<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1997 or
[_]Transition Report Pursuant to Section 12 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
COMMISSION FILE NUMBER 0-15903
CALGON CARBON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-0530110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 CALGON CARBON DRIVE 15205
PITTSBURGH, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 787-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $0.01 per New York Stock Exchange
share
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
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. [_]
As of March 3, 1998, there were outstanding 39,742,660 shares of Common Stock,
par value of $0.01 per share.
The aggregate market value of the voting stock held by non-affiliates as of
March 3, 1998 was $447,451,950.
The following documents have been incorporated by reference:
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FORM 10-K
DOCUMENT PART NUMBER
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Portions of Annual Report to Stockholders for the Year Ended
December 31, 1997................................................. II and IV
Proxy Statement filed pursuant to Regulation 14A in connection with
registrant's Annual Meeting of Stockholders to be held on April 21,
1998............................................................... III
</TABLE>
<PAGE>
INDEX
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PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 8
Item 3. Legal Proceedings............................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 11
Matters.....................................................
Item 6. Selected Financial Data...................................... 11
Item 7. Management's Discussion and Analysis......................... 11
Item 8. Financial Statements and Supplementary Data.................. 11
Item 9. Disagreements with Accountants............................... 11
PART III
Item 10. Directors and Executive Officers of the Registrant........... 11
Item 11. Executive Compensation....................................... 11
Item 12. Security Ownership of Certain Beneficial Owners and 11
Management..................................................
Item 13. Certain Relationships and Related Transactions............... 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 12
8-K.........................................................
SIGNATURES................................................................ 14
</TABLE>
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PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K, specifically
those contained in Item 1 "Business" and Item 7 "Management's Discussion and
Analysis" and statements incorporated by reference into this Form 10-K from
the 1997 Annual Report to Stockholders along with statements in other reports
filed with the Securities and Exchange Commission, external documents and oral
presentations, which are not historical are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent Calgon Carbon Corporation's (the
"Company") present expectations or beliefs concerning future events. The
Company cautions that such statements are qualified by important factors that
could cause actual results to differ materially from those in the forward-
looking statements. Those factors which specifically relate to the Company's
business include the following: worldwide economy, competition, worldwide
environmental and drinking water regulations, weather conditions, customers'
growth, productivity improvements at its locations and new technologies that
could affect the use of the Company's products.
ITEM 1. BUSINESS:
The Company:
The predecessor of the Company's activated carbon business was formed in
1942. In April 1985, the Company's predecessor business was purchased by its
management in a leveraged buyout. On June 9, 1987, the Company completed its
initial public offering of common stock. In May 1988, the Company acquired an
activated carbon and charcoal business which provided the Company with two
additional manufacturing facilities located in Germany. The acquisition was
accounted for as a purchase. In September 1990, the Company purchased the
assets of TMPC, Inc. (Vara International) in order to strengthen its vapor
phase equipment business. During the fourth quarter 1994, it was decided to
close one of the German plants due to high operating costs. In accordance with
the plan, the Brilon-Wald plant was closed during 1995. In February 1996, the
Company acquired the business and operating assets of the perox-pure (TM)
operations of Vulcan Peroxidation Systems, Inc. and in June 1996 also acquired
the common stock of Solarchem Enterprises, Inc. Both of these transactions
were accounted for as purchases and provided the Company with an entry into
the oxidative water treatment market. In December 1996, the Company acquired
the common stock of Charcoal Cloth (International) Limited and Charcoal Cloth
Limited. This acquisition was also accounted for as a purchase. The acquired
companies produce activated carbon in cloth form for odor control in medical
and industrial applications where granular activated carbon is not feasible.
Also in December 1996, the Company purchased the common stock of Advanced
Separation Technologies Incorporated. This Company designs and assembles
proprietary separation equipment for use in the industrial process and
environmental markets. During the fourth quarter of 1997, the Company
initiated a plan to consolidate the manufacturing operations and research
activities of its Advanced Oxidation Technologies unit in Tucson, Arizona to
its Markham, Ontario, Canada site.
Products and Services:
Calgon Carbon is engaged in the manufacture and marketing of products and
services employed for separation, concentration or purification of liquids and
gases.
The Company's activities consist of four areas: (1) activated carbons--the
production and sale of a broad range of untreated, impregnated or acid washed
carbons, in either powdered, granular, pellet or cloth form; (2) services--the
provision of carbon reactivation, handling and transportation and on-site
purification, separation and concentration services; (3) systems--the design,
assembly and sales of systems that employ activated carbon, advanced
oxidation, ion exchange or chromatographic separation technology for
purification, separation and concentration; and (4) charcoal--the production
and sale of charcoal to consumer markets in Germany.
1
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Activated Carbons. The Company's principal product is activated carbon.
Activated carbon is a porous material that removes organic compounds from
liquids and gases by a process known as "adsorption." In "adsorption" organic
molecules contained in a liquid or gas are attracted and bound to the surface
of the pores of the activated carbon as the liquid or gas is passed through
it. The Company also has a patented manufacturing process which enhances the
catalytic functionality of activated carbon, expanding its capability to
remove inorganic compounds. The product was introduced in 1994 and is called
Centaur (R).
The primary raw material used in the production of the Company's activated
carbons is bituminous coal which is crushed, mixed with pitch, sized and
processed in low temperature bakers followed by high temperature furnaces.
This heating process is known as "activation" and develops the pore structure
of the carbon. Through adjustments in the "activation" process, pores of the
required size for a particular purification application are developed. The
Company's technological expertise in adjusting the pore structure in the
activation process has been one of the factors that has enabled the Company to
develop many special types of activated carbon. Currently, the Company offers
many types of activated carbon with most available in several particle sizes.
The Company also produces activated carbon in cloth form, using rayon as the
primary raw material. The Company also markets other activated carbons
including products based on coconut or wood which it purchases from
independent suppliers.
Activated carbons are produced in granular, pellet, powdered and cloth
forms, although the Company has historically concentrated on granular and
pelletized activated carbon. The Company manufactures powdered activated
carbon as a by-product and/or by crushing granular activated carbons. Granular
activated carbon is generally used in fixed filter beds for continuous flow
purification processes, while powdered activated carbon is generally used in
batch purification processes. Use of fixed filter beds of activated carbon for
continuous flow processing of a liquid or gas achieves a lower cost of
operation and avoids the disposal costs associated with powdered carbon.
Once activated carbon is saturated with organic materials and can no longer
adsorb any additional organic compounds, its adsorption capacity can be
restored by "reactivation." Reactivation is a process by which the organic
compounds are driven off activated carbon particles by passing the spent
activated carbon through a high temperature furnace. Granular activated carbon
is employed in reactivation applications for economic reasons or to destroy
hazardous adsorbed organic compounds.
Services. The principal service sold by the Company is the Calgon Carbon
Service (TM) which supplies customers with a complete wastewater treatment
service, particularly suited for treating wastewater containing hazardous
organic chemicals at the customer's facility. The service is based primarily
on reactivation of spent carbon and transportation of activated carbon to and
from the reactivation facility, but also includes feasibility testing, process
design, on-site equipment, initial activated carbon supply, performance
monitoring and major maintenance of Company-owned equipment. The Company also
provides a number of service packages which include two or more elements of
the complete service. Services are provided under contract at a fixed minimum
monthly fee subject to additional charges for increased carbon usage. The
Company provides services in packages ranging from a fifty-five-gallon drum to
truckload quantities.
The Company also offers services to clean water from contaminated aquifers
and surface impoundments and to clean accidental spills on a fee basis. These
services include both activated carbon and advanced oxidation processes. The
Company maintains an inventory of mobile adsorption equipment which can be
dispatched on twenty-four hours notice and can be operational within forty-
eight hours after arrival on site.
Purification services provided by the Company are used to improve the
quality of food, chemical, pharmaceutical and petrochemical products. Such
services may be utilized in permanent installations or in temporary
applications, as pilot studies for new manufacturing processes or recovery of
off-specification products.
The Company also provides custom reactivation services, primarily in Europe.
As part of this service, the Company picks up spent carbon at a customer's
site, transports it to the Company's reactivation facilities, reactivates it
and then returns the same carbon to the customer.
2
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Systems. In 1978, the Company began marketing equipment which employs
activated carbon in various purification, separation and concentration
processes, as a means for expanding the market for its products and for
revenue growth. In 1996, the Company added, through acquisition, the
manufacture and marketing of advanced oxidation equipment, continuous ion
exchange and chromatographic separation equipment.
The Company sells a line of adsorption and filtration equipment to clean
water from contaminated aquifers, industrial wastewater and surface
impoundments, to eliminate odors from municipal wastewater plants (including
Phoenix (TM)) and other equipment to purify gases and liquids in industrial
process applications. Equipment for these applications can be custom designed
and fabricated for a specific project or can be drawn from the Company's
inventory. The adsorption equipment product line varies in size from fifty-
five-gallon to twelve-foot-diameter vessels. Through its Vara International
unit, the Company sells customized engineered systems for solvent recovery and
volatile organic compound abatement. The technologies provided include steam
regenerable fixed bed adsorption, distillation and adsorption/catalytic
oxidation (CADRE (TM)). The Company also designs and markets systems that
employ advanced oxidation technology, specifically ultraviolet irradiation in
conjunction with hydrogen peroxide and/or other oxidizing agents, to destroy
waterborne organic contaminants. Through its wholly owned subsidiary, Advanced
Separation Technologies Incorporated (AST), the Company also designs and
markets proprietary ISEPR (Ionic Separator) continuous ion exchange units for
separation of organic and inorganic compounds, principally for process
applications in the food, pharmaceutical and biotechnology industries. AST
also designs and markets the CSEPR (Chromatographic Separator), a continuous
chromatography separation system for applications in the food, pharmaceutical
and fine chemicals market segments.
Charcoal. This product is manufactured in Germany and used for barbecue
grilling by consumers and restaurants.
Markets:
The Company offers its activated carbon products and services, as well as
its adsorption systems (activated carbon and ion exchange) to the Industrial
Process Market and the Environmental Market. Its advanced oxidation systems
are used primarily in the Environmental Market with increasing activity in the
process water market. Applications involving advanced oxidation include the
treatment of ultra pure water for the semi-conductor industry and the
recycling of heavy water in the nuclear industry. Industrial process
applications include purification, catalysis and product recovery within the
food, chemical, pharmaceutical, biotechnology, medical, personnel protection,
cigarette and precious metals industries. Environmental applications include
drinking water purification, wastewater and sewage treatment, groundwater
remediation and emissions control in both industrial and municipal markets.
Charcoal products are used primarily in Germany for barbecue grilling. The
following table details total net sales by market for the past three years.
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PERCENTAGE OF TOTAL NET SALES
---------------------------------
1997 1996 1995
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Industrial Process Market:
Food...................................... 17% 14% 12%
Original equipment manufacturers.......... 15 16 10
Chemical and pharmaceutical............... 8 7 14
Other..................................... 8 10 11
--------- --------- ---------
Subtotal Industrial..................... 48 47 47
--------- --------- ---------
Environmental Market:
Industrial................................ 24 26 25
Municipal................................. 22 20 21
--------- --------- ---------
Subtotal Environmental.................. 46 46 46
--------- --------- ---------
Consumer Market:............................ 6 7 7
--------- --------- ---------
Total net sales......................... 100% 100% 100%
========= ========= =========
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3
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Industrial Process Market:
The Industrial Process Market consists of customers that use the Company's
products either for purification, separation or concentration of their
products in the manufacturing process or direct incorporation into their
product. The Industrial Process Market includes four significant sub-markets:
the food market, the original equipment manufacturers market, the chemical and
pharmaceutical market and a group of other sub-markets.
Food Market. Sweetener manufacturers are the principal purchasers of the
Company's products in the industrial process market. In terms of revenue, the
Company is the major supplier of activated carbons used in the purification of
dextrose and high fructose corn syrup. Activated carbons are also sold for use
in the manufacture of artificial sweeteners and cane sugar.
Other food processing applications include decolorization of monosodium
glutamate and purification of citric acid, artificial sweeteners, soya oils,
protein hydrolysates and wine and spirits; process water treatment in the
beverage industry; and decaffeination of coffee utilizing the water process.
