Item 1. Business
Elcor Corporation (Registrant), incorporated in 1965 as a Delaware corporation, is a publicly held corporation headquartered in Dallas, Texas. Shares of the Registrant's common stock are traded on the New York Stock Exchange with the ticker symbol - ELK.
Lines of Business
Roofing Products
The Registrant, through Elk Corporation of Dallas and its subsidiaries (Elk), is engaged in the manufacture and sale of premium laminated fiberglass asphalt residential roofing shingles and accessory products. Elk also manufactures and sells nonwoven fiberglass roofing mats for use in manufacturing asphalt roofing products, and nonwoven mats for use in other industrial applications. Elk's premium laminated fiberglass asphalt shingle manufacturing plants are located in Tuscaloosa, Alabama, Ennis, Texas, and Shafter, California. The major products manufactured at Elk's roofing plants are premium laminated fiberglass asphalt shingles sold under its brand names: Prestique(R) Plus, Prestique(R) I, Prestique(R) II and Capstone(R). In fiscal 1995, Elk introduced Prestique premium laminated fiberglass asphalt shingle product lines with the patented Enhanced High Definition(R) and Raised Profile(TM) look. In addition, Elk also manufactures premium fiberglass asphalt hip and ridge products: Seal-a-Ridge(R) and Z(R) ridge brands. Premium laminated asphalt shingles account for approximately 30% of the residential sloped asphalt shingle roofing market. About 80% of asphalt shingles are used in reroofing and remodeling and 20% are used in new construction.
Elk's roofing products are sold by employee sales personnel primarily to roofing wholesale distributors, delivery being made by common carrier or by customer vehicles from the manufacturing plants or warehouses. Elk's products are distributed nationwide with Texas, California and Florida representing the largest market areas. The Roofing Products segment accounted for approximately 86% of consolidated sales of the Registrant in fiscal 1998. For the past several years, the building materials distribution industry has consolidated at a rapid pace with many smaller independent distributors being acquired by emerging larger national building products distributors. One customer, ABC Supply Co. Inc., the largest roofing wholesale distributor in the United States, accounted for 16% of consolidated sales in fiscal 1998, 14% of consolidated sales in fiscal 1997, and 13% of consolidated sales in fiscal 1996.
The company's new nonwoven fiberglass roofing mat facility at its Ennis, Texas plant achieved its performance test level of operations effective April 1, 1997. The new facility operates in parallel to the original fiberglass mat manufacturing facility at the Ennis, Texas plant and produces nonwoven fiberglass roofing mats and other mats for a variety of industrial uses. The new plant was designed to more than triple Elk's previous manufacturing capacity for nonwoven fiberglass mats.
Elk's nonwoven fiberglass roofing mat facilities supply all of its internal fiberglass roofing mat needs. In addition, roofing mats are sold by employee sales personnel to other asphalt roofing products manufacturers. Nonwoven mats are also sold to manufacturers of construction and industrial products which use such mats in their products, and to distributors of industrial filtration products. Elk's nonwoven mats are shipped by common carrier to its other roofing plants and to its customers' locations.
Industrial Products
The Registrant, through Chromium Corporation (Chromium), is engaged in two business lines. Chromium's Reciprocating Engine Components Division is engaged in the remanufacture of diesel engine cylinder liners, including hard chrome plating of cylinder bores and tin plating of pistons, primarily for the railroad, marine, and stationary power industries; and hard chrome plating of original equipment cylinder liners and tin plating of pistons for major domestic locomotive manufacturers and stationary power equipment manufacturers. Chromium's Conductive Coatings Division (CCD) is engaged in electroless shielding of plastic enclosures for digital cellular phones, telecommunications and other electronic equipment. Electroless shielding is designed to control the level of electromagnetic and radio frequency interference (EMI/RFI) emissions generated by electronic components. During fiscal 1998, CCD broadened its product offerings to include dispense conductive gaskets which are formed in place. Sales are generated by employee sales personnel, with delivery made primarily by common carrier. To keep pace with rapidly growing demand, CCD completed two expansions at its Lufkin, Texas facility in fiscal 1998, and a third expansion is currently in progress. In fiscal 1999, CCD will be developing plans for a second manufacturing location. In fiscal 1998, net sales for Chromium Corporation were 11% of consolidated net sales.
Another unit of the Registrant, OEL, LTD, d/b/a Ortloff Engineers, LTD (Ortloff) is engaged in providing technology licensing and engineering support services and in providing engineering consulting services to the oil and gas production, gas processing and sulfur recovery industries. Ortloff licenses technology covered by and related to ten patents owned by the Registrant for use in new or redesigned natural gas and refinery gas processing facilities, and utilizes technology licensed from others and its own expertise in the performance of consulting and engineering assignments. Although one important patent will expire in fiscal 1999, Ortloff continues to develop and patent improved processes for natural gas processing. Moreover, Ortloff offers significant expertise and other nonpatented technology associated with its processes that is difficult for customers to obtain on a cost effective basis from others. Three patents are currently pending and two new patent applications are being written. These efforts reflect Ortloff's commitment to continually update and advance its technological position. Ortloff was also successful in expanding its markets into several parts of Latin America during fiscal 1998.
Patent license fees are calculated by standard formulas that take into account both specific project criteria and market conditions, adjusted for special conditions that exist in a project. Engineering consulting assignments are performed under consulting services agreements at negotiated rates.
Information as to Industry Segments
For Financial Information by Company Segments, see the table on page 39 of this Annual Report on Form 10-K.
Accounting Change
In fiscal 1998, the Registrant changed its method of accounting for inventories from the LIFO method to the FIFO method. All prior period financial information, including industry segment information, has been restated to reflect this accounting change. See the Inventories footnote on page 28 of this Annual Report of Form 10-K for additional information regarding this accounting change.
Competitive Conditions
Roofing Products
Even though the asphalt roofing products manufacturing business is highly competitive, the Registrant believes that Elk is a leading manufacturer of premium laminated fiberglass asphalt shingles. Elk has been able to compete successfully with its competitors, some of which are larger in size and have greater financial resources.
There are a number of major national and regional manufacturers marketing their products in a portion or all of the market areas served by the Registrant's plants. The Registrant competes primarily on the basis of product quality, design and service. Typically, the Registrant is able to sell its roofing products at higher prices than its competitors receive for similar type products.
Industrial Products
The Registrant believes that Chromium is the leading remanufacturer of diesel engine cylinder liners and pistons for the railroad and marine transportation industries and is the primary supplier of hard chrome plated finishes for original equipment diesel engine cylinder liners to all of the major domestic locomotive manufacturers. The Registrant believes it has smaller competitors in the locomotive diesel engine cylinder liner remanufacturing market. The Registrant also believes that Chromium is one of the leading hard chrome platers of recycled and original equipment large bore cylinder liners for stationary power applications. Chromium has achieved a leading position in these markets through competition on the basis of product performance, quality, service and price. The Registrant, through the Conductive Coatings Division of Chromium, is engaged in electroless shielding of plastic enclosures for digital cellular phones, telecommunications, and other electronic equipment. The Registrant believes the success of Chromium's Conductive Coatings Division in becoming a qualified supplier for and obtaining significant orders from major digital cellular phone manufacturers, together with telecommunications and other electronic equipment manufacturers, has enabled it to become a market leader.
The Registrant believes that it holds significant state-of-the-art patents covering some of the most competitive processes for the cryogenic processing of refinery and natural gas streams to remove the higher value components, such as ethane and propane, which are primarily used as petrochemical feedstocks. The Registrant believes that Ortloff has widely recognized expertise in the design and operation of facilities for natural gas and refinery gas processing and sulfur recovery.
Backlog
Backlog was not significant, nor is it material, in the Registrant's operations.
Raw Materials
Roofing Products
In the asphalt roofing products manufacturing business, the significant raw materials are ceramic coated granules, asphalt, glass fibers, resins and mineral filler. All of these materials are presently available from several sources and are in adequate supply. Historically, the Registrant has been able to pass some of the higher raw material and transportation costs through to the customer.
Industrial Products
In the Registrant's business of hard chrome plating and remanufacturing diesel engine cylinder liners and large bore cylinder liners, chromic acid is a significant raw material which is presently available from a number of domestic suppliers. The Registrant believes these domestic suppliers obtain the ore for manufacturing chromic acid principally from sources outside the United States, some of which may be subject to political uncertainty. The Registrant has been advised by its suppliers that they maintain substantial inventories of chromic acid in order to minimize the potential effects of foreign interruption in ore supply. In the electroless shielding business, copper and nickel are the significant raw materials. These materials are presently available and are in adequate supply.
No raw materials are utilized in the Registrant's engineering consulting and technology licensing business.
Patents, Licenses, Franchises and Concessions
The Registrant holds certain patents, particularly in its engineering consulting and licensing business, which are significant to its operations. However, the Registrant does not believe that the loss of any one of these patents or of any license, franchise or concession would have a material adverse effect on the Registrant's overall business operations. The Registrant, through its subsidiary, Elk Corporation of Dallas, is involved in patent litigation against GAF Building Materials Corporation and related GAF entities concerning design and utility patents covering certain aspects of Elk's High Definition shingles. Refer to Item 3 "Legal Proceedings" for a more detailed discussion of this matter.
Environmental Matters
The Registrant and its subsidiaries are subject to federal, state and local requirements regulating the discharge of materials into the environment, the handling and disposal of solid and hazardous wastes, and protection of the public health and the environment generally (collectively, Environmental Laws). Certain facilities of the Registrant's subsidiaries ship waste products to various waste management facilities for treatment or disposal. Governmental authorities have the power to require compliance with these Environmental Laws, and violators may be subject to civil or criminal penalties, injunctions or both. Third parties may also have the right to sue for damages and/or to enforce compliance and to require remediation of contamination.
The Registrant and its subsidiaries are also subject to Environmental Laws that impose liability for the costs of cleaning up contamination resulting from past spills, disposal, and other releases of hazardous substances. In particular, an entity may be subject to liability under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) and similar state laws that impose liability -- without a showing of fault, negligence, or regulatory violations -- for the generation, transportation or disposal of hazardous substances that have caused or may cause, environmental contamination. In addition, an entity could be liable for cleanup of property it owns or operates even if it did not contribute to the contamination of such property. From time to time, the Registrant or its subsidiaries may incur such remediation and related costs at the company owned plants and certain offsite locations.
The Registrant anticipates that its subsidiaries will incur costs to comply with Environmental Laws, including correcting existing non-compliance with such laws and achieving compliance with anticipated future standards for air emissions and reduction of waste streams. Such subsidiaries expend funds to minimize the discharge of materials into the environment and to comply with governmental regulations relating to the protection of the environment. Neither these expenditures nor other activities initiated to comply with Environmental Laws is expected to have a material impact on the consolidated financial position, net earnings or liquidity of the Registrant.
Persons Employed
At June 30, 1998, the Registrant and its subsidiaries had 867 employees.
Extended Payment Terms
In some years, the Registrant's roofing products business grants extended payment terms to certain customers for some product shipments during the winter and early spring months, with payment generally due during the summer months. As of June 30, 1998, $6,299,000 in receivables relating to such shipments were outstanding, the majority of which are due in the first four months of fiscal 1999. As of August 31, 1998, $3,647,000 of these receivables have been collected.
Seasonal Business
The Registrant's industrial products businesses are substantially nonseasonal. The Registrant's roofing products manufacturing business is seasonal to the extent that cold, wet or icy weather conditions during the late fall and winter months in its marketing areas typically limit the
installation of residential roofing products which causes sales to be slower during such periods. Damage to roofs from extreme weather such as severe wind, hurricanes and hail storms can result in higher demand for periods up to eighteen months depending upon the extent of roof damage. Working capital requirements and related borrowings fluctuate during the year because of seasonality. Generally, working capital requirements and borrowings are higher in the spring and summer months, and lower in the fall and winter months.
Item 2.
Item 2. Properties
All significant facilities are owned and unencumbered by liens in favor of nonaffiliates except as discussed herein.
Roofing Products
Asphalt roofing products are manufactured at plants located at Tuscaloosa, Alabama, Ennis, Texas and Shafter, California. Fiberglass roofing mat, nonwoven industrial, reinforcement and filtration products are manufactured on two production lines located at Ennis, Texas.
Corporate headquarters and administrative offices for the asphalt roofing products operations are located in the same leased facility as the Registrant's corporate offices in Dallas, Texas.
Industrial Products
Plants for the hard chrome plating of original equipment and remanufactured diesel engine cylinder liners and related equipment are located in Cleveland, Ohio and Lufkin, Texas. The Conductive Coatings Division's (CCD) EMI/RFI shielding facility is located at the Lufkin, Texas plant. During fiscal 1998, CCD completed two expansions and a third expansion is currently in progress.
Corporate headquarters and administrative offices are located in the same leased facility as the Registrant's corporate offices in Dallas, Texas.
The Ortloff engineering and process licensing group is located in leased offices in Midland, Texas.
Corporate Offices
The Registrant's corporate headquarters is located in leased offices in Dallas, Texas.
In addition, one of the Registrant's subsidiaries owns land and buildings in Waco, Texas, formerly used in the discontinued solid waste handling equipment manufacturing business. This facility is currently subject to a lease/purchase agreement.
Item 3.
Item 3. Legal Proceedings
GAF Patent Litigation
On February 8, 1994, a wholly owned subsidiary, Elk Corporation of Dallas (Elk) was granted a design patent covering the ornamental aspects of certain Elk shingles. On December 6, 1994, Elk was granted a utility patent on the functional aspects of certain Elk shingles. Elk has sued GAF Building Materials Corporation and related GAF entities (collectively GAF) in federal court for infringement of these patents and trade dress. In the design patent case, Elk seeks to recover as damages the total profit that GAF has made from the infringing shingles. In the utility patent case, Elk seeks to recover as damages a reasonable royalty on GAF's sales of infringing shingles and certain lost profits.
GAF seeks a declaratory judgment that the Elk patents are not infringed and are either invalid or unenforceable. GAF has also asserted claims for unfair competition, Lanham Act violations based on alleged false advertising, and common law fraud, generally praying for damages of not less than $25 million including actual and punitive damages, plus interest, costs, and reasonable attorney fees. Elk disputes GAF's claims, and management intends vigorously to defend them and to enforce its intellectual property rights. In April, 1998, the District Court for the Northern District of Texas entered a partial final judgment against Elk in the design patent case based on an inequitable conduct ruling and certified the case for appeal. Elk has contested that judgment in an appeal which it has filed with the United States Court of Appeals for the Federal Circuit. Elk expects its appeal to be decided by the Court of Appeals in 1999. In the interim, trial on the trade dress claim and certain other matters in the design patent case and trial in the utility patent cases are unscheduled but pending.
While management can give no assurances regarding the ultimate outcome of the litigation, outside counsel believe that Elk will prevail on its patent and trade dress claims and that Elk will defeat GAF's counterclaims. Even if the outcome were to be adverse to Elk, it is not expected to have a material effect on the Registrant's financial position or liquidity.
Gibraltar Tort Litigation
In December 1995 through August 1996, Chromium Corporation was sued in four separate tort lawsuits brought by the same attorneys on behalf of plaintiffs who allege unspecified personal injuries and property damages associated with the former operation of a licensed hazardous waste treatment, storage and disposal facility in Smith County, Texas known as the Gibraltar facility. The four suits were brought against or expanded to include the current and former owners and operators of the facility, and more than fifty other defendants, including Chromium and several Fortune 500 companies, as generators of waste sent to the facility (as named in a particular lawsuit,"Generator Defendants").
The plaintiffs have non-suited or dismissed the Generator Defendants from two of the cases. In another case, Williams, et al. v. Akzo Nobel Chemicals, Inc., et al., the Smith County (Texas) District Court has dismissed Chromium and certain other Generator Defendants. Plaintiffs' appeal of this decision is pending.
Chromium remains a defendant in the fourth case, Adams v. American Ecology Environmental Services Corporation, pending in Tarrant County (Texas) District Court since August 1996, when approximately 650 plaintiffs filed it. On July 30, 1998, the court issued a ruling denying the Generator Defendants' motions for a discovery management order and lifted the stay on discovery in the case. Discovery has recommenced and is ongoing. No trial date has been set for Adams as yet.
In connection with these cases, Chromium has entered into joint defense agreements with more than twenty other Generator Defendants. Chromium also has demanded a defense and indemnity from the facility owners pursuant to the waste disposal contract and from Chromium's insurers. To date, the facility owners have not responded and the insurers have declined or failed to accept the defense and indemnity obligation. Chromium intends to pursue its defenses vigorously.
Management believes that the claims brought against Chromium in these cases are without merit. While management can give no assurances regarding the ultimate outcome of this litigation, it believes that it will not have a material adverse effect on the consolidated results of operations, financial position or liquidity of the Registrant.
Chromium/TWC Settlement
In May 1993, Chromium entered into an Agreed Order with the Texas Water Commission (TWC) in settlement of an enforcement proceeding. Pursuant to the Agreed Order, the TWC assessed $60,000 in penalties and agreed to defer and forgive $74,800 in penalties contingent on Chromium's completion of certain technical and remedial activities at the Lufkin facility ("Technical Recommendations"). Chromium has paid the assessed penalties, and completed the Technical Recommendations. On August 31, 1998, the Texas Natural Resource Conservation Commission, TWC's successor, issued a letter stating that it considered all of the actions required under the Agreed Order to have been fulfilled and completed.
Frontier Chemical Site
In May 1993, Chromium received a Notification Letter from the United States Environmental Protection Agency (USEPA) informing Chromium that USEPA had reason to believe that Chromium was a Potentially Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act at the Frontier Chemical Royal Avenue Site (Site), a former state-permitted waste processing and management facility in Niagara Falls, New York. In September 1993, Chromium entered into an Administrative Order on Consent with USEPA under which Chromium and other PRPs agreed to perform Phase I response activities at the Site and to reimburse USEPA for response costs incurred by USEPA at the Site.
All of the Phase I work was concluded in May 1994. Chromium was assessed a total of $109,250 of the $4 million cost estimate assessed to all Phase I PRPs. Chromium has not been and does not expect to be named as a PRP in Phase II or any subsequent phases of cleanup.
Certain Phase I and Phase II PRPs intervened in a suit brought by the New York Attorney General seeking recovery of approximately $1.2 million in proceeds from a closure bond relating to the Site. If such intervention is successful, participating Phase I and Phase II PRPs will share in any recovery with the State of New York. In February 1998, a court denied the motion for summary judgment of the PRPs, including Chromium, in the suit, and granted the New York Attorney General's opposing motion. Appeal from the ruling is pending.
In March 1997, the USEPA issued its demand for future costs pursuant to the Administrative Order on Consent. The PRPs have objected to this cost demand and have demanded an accounting. Resolution of this dispute still is pending, but even if the USEPA demand remains at the current amount, no further assessments from Chromium will be necessary to meet it; moreover, Chromium received a refund of a small portion of its original assessment on the basis of the existing demand.
Chromium's final assessment in this matter net of all recoveries cannot be calculated until its PRP group determines which assessments are uncollectible, and the closure bond action and USEPA cost reimbursement are resolved. Management of the Registrant believes that the final disposition of this matter will not have a material adverse effect on the consolidated results of operations, financial position, or liquidity of the Registrant.
Other
There are various other lawsuits and claims pending against the Registrant and its subsidiaries arising in the ordinary course of their businesses. In the opinion of the Registrant's management based in part on advice of counsel, none of these actions should have a material adverse effect on the Registrant's consolidated results of operations, financial position, or liquidity.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Executive Officers of the Registrant
Certain information concerning the Registrant's executive officers is set forth below:
All of the executive officers except Mr. Sisler have been employed by the Registrant or its subsidiaries in responsible management positions for more than the past five years. In October 1993, Mr. Rosebery and Mr. Work were elected as Executive Vice Presidents of the Registrant. Previously Mr. Rosebery was Vice President, Treasurer and Chief Administrative and Financial Officer. Mr. Work was Vice President. In July 1996, Mr. Rosebery and Mr. Work were appointed as Directors of the Registrant. On August 18, 1997, Mr. Work and Mr. Rosebery were each elected as Vice Chairman. On August 26, 1997, Mr. Work was elected as Chairman of the Board, President and Chief Executive Officer of the Registrant following the death on August 22, 1997 of Mr. Roy E. Campbell, who previously held those positions. In October 1993, Mr. Harral and Mr. Waibel were elected as Vice Presidents. Previously Mr. Harral was Chief Accounting Officer and Mr. Waibel was Assistant Vice President, Administration. In June 1997, Mr. Holguin was elected as Vice President, Information Systems. Previously Mr. Holguin was Assistant Vice President, Information Systems.
On August 14, 1995, Mr. Sisler was appointed by the Board of Directors as Vice President, General Counsel and Secretary of the Registrant. Mr. Sisler was employed by Central and South West Corporation from 1991 to 1995, most recently as a Senior Attorney. From 1989 to 1991, Mr. Sisler was employed by Johnson & Gibbs, a private law firm. Mr. Sisler has practiced law for more than fourteen years and his responsibilities have included corporate, securities and other business legal matters in several industries.
Officers are elected annually by the Board of Directors.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The principal market on which the Registrant's Common Stock is traded is the New York Stock Exchange. The Boston, Midwest, Philadelphia and Toronto Stock Exchanges have granted unlisted trading privileges for the Registrant's Common Stock. There were 992 holders of record of the Registrant's Common Stock at September 1, 1998.
The quarterly dividend declared per share and the high and low prices in dollars per share on Registrant's Common Stock for each quarter during fiscal year 1998 and fiscal year 1997, adjusted for a three-for-two stock split in November 1997, are set forth in the following tables:
The Registrant's Board of Directors has authorized the purchase of up to $10,000,000 of the Registrant's common shares from time to time on the open market to be used for general corporate purposes. As of June 30, 1998, 327,850 shares with cumulative cost of $5,466,000 had been repurchased under this program. In September 1995, the Board of Directors reinstated the Registrant's regular quarterly cash dividend. In September 1997, the regular quarterly cash dividend was increased to six cents per common share (after giving effect to a stock split) and a three-for-two stock split payable in the form of a stock dividend was declared, to be distributed on November 12, 1997 to shareholders of record on October 16, 1997.
The limitations affecting the future payment of dividends by Registrant imposed as a part of the Registrant's revolving credit agreement are discussed under the caption "Notes to Consolidated Financial Statements" under the heading "Long-Term Debt" on page 30 of this Annual Report on Form 10-K.
Item 6.
Item 6. Selected Financial Data
The following selected consolidated financial data for each of the five years in the period ended June 30, 1998 have been derived from the audited consolidated financial statements of the Registrant included herein. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this report.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(1) Restated for a change in accounting for inventories and adjusted for a three-for-two stock split in November 1997.
(2) 1996 results include $1,595 in pretax charges in connection with a provision for the adoption of SFAS No. 121 and a previous reduction in value of certain other assets.
(3) 1994 results include $1,706 in pretax charges in connection with the closed Chromium Chicago plant, and $82 in losses, net of tax, on the disposal of a discontinued operation.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
During the fiscal year ended June 30, 1998, sales increased 16% to $268,178,000 from the $230,756,000 reported in fiscal 1997. Net income in fiscal 1998 increased 49% to $18,324,000 from $12,276,000 in the prior fiscal year. Both the Roofing Products and Industrial Products Groups generated significant increases in sales. The Roofing Products Group reported better operating results in fiscal 1998 as compared to the prior fiscal year. However, the substantial increase in net income was primarily attributable to increased demand and dramatically improved operating results in each of the Industrial Products Group's principal operations of: (1) conductive coatings used in digital cellular phones and in other electronic equipment; (2) remanufactured diesel engine components used in the transportation industry; and (3) technology licensing and consulting services for the natural gas processing industry. In fiscal 1998, the company changed its method of accounting for inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Accordingly, fiscal 1997 amounts have been restated to reflect the accounting change. Had the company not made this change, net income would have been lower by $130,000 in fiscal 1998.
Sales for the Roofing Products Group increased 11% in fiscal 1998 to $229,475,000 from $207,017,000 in fiscal 1997. The Western United States produced very strong demand for Elk Prestique premium laminated shingles. However, shipments on the West Coast were limited during much of the second half of fiscal 1998 by El Nino's impact, as many roofing contractors could not replace leaking roofs during extended periods of heavy rainfall. Demand was also higher in the Southeast, Midwest and North regions. Only in the Southwestern region was demand lower than in the previous fiscal year. Average selling prices were about the same in fiscal 1998 compared to fiscal 1997.
Elk's roofing mat operations achieved significantly higher sales and operating profit, primarily as a result of growing demand for its high quality roofing mats and specialty industrial products.
Operating income for the Roofing Products Group increased 18% in fiscal 1998 to $24,885,000 from $21,052,000 in fiscal 1997. Each of Elk's three roofing plants and its roofing mat operation were very profitable in fiscal 1998, although the Ennis, Texas roofing plant's operating results were lower in fiscal 1998 as a result of lower demand in the Southwestern region. The impact of high winds and heavy rainfall in much of the nation this past winter has increased the level of demand during the latter months of fiscal 1998 and early fiscal 1999. The company currently anticipates sharply higher demand for its premium laminated fiberglass asphalt shingles and mat products in fiscal 1999.
Sales for the Industrial Products Group increased 64% in fiscal 1998 to $38,586,000 from $23,542,000 in fiscal 1997. Operating income for this Group increased to $10,780,000 in fiscal 1998 from $3,498,000 in fiscal 1997. Each of the three principal operations in this business segment reported significantly higher sales and operating income in fiscal 1998. Chromium Corporation continued to benefit from strong demand for its Compushield(R) conductive coatings and dispense
conductive gasketing used in digital cellular phones and in other electronic equipment. Chromium also experienced higher sales and significantly improved margins in plating certain proprietary finishes for large diesel engine components during fiscal 1998. Further, Ortloff Engineers' revenues from its technology licensing and consulting services for the natural gas processing industry about doubled in fiscal 1998 as compared to fiscal 1997. This resulted in a tripling of operating income for this business activity in fiscal 1998. However, management expects that Ortloff Engineers' sales and operating profit will decline in fiscal 1999 as a result of lower oil prices, which may cause some potential customers to defer planned projects until economic conditions are more favorable.
Selling, general and administrative (SG&A) costs in fiscal 1998 increased 12.9% from fiscal 1997 primarily as a result of increased business activity. As a percentage of sales, SG&A costs declined to 13.0% of sales in fiscal 1998 from 13.4% of sales in fiscal 1997.
Interest expense in fiscal 1998 was $2,577,000 compared to $1,136,000 in fiscal 1997. In fiscal 1997, $1,784,000 of interest was capitalized in connection with the company's major facilities expansion program. In fiscal 1998, the company capitalized $160,000 in interest costs in connection with its existing plant expansion program.
FISCAL 1997 COMPARED TO FISCAL 1996
During the fiscal year ended June 30, 1997, sales grew to $230,756,000, a 17% increase over fiscal 1996 sales of $196,462,000. Both the Roofing Products and Industrial Products Groups contributed to the increase in sales. Net income in fiscal 1997 increased 15% to $12,276,000 from the $10,676,000 achieved in fiscal 1996. Higher net income was primarily attributable to the Industrial Products Group, which achieved substantially improved operating results in fiscal 1997. In addition, in fiscal 1996 the Company incurred $1,595,000 in pretax charges in connection with a provision for the adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the reduction in value of certain other assets during that fiscal year. Fiscal 1997 and 1996 amounts have been restated to reflect the accounting change for inventories adopted in fiscal 1998.
Sales for the Roofing Products Group increased 16% in fiscal 1997 to $207,017,000 from $178,378,000 in fiscal 1996. The Roofing Products Group accounted for 90% of consolidated sales in fiscal 1997 and 91% in fiscal 1996. Higher sales were primarily due to an increase in shipments of premium laminated fiberglass asphalt shingles. Sales from the new plant in Shafter, California accounted for a significant part of the increased shipments. Average selling prices were about the same in fiscal 1997 compared to fiscal 1996.
Operating profit for the Roofing Products Group decreased to $21,052,000 in fiscal 1997 from $22,675,000 in fiscal 1996. The Shafter, California plant achieved profitable operations in fiscal 1997 after incurring a significant operating loss in the prior fiscal year. Although both of the other roofing plants were very profitable, operating income at these facilities was lower in fiscal 1997, primarily as a result of higher freight rates, higher raw materials costs and costs of implementing a fourth shift operation at the Tuscaloosa, Alabama roofing plant to increase that facility's production capacity.
The company's new nonwoven fiberglass roofing mat plant at its Ennis, Texas facility achieved its performance test level of operations effective April 1, 1997. Although overall mat plant operations were profitable in fiscal 1997, operating income from mat plant operations was significantly lower in fiscal 1997 compared to fiscal 1996 due primarily to higher costs associated with the new plant in its start-up year of operations.
Sales for the Industrial Products Group increased 31% in fiscal 1997 to $23,542,000 from $17,930,000 in fiscal 1996. Operating income for this business segment increased to $3,498,000 in fiscal 1997 compared to an operating loss of $224,000 in fiscal 1996. Chromium Corporation achieved significantly higher revenues and operating results relating to conductive coatings of plastic enclosures for electronic equipment. Improved operating conditions in this area more than offset decreased demand for Chromium's hard chrome plated diesel engine cylinder liners for the railroad, marine and stationary power industries. In addition, in fiscal 1996, Chromium recorded $1,037,000 in charges relating to a reduction in value of assets at its Cleveland, Ohio plant upon the adoption of SFAS No. 121. Ortloff Engineers achieved much higher revenues in fiscal 1997 from licensing the company's process technology for construction of both new natural gas processing plants and retrofits to upgrade existing gas processing plants.
Selling, general and administrative costs as a percentage of sales were 13.4% for fiscal 1997 compared to 14.8% in fiscal 1996. In fiscal 1995, the company established a larger sales organization to better serve growing market areas. During fiscal 1997, this larger organization was able to service the increase in sales orders without a proportionate increase in overall selling costs.
Interest expense was higher in fiscal 1997 as a result of the company's completion of its three-year major facilities expansion program which was completed in March 1997. Subsequent to that date, all interest was expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
The company generated cash flows from operating activities of $23,207,000 in fiscal 1998, despite a $10,115,000 increase in working capital. The increase in working capital was primarily the result of higher trade receivables, which increased $13,272,000 during fiscal 1998. Receivables increased primarily as a result of higher sales in fiscal 1998, together with a higher level of deferred payment term receivables. At June 30, 1998, deferred payment term receivables from promotional programs to certain customers were $6,299,000 compared to $2,139,000 at June 30, 1997. Deferred receivables outstanding at June 30, 1998, are primarily due during the first four months of fiscal 1999. The increase in receivables was partially offset by lower inventories and prepaid expenses. The current ratio at June 30, 1998 was 3.5 to 1 compared to 3.0 to 1 at June 30, 1997. Historically, working capital requirements and associated borrowings fluctuate during the year because of seasonality in some market areas. Generally, working capital requirements and borrowings are higher in the spring and summer, and lower in the fall and winter.
The company used $12,614,000 for investing activities in fiscal 1998. The majority of investing expenditures were for additions to property, plant and equipment. Most capital expenditures in fiscal 1998 were for productivity, capacity, and cost improvement projects at the current roofing plants and for the development of new computer systems. In addition, the company expanded its capacity in the Chromium Corporation Conductive Coatings operation to meet rapidly growing demand for its Compushield process. Capital expenditures are expected to be about $24,000,000 in fiscal 1999. The majority of currently planned fiscal 1999 capital expenditures are a continuation of productivity, capacity and cost improvement projects at its existing roofing plants, continued capacity expansion of the Conductive Coatings operation, and capital costs associated with developing new computer systems. The company expects to invest about $100 million over the next three years to expand capacity and improve productivity at existing plants and to build new plants in both the Roofing Products and Industrial Products segments.
Cash flows used for financing activities were $8,954,000 in fiscal 1998, primarily resulting from dividend payments, a $4,600,000 decrease in long-term debt, and purchases of treasury shares. Long-term debt represented 28% of the $173,956,000 of invested capital (long-term debt plus shareholders' equity) at June 30, 1998. In December 1997, the company increased its unsecured revolving line of credit to $100,000,000 and extended the term to December 15, 2002. As of June 30, 1998, $50,210,000 was available under this facility.
The company's Board of Directors has authorized the purchase of up to $10,000,000 of the company's common shares on the open market to be used for general corporate purposes. As of June 30, 1998, 327,850 shares with cumulative cost of $5,466,000 had been repurchased. In September 1997, the Board of Directors increased the regular quarterly cash dividend to six cents per common share (after giving effect to a stock split) and declared a three-for-two stock split payable in the form of a stock dividend distributed on November 12, 1997 to shareholders of record on October 16, 1997.
Management believes that current cash and cash equivalents, cash flows from operations and its unsecured revolving credit facility should be sufficient during fiscal 1999 and beyond to fund its planned capital expenditures, working capital needs, dividends, stock repurchases and other cash requirements. However, management believes it could secure additional capital at favorable rates, if needed, to support its capital expansion program.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards of reporting of comprehensive income and its components in the consolidated financial statements. The company will adopt SFAS No. 130 in fiscal 1999, but does not expect the adoption of SFAS No. 130 to impact the company's financial position or results of operations.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires public companies to disclose, among other things, certain interim and annual financial information about the enterprise using a new management approach. This approach requires segment information to be reported based on how management evaluates the operating performance of its business units or segments. The company
will adopt SFAS No. 131 in fiscal 1999 and does not currently anticipate significant changes in its reportable segments.
In April 1998, the Accounting Standards Executive Committee (AcSec) of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," requiring, among other things, companies to expense on a current basis previously capitalized start-up costs. At June 30, 1998, the company had $6,682,000 of unamortized capitalized start-up costs. This Statement of Position is effective for financial statements for fiscal years beginning after December 15, 1998, unless adopted earlier. The company plans to adopt this new accounting standard in fiscal 1999 at which time all remaining unamortized capitalized start-up costs will be expensed and reflected in the Consolidated Statement of Operations as a cumulative change in accounting principle.
YEAR 2000 ISSUE
The company is currently developing a new information system for its critical financial, distribution and manufacturing applications. The system is scheduled for completion and full implementation in the summer of 1999 at an estimated total cost of about $10 million. While the primary purpose of this new information system is to modernize and improve the company's operations, it is also expected to resolve the Year 2000 issues in these critical computer systems. Costs to develop this new information system are being capitalized in accordance with SOP 98-1. Costs to implement the new information system and other costs relating to Year 2000 readiness are being expensed as incurred. As of June 30, 1998, the company's expenditures for its new information system have been $3.7 million and its expenditures for Year 2000 readiness projects have been less than $200,000. At this time, other than the cost of developing and implementing its new information system, the company does not believe that the costs of addressing the Year 2000 issue will be material. The company does not believe that other critical information systems work has been deferred due to its Year 2000 efforts.
The company also has teams of employees and consultants who are reviewing other computer applications and systems not included in the scope of the new information system, including systems other than information systems that have embedded technology, and its interaction with its suppliers, customers and other business partners for Year 2000 readiness. The company is close to completing the process of taking relevant inventory, assessing risk, assigning priorities to various tasks and performing limited internal tests. The company has completed its initial remedial programming for its mainframe computer system and is ready to begin testing this system. The company has developed contingency plans for its critical information system which primarily consist of making its existing information system Year 2000 compliant in the event the new system is not completed by its scheduled date. Contingency plans for other aspects of Year 2000 readiness are currently being developed. The company expects to have fully developed action and contingency plans by the end of calendar 1998, and to have completed integrated testing and any remediation before January 1, 2000.
The company believes the Year 2000 readiness project is on schedule for timely completion. Based on a current assessment of risks relating to its Year 2000 readiness, the company does not believe that this issue will result in uncertainty that is reasonably likely to materially affect future financial results or operating performance.
FORWARD - LOOKING STATEMENTS
In an effort to give investors a well-rounded view of the company's current condition and future opportunities, management's discussion and analysis of the results of operations and financial condition and other sections of this Form 10-K contain "forward-looking statements" about its prospects for the future. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to the following:
1. The company's roofing products business is cyclical and is affected by weather and some of the same economic factors that affect the housing and home improvement industries generally, including interest rates, the availability of financing and general economic conditions. In addition, the asphalt roofing products manufacturing business is highly competitive. Actions of competitors, including changes in pricing, or slowing demand for asphalt roofing products due to general or industry economic conditions or the amount of inclement weather could result in decreased demand for the company's products, lower prices received or reduced utilization of plant facilities. Further, changes in building codes and other standards from time to time can cause changes in demand, or increases in costs that may not be passed through to customers.
2. In the asphalt roofing products business, the significant raw materials are ceramic coated granules, asphalt, glass fibers, resins and mineral filler. Increased costs of raw materials can result in reduced margins, as can higher trucking and rail costs. Historically, the company has been able to pass some of the higher raw material and transportation costs through to the customer. Should the company be unable to recover higher raw material and transportation costs from price increases of its products, operating results could be lower than projected.
3. During fiscal 1997, the company completed the construction of a plant at the company's Ennis, Texas facility to manufacture nonwoven fiberglass roofing mats and other mats for a variety of industrial uses. The company also expects to make up to $100 million in new investments to expand capacity and improve productivity at existing plants and to build new plants over the next three years. Progress in achieving anticipated operating efficiencies and financial results is difficult to predict for new plant facilities. If such progress is slower than anticipated, if substantial cost overruns occur in building new plants, or if demand for products produced at new plants does not meet current expectations, operating results could be adversely affected.
4. Certain facilities of the company's industrial products subsidiaries must utilize hazardous materials in their production process. As a result, the company could incur costs for remediation activities at its facilities or off-site, and other related exposures from time to time in excess of established reserves for such activities.
5. The company's litigation, including its patent infringement suits against GAF Building Materials Corporation and certain affiliates, is subject to inherent and case-specific uncertainty. The outcome of such litigation depends on numerous interrelated factors, many of which cannot be predicted.
6. Even with fully developed action and contingency plans for Year 2000 readiness, it is possible that the company will not achieve full internal readiness. Further, the company's business may be adversely affected by external Year 2000 disruption that the company is not in position to control, including but not limited to potential disruptions in power and other energy supplies, telecommunications or other infrastructure, potential disruptions in transportation and the supply of raw materials, and potential disruptions in financial and banking systems. Year 2000 problems therefore could result in unanticipated expenses or liabilities, production or disruption delays or other adverse effects on the company.
7. Although the company currently anticipates that most of its needs for new capital in the near future will be met with internally generated funds, significant increases in interest rates could substantially affect its borrowing costs under its existing loan facility, or its cost of alternative sources of capital.
8. Each of the company's businesses, especially its Conductive Coatings Division's business, is subject to the risks of technological changes that could affect the demand for or the relative cost of the company's products and services, or the method and profitability of the method of distribution or delivery of such products and services. In addition, the company's businesses each could suffer significant setbacks in revenues and operating income if it lost one or more of its largest customers.
9. Although the company insures itself against physical loss to its manufacturing facilities, including business interruption losses, natural or other disasters and accidents, including but not limited to fire, earthquake, damaging winds and explosions, operating results could be adversely affected if any of its manufacturing facilities became inoperable for an extended period of time due to such events.
Parties are cautioned not to rely on any such forward-looking beliefs or judgments in making investment decisions.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inapplicable.
Item 8.
Item 8. Financial Statements and Supplemental Data
Index to Financial Statements and Financial Statement Schedule
All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors, Elcor Corporation
We have audited the accompanying consolidated balance sheets of Elcor Corporation (a Delaware corporation) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elcor Corporation and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies, the company has given retroactive effect to the change in the method of accounting for inventories from the last-in, first-out method to the first-in, first-out method in fiscal 1998.
As discussed in the Summary of Significant Accounting Policies, the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in fiscal 1996.
/s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP
Dallas, Texas August 17, 1998
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF OPERATIONS
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are in integral part of this statement.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements are an integral part of this statement.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Elcor Corporation (the company), through subsidiaries, is engaged in two lines of business: Roofing Products and Industrial Products. The Roofing Products segment, which accounts for 86% of consolidated sales, manufactures and sells premium laminated fiberglass asphalt residential roofing products, together with nonwoven mats used in manufacturing asphalt roofing products and various industrial applications. The Industrial Products group of companies is engaged in the shielding of plastic enclosures used in digital cellular phones and in other industries from electromagnetic and radio frequency interference, the plating of proprietary finishes for large diesel engine cylinder liners and pistons, and engineering consulting services and licensing of certain patented technologies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and all subsidiaries after elimination of significant intercompany balances and transactions. Service revenues and related expenses are not disaggregated in the Consolidated Statement of Operations due to immateriality. Certain prior year information has been restated as a result of a change in accounting for inventories as discussed in the Inventories section, and the three-for-two stock split in November 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The majority of the company's sales are in the Roofing Products segment and its primary customers are building materials distributors. For the past several years, the building materials distribution industry has consolidated at a rapid pace with many smaller independent distributors being acquired by emerging larger national building products distributors. One customer accounted for 16%, 14% and 13% of consolidated sales in fiscal years 1998, 1997 and 1996, respectively. The company performs ongoing credit evaluations and maintains reserves for potential credit losses.
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped to the customer or at the time services are rendered.
INVENTORIES
Inventories are stated at the lower of cost (including direct materials, labor, and applicable overhead) or market, using the first-in, first-out (FIFO) method. Inventories were comprised of:
In fiscal 1998, the company changed its method of accounting for inventories from the LIFO method to the FIFO method. Management believes that as a result of productivity improvements and the declining cost of raw materials since the adoption of the LIFO method in fiscal 1985, the FIFO method provides a better measurement of operating results.
In accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes," prior period financial statements have been restated to reflect this accounting change.
The effect on net income by year of this accounting change is summarized as follows (in thousands, except per share amounts):
Further, as of July 1, 1993, inventories were reduced $905,000, deferred taxes reduced $314,000 and retained earnings reduced $591,000 to reflect this accounting change on reported beginning balances.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Useful lives for property and equipment are as follows:
The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in income. Historically, preoperating and start-up costs incurred in connection with the construction of major new manufacturing facilities were capitalized until such facilities became operational. These costs were then amortized over a five-year period. Capitalized preoperating and start-up costs included in capital expenditures were $977,000 and $4,772,000 in fiscal years 1997 and 1996 respectively. Effective in fiscal 1999, preoperating and start-up costs will be expensed as incurred in accordance with AcSec Statement of Position 98-5, as described more fully in the New Accounting Standards section of these financial statements. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. In 1998, 1997 and 1996, $160,000, $1,784,000 and $1,459,000 of interest cost was capitalized, respectively.
INCOME TAXES
Deferred income taxes are provided to reflect temporary differences between the financial reporting basis and the tax basis of the company's assets and liabilities using presently enacted tax rates.
IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of fiscal 1996, the company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The company recorded a provision of $1,037,000 to reduce the assets of Chromium Corporation's Cleveland plant and provide for related environmental remediation in the Industrial Products segment relating to the new accounting standard. The company had previously reduced the value of certain equipment in the Roofing Products segment by $558,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year, adjusted for the three-for-two stock split in November 1997. The reconciliation of basic earnings per share to diluted earnings per share is shown in the following table.
LONG-TERM DEBT
Effective December 15, 1997, the company increased its unsecured revolving credit facility (Facility) to $100,000,000 of primary credit, including up to a maximum of $5,000,000 in letters of credit, through December 15, 2002. At June 30, 1998, letters of credit totaling $1,790,000 were outstanding.
Borrowings under the Facility bear interest at (1) the higher of the federal funds rate plus .5% or the lender's prime rate, or (2) at the company's option, LIBOR, in each case plus specified basis points based on the ratio of the company's total indebtedness to total capital. The Facility also provides for a commitment fee on the average unused portion of the line and is also based on the ratio of the company's total indebtedness to total capital. Based on financial ratios at June 30, 1998, the LIBOR borrowing rate was LIBOR plus .5% and the commitment fee was .175% of the average unused portion of the line. The average interest rate paid on indebtedness in fiscal 1998 was 6.4%.
The loan agreement, among other things, limits the sale or pledging of assets of subsidiaries involved in manufacturing asphalt roofing products, and requires maintenance of specified current ratios, capitalization ratios and cash flow levels. Dividend payments and stock repurchases are limited to certain specified levels providing no default or event of default would occur. At June 30, 1998, total cumulative dividend payments and stock repurchased since July 1, 1993 were subject to a $32,765,000 limitation. Actual expenditures for these items as of June 30, 1998 have been $13,204,000.
SHAREHOLDERS' EQUITY
Authorized common stock, par value $1.00, is 50,000,000 shares, of which 13,325,569 shares were issued at June 30, 1998 and 13,221,119 shares were issued at June 30, 1997. The Board of Directors is authorized to issue up to 1,000,000 shares of preferred stock, without par value, in one or more series and to determine the rights, preferences, and restrictions applicable to each series. No preferred stock has been issued.
In September 1997, the Board of Directors declared a three-for-two stock split payable in the form of a stock dividend which was distributed on November 12, 1997. An amount equal to the par value of the common shares issued in connection with the split was transferred from paid-in capital to the common stock account. Appropriate references to number of shares and to per share information in the Consolidated Financial Statements have been adjusted to reflect the stock split on a retroactive basis.
SHAREHOLDER RIGHTS PLAN
On May 26, 1998, the company's Board of Directors adopted a new Shareholder Rights Plan which took effect when the existing rights plan expired on July 8, 1998. Under the new plan, rights were constructively distributed as a dividend at the rate of one right for each share of common stock of the company held by the shareholders of record as of the close of business on July 8, 1998. Until the occurrence of certain events, the rights are represented by and traded in tandem with common stock. Each right will separate and entitle shareholders to buy stock upon an occurrence of certain takeover or stock accumulation events. Should any person or group (Related Person) acquire beneficial ownership of 15% or more of the company's common stock other than certain bona fide institutional investors to whom a 20% threshold applies, all rights not held by the Related Person become rights to purchase one one-hundredth of a share of preferred stock for $165 or $165 of Elcor common stock at a 50% discount. If after such an event the company merges, consolidates or engages in a similar transaction in which it does not survive, each holder has a "flip over" right to buy discounted stock in a surviving entity.
Under certain circumstances, the rights are redeemable at a price of $0.01 per right. Further, upon defined stock accumulation events, the Board of Directors has the option to exchange one share of common stock per right. The rights will expire by their terms on July 8, 2008.
EMPLOYEE BENEFIT PLANS
The company's Incentive Stock Option Plan provides for the granting of incentive and non-qualified stock options to directors, officers and key employees of the company for purchase of the company's common stock.
Information relating to options is as follows:
The following table summarizes information about options outstanding at June 30, 1998:
At June 30, 1998, 1997 and 1996, 209,813, 218,231 and 173,694 shares were exercisable, respectively. A total of 250,064, 397,271 and 547,274 shares were reserved for future grants at June 30, 1998, 1997 and 1996, respectively.
Beginning in fiscal 1997, the company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized with respect to the company's stock option plan. Pro forma information regarding net income and income per share set forth below has been determined as if the company had accounted for its stock options under the fair value methodology prescribed by SFAS No. 123. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for fiscal 1998, 1997 and 1996; dividend yields of 1.1%, 1.5% and 1.1%; risk-free interest rates of 6.2%, 6.5% and 6.2%; expected market price volatility of .413, .429 and .450; and expected lives of options of 8.5, 6.9 and 7.5 years. Based on this model, the weighted average fair value of stock options granted in fiscal 1998, 1997 and 1996 was $11.63, $5.78 and $7.48, respectively.
The pro forma amounts presented above may not be representative of the effects on reported net income for future years.
The company's Employee Stock Ownership Plan (ESOP) became effective January 1, 1981. Under the plan, the company contributes a percentage of each participant's annual compensation into a trust, either as treasury stock contributions or cash, which is then used to purchase Elcor common stock. Employees vest 20% after three years of employment and 20% per year thereafter, with the stock distributed at retirement, death, disability, or as authorized by the Plan Administrative Committee. Effective January 1, 1990, the company established an Employee Savings Plan under Internal Revenue Code section 401(k). All employees, except those covered by plans established through collective bargaining, are eligible for participation. Under this Plan, the company contributes a percentage of each participant's annual compensation into a Plan to be invested among various defined alternatives at the participants' direction. Vesting of company contributions is in accordance with the same schedule as that of the ESOP.
The Board of Directors authorized total contributions of 5.0% in fiscal 1998, 4.6% in fiscal 1997 and 4.6% in fiscal 1996, of each participant's annual compensation, as defined, including forfeitures, split equally between the ESOP and 401(k) Plans. In addition, on January 1, 1998, the company began contributing an additional $.50 for every $1.00 of employee contributions into the 401(k) Plan, limited to a maximum matching of 2% of an employee's compensation. Total contributions charged to expense for these plans were $1,722,000, $1,245,000 and $1,120,000, in 1998, 1997 and 1996, respectively.
The company has a Stock/Loan Plan which allows certain key employees to borrow an amount, based on a percentage of their salaries and the performance of their operating units, for the purpose of purchasing the company's common stock. Under the Stock/Loan Plan, the loans, which are unsecured, and any accrued interest are forgiven and amortized as compensation over five years of continuing service with the company. If employment is terminated for any reason except death, disability or retirement, the balance of the loan becomes due and payable. Loans outstanding at June 30, 1998 and 1997 totaling $1,074,000 and $1,078,000, respectively, are included in Other Assets.
COMMITMENTS AND CONTINGENCIES
The company and its subsidiaries lease certain office space, facilities, and equipment under operating leases, expiring on various dates through 2004. Total rental expense was $1,505,000 in 1998, $1,295,000 in 1997 and $1,167,000 in 1996. At June 30, 1998, future minimum rental commitments under noncancellable operating leases, payable over the remaining lives of the leases, are:
The company's subsidiaries provide certain warranties for their products which are generally limited to being free from defect in materials or workmanship affecting performance or meeting specified manufacturing and material specifications. During 1998, 1997 and 1996, the company recorded to expense approximately $1,681,000, $1,566,000 and $1,637,000, respectively, in warranty claim settlements and reserves. The company has established reserves for estimated probable future claims in accordance with SFAS No. 5, "Accounting for Contingencies."
On February 8, 1994, a wholly owned subsidiary, Elk Corporation of Dallas (Elk) was granted a design patent covering the ornamental aspects of certain Elk shingles. On December 6, 1994, Elk was granted a utility patent on the functional aspects of certain Elk shingles. Elk has sued GAF Building Materials Corporation and related GAF entities (collectively GAF) in federal court for infringement of these patents and trade dress. In the design patent case, Elk seeks to recover as damages the total profit that GAF has made from the infringing shingles. In the utility patent case, Elk seeks to recover as damages a reasonable royalty on GAF's sales of infringing shingles and certain lost profits.
GAF seeks a declaratory judgment that the Elk patents are not infringed and are either invalid or unenforceable. GAF has also asserted claims for unfair competition, Lanham Act violations based on alleged false advertising, and common law fraud, generally praying for damages of not less than $25 million including actual and punitive damages, plus interest, costs, and reasonable attorney fees. Elk disputes GAF's claims, and management intends vigorously to defend them and to enforce its intellectual property rights. In April, 1998, the District Court for the Northern District of Texas entered a partial final judgement against Elk in the design patent case based on an inequitable conduct ruling and certified the case for appeal. Elk has contested that judgment in an appeal which it has filed with the United States Court of Appeals for the Federal Circuit. Elk expects its appeal to be decided by the Court of Appeals in 1999. In the interim, trial on the trade dress claim and
certain other matters in the design patent case and trial in the utility patent cases are unscheduled but pending.
While management can give no assurances regarding the ultimate outcome of the litigation, outside counsel believe that Elk will prevail on its patent and trade dress claims and that Elk will defeat GAF's counterclaims. Even if the outcome were to be adverse to Elk, it is not expected to have a material effect on the company's financial position or liquidity.
The company and its subsidiaries are involved in other legal actions and claims arising in the ordinary course of business. Based on advice from legal counsel, management believes such litigation and claims will be resolved without material adverse effect on the consolidated financial statements.
On December 1, 1985, the company became self-insured for its products and completed operations liability exposure because the cost of insurance for such risks was believed to be excessive for the coverage to be provided. Reserves for estimated potential losses of this type have been established.
The company's operations are subject to extensive federal, state and local laws and regulations relating to environmental matters. Although the company does not believe it will be required to expend amounts which will have a material adverse effect on the company's consolidated financial position or results of operations by reason of environmental laws and regulations, such laws and regulations are frequently changed and could result in significantly increased cost of compliance. Further, certain of the company's industrial products operations utilize hazardous materials in their production processes. As a result, the company incurs costs for remediation activities at its facilities and off-site from time to time. The company establishes and maintains reserves for such remediation activities, when appropriate, in accordance with SFAS No. 5, "Accounting for Contingencies."
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
SUPPLEMENTAL CASH FLOWS
The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Supplemental cash flow amounts were as follows:
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards of reporting of comprehensive income and its components in the consolidated financial statements. The company will adopt SFAS No. 130 in fiscal 1999, but does not expect the adoption to impact the company's financial position or results of operations.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires public companies to disclose, among other things, certain interim and annual financial information about the enterprise using a new management approach. The management approach requires segment information to be reported based on how management evaluates the operating performance of its business units or segments. The company will adopt SFAS No. 131 in fiscal 1999 and does not currently anticipate significant changes in its reportable segments.
In April 1998, the Accounting Standards Executive Committee (AcSec) of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," requiring, among other things, companies to expense on a current basis previously capitalized start-up costs. At June 30, 1998, the company had $6,682,000 of unamortized capitalized start-up costs. This Statement of Position is effective for financial statements for fiscal years beginning after December 15, 1998, unless adopted earlier. The company plans to adopt this new accounting standard in fiscal 1999 at which time all remaining unamortized capitalized start-up costs will be expensed and reflected in the Consolidated Statement of Operations as a cumulative change in accounting principle.
INCOME TAXES
The company's effective tax rate was 35.6% in 1998, 37.0% in 1997 and 37.6% in 1996. The difference between the federal statutory tax rate and the effective tax rate is reconciled as follows:
Components of the income tax provisions consist of the following:
The significant components of the company's deferred tax assets and liabilities are summarized below:
QUARTERLY SUMMARY OF OPERATIONS
(Unaudited, $ in thousands, except per share amounts adjusted for a three-for-two stock split in November, 1997)
FINANCIAL INFORMATION BY COMPANY SEGMENTS
(1) In fiscal 1998, operating profit from the company's technology licensing and consulting services business exceeded 10% of consolidated operating profit. This business has not historically met the 10% reporting test nor is it typically expected to in the future. No separate segment is reflected in fiscal 1998 for this business unit.
(2) Consists principally of cash and cash equivalents, trade receivables, inventories, and net property, plant and equipment.
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE
To the Shareholders and Board of Directors of Elcor Corporation:
We have audited in accordance with generally accepted auditing standards, the accompanying consolidated financial statements of Elcor Corporation and have issued our report thereon dated August 17, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The Supplemental Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth herein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP
Dallas, Texas August 17, 1998
SCHEDULE II (In thousands) ELCOR CORPORATION AND SUBSIDIARIES SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
The Registrant has retained its independent public accountants for over 30 years. There have been no disagreements with the independent public accountants on accounting or financial disclosure matters.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Directors of the Registrant required by this item is incorporated herein by reference to the material under the caption "Election of Directors" on pages 5 and 6 of the Registrant's Proxy Statement dated September 18, 1998. Information concerning the Executive Officers of the Registrant is contained in Item 1 of this report under the caption "Executive Officers of the Registrant" on pages 10 and 11 of this Annual Report on Form 10-K.
Item 11.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to the information under the caption "Executive Compensation" on pages 7 through 16 of the Registrant's Proxy Statement dated September 18, 1998.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to the information under the caption "Stock Ownership" on pages 2 and 3 of the Registrant's Proxy Statement dated September 18, 1998. The referenced information was provided as of September 1, 1998. Registrant is aware of no material change since such date in the beneficial ownership of any officer, director or beneficial owner of five percent of any class of its voting stock except that Registrant was informed after the company's Proxy Statement had been printed that Reich & Tang Capital Management Group has increased its beneficial ownership to 682,900 shares, or approximately 5.2% of shares outstanding.
Item 13.
Item 13. Certain Relationships and Related Transactions.
There are no reportable transactions, business relationships or indebtedness between the Registrant and any covered party.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
(a) 1. Financial Statements
The following financial statements of Elcor Corporation are set forth in Item 8 of this Annual Report on Form 10-K:
Financial Statements:
Independent Auditors' Report Consolidated Balance Sheet at June 30, 1998, and 1997 Consolidated Statement Operations for the years ended June 30, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the years ended June 30, 1998, 1997, and 1996 Consolidated Statement of Shareholders' Equity for the years ended June 30, 1998, 1997, and 1996 Notes to Consolidated Financial Statements
Financial Statement Schedule:
Independent Auditors' Report Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K on April 16, 1998 relating to a press release containing "forward-looking statements" about its prospects for the future. The Registrant also filed a Form 8-K on May 29, 1998 relating to the adoption of a new Shareholder Rights Plan to take effect when the current rights plan expires on July 8, 1998.
(c) Exhibits
**3.1 The Articles of Incorporation of the Registrant, filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994 (File No. 1-5341).
**3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit 3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1981 and as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1988 originally filed with the Securities and Exchange Commission on February 11, 1989 (File No. 1-5341).
**4.1 Form of Rights Agreement dated as of July 7, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibits B and C thereto the Form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock, respectively (filed as Exhibit 4.1 to the company's Current Report on Form 8-K dated May 26, 1998 (File No.1-5341).
**4.6 Loan Agreement dated September 19, 1993 among Elcor Corporation, Certain Lenders, NationsBank of Texas, N.A., as Issuer, and NationsBank of Texas, N.A., as Administrative Lender, filed as Exhibit 4.6 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-5341).
**4.7 First Amendment dated October 31, 1994 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, and NationsBank of Texas, N.A. as Administrative Lender, filed as Exhibit 4.7 in the Registrant's Quarterly Report on Form 10-Q for this quarter ended September 30, 1994 (File No. 1-5341).
**4.8 Second Amendment dated December 15, 1995 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., As Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A. and Comerica Bank - Texas as Lenders, filed as Exhibit 4.8 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 (File No. 1-5341).
**4.9 Third Amendment dated October 31, 1996 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., As Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A. and Comerica Bank - Texas as Lenders, filed as Exhibit 4.9 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-5341).
**4.10 Fourth Amendment dated December 15, 1997 to Loan Agreement dated September 29, 1993 among Elcor Corporation, NationsBank of Texas, N.A., as Issuer, Administrative Lender, and Lender; and Bank of America - Texas, N.A., Comerica Bank - Texas, and the Bank of Tokyo - Mitsubishi, Ltd. As Lenders, filed as Exhibit 4.10 in the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (File No. 1-5341).
*10.1 Form of Executive Agreement
*10.2 Amended and Restated Elcor Corporation Employee Stock/Loan Plan.
*18 Letter Re: Change in Accounting Principle.
*21 Subsidiaries of the Registrant.
*23 Consent of Independent Public Accountants.
*27 Financial Data Schedule (EDGAR submission only).
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* Filed herewith.
** Incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ELCOR CORPORATION
By /s/ RICHARD J. ROSEBERY ----------------------------------- Richard J. Rosebery Vice Chairman, Chief Financial and Administrative Officer, and Treasurer
By /s/ LEONARD R. HARRAL ----------------------------------- Leonard R. Harral Vice President and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below in multiple counterparts by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
EXHIBIT INDEX
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* Filed herewith.
** Incorporated by reference.