 10-K for the Incorporation dated April year ended December 31, 23, 1986 1994* 3G Certificate of Amendment of Exhibit 3G to the report Restated Certificate of on Form 10-K for the Incorporation dated May 4, year ended December 31, 1987 1994* 3I Restated Bylaws containing Exhibit 3I to the Report all previous amendments on Form 10-K for the adopted year ended December 31, 1996* 4 Instruments Defining Rights Articles of of Security Holders Incorporation, Exhibits 3A, and Exhibits 3F and 3G to the Report on Form 10-K for the year ended December 31, 1994* 10D(23) Amendment Credit Agreement Exhibit 10D(23)A to the A dated December 1, 1996 Report on Form 10-K for the year ended December 31, 1996* 10D(24) Industrial Revenue Bond Exhibit 10D(24) to the Agreement dated January 1, report on Form 10-K for 1993. the year ended December 31, 1997* 10D(25) Industrial Revenue Bond Loan Exhibit 10D(25) to the Agreement dated December 1, Report on Form 10-K for 1996 the year ended December 31, 1996* 10D(26) Building Loan Agreement Exhibit 10D(26) to the dated December 1, 1996 Report on Form 10-K for the year ended Dec 31, 1996* 10F Stockholder's Agreement Exhibit 10F to the dated as of April 26, 1984 report on Form 10-K for between the Registrant and the year ended December Wacker Chemical Corporation 31, 1995* 10G Restated License Agreement Exhibit 10G to the dated as of April 26, 1984 report on Form 10-K for among Elektroschmelzwerk the year ended December Kempten GmbH, ESK 31, 1995* Corporation and the Registrant 10H Distributorship Agreement Exhibit 10H to the dated July 30, 1997 between report on Form 10-K for Elektroschmelzwerk Kempten the year ended December GmbH and the Registrant 31, 1997* 10I Indemnification Agreement Exhibit 10I to the dated as of December 15, report on Form 10-K for 1984 between Wacker Chemical the year ended December Corporation and the 31, 1995* Registrant 10J Agreement and Plan Of Merger 0 dated as of March 14, 2001 among Registrant, Washington Mills, and EXL Acquisition Corp. 10K Stockholder's Agreement * entered into by Wacker Ceramics and Washington Mills 22 Subsidiaries of the Exhibit 22 Registrant 27 Financial Data Schedule Submitted electronically * Previously filed and incorporated herein by reference. -43- EX-22 2 0002.txt Exhibit 22 SUBSIDIARIES OF THE REGISTRANT The subsidiaries listed below have been included in the Consolidated Financial Statements of the Registrant. See Note 1 of Notes to Consolidated Financial Statements. Place of Percentage Subsidiaries of the Registrant Incorporation Owned ------------------------------ ------------- ---------- Exolon-ESK Company of Canada, Dominion of 100% Ltd. Canada Norsk Exolon AS Kingdom of 100% Norway Exolon-ESK International Sales U.S. Virgin 100% Corp. Islands EX-27 3 0003.txt
5 0000034046 EXOLON-ESK COMPANY 1000 12-MOS DEC-31-2000 DEC-31-2000 5093 0 5526 150 14120 24670 77637 54996 58530 24629 0 0 442 1026 28918 58530 50482 50482 43922 7596 339 0 1135 (2510) (484) (2026) 0 0 0 (2026) (2.15) (2.15)
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