Original Equipment Manufacturers Market. Manufacturers of various types of
equipment purchase activated carbons for incorporation in such equipment. The
Company is the sole supplier of activated carbons to manufacturers of gas
masks and filters used by the United States military and is a major supplier
of activated carbons to manufacturers of such products used by the European
military. The Company sells activated carbons for use in protective
respirators and collective filters for both private industry and the military.
Other purchasers in the market include manufacturers of home water filters,
spill cleanup equipment, commercial and residential water filters, solvent
recovery equipment and gasoline vapor recovery equipment.
Chemical and Pharmaceutical Market. The Company sells a wide range of
activated carbons to the chemical and pharmaceutical market for the
purification of organic and inorganic chemicals, by-product recovery, gas
treatment and catalysis. Applications of these activated carbons include
decolorization of hydrochloric acid, purification of soda ash, glycerine,
analgesics, antibiotics and vitamins and removal of trace impurities from
neon, carbon dioxide, acetylene and hydrogen.
Other Markets. The Company sells its products to a number of additional
industrial process markets. Petroleum refining and petrochemical processing
industries use activated carbons for the removal of sulfur compounds from
natural gas, amine purification and spirits decolorization. The liquefied
natural gas industry uses activated carbons to remove mercury compounds which
would otherwise corrode process equipment. Cigarette manufacturers use
activated carbons in charcoal filters and precious metals producers use
activated carbons to recover gold and silver from low grade ore.
Environmental Market:
The Environmental Market consists of customers that use the Company's
products to control air and water pollutants. The Environmental Market has two
sub-markets, the industrial market and the municipal market.
Industrial Market. The Company offers its products and services to private
industry to meet wastewater discharge requirements imposed by various
governmental entities. Most of the Company's sales to this market are sales of
the Calgon Carbon Service (TM) for wastewater treatment. The reactivation
portion of this service is an important element if the contaminants in the
wastewater are hazardous organic chemicals. The hazardous organic chemicals
which are adsorbed from the water by the activated carbons are decomposed at
the high temperatures of the reactivation furnace and thereby removed from the
environment. Reactivation saves customers the difficulty of having to find a
method of long-term containment (such as a landfill) for hazardous organic
chemicals removed from their industrial wastewater.
The cleanup of contaminated groundwater, surface impoundments and accidental
spills comprise a significant market for the Company. The Company provides
emergency and temporary cleanup services for public and private entities.
4
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Activated carbon is also used in the chemical, pharmaceutical and refining
industry for purification of air discharges to remove contaminants such as
benzene, toluene and other volatile organics. The Company offers carbon,
services and equipment for these applications.
Municipal Market. The Company sells activated carbons, systems and services
to municipal customers in connection with the treatment of potable water to
remove pesticides and other dissolved organic material to meet current
regulations and to remove tastes and odors to make the water aesthetically
acceptable to the public. The Company primarily sells granular activated
carbon products to this market and in many cases the granular carbon functions
both as the primary filtration media as well as an adsorption media to remove
the contaminants from the water.
Municipal sewage treatment plants purchase the Company's odor control
systems and activated carbon products to remove objectionable odors emanating
from the plant and to treat the wastewater to meet operating requirements.
Granular activated carbon is used in odor control applications but both
granular and powdered activated carbons are used to treat wastewater. The
granular activated carbon is used as a filtration/adsorption medium and the
powdered activated carbon is used to enhance the performance of existing
biological waste treatment processes.
Consumer Market:
The Consumer Market consists of sales of charcoal (Grillis (R) and Der
Sommer-Hit (R)) for outdoor barbecue grilling. The Company's charcoal is sold
principally in Germany. This market is weather dependent, with the majority of
the sales in the spring and summer months.
Sales and Marketing:
The Company sells activated carbons, systems and services throughout the
world and in Germany sells charcoal. In areas outside of the United States and
Europe, the Company's primary activity is the sale of activated carbons.
Approximately 88% of its products and services are sold through its direct
sales force, while 12% is through agents and distributors.
The Company has a direct sales force in the United States in offices located
in Pittsburgh, Pennsylvania; Tucson, Arizona; Richmond, California; Lakeland,
Florida; Vero Beach, Florida; Houston, Texas; and Bridgewater, New Jersey. The
Company conducts sales in Canada through a distributor under direction of its
wholly owned subsidiary. The Company also has a sales office in Toronto,
Ontario, Canada. The Company maintains an office in Singapore to manage its
business in South East Asia, including Malaysia, Thailand, Indonesia, India,
Singapore and Oceana.
In 1997, the Company established a subsidiary in Singapore to oversee all
activities in Asia. A representative office was established in Tokyo, Japan to
manage its business in Korea, Taiwan and the People's Republic of China.
In Europe the Company has sales offices in Brussels, Belgium; Paris, France;
Manchester, England; and Frankfurt, Germany. The Company also has a network of
agents and distributors that conduct sales in certain countries in Europe, the
Middle East, Africa, Latin America, the Far East, Australia and New Zealand.
The following table details total net sales to customers by geographic areas
in the past three years:
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PERCENTAGE OF TOTAL NET SALES
---------------------------------
1997 1996 1995
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United States................................. 53% 57% 54%
Europe........................................ 31 34 37
Other......................................... 16 9 9
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Total net sales............................. 100% 100% 100%
========= ========= =========
</TABLE>
5
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Refer to Note 16 to the Consolidated Financial Statements for a discussion
of other financial information classified by major geographic areas in which
the Company operates.
Sales of the Company's products in Japan are conducted exclusively by Calgon
Far East Co. Ltd., a joint venture in which the Company is a 60% participant.
The joint venture purchases the Company's products for resale in Japan. The
joint venture also owns and operates a reactivation facility in Fukui, Fukui
Prefecture, Japan and sells related services. Sales to the joint venture have
not been a significant portion of the Company's total net sales.
The Company's products and services were purchased by approximately 4,000
active customers in 1997. Over the past three years, no single customer
accounted for more than 10% of the total sales of the Company in any year.
Competition:
The Company has three principal competitors with respect to the production
and sale of activated carbons: Norit, N.V., a Dutch company; CECA, a
subsidiary of Elf-Aquitaine, a French company; and Westvaco Corporation, a
United States company. Chinese producers of coal-based activated carbon and
certain East Asian producers of coconut-based activated carbon participate the
market on a worldwide basis and sell principally through resellers.
Competition in activated carbons, systems and services is based both on price
and performance. Other sources of competition for the Company's activated
carbon services and systems are purification, filtration and extraction
processes that do not employ activated carbons.
A number of other smaller competitors engage in the production and sale of
activated carbons in the United States and throughout the world. These
companies compete with the Company in the sale of specific types of activated
carbons, but do not generally compete with the Company in the worldwide
activated carbon business.
In the United States and Europe the Company competes with several small
regional companies for the sale of its reactivation services and equipment.
In North America, the Company has competition for its advanced oxidation
product line from products not involving oxidation and from a number of
smaller firms offering some form of advanced oxidation. In Europe, competition
comes primarily from manufacturers of ozone generation equipment, principally
Ozonia, a division of Lyonnaise des Eaux, Trailigaz, a subsidiary of Compagnie
Generale des Eaux and Wedeco, a German-based supplier of ozone and
ozone/ultraviolet based systems.
In the advanced separation technologies market, competitors range from a few
large companies such as U.S. Filter and Applexion to hundreds of small local
companies, with a few competitors providing a full range of
filtration/separation equipment, technologies and service.
There are a number of competitors in the consumer charcoal market who are
located in Eastern European countries, Spain, Portugal, South Africa and South
America. These competitors offer inexpensive, low-quality products to the
market.
Capital Expenditures:
In 1997, the Company invested $34.4 million for capital expenditures. The
Company's 1998 capital expenditure budget approximates $28.0 million and is to
include carbon production capacity increases at the Big Sandy, Kentucky and
Feluy, Belgium plants, domestic service customer capital and new computer
hardware and software to operate the Company's corporate-wide business system.
The Company believes that the funds generated from operations, supplemented as
necessary with funds from lines of credit and its cash reserves, will provide
sufficient funds required for such capital expenditures.
Raw Materials:
The principal raw material purchased by the Company is bituminous coal from
mines in the Appalachian Region and mines outside the United States, under
both long-term and annual supply contracts. The Company
6
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purchases the coal used in its Belgian production facility from a number of
coal companies throughout the world under similar arrangements. The Company
purchases beech wood for its German charcoal operations through long-term
contracts and on the open market, primarily waste slabs from saw mills or as
off-cuts from the furniture industry. Most of the wood is sourced in Germany
and the supply of wood is adequate.
The Company purchases significant amounts of natural gas from various
suppliers for use in its production facilities. In both the United States and
Europe, this natural gas is purchased pursuant to various annual contracts
with natural gas companies.
The Company purchases hydrogen peroxide via long-term fixed-price contracts.
The only other raw material that is purchased by the Company in significant
quantities is pitch, which is used as a binder in the manufacturing process.
The Company purchases pitch from various suppliers in the United States and
Europe under annual supply contracts.
The purchase of key equipment components for all areas is coordinated
through agreements with various suppliers.
The Company does not presently anticipate any problems in obtaining adequate
supplies of any of its raw materials.
Research and Development:
The Company's research and development activities are conducted primarily at
a research center near Pittsburgh, Pennsylvania, under the direction of a
Senior Vice President with a staff of 65 employees. The Company also has
specialty facilities in Markham, Ontario, Canada for oxidation system research
and in Lakeland, Florida for separation research. A pilot plant located near
Pittsburgh is used for the production of experimental activated carbon
products for testing and applications development. Experimental systems are
also evaluated at this location.
The principal goals of the Company's research program are maintaining the
Company as a technological leader in the production and utilization of
activated carbon, systems and services; developing new products and services;
and providing technical support to the manufacturing and marketing operations
of the Company with specific focus on advanced oxidation and separation
research.
The Company's research programs include new and improved methods of
activated carbon manufacturing, new and improved activated carbons for
applications as physical adsorbents and adsorptive catalysts and other
emerging purification/separation/concentration technologies. The Centaur (R)
product line represents a new family of activated carbons developed for
adsorptive catalytic applications and the charcoal cloth line is the first
commercial entry into the shaped carbon business.
Research and development expenses were $8.3 million, $6.5 million and $5.6
million in 1997, 1996 and 1995, respectively.
Patent and Trade Secrets:
The Company possesses a substantial body of technical knowledge and trade
secrets and owns 75 United States patents and 117 patents in other countries.
The technology embodied in these patents, trade secrets and technical
knowledge applies to all phases of the Company's business including production
processes, product formulations and application engineering. The Company
considers this body of technology important to the conduct of its business,
although it considers no individual item material to its business.
Regulatory Matters:
Domestic. The Company is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to waterways and the
generation, handling, storage, transportation, treatment and disposal
7
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of waste materials and is also subject to other federal and state laws
regarding health and safety matters. The Company believes it is presently in
substantial compliance with these laws and regulations. These laws and
regulations are constantly evolving, and it is impossible to predict the
effect these laws and regulations may have on the Company in the future.
The Environmental Protection Agency (EPA) has issued certain regulations
under the Resource Conservation and Recovery Act (RCRA) dealing with the
transportation, storage and treatment of hazardous waste that impact the
Company in its carbon reactivation services. Once activated carbon supplied to
a customer can no longer adsorb contaminating organic substances, it is
returned to the Company's facilities for reactivation and subsequent reuse. If
the substance(s) adsorbed by the spent carbon is considered hazardous, under
these EPA regulations the activated carbon used in the treatment process is
also considered hazardous. Therefore, a permit is required to transport the
hazardous carbon to the Company's facility for reactivation. The Company
possesses the necessary federal and state permits to transport hazardous
waste. Once at the Company's reactivation site, the hazardous spent activated
carbon is placed in temporary storage tanks. Under the EPA regulations, the
Company is required to have a hazardous waste storage permit. The Company has
obtained RCRA Part B permits to store hazardous waste at its Pittsburgh and
Catlettsburg facilities. The process of reactivating the spent activated
carbon, which destroys the hazardous organic substances, is subject to
permitting as a thermal treatment unit under RCRA. The Company does not accept
for reactivation carbons containing certain hazardous materials, including
PCBs, dioxins and radioactive materials.
Each of the Company's domestic production facilities has permits and
licenses regulating air emissions and water discharges. All of the Company's
domestic production facilities are controlled under permits issued by state
and federal air pollution control entities. The Company is presently in
substantial compliance with these permits. Continued compliance will require
administrative control and will be subject to any new or additional standards.
Europe. The Company is also subject to various environmental health and
safety laws and regulations at its facilities in Belgium, England and Germany.
These laws and regulations address substantially the same issues as those
applicable to the Company in the United States. The Company believes it is
presently in substantial compliance with these laws and regulations.
Indemnification. The Company has a limited indemnification agreement with
the previous owner of the Company which will fund certain environmental costs
if they are incurred at the Company's Catlettsburg, Kentucky plant. The
Company believes that the amount of the indemnification is sufficient to fund
these liabilities if they arise.
Employee Relations:
As of December 31, 1997, the Company employed 1,341 persons on a full-time
basis, 812 of whom were salaried production, office, supervisory and sales
personnel. The 297 hourly personnel in the United States are represented by
the United Steelworkers of America. The current contracts with the United
Steelworkers of America expire on February 1, 1999 with respect to the
Pittsburgh facility and on June 6, 2001 with respect to the Catlettsburg
facility. The 112 hourly personnel at the Bodenfelde plant in Germany are
represented by the German Chemical Industry Union. Agreements are reached
every two years between the National Chemical Union and the German Chemical
Federation. The current agreement expires on March 31, 1998. The 72 hourly
personnel at the Company's Belgian facility are represented by two national
labor organizations with contracts expiring on July 31, 1999. The Company has
48 hourly employees at its three non-union United Kingdom facilities.
ITEM 2. PROPERTIES:
The Company owns ten production facilities, two of which are located in
Pittsburgh, Pennsylvania; and one each in the following locations:
Catlettsburg, Kentucky; Pearlington, Mississippi; Blue Lake, California;
Feluy, Belgium; Grays, England; Brilon-Wald and Bodenfelde, Germany; Fukui,
Fukui Prefecture, Japan. The Company closed its Brilon-Wald plant in 1995. The
Company leases three production facilities as follows: Lakeland, Florida;
Markham, Ontario, Canada; Houghton Le Spring, England. The Company closed its
Tucson, Arizona facility in 1997.
8
<PAGE>
The Catlettsburg, Kentucky plant is the Company's largest facility, with
plant operations occupying approximately 50 acres of a 226-acre site. This
plant produces granular and powdered activated carbons, acid washed granular
activated carbons and reactivates spent granular activated carbons.
The Pittsburgh, Pennsylvania carbon production plant occupies a four-acre
site. Operations at the plant include the reactivation of spent granular
activated carbons, the impregnation of granular activated carbons, the
grinding of granular activated carbons into powdered activated carbons and the
production of pelletized carbons. The plant also has the capacity to produce
coal-based or coconut-based granular activated carbons.
The Pearlington, Mississippi plant occupies a site of approximately 100
acres. The plant has one production line that produces granular activated
carbons and powdered carbons.
The Blue Lake plant, located near the city of Eureka, California occupies
approximately two acres. The primary operation at the plant includes
reactivation of spent granular activated carbons. During 1997, the Company
reinstated virgin and react coal-based powdered carbon production at this
location.
The Pittsburgh, Pennsylvania equipment and assembly plant is located
approximately one mile from the carbon production plant and is situated within
a 16-acre site that includes a 300,000 square foot building. The equipment and
assembly plant occupies 95,000 square feet with the remaining space used as a
centralized warehouse for carbon inventory. The plant assembles fully
engineered equipment for purification, concentration and separation systems.
The Markham, Ontario, Canada assembly facility is housed in a 19,000 square
foot building near Toronto, Ontario, Canada. Assembly of ultraviolet oxidation
equipment takes place at this location. In addition, this facility houses a
testing laboratory and pilot plant operations.
The Lakeland, Florida ion separation equipment plant occupies a 26,400
square foot building on approximately one and a half acres of property. The
primary operations are the assembly of both small size ion exchange systems
and components of larger ion exchange systems, plus the operation of pilot
plant testing of customer ion exchange processes.
The Feluy plant occupies a site of approximately 21 acres located 30 miles
south of Brussels, Belgium. It has one production line which manufactures
granular activated carbons. In addition, operations at the plant include the
reactivation of spent granular activated carbons and the grinding of granular
activated carbons into powdered activated carbons.
The Grays plant occupies a three-acre site near London, England. Operations
at the plant include the reactivation of spent granular activated carbons and
the impregnation of granular activated carbon.
The Bodenfelde plant occupies a site of approximately 40 acres and is
situated in the State of Lower Saxony, Germany. Operations at the plant
include the manufacture of charcoal for the consumer market. Also a by-
product, acetic acid of various grades, is produced and sold.
The Brilon-Wald plant occupies a site of approximately 25 acres and is
situated in the North Rhine-Westphalia Region, Germany. This plant was closed
in 1995. The Company has been approached by potential purchasers of this
facility, however, at this time a suitable buyer has not been identified.
The Houghton Le Spring plant, located near the city of Newcastle, England,
occupies approximately two acres. Operations at the plant include the
manufacture of woven and knitted activated carbon textiles and their
impregnation and lamination.
The Fukui, Fukui Prefecture, Japan plant is owned by Calgon Far East Co.,
Ltd., a joint venture of which the Company is a 60% participant. It occupies a
site of approximately 6 acres and has one production line which reactivates
spent granular activated carbon mainly for water plants. In addition, the
operations at the plant includes acid rinsing for reactivated and virgin
carbons.
9
<PAGE>
The Company believes that the plants are adequate and suitable for its
operating needs.
ITEM 3. LEGAL PROCEEDINGS:
The Company is a party to an action, Powell Duffryn Terminals, Inc. et al.
v. Calgon Carbon Corporation and Rayonier, Inc. CV 497-080 (U.S.D.C. S.D.
Ga.), filed in April 1997, by Powell Duffryn Terminals, Inc. ("Powell
Duffryn"), and sixteen of its insurance carriers. Plaintiffs seek indemnity,
contribution and damages as a result of a fire and explosion that occurred on
April 10, 1995 at Powell Duffryn's Savannah, Georgia chemical storage
facility. Plaintiffs seek to recover all or part of an amount in excess of $57
million paid to resolve claims by third parties and to remediate Powell
Duffryn's property and adjoining lands as a result of the fire and
approximately $5.5 million allegedly paid by Powell Duffryn's first-party
insurer Industrial Risk Insurers ("IRI") for Powell Duffryn's property damage
and business interruption claims.
Plaintiffs contend that the fire was caused as a result of an exothermic
reaction occurring in a Calgon Carbon Corporation VentSorb containing BPL
activated carbon that Powell Duffryn had connected to three tanks containing
flammable Crude Sulfate Turpentine ("CST") in order to control odors.
Plaintiffs contend that the Company failed to warn of the potential for a fire
from the use of VentSorbs containing activated carbon. Plaintiffs also seek to
hold the Company liable for alleged negligent misrepresentation or negligent
dissemination of business information.
The Company denies Plaintiffs' allegations. The Company intends to defend
this matter vigorously. The Company is not able to predict at this time the
likelihood of, or range of, any adverse outcome or the amount of damages which
may be awarded against the Company.
On August 26, 1997, Plaintiffs' counsel made a demand for damages under
O.C.G.A. (S)51-12-14 for $35 million which encompassed all claims raised by
Plaintiffs in the action. The Company rejected this demand.
The Company has $40 million in excess third-party insurance coverage. The
Company and its insurers are currently discussing whether certain "pollution"
exclusion clauses in the Company's policies are applicable to all of the
claims raised by Plaintiffs. To date, the Company has been unable to ascertain
specific damages claimed for "pollution" related damages and "non-pollution"
related damages. The Company is also presently investigating whether it has a
right of recovery from other parties for any damages it may incur in the
action brought against it. At this time, the Company is not able to predict
the likelihood of, or range of, a favorable outcome with regard to any
insurance coverage or other claims which the Company may have in the event
that it is found liable for damages.
------------
In December 1996, the Company purchased the common stock of Advanced
Separation Technologies Incorporated (AST). This Company designs and assembles
proprietary separation equipment for use in the industrial process and
environmental markets.
During 1997, the Company recognized additional costs, primarily related to
design and mechanical failures on projects which were represented to be
substantially complete as of December 31, 1996. A significant portion of these
costs were related to design and/or other defects on critical components which
the Company believes were known to the AST management and its owners as of
December 31, 1996. The net additional estimated cost incurred and accrued as
of December 31, 1997 on these projects of $9.7 million has been considered as
additional acquisition costs and accordingly goodwill has been increased to
reflect these costs.
On January 12, 1998, the Company filed a claim for unspecified damages in
the United States District Court in the Western District of Pennsylvania
alleging among other things that Progress Capital Holdings and Potomac Capital
Investment Corporation materially breached various AST financial and
operational representations and warranties included in the Stock Purchase
Agreement. Based upon information obtained throughout 1997, the Company
believes that it has a reasonable basis for this claim and intends to
vigorously pursue reimbursement for damages sustained. Neither the Company nor
its counsel can predict with certainty the amount, if any, of recovery that
will be obtained from the defendants in this matter. Accordingly, the Company
has not recorded a receivable for this gain contingency pending further
developments in the litigation.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The information required for this Item 5 appears under the caption "Common
Shares and Market Information" on page 40 of the Annual Report to Stockholders
for the Year Ended December 31, 1997 and is incorporated in this Annual Report
by reference.
ITEM 6. SELECTED FINANCIAL DATA:
The information required by this Item 6 appears under the caption "Six-Year
Summary, Selected Financial and Statistical Data" on page 40 of the Annual
Report to Stockholders for the Year Ended December 31, 1997 and is
incorporated in this Annual Report by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS:
The Discussion and Analysis of Financial Condition required by this Item 7
appears on pages 17 through 21 of the Annual Report to Stockholders for the
Year Ended December 31, 1997 and is incorporated in this Annual Report by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The financial statements and related report on the consolidated financial
statements of Calgon Carbon Corporation and its subsidiaries for the Years
Ended December 31, 1997, 1996 and 1995 required by this Item 8 appear on pages
22 through 40 of the Annual Report to Stockholders for the Year Ended December
31, 1997 and are incorporated in this Annual Report by reference.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information concerning the directors and executive officers of the
Corporation required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Company's Proxy
Statement for the 1998 Annual Meeting of its Stockholders.
ITEM 11. EXECUTIVE COMPENSATION:
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Company's
Proxy Statement for the 1998 Annual Meeting of its Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Information required by this item is incorporated by reference to the
material appearing under the heading "Security Ownership of Management and
Certain Beneficial Owners" in the Company's Proxy Statement for the 1998
Annual Meeting of its Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" in the Company's
Proxy Statement for the 1998 Annual Meeting of its Stockholders.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
A. Financial Statements
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE(S) IN ANNUAL
REPORT TO
STOCKHOLDERS
FOR THE YEAR ENDED
FINANCIAL STATEMENTS AND RELATED REPORT DECEMBER 31, 1997
--------------------------------------- ------------------
<C> <S> <C>
Report of Independent Accountants, dated February 3,
1998.................................................... 21
Consolidated Statement of Income for the Years Ended
December 31, 1997, 1996 and 1995........................ 22
Consolidated Balance Sheet as of December 31, 1997 and
1996.................................................... 23
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995........................ 24
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995............ 25
Notes to the Consolidated Financial Statements........... 26-39
Quarterly Financial Data--Unaudited...................... 40
C. Exhibits
<CAPTION>
PAGE
----
<C> <S> <C>
3.1 Amended Certificate of Incorporation............... (d)
3.2 By-laws of the Registrant.......................... (a)
4.0 Rights Agreement................................... (f)
9.1 Voting Trust Agreement............................. (b)
9.2 Voting Trust Certificate of Amendment.............. (c)
10.1* Calgon Carbon Corporation Stock Option Plan, as
Amended............................................ (e)
10.3* Officers Incentive Plan of Calgon Carbon
Corporation, as Amended............................ (h)
10.4* 1993 Non-Employee, Directors' Stock Option Plan.... (g)
21.0 The wholly owned subsidiaries of the Company are
Chemviron Carbon GmbH, a German corporation; Calgon
Carbon Canada, Inc., a Canadian corporation;
Chemviron Carbon Ltd., a United Kingdom
corporation; Calgon Carbon Investments Inc., a
Delaware corporation; Solarchem Environmental
Systems Inc., a Nevada corporation; Charcoal Cloth
(International) Limited, a United Kingdom
corporation; Charcoal Cloth Limited, a United
Kingdom corporation; Advanced Separation
Technologies Incorporated, a Florida corporation;
and Calgon Carbon Export Inc., a Barbados
corporation. In addition, the Company owns 60% of
Calgon Far East Co. Ltd., a Japanese corporation.
23.0 Consent of Independent Accountants................. (16)
</TABLE>
Note: The Registrant hereby undertakes to furnish, upon request of the
Commission, copies of all instruments defining the rights of holders of long-
term debt of the Registrant and its consolidated subsidiaries. The total
amount of securities authorized thereunder does not exceed 10% of the total
assets of the Registrant and its subsidiaries on a consolidated basis.
(a) Incorporated herein by reference to Exhibit 3.2 to the Company's
registration statement on Form S-1 (File No. 33-13443) effective June 2,
1987.
(b) Incorporated herein by reference to Exhibit 9.1 to the Company's
registration statement on Form S-1 (File No. 33-13443) effective June 2,
1987.
(c) Incorporated herein by reference to Exhibit 9.2 to the Company's report
on Form 10-K filed for the fiscal year ended December 31, 1987.
(d) Incorporated herein by reference to Exhibit 3.1 to the Company's report
on Form 10-K filed for the fiscal year ended December 31, 1990.
12
<PAGE>
(e) Incorporated herein by reference to Exhibit 10.1 to the Company's report
on Form 10-K filed for the fiscal year ended December 31, 1990.
(f) Incorporated herein by reference to Exhibit 4.0 to the Company's report
on Form 8-A dated February 6, 1995.
(g) Incorporated herein by reference to Exhibit 10.4 to the Company's report
on Form S-8 dated February 16, 1996.
(h) Incorporated herein by reference to Exhibit 10.3 to material appearing
under the heading of "Executive Compensation" in the Company's Proxy
Statement for the 1998 Annual Meeting of its Stockholders.
* Executive compensation plans.
D. Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year ended
December 31, 1997.
13
<PAGE>
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.
Calgon Carbon Corporation
March 16, 1998 /s/ Thomas A. McConomy
- ------------------ By___________________________________
(Date) THOMAS A. MCCONOMY
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 on the dates indicated.
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
/s/ Thomas A. McConomy President, Chief Executive March 16, 1998
- --------------------------- Officer, Director,
THOMAS A. MCCONOMY Chairman of the Board
/s/ Robert W. Cruickshank Director March 16, 1998
- ---------------------------
ROBERT W. CRUICKSHANK
/s/ Arthur L. Goeschel Director March 16, 1998
- ---------------------------
ARTHUR L. GOESCHEL
/s/ Nick H. Prater Director March 16, 1998
- ---------------------------
NICK H. PRATER
/s/ Seth E. Schofield Director March 16, 1998
- ---------------------------
SETH E. SCHOFIELD
/s/ Harry H. Weil Director March 16, 1998
- ---------------------------
HARRY H. WEIL
/s/ Robert L. Yohe Director March 16, 1998
- ---------------------------
ROBERT L. YOHE
</TABLE>
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF
NO. DESCRIPTION FILING
------- ----------- --------------
<C> <S> <C>
3.1 Amended Certificate of Incorporation................. (d)
3.2 By-laws of the Registrant............................ (a)
4.0 Rights Agreement..................................... (f)
9.1 Voting Trust Agreement............................... (b)
9.2 Voting Trust Certificate of Amendment................ (c)
Calgon Carbon Corporation Stock Option Plan, as
10.1* Amended.............................................. (e)
Officers Incentive Plan of Calgon Carbon Corporation,
10.3* as Amended........................................... (h)
10.4* 1993 Non-Employee, Directors' Stock Option Plan...... (g)
21.0 The wholly owned subsidiaries of the Company are
Chemviron Carbon GmbH, a German corporation; Calgon
Carbon Canada, Inc., a Canadian corporation;
Chemviron Carbon Ltd., a United Kingdom corporation;
Calgon Carbon Investments Inc., a Delaware
corporation; Solarchem Environmental Systems Inc., a
Nevada corporation; Charcoal Cloth (International)
Limited, a United Kingdom corporation; Charcoal Cloth
Limited, a United Kingdom corporation; Advanced
Separation Technologies Incorporated, a Florida
corporation; and Calgon Carbon Export Inc., a
Barbados corporation. In addition, the Company owns
60% of Calgon Far East Co. Ltd., a Japanese
corporation.......................................... Filed herewith
23.0 Consent of Independent Accountants................... Filed herewith
</TABLE>
Note: The Registrant hereby undertakes to furnish, upon request of the
Commission, copies of all instruments defining the rights of holders of long-
term debt of the Registrant and its consolidated subsidiaries. The total
amount of securities authorized thereunder does not exceed 10% of the total
assets of the Registrant and its subsidiaries on a consolidated basis.
(a) Incorporated herein by reference to Exhibit 3.2 to the Company's
registration statement on Form S-1 (File No. 33-13443) effective June 2,
1987.
(b) Incorporated herein by reference to Exhibit 9.1 to the Company's
registration statement on Form S-1 (File No. 33-13443) effective June 2,
1987.
(c) Incorporated herein by reference to Exhibit 9.2 to the Company's report
on Form 10-K filed for the fiscal year ended December 31, 1987.
(d) Incorporated herein by reference to Exhibit 3.1 to the Company's report
on Form 10-K filed for the fiscal year ended December 31, 1990.
(e) Incorporated herein by reference to Exhibit 10.1 to the Company's report
on Form 10-K filed for the fiscal year ended December 31, 1990.
(f) Incorporated herein by reference to Exhibit 4.0 to the Company's report
on Form 8-A dated February 6, 1995.
(g) Incorporated herein by reference to Exhibit 10.4 to the Company's report
on Form S-8 dated February 16, 1996.
(h) Incorporated herein by reference to Exhibit 10.3 to the material
appearing under the heading of "Executive Compensation" in the Company's
Proxy Statement for the 1998 Annual Meeting of its Stockholders.
* Executive compensation plans.
15
<PAGE>
Financial
Contents
17
Management's
Discussion
and Analysis
21
Report of
Management
21
Report of Price
Waterhouse LLP
Independent
Accountants
22
Consolidated
Statement
of Income
23
Consolidated
Balance Sheet
24
Consolidated
Statement
of Cash Flows
25
Consolidated
Statement
of Shareholders'
Equity
26
Notes to the
Consolidated
Financial
Statements
40
Six-Year Summary
Selected Financial
and Statistical Data
40
Quarterly
Financial Data--
Unaudited
40
Common Shares
and Market
Information
Management's Discussion and Analysis
Calgon Carbon Corporation
Overview
Industry
Economic conditions continued to be strong in the United States during 1997 and
demand for activated carbon products and services was stable overall. The
European economy started to improve during the year with activated carbon demand
increasing accordingly. In Asia, demand for activated carbon was strong for most
of the year, reflecting robust economic performance until the onset of the
financial crisis during the latter part of the year.
In the United States, capacity utilization of activated carbon was high, and
imports, particularly from the Far East, continued to increase. While price
increases in Europe were marginal, moderate price increases were achieved in the
U.S.
The Company
The Company's business followed the economic patterns established in the
industry with the exception of three noteworthy factors that affected its 1997
results. Revenues include increases from businesses acquired in 1996 and strong
sandwich filter activity in Europe which were partially offset by the non repeat
of prior year initial fills in Europe. The 1996 acquisitions increased the
Company's revenues by approximately 8% while the increase in sandwich filter
performance resulted in an additional 2%.
Excluding the effect of the acquisitions, in the United States volume
increases of approximately 3% were achieved for activated carbon products and
approximately 17% in the equipment business. The service category was flat.
Price increases for activated carbon products represented an increase of 2%.
Also excluding the effect of the acquisitions in Europe, activated carbon
volume decreased slightly due primarily to reduced initial fills, while service
and equipment experienced volume gains of 23% and 33%, respectively.
As a result of these activities, consolidated revenues in 1997 increased by
13% versus 1996.
At the end of 1996, the Company acquired Advanced Separation Technologies
Incorporated (AST). This acquisition did not meet expectations. Three conditions
began to manifest themselves during the second quarter and were magnified as the
year progressed:
. On projects shipped prior to the acquisition, warranty and cost overruns
were encountered, in 1997, due to design and mechanical failures and due to
faulty materials of construction.
. Revenues were lost due to the market's reaction to the above problems.
. The Company also incurred costs to complete projects supposedly completed
before the acquisition.
See Note 2 to the Consolidated Financial Statements for further information
about these problems and the claims made by the Company against the sellers of
AST. The equipment shipped in 1997 does not have the aforementioned problem
design. Actions are currently being taken to resolve the problems and the
Company remains committed to this technology.
The Company continues to focus on achieving its vision, which is to be the
world's leading producer, supplier and designer of innovative technologies,
value-added products and services, specifically developed for the purification,
separation and concentration of liquids and gases.
Beginning in 1997, the Company began using the "Shareholder Value Added"
technique of measuring progress towards its goals. This performance measurement
method compares cash-based operating results to the cost of capital employed to
determine if value is being added to the Company.
Results of Operations
1997 Versus 1996
Consolidated net sales in 1997 increased by $37.3 million or 12.9% versus 1996.
This increase was primarily the combination of increases for carbon, service and
equipment of 2.6%, 12.1% and 99.5%, respectively. Of the total sales increase
for the Company, 61.6% was related to the 1996 acquisition program. By category,
the percentage of the sales increase related to acquisitions was as follows:
carbon (51.2%), service (26.7%) and equipment (76.9%). The remainder of the
increase was the net effect of worldwide volume and price increases partially
offset by the negative effect of the strengthening of the U.S. dollar versus
certain European currencies, which totaled $9.3 million. On a market basis,
sales to the industrial process market increased by $20.8 million or 15.3%. This
increase was related to increases in the food, chemical-pharmaceutical and
original equipment manufacture areas. The improvements in the food and chemical-
pharmaceutical areas were associated with the
17
<PAGE>
Company's Advanced Separation Technologies business, which was acquired at the
end of 1996, while the increase within the original equipment manufacture area
resulted from improvements in the United States home water filter, personnel
protection and gasoline vapor recovery areas. Net sales to the environmental
markets increased by $16.9 million or 12.7%. This increase was due to strong
worldwide municipal activity in the carbon and service categories and gains
associated with the Advanced Oxidation group, another 1996 acquisition. The
consumer charcoal area was down $.5 million or 2.3%.
Gross profit before depreciation as a percentage of net sales was 38.1% in
1997 compared to 37.8% in 1996. This improvement was the result of sales
increases for higher margin products and reduced natural gas prices partially
offset by lower margin equipment sales by the Company's recently acquired
businesses.
Depreciation and amortization increased by $1.4 million due to the net effect
of increased amortization of intangibles (primarily goodwill) associated with
the Company's 1996 acquisitions and depreciation decreases due to an increase in
fully depreciated fixed assets.
Selling, general and administration expenses increased by $5.9 million due
primarily to the 1996 acquisitions.
Research and development expenses, as a percentage of net sales, were 2.5% in
1997 versus 2.2% in 1996. This $1.8 million increase was primarily due to
increases associated with the 1996 acquired businesses which have a higher
expense ratio to sales than the existing activities.
During 1997, interest income decreased and interest expense increased versus
1996 resulting in an increase in net interest costs. These changes were related
to the Company's 1996 acquisition program which reduced investable cash and
increased debt by $60.2 million.
The increase in other (expense) during the year was the combined result of net
foreign exchange transaction losses in 1997, versus gains in 1996, which were
partially offset by reduced taxes, other than income, in 1997 versus the prior
year.
The effective income tax rate was 35.3% in 1997 compared to 36.0% in 1996.
This difference was the net effect of increased benefits associated with foreign
income and favorable difference between the 1996 tax return, as filed, versus
the year-end tax provision, partially offset by an increase in state income
taxes.
1996 Versus 1995
Consolidated net sales in 1996 decreased by $1.7 million or .6% versus 1995.
This decrease was the result of decreases for carbon, equipment and charcoal of
3.9%, 10.7% and 4.4%, respectively, partially offset by an 11.7% increase for
service. The net sales decrease was primarily related to declines in the
European markets resulting from the closure of the Brilon-Wald, Germany plant in
1995 and the strengthening of the U.S. dollar relative to the European
currencies which resulted in a negative effect on revenues of $3.9 million. On a
market basis, sales to the industrial process area decreased by $1.0 million or
.7% and sales of charcoal decreased by $.8 million or 4.4%. Sales to the
environmental category were flat. The reduction in the industrial process
category was the result of increases in the worldwide food category (primarily
sweeteners) and in the United States original equipment manufacturers area which
were more than offset by declines in the worldwide chemical-pharmaceutical
category, the European original equipment manufacturer area and in the domestic
cigarette and worldwide energy categories. The consistent results, year-to-year,
in the environmental area were due to decreases in the European municipal market
and reduced equipment sales in the industrial category offset by sales in the
oxidation technologies business, which was acquired in mid 1996. The consumer
charcoal area decrease was due to unfavorable barbecuing weather conditions in
Germany.
Gross profit before depreciation as a percentage of net sales was 37.8% in
1996 versus 36.9% in 1995. The improvement was the result of increased prices,
sales of higher valued products and reduced manufacturing costs, partially
offset by increased natural gas costs and higher costs for coconut-based
products.
Depreciation increased by $.6 million in 1996 due to normal, ongoing capital
spending.
Selling, general and administration expenses increased by $.1 million in 1996.
This increase was due to increases associated with the aforementioned oxidation
technologies business acquisition partially offset by personnel related
decreases, including
18
<PAGE>
a $.9 million reduction in the provision for the Employee Growth Sharing Plan.
Research and development expenses, as a percentage of sales, were 2.2% in 1996
compared to 1.9% in 1995. The increase of $.9 million resulted from personnel
additions and the new oxidation technologies business.
Interest income increased by $.1 million in 1996 due to improved rates of
return. Interest expense increased in 1996 by $.1 million due to increased debt
incurred in June 1996 to fund the acquisition of the oxidation technologies
business.
Other (expense)--net reported a favorable variation in 1996 of $1.3 million.
This favorable variation was the result of net foreign currency transaction
gains in 1996 versus net foreign currency transaction losses in 1995.
The effective tax rate in 1996 was 36.0% compared to an effective tax rate of
33.8% in 1995. This 2.2 percentage point increase was primarily due to reduced
state income tax benefits and to reduced research and development credits.
Year 2000
The Company is engaged in a program to modernize and replace its computerized
production control and management information systems. Although not the primary
purpose of the program, the new systems are scheduled to be in place by mid-1999
and are expected to be Year 2000 ready. A task force has been established to
identify all other potential areas of risk and to make required modifications as
they relate to business computer systems, technical infrastructure, end user
computing, suppliers and customers and manufacturing systems. Based on
information available at this time, management believes that the incremental
costs associated with achieving Year 2000 compliance will not be material to the
operating results.
Discussion of the Company's efforts and management's expectations relating to
Year 2000 compliance are forward-looking statements. The Company's ability to
achieve Year 2000 compliance and the level of incremental costs associated with
compliance could be adversely impacted by, among other matters, the availability
and cost of programming and testing resources, vendors' ability to modify
software and unanticipated problems identified in the ongoing compliance review.
The Company has little or no control over the actions of the proprietary
software vendors and other entities with which it interacts. Therefore, Year
2000 compliance problems experienced by these entities could adversely affect
the operating results of the Company.
Working Capital and Liquidity
The Company's 1997 operating activities generated $37.5 million in net cash
flows primarily from net earnings before non-cash charges of depreciation and
amortization offset by increased investment in working capital.
During 1997, the Company added a $50.0 million five-year bank credit facility
to provide longer term financing for its 1996 acquisition of Advanced
Separation Technologies Incorporated. This facility was fully utilized at
December 31, 1997. Additionally, $3.0 million of tax exempt industrial revenue
bonds were obtained to finance certain equipment additions at the Company's
Pearl River, Mississippi plant. The Company maintains two 364-day United States
bank credit lines totaling $50.0 million. At December 31, 1997, $44.9 million
was available under these lines. The Company maintains a $14.0 million (25
million deutsche mark) credit facility with a German bank with a duration of
"until further notice." This facility was unused at December 31, 1997. Total
debt as of December 31, 1997 was $81.9 million, reflecting an increase of $11.6
million. As a result of the consolidation of the financial statements of Calgon
Far East Co., Ltd. (CFE) with those of the Company, an additional $7.9 million
of CFE's indebtedness is shown on the Company's consolidated balance sheet. This
consolidation was effective July 1, 1997 upon the Company's increase in
ownership from 50% to 60%.
Net working capital excluding cash and cash equivalents remained unchanged at
$53.2 million at December 31, 1997. Increases in accounts receivable, inventory
and other current assets were offset by increases in accounts payable, accrued
liabilities and currently maturing long-term debt. The impact of foreign
currency translation resulting from the strengthening of the U.S. dollar reduced
working capital by $2.1 million.
It is the intention of the Company to declare and pay quarterly cash dividends
on its common stock. The Company has paid cash dividends
since the third quarter of 1987, the quarter succeeding the one in which the
Company went public. The
19
<PAGE>
declaration and payment of dividends is at the discretion of the Board of
Directors of the Company. Future dividends will depend on the Company's
operating results, financial condition, cash requirements of its business,
future prospects and other factors considered relevant by the Board of
Directors. At the February 1998 Board of Directors meeting, the regular dividend
of $.08 per common share was declared and will be paid on April 1, 1998.
The Company expects that cash from operating activities plus cash balances and
available external financing will be sufficient to fund its operating, dividend
and capital requirements.
Capital Expenditures and Investments
Capital expenditures were $34.4 million in 1997, $14.4 million in 1996 and $12.7
million in 1995. Included in the 1997 spending amount were capacity expansion
and cost reduction projects at the Big Sandy, Kentucky; Pearl River,
Mississippi; and Feluy, Belgium plants in the amounts of $13.2 million, $2.8
million and $3.6 million, respectively, and an improved coal handling system at
the Big Sandy, Kentucky plant in the amount of $7.0 million. The major 1996
spending was associated with capacity expansions at the Big Sandy, Kentucky
plant ($6.0 million) and at the Feluy, Belgium facility ($1.2 million) and for
domestic service customer capital ($2.9 million). Significant 1995 expenditures
were for improvements to one of the Big Sandy, Kentucky production lines ($6.7
million) and for domestic service customer capital ($1.1 million). Capital
expenditures for 1998 are projected to be approximately $28.0 million and are to
include carbon production capacity increases at the Big Sandy, Kentucky and
Feluy, Belgium plants, domestic service customer capital and new computer
hardware and software to operate the Company's corporate-wide business system.
The 1997 purchase of businesses amount of $4.5 million includes an increase to
the purchase price for Advanced Separation Technologies Incorporated (a 1996
acquisition) of $.5 million, cash expended for AST project failures for projects
completed before the acquisition (see Note 2 to the Consolidated Financial
Statements) of $2.7 million, payments of accruals related to the 1996
acquisitions of $.8 million and a net expenditure of $.6 million which increased
the Company's ownership percentage in Calgon Far East Co., Ltd., its Japanese
joint venture. The increased purchase price for AST was due to a higher level of
"Adjusted Closing Net Current Assets" than stated in the purchase agreement. The
increased investment in Calgon Far East Co., Ltd. was effective July 1, 1997 and
increased the Company's ownership of that entity from 50% to 60% giving it a
controlling interest. Cash expended for this increase in ownership was $1.1
million and was partially offset by cash on this entity's July 1, 1997 balance
sheet of $.5 million resulting in a net purchase of business amount of $.6
million.
Prior to the Calgon Far East Co., Ltd. ownership change, the balance sheet and
income statement of this entity were included in the Company's financial
statements under the equity method of accounting. Now, the financial statements
are consolidated into the Company's financial statements recognizing minority
interest on both the balance sheet and income statement.
The information on the 1996 purchase of businesses amount can be found in
Note 2 to the Consolidated Financial Statements.
Market Risk
Commodity Price Risk
In the normal course of its business, the Company is exposed to market risk or
price fluctuations related to the purchase and production of carbon products and
its inventories of carbon products as well as the cost of natural gas used in
the production of its products. The Company obtains competitive prices for its
products and allows operating results to reflect market price movements dictated
by supply and demand where regulated prices do not exist. The Company uses fixed
price contracts to manage a portion of its coal and natural gas commodity price
risk.
Interest Rate Risk
Substantially all current and long-term debt is based on rates that float with
prime rates and the carrying value approximates fair value.
Foreign Currency Exchange Risk
The Company is subject to risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies
20
<PAGE>
other than U.S. dollars. The Company has made limited use of forward currency
contracts to manage these exposures. At December 31, 1997, the fair value of
forward contracts, all of which mature in four months or less, were not
material. These contracts hedge exposures to currency price fluctuations
primarily related to intercompany transactions. Non-derivative financial
instruments subject to foreign exchange exposure are limited to a foreign
currency denominated loan of 14.0 million Canadian dollars as described in Note
7 to the Consolidated Financial Statements.
- -------------------------------------------------------------------------------
Report of
Management
The consolidated financial statements and related notes have been prepared by
management, who are responsible for their integrity and objectivity. The
statements have been prepared in accordance with generally accepted accounting
principles and include amounts based on management judgments and estimates. All
other financial information in this annual report is consistent with that in the
financial statements.
The Company maintains internal accounting control systems that are designed to
provide reasonable assurance that assets are safeguarded, that transactions are
executed in accordance with management's authorization and are properly recorded
and that accounting records are adequate for preparation of financial
statements and other financial information. The design, monitoring and revision
of internal accounting control systems involve management's judgments with
respect to the relative cost and expected benefits of specific control measures.
In addition to the system of internal accounting controls, the Company
maintains guidelines of Company policy emphasizing proper overall business
conduct, possible conflicts of interest, compliance with laws and
confidentiality of proprietary information.
The financial statements have been audited by Price Waterhouse LLP,
independent accountants. Their responsibility is to examine the Company's
financial statements in accordance with generally accepted auditing standards
and to express their opinion with respect to the fairness of presentation of the
statements.
The members of the audit committee of the Board of Directors, none of whom are
employees of the Company, review the services performed by the independent
accountants and receive and review the reports submitted by them. The audit
committee meets several times during the year with management and the
independent accountants to discuss audit activities, internal controls and
financial reporting matters. The independent accountants have full and free
access to the committee.
- -------------------------------------------------------------------------------
Report of Price
Waterhouse LLP
Independent
Accountants
To the Board of Directors and Shareholders of Calgon Carbon Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Calgon
Carbon Corporation (the Company) and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 3, 1998
21
<PAGE>
Consolidated Statement of Income
Calgon Carbon Corporation
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $327,500 $290,196 $291,898
- -----------------------------------------------------------------------------------------------------------------
Cost of products sold (excluding depreciation) 202,629 180,600 184,219
Depreciation and amortization 20,436 19,049 18,450
Selling, general and administrative expenses 56,211 50,277 50,195
Research and development expenses 8,331 6,518 5,593
Restructuring charges 1,532 -- --
- -----------------------------------------------------------------------------------------------------------------
289,139 256,444 258,457
- -----------------------------------------------------------------------------------------------------------------
Income from operations 38,361 33,752 33,441
Interest income 325 1,551 1,474
Interest expense (4,057) (752) (620)
Other (expense)--net (1,440) (742) (2,041)
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 33,189 33,809 32,254
Provision for income taxes 11,716 12,171 10,909
- -----------------------------------------------------------------------------------------------------------------
Income before minority interest 21,473 21,638 21,345
Minority interest 105 -- --
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 21,578 $ 21,638 $ 21,345
- -----------------------------------------------------------------------------------------------------------------
Net income per common share (basic and diluted) $ .54 $ .54 $ .53
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares, in thousands 39,696 40,267 40,419
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
Consolidated Balance Sheet
Calgon Carbon Corporation
<TABLE>
<CAPTION>
December 31
----------------------------
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,982 $ 15,439
Receivables 67,888 59,355
Inventories 50,954 46,471
Other current assets 16,731 13,654
- ----------------------------------------------------------------------------------------
Total current assets 143,555 134,919
Property, plant and equipment, net 188,082 173,564
Intangibles 80,971 72,658
Other assets 10,849 16,110
- ----------------------------------------------------------------------------------------
Total assets $423,457 $397,251
- ----------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt due within one year $ 9,617 $ 4,451
Accounts payable and accrued liabilities 47,563 35,846
Restructuring reserve 6,282 7,847
Payroll and benefits payable 14,252 12,903
Accrued income taxes 4,625 5,202
- ----------------------------------------------------------------------------------------
Total current liabilities 82,339 66,249
Long-term debt 72,297 65,837
Deferred income taxes 38,900 40,522
Other liabilities 6,463 7,748
- ----------------------------------------------------------------------------------------
Total liabilities 199,999 180,356
- ----------------------------------------------------------------------------------------
Minority interest 1,378 --
- ----------------------------------------------------------------------------------------
Commitments and contingencies (Note 17) -- --
- ----------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, $.01 par value, 100,000,000 shares
authorized, 41,503,960 and 41,435,960 shares issued 415 414
Additional paid-in capital 62,868 62,102
Retained earnings 170,974 162,098
Cumulative translation adjustments 7,889 12,347
- ----------------------------------------------------------------------------------------
242,146 236,961
Treasury stock, at cost, 1,761,300 shares (20,066) (20,066)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 222,080 216,895
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 423,457 $397,251
========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
Consolidated Statement of Cash Flows
Calgon Carbon Corporation
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 21,578 $ 21,638 $ 21,345
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,436 19,334 18,527
Employee benefit plan provisions 488 523 448
Changes in assets and liabilities--net of
effects from purchase of businesses and exchange:
(Increase) decrease in receivables (3,264) 3,957 (3,957)
(Increase) in inventories (6,949) (966) (205)
(Increase) decrease in other current assets (2,801) (240) 2,761
(Decrease) in restructuring reserve (544) (3,006) (12,850)
Increase in accounts payable and accruals 6,366 4,933 3,362
Increase in long-term deferred income taxes (net) 3,581 1,919 7,226
Other items--net (1,421) (1,723) (1,051)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,470 46,369 35,606
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of businesses (4,546) (92,633) --
Property, plant and equipment expenditures (34,411) (14,358) (12,676)
Proceeds from disposals of equipment 1,607 1,006 698
- ----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (37,350) (105,985) (11,978)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from borrowings 5,202 56,071 3,999
Treasury stock purchases -- (7,738) --
Common stock dividends (12,697) (12,733) (32,335)
Other 767 116 --
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,728) 35,716 (28,336)
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (849) (750) (579)
- ----------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalents (7,457) (24,650) (5,287)
Cash and cash equivalents, beginning of period 15,439 40,089 45,376
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,982 $ 15,439 $ 40,089
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
Consolidated Statement of Shareholders' Equity
Calgon Carbon Corporation
<TABLE>
<CAPTION>
Common Additional Cumulative
Shares Common Paid-in Retained Translation
(Dollars in thousands) Issued Shares Capital Earnings Adjustments Sub-Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 41,424,960 $ 414 $ 61,986 $164,325 $12,750 $239,475
1995
Net income -- -- -- 21,345 -- 21,345
Common stock dividends
Cash ($.80 per share) -- -- -- (32,335) -- (32,335)
Translation adjustments -- -- -- -- 2,030 2,030
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 41,424,960 414 61,986 153,335 14,780 230,515
- -------------------------------------------------------------------------------------------------------------
1996
Net income -- -- -- 21,638 -- 21,638
Employee stock plans 11,000 -- 116 -- -- 116
Common stock dividends
Cash ($.32 per share) -- -- -- (12,875) -- (12,875)
Translation adjustments -- -- -- -- (2,433) (2,433)
Treasury stock purchased -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 41,435,960 414 62,102 162,098 12,347 236,961
- -------------------------------------------------------------------------------------------------------------
1997
Net income -- -- -- 21,578 -- 21,578
Employee stock plans 68,000 1 766 -- -- 767
Common stock dividends
Cash ($.32 per share) -- -- -- (12,702) -- (12,702)
Translation adjustments -- -- -- -- (4,458) (4,458)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 41,503,960 $ 415 $ 62,868 $170,974 $ 7,889 $242,146
=============================================================================================================
<CAPTION>
Treasury Stock
------------------
(Dollars in thousands) Shares Amount Total
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 1,006,100 $(12,328) $227,147
1995
Net income -- -- 21,345
Common stock dividends
Cash ($.80 per share) -- -- (32,335)
Translation adjustments -- -- 2,030
- ----------------------------------------------------------------------
Balance, December 31, 1995 1,006,100 (12,328) 218,187
- ----------------------------------------------------------------------
1996
Net income -- -- 21,638
Employee stock plans -- -- 116
Common stock dividends
Cash ($.32 per share) -- -- (12,875)
Translation adjustments -- -- (2,433)
Treasury stock purchased 755,200 (7,738) (7,738)
- ----------------------------------------------------------------------
Balance, December 31, 1996 1,761,300 (20,066) 216,895
- ----------------------------------------------------------------------
1997
Net income -- -- 21,578
Employee stock plans -- -- 767
Common stock dividends
Cash ($.32 per share) -- -- (12,702)
Translation adjustments -- -- (4,458)
- ----------------------------------------------------------------------
Balance, December 31, 1997 1,761,300 $(20,066) $222,080
======================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
Notes to the Consolidated Financial Statements
Calgon Carbon Corporation
- --------------------------------------------------------------------------------
1. Statement
of Accounting
Policies
Operations
The Company's operations are principally conducted in one business segment, the
production, design and marketing of products and services specifically developed
for the purification, separation and concentration of liquids and gases. The
Company's markets are primarily in the United States and in Europe.
Principles of Consolidation
The consolidated financial statements include the accounts of Calgon Carbon
Corporation and its wholly owned subsidiaries, Chemviron Carbon GmbH, Calgon
Carbon Canada, Inc., Chemviron Carbon Ltd., Calgon Carbon Investments Inc.,
Solarchem Environmental Systems Inc., Charcoal Cloth (International) Limited,
Charcoal Cloth Limited, Advanced Separation Technologies Incorporated and the
Company's foreign sales corporation. A portion of the Company's international
operations in Europe are owned directly by the Company and are operated as
branches. During 1997, the Company increased its investment in Calgon Far East
Co., Ltd. from 50% to 60% and accordingly changed its accounting treatment from
the equity method to the consolidation method. Consolidation of less than 100%
owned entities results in recording and presentation of minority interest.
Intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
Substantially all assets and liabilities of the Company's international
operations are translated at year-end exchange rates; income and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments are accumulated in a separate component of shareholders' equity, net
of tax effects. Transaction gains and losses are included in income.
Revenue Recognition
Revenue and related costs are recognized when goods are shipped or services are
rendered to customers except for major equipment projects where revenues are
recognized under the percentage of completion method.
Inventories
Inventories are carried at the lower of cost or market. Inventory costs are
primarily determined using the last in, first out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment expenditures are recorded at cost. Repair and
maintenance costs are expensed as incurred. Depreciation for financial statement
purposes is computed on the straight-line method over the estimated service
lives of the assets, which are from twenty to thirty years for buildings and
land improvements, fifteen years for machinery and equipment and seven years for
furniture and vehicles.
Intangibles Resulting from Business Acquisitions
Intangible assets resulting from business acquisitions principally consist of
the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill is amortized on a straight-line basis
over 40 years. Other intangible assets are amortized on a straight-line basis
over their estimated useful lives.
Long-Lived Assets
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,"
requires that long-lived assets, including goodwill, be reviewed for impairment
and written down to fair value whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company adopted this statement upon its issuance and determined that no
impairment loss need be recognized for applicable assets of continuing
operations.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
Pensions
Substantially all U.S. employees of the Company are covered by one of three non-
contributory defined benefit pension plans. It is the Company's policy to
annually fund net pension cost accrued to these plans, subject to minimum and
maximum amounts specified by regulations. In Europe, employees are also covered
by various defined benefit pension plans or government sponsored defined
contribution plans. The Company funds these plans according to local laws and
practices.
26
<PAGE>
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per common share is computed by dividing net income by the weighted
average number of common shares outstanding plus all dilutive potential common
shares outstanding during the period. Dilutive common shares are determined
using the treasury stock method. Under the treasury stock method, exercise of
options are assumed at the beginning of the period when the average stock price
during the period exceeds the exercise price of outstanding options, and common
shares are assumed issued. The proceeds from exercise are assumed to be used to
purchase common stock at the average market price during the period. The
incremental shares to be issued are considered to be the dilutive potential
common shares outstanding.
Statement of Cash Flows
For the purpose of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
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.
- --------------------------------------------------------------------------------
2. Acquisitions
In February 1996, the Company acquired the business and operating assets of the
perox-pure(TM) operations of Vulcan Peroxidation Systems, Inc. The purchase
provided the Company with entry into the oxidative water treatment market. The
technology is complementary to the Company's existing carbon adsorption service.
The business had equipment assembly and office facilities in Tucson, Arizona.
(During the latter part of 1997, this location was closed and its activities
were consolidated at the Markham, Ontario, Canada location).
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements from February 20, 1996, the effective date
of the acquisition. The cost was approximately $7,528,000 in cash.
In June 1996, Calgon Carbon Canada, Inc. acquired the common stock of
Solarchem Enterprises Inc. This purchase, along with the perox-pure(TM)
purchase, broadened the Company's coverage in the oxidative water treatment
market. This business has assembly, research and office space in Markham,
Ontario, Canada.
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements from June 3, 1996, the effective date of
the acquisition. The cost was $10,998,000 in cash.
In December 1996, Chemviron Carbon Ltd. acquired the common stock of Charcoal
Cloth (International) Limited and Charcoal Cloth Limited from CCL Holdings
Limited. The acquired companies, with manufacturing and office facilities, are
near Newcastle, England and produce activated carbon in cloth form for odor
control in medical and industrial applications. The textile properties are
suitable for applications where granular activated carbon is not feasible.
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements effective December 30, 1996. The cost was
approximately $4,114,000 in cash.
On December 31, 1996, the Company purchased the common stock of Advanced
Separation Technologies Incorporated (AST) from Progress Capital Holdings, Inc.
and Potomac Capital Investment Corporation. AST is headquartered in Lakeland,
Florida, where there are equipment assembly, research and office facilities. AST
designs and assembles proprietary separation equipment that employs continuous
ion exchange and continuous chromatography technologies. AST serves both the
industrial process and environmental markets worldwide and is a leader in
supplying separation systems to the lysine and corn syrup industries.
The acquisition was accounted for by the purchase method and is included in
the consolidated financial statements effective December 31, 1996. The cost was
$71,262,000 in cash.
27
<PAGE>
Application of purchase accounting to the acquisitions at December 31, 1997
resulted in recognization of goodwill of $69,313,000 and other intangible
assets of $3,907,000.
During 1997, at AST, the Company recognized additional costs, primarily
related to design and mechanical failures on projects which were represented to
be substantially complete as of December 31, 1996. A significant portion of
these costs were related to design and/or other defects on critical components
which the Company believes were known to the AST management and its owners as of
December 31, 1996. The net additional estimated cost incurred and accrued as of
December 31, 1997 on these projects of $9.7 million has been considered as
additional acquisition costs and accordingly goodwill has been increased to
reflect these costs.
On January 12, 1998, the Company filed a claim for unspecified damages in the
United States District Court in the Western District of Pennsylvania alleging
among other things that Progress Capital Holdings and Potomac Capital Investment
Corporation materially breached various AST financial and operational
representations and warranties included in the Stock Purchase Agreement. Based
upon information obtained throughout 1997, the Company believes that it has a
reasonable basis for this claim and intends to vigorously pursue reimbursement
for damages sustained. Neither the Company nor its counsel can predict with
certainty the amount, if any, of recovery that will be obtained from the
defendants in this matter. Accordingly, the Company has not recorded a
receivable for this gain contingency pending further developments in the
litigation.
Except for the acquisition of AST, the results of operations on a pro forma
basis for the Company's other acquisitions are not presented as the effects are
not material to the consolidated financial statements individually or in the
aggregate.
Unaudited pro forma results of operations for the years ended December 31,
1996 and 1995 included in the 1996 Notes to the Consolidated Financial
Statements of the Company reflected net income of $21,411,000 or $.53 per share
(on net sales of $317,514,000) and $19,796,000 or $.49 per share (on net sales
of $313,374,000), respectively. These amounts assumed the AST acquisition
occurred on January 1, 1995. Assuming that the entire $9,700,000 referred to
above should have been reflected in the 1996 AST historical financial statements
(which has not yet been finally determined), pro forma net income for the year
ended December 31, 1996 would have been approximately $15,100,000.
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been combined
during the entire period presented and is not intended to be a projection of
future results.
- --------------------------------------------------------------------------------
3. Restructuring
Charges
During the fourth quarter of 1997, the Company initiated a plan to consolidate
the manufacturing operations and research activities of its Advanced Oxidation
Technologies unit in Tucson, Arizona to its Markham, Ontario, Canada site. The
Company recorded a restructuring charge of $1,532,000. This charge included
writeoffs of fixed assets and inventory, closing of a facility and employee
termination costs.
In 1994, the Company recorded a restructuring charge which included costs
associated with the closing of the Brilon-Wald, Germany plant. As of December
31, 1997, the only incomplete aspect of that plan is the demolition of that
plant as discussions continue with parties interested in purchasing the plant.
The reserve balance for demolition, disposition and environmental costs totaled
$6,282,000 at December 31, 1997 and $7,847,000 at December 31, 1996.
28
<PAGE>
- ------------------------------------------------------------------------------
4. Inventories
<TABLE>
<CAPTION>
December 31
-----------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $12,566 $16,122
Finished goods 38,388 30,349
- ------------------------------------------------------------------------------
Total $50,954 $46,471
==============================================================================
</TABLE>
Approximately 76% and 74% of total inventories at December 31, 1997 and 1996,
respectively, are valued using the LIFO method. The LIFO carrying value of
inventories exceeded the related current cost by $4,401,000 and $3,473,000 at
December 31, 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
5. Property, Plant
and Equipment
<TABLE>
<CAPTION>
December 31
----------------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 13,074 $ 12,744
Buildings 22,324 21,823
Machinery and equipment 292,906 266,748
Furniture and vehicles 11,016 8,592
- ------------------------------------------------------------------------------
$ 339,320 $ 309,907
Less accumulated depreciation (151,238) (136,343)
- ------------------------------------------------------------------------------
Net $ 188,082 $ 173,564
==============================================================================
</TABLE>
- ------------------------------------------------------------------------------
6. Intangibles
The following summarizes intangible assets, net of accumulated amortization of
$2,360,000 and $250,000 at December 31, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
December 31
--------------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $77,122 $68,663
Other 3,849 3,995
- ------------------------------------------------------------------------------
Total $80,971 $72,658
==============================================================================
</TABLE>
- ------------------------------------------------------------------------------
7. Long-Term
Debt
<TABLE>
<CAPTION>
December 31
--------------------
(Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
United States credit facilities $55,100 $50,000
Term loan 9,789 10,220
Pollution control debt and Industrial revenue bonds 8,342 5,569
German credit facility -- 3,862
Other 8,683 637
- ------------------------------------------------------------------------------
Total $81,914 $70,288
Less current maturities of long-term debt (9,617) (4,451)
- ------------------------------------------------------------------------------
Net $72,297 $65,837
==============================================================================
</TABLE>
United States Credit Facilities
The United States credit facilities, which total $100 million, are comprised of
a five-year unsecured $50-million, multi-bank credit facility expiring March
2002 and two 364-day unsecured credit lines totaling $50 million expiring April
and May 1998. Annual facility fees are paid on each of the lines. Availability
under these credit facilities at
29
<PAGE>
December 31, 1997 was $44.9 million. Interest rates are based upon the bank's
prime rate with other interest rate options available. The weighted average
interest rate on the loans outstanding was 6.0%.
Term Loan
In June 1996, the Company entered into a five-year unsecured $9,789,000 (14
million Canadian dollars) term loan with a Canadian bank. Interest rates are
based upon the bank's Prime Rate or a Bankers Acceptance Rate. As of December
31, 1997, the interest rate was 5.1%.
Pollution Control Debt and Industrial Revenue Bonds
The City of Ashland, Kentucky Floating Rate Pollution Control Revenue bonds
totaling $5.1 million bear interest at a defined floating rate and are due
October 1, 2006. As of December 31, 1997, the interest rate was 4.4%. These
pollution control bonds are secured by certain pollution control assets located
at the Company's Big Sandy, Kentucky plant.
In June 1997, the Company obtained $3.0 million of tax-exempt Industrial
Revenue Bonds to finance certain equipment acquisitions at the Company's Pearl
River, Mississippi plant. The bonds bear interest at a floating rate and mature
in May 2009. The interest rate as of December 31, 1997 was 4.4%.
The German pollution control loans consist of two loans, due in 1998 through
2000 and have fixed interest rates of up to 6.5%.
German Credit Facility
The Company maintains a bank credit facility in Germany which provides for
borrowings up to $14 million (25 million deutsche mark). The facility has no set
maturity date and is made available on an "until further notice" basis. No
commitment fee is required on the unused portion of the credit line. Loans bear
interest at the German Bank Rate with other interest options available.
Other
Other consists of foreign borrowings at various interest rates of up to 10.3%
and maturities through 2007. The weighted average interest rate was 2.9% at
December 31, 1997.
Restrictive Covenants
The United States credit facilities' covenants impose financial restrictions on
the Company, including maintaining certain ratios of debt to capital and
operating income to interest expense. At December 31, 1997, the Company was in
compliance with all financial covenants relating to the credit facilities in the
United States.
The German credit facility and the term loan have no financial covenants.
Fair Value of Long-Term Debt
Substantially all long-term debt is based on rates that float with prime rates
and the carrying value approximates fair value.
Maturities of Debt
The Company is obligated to make principal payments on debt outstanding at
December 31, 1997 of $9,617,000 in 1998, $903,000 in 1999, $788,000 in 2000,
$10,535,000 in 2001 and $50,826,000 in 2002.
- -------------------------------------------------------------------------------
8. Lease
Commitments
The Company has entered into leases covering principally office, research and
warehouse space, office equipment and vehicles.
Future minimum rental payments required under all operating leases that have
remaining noncancelable lease terms in excess of one year are $7,166,000 in
1998, $6,219,000 in 1999, $4,999,000 in 2000, $4,219,000 in 2001, $3,840,000 in
2002 and $13,601,000 thereafter.
Total rental expenses on all operating leases were $7,195,000, $7,136,000 and
$6,829,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
- -------------------------------------------------------------------------------
9. Shareholders'
Equity
On July 13, 1993, the Board of Directors authorized the Company to purchase up
to two million shares, or approximately 5% of its common stock. Purchases have
been made from time to time and the repurchased shares are held as treasury
stock. No shares were purchased during 1997. During 1996, 755,200 shares were
purchased at a cost of $7,738,000. As of December 31, 1997, the Company had
purchased 1,761,300 shares of its common stock at an aggregate cost of
$20,066,000.
30
<PAGE>
The Board of Directors adopted a Stockholder Rights Plan in January 1995
designed to guard against (1) coercive and abusive tactics that might be used in
an attempt to gain control of the Company without paying all stockholders a fair
price for their shares or (2) the accumulation of a substantial block of stock
without Board approval. The Rights Plan will not prevent takeovers, but is
designed to encourage anyone attempting to acquire the Company to first
negotiate with the Board. The Plan awards one Right for each outstanding share
of common stock held by stockholders of record on February 14, 1995 and
thereafter. Each right entitles the holder to purchase from the Company one one-
hundredth of a share of Calgon Carbon common stock at a purchase price of $50
per share. The Rights will be exercisable only if a person or group acquires
beneficial ownership of 20% or more of the Company's outstanding common stock.
If one of those events occurs, each stockholder (with the exception of the
person or group who owns 20% or more of the outstanding stock) can exchange the
rights for shares with a market value equal to the then-current exercise price
or three shares, whichever has the greater value.
- -------------------------------------------------------------------------------
10. Stock
Compensation
Plans
At December 31, 1997, the Company has two stock-based compensation plans that
are described below.
Fixed Stock Option Plan
The Company has an Employee Stock Option Plan for officers and other key
employees of the Company. Stock options may be "nonstatutory," with a purchase
price not less than 80% of fair market value on the date of the grant, or
"incentive" with a purchase price of not less than 100% of the fair market value
on that date. Stock appreciation rights may be granted at date of option grant
or at any later date during the term of the option.
"Incentive" stock options granted since 1986 become exercisable no less than
six months after the date of grant primarily in five equal annual installments
and are no longer exercisable after the expiration of eight years from the date
of grant.
A summary of the Plan activity for the years ended December 31, 1997, 1996
and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 764,000 $11.45 767,000 $ 11.36 62,000 $20.24
Granted 60,000 13.69 68,000 12.06 755,000 10.57
Exercised (68,000) 11.27 (11,000) 10.50 -- --
Canceled (49,500) 18.13 (60,000) 11.05 (50,000) 10.50
Outstanding at end of year 706,500 11.19 764,000 11.45 767,000 11.36
Options exercisable at year end 251,600 185,500 43,600
Weighted-average fair value of
options granted during the year $2.49 $ 3.41 $ 3.42
===================================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12-31-97 Contractual Life Exercise Price at 12-31-97 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.50 to $21.88 706,500 5.2 Years $ 11.19 251,600 $ 11.29
===================================================================================================================================
</TABLE>
31
<PAGE>
Performance Based Stock Option Plan
The Company also has a Non-Employee Directors' Stock Option Plan for outside
directors. The aggregate number of shares that may be issued under the plan is
100,000. If the Company's "Income From Operations" in the applicable fiscal year
is greater than the "Income From Operations" of the previous year, options
granted in the current year vest. These stock options are no longer exercisable
after expiration of ten years from the date of grant.
A summary of the Plan activity for the years ended December 31, 1997, 1996
and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 16,100 $15.50 8,000 $ 15.50 6,500 $15.50
Granted 8,400 15.50 8,100 15.50 8,000 15.50
Canceled (1,300) 15.50 -- -- (6,500) 15.50
Outstanding at end of year 23,200 15.50 16,100 15.50 8,000 15.50
Options exercisable at year end 14,800 8,000 --
Weighted-average fair value of
options granted during the year $2.25 $ 2.82 $ 2.86
===================================================================================================================================
</TABLE>
No options were vested for 1997.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise Price at 12-31-97 Contractual Life Exercise Price at 12-31-97 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$15.50 23,200 6.1 Years $ 15.50 14,800 $ 15.50
===================================================================================================================================
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized for these plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans, the Company's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $21,578 $21,638 $21,345
Pro forma $21,311 $21,317 $21,084
Net income per common share
(basic and diluted) As reported $ .54 $ .54 $ .53
Pro forma $ .54 $ .53 $ .52
========================================================================================================
</TABLE>
32
<PAGE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.98% 2.67% 2.67%
Risk-free interest rates 6.13%-6.81% 5.10%-6.60% 6.10%-6.80%
Expected volatility 23%-27% 29%-32% 35%
Expected lives of options 3-5 years 5 years 3-5 years
</TABLE>
- --------------------------------------------------------------------------------
11. Employee
Growth
Sharing Plan
Under the Plan, an employee growth sharing plan pool is calculated as a
percentage of the increase in year-to-year pre-tax income. All full-time
employees not included in any other incentive compensation plan of the Company
are eligible. This plan pool may be adjusted by the Board of Directors at its
sole discretion in any plan year in order to reflect any material events that
would impact the calculation in either a positive or negative manner. No awards
were made under the plan for 1997. The pools for distribution for the years
ended December 31, 1996 and December 31, 1995 were $143,000 and $1,009,000,
respectively.
- --------------------------------------------------------------------------------
12. Pensions
The Company has three non-contributory defined benefit pension plans for its
U.S. employees which provide benefits based upon the greater of a fixed rate per
month or a percentage of average compensation. Prior service and compensation of
employees formerly covered by pension plans of the previous owners of the
Company's operations are considered in the determination of benefits payable
under Company plans. By agreement with previous owners, benefits payable under
Company plans are reduced by the benefit amounts attributable to the previous
owners which are computed utilizing a 2.5% compensation increase assumption.
Domestic plan assets are invested primarily in commingled equity and bond
trust funds administered by a bank. Prior service cost for all plans is
amortized on a straight-line basis over the remaining average service period of
employees expected to receive benefits under the plans. For U.S. plans, net
pension costs, amounts recognized in the balance sheet and significant
assumptions are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 2,192 $ 1,939 $ 1,332
Interest cost on projected benefit obligation 2,821 2,442 1,822
Net amortization 239 242 222
- -------------------------------------------------------------------------------------------------------
5,252 4,623 3,376
- -------------------------------------------------------------------------------------------------------
Return on plan assets:
Actual (return) (7,115) (4,291) (5,126)
Amount deferred 4,462 2,049 3,688
- -------------------------------------------------------------------------------------------------------
Recognized return on plan assets (2,653) (2,242) (1,438)
- -------------------------------------------------------------------------------------------------------
Net pension cost for the period $ 2,599 $ 2,381 $ 1,938
=======================================================================================================
Discount rate 7.75% 7.25% 8.25%
Long-term rate of return on assets 9.00% 9.00% 8.50%
- -------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
December 31
-----------------------------
(Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $ 20,397 $ 14,422
Nonvested benefits 4,593 3,832
- -------------------------------------------------------------------------------------------------------
Accumulated benefit obligations $ 24,990 $18,254
=======================================================================================================
Projected benefit obligation $ 43,258 $ 32,584
Plan assets at fair value (37,112) (29,271)
- -------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets $ 6,146 $ 3,313
Unrecognized net (loss) gain from past experience
different from assumed (262) 1,462
Prior service cost not yet recognized in net periodic pension cost (2,719) (2,958)
- -------------------------------------------------------------------------------------------------------
Pension liability included in the balance sheet $ 3,165 $ 1,817
=======================================================================================================
Discount rate 7.25% 7.75%
Rate of increase in compensation levels 4.00% 4.00%
- -------------------------------------------------------------------------------------------------------
</TABLE>
There are several defined benefit plans covering certain employees of Chemviron
Carbon GmbH for which the obligations are accrued but not funded in accordance
with local practice. Benefits under these plans are generally based on a
percentage of average compensation.
The European employees in the branches and United Kingdom subsidiary
participate in certain contributory defined benefit pension plans which
guarantee a pension over the state pension level. These plans are funded by
employee contributions calculated as a percentage of their compensation with the
balance of the plan funding provided by Company contributions. Funds are managed
by an insurance company under a deposit administration contract. Benefits under
these plans are generally based upon a percentage of final earnings subject to
an upper earnings limit.
For European plans, net pension costs, amounts recognized in the balance sheet
and significant assumptions are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 621 $ 639 $ 678
Interest cost on projected benefit obligation 895 905 937
Net amortization 10 -- 36
- -------------------------------------------------------------------------------------------------------
1,526 1,544 1,651
- -------------------------------------------------------------------------------------------------------
Return on plan assets:
Actual (return) (562) (321) (282)
Amount deferred 224 3 (33)
- -------------------------------------------------------------------------------------------------------
Recognized return on plan assets (338) (318) (315)
- -------------------------------------------------------------------------------------------------------
Net pension cost for the period $ 1,188 $ 1,226 $ 1,336
- -------------------------------------------------------------------------------------------------------
Discount rate 6.5-7.8% 7.0-7.8% 7.5-9.0%
Long-term rate of return on assets 6.5-8.3% 7.0-7.8% 7.0-7.8%
- -------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
In addition to the above pension cost for the year ended December 31, 1995,
the Company recognized $268,000 for pension curtailment gains associated with
employee terminations in Germany related to the Brilon-Wald plant shut down in
1995.
<TABLE>
<CAPTION>
December 31
-----------------------------
(Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $10,385 $ 9,902
Nonvested benefits 493 397
- -------------------------------------------------------------------------------------------------------
Accumulated benefit obligations $10,878 $10,299
=======================================================================================================
Projected benefit obligation $13,789 $13,698
Plan assets at fair value (5,548) (4,842)
- -------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets $ 8,241 $ 8,856
Unrecognized net (loss) gain from past
experience different from assumed (25) 214
Unrecognized net transition obligation,
net of amortization (575) (694)
- -------------------------------------------------------------------------------------------------------
Pension liability included in the balance sheet $ 7,641 $ 8,376
=======================================================================================================
Discount rate 6.0-6.5% 6.5-7.8%
Rate of increase in compensation levels 3.0-4.0% 4.0-5.0%
- -------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
13. Provision for
Income Taxes
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 5,773 $ 8,376 $ 3,004
State and local 972 442 (58)
Foreign 1,824 2,252 54
- -------------------------------------------------------------------------------------------------------
8,569 11,070 3,000
- -------------------------------------------------------------------------------------------------------
Deferred
Federal 818 445 6,880
State and local 175 (972) (948)
Foreign 2,154 1,628 1,977
- -------------------------------------------------------------------------------------------------------
3,147 1,101 7,909
- -------------------------------------------------------------------------------------------------------
Provision for income taxes $11,716 $12,171 $10,909
=======================================================================================================
</TABLE>
35
<PAGE>
Income before income taxes for 1997, 1996 and 1995 includes $9,532,000,
$9,559,000 and $7,846,000, respectively, generated by operations outside the
United States.
The difference between the U.S. federal statutory tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 2.2 (1.0) (2.0)
Higher tax (benefit) rate on foreign income (loss) (.9) 2.4 3.9
Other--net (1.0) (.4) (3.1)
- ------------------------------------------------------------------------------------------
Effective income tax rate 35.3% 36.0% 33.8%
==========================================================================================
</TABLE>
The Company has the following operating loss and tax credit carryforwards
as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Type Amount Expiration Date
<S> <C> <C>
- -------------------------------------------------------------------------------
Operating loss carryforwards--foreign $25,755 None
Operating loss carryforwards--foreign $ 343 2002-2004
Tax credit carryforwards $ 584 1998-2007
===============================================================================
</TABLE>
The Company's U.S. income tax returns have been examined by the Internal Revenue
Service through 1993. Management believes that adequate provisions for taxes
have been made through December 31, 1997.
The components of deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
(Thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Foreign tax loss and credit carryforwards $11,520 $13,979
U.S. tax benefits on deferred foreign income 1,134 2,252
Accruals 6,795 7,089
Intangibles -- 1,156
Pensions 951 1,513
Organization costs 664 663
Other 203 106
- -------------------------------------------------------------------------------
Total deferred tax assets $21,267 $26,758
===============================================================================
Deferred tax liabilities
Property, plant and equipment $37,060 $37,560
U.S. liability on German deferred tax assets 7,438 9,348
Cumulative translation adjustment 4,249 6,649
Inventories 1,061 1,761
Intangibles 472 --
Other 1,024 295
- -------------------------------------------------------------------------------
Total deferred tax liabilities $51,304 $55,613
===============================================================================
</TABLE>
36
<PAGE>
- -------------------------------------------------------------------------------
14. Other
Information
Repair and maintenance expenses were $19,778,000, $19,695,000 and $19,330,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Other (expense)--net includes net foreign currency transaction losses of
($238,000) and ($358,000) for the years ended December 31, 1997 and 1995,
respectively, and gains of $1,002,000 for the year ended December 31, 1996. Also
included are taxes other than on income of ($691,000), ($1,152,000) and
($1,162,000) for the years ended December 31, 1997, 1996 and 1995, respectively.
Deferred taxes included in the translation adjustments for 1997, 1996 and
1995 were ($2,449,000), ($1,309,000) and $1,093,000, respectively.
- -------------------------------------------------------------------------------
15. Supplemental
Cash Flow
Information
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for
Interest $ 3,768 $ 768 $ 918
Income taxes (net of refunds) $ 9,267 $ 5,290 $ 802
- ------------------------------------------------------------------------------
Bank debt
Borrowings $ 19,584 $ 79,660 $ 38,300
Repayments (14,382) (23,589) (34,301)
- ------------------------------------------------------------------------------
Net proceeds from borrowings $ 5,202 $ 56,071 $ 3,999
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
16. Geographic
Information
Net sales by the Company's operations in certain geographic areas, transfers
between geographic areas and income from operations for 1997, 1996 and 1995 and
identifiable assets, at the end of each year, classified by major geographic
areas in which the Company operates, were as follows:
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers
U.S. $227,230 $192,817 $182,414
Europe 100,270 97,379 109,484
- ----------------------------------------------------------------------------------
$327,500 $290,196 $291,898
==================================================================================
Transfers between areas
U.S. $ 12,867 $ 11,231 $ 9,340
Europe 8,225 10,394 6,958
- ----------------------------------------------------------------------------------
$ 21,092 $ 21,625 $ 16,298
==================================================================================
Income from operations
U.S. $ 32,170 $ 29,709 $ 27,714
Europe 7,979 6,024 7,011
Eliminations (1,788) (1,981) (1,284)
- ----------------------------------------------------------------------------------
$ 38,361 $ 33,752 $ 33,441
==================================================================================
Identifiable assets, end of year
U.S. $331,668 $294,368 $229,740
Europe 93,275 104,587 109,234
Eliminations (1,486) (1,704) (973)
- ----------------------------------------------------------------------------------
$423,457 $397,251 $338,001
==================================================================================
</TABLE>
Transfers between geographic areas are at prices in excess of cost and the
resultant income is assigned to the geographic area of manufacture. Interarea
income remaining in inventories is eliminated in consolidation.
37
<PAGE>
17. Litigation
The Company is a party to an action, Powell Duffryn Terminals, Inc. et al. v.
Calgon Carbon Corporation and Rayonier, Inc. CV 497-080 (U.S.D.C. S.D. Ga.),
filed in April 1997, by Powell Duffryn Terminals, Inc. ("Powell Duffryn") and
sixteen of its insurance carriers. Plaintiffs seek indemnity, contribution and
damages as a result of a fire and explosion that occurred on April 10, 1995 at
Powell Duffryn's Savannah, Georgia chemical storage facility. Plaintiffs seek to
recover all or part of an amount in excess of $57 million paid to resolve claims
by third parties and to remediate Powell Duffryn's property and adjoining lands
as a result of the fire and approximately $5.5 million allegedly paid by Powell
Duffryn's first-party insurer Industrial Risk Insurers ("IRI") for Powell
Duffryn's property damage and business interruption claims.
Plaintiffs contend that the fire was caused as a result of an exothermic
reaction occurring in a Calgon Carbon Corporation VentSorb containing BPL
activated carbon that Powell Duffryn had connected to three tanks containing
flammable Crude Sulfate Turpentine ("CST") in order to control odors. Plaintiffs
contend that the Company failed to warn of the potential for a fire from the use
of VentSorbs containing activated carbon. Plaintiffs also seek to hold the
Company liable for alleged negligent misrepresentation or negligent
dissemination of business information.
The Company denies Plaintiffs' allegations. The Company intends to defend
this matter vigorously. The Company is not able to predict at this time the
likelihood of, or range of, any adverse outcome or the amount of damages which
may be awarded against the Company.
On August 26, 1997, Plaintiffs' counsel made a demand for damages under
O.C.G.A. (S) 51-12-14 for $35 million which encompassed all claims raised by
Plaintiffs in the action. The Company rejected this demand.
The Company has $40 million in excess third-party insurance coverage. The
Company and its insurers are currently discussing whether certain "pollution"
exclusion clauses in the Company's policies are applicable to all of the claims
raised by Plaintiffs. To date, the Company has been unable to ascertain specific
damages claimed for "pollution" related damages and "non-pollution" related
damages. The Company is also presently investigating whether it has a right of
recovery from other parties for any damages it may incur in the action brought
against it. At this time, the Company is not able to predict the likelihood of,
or range of, a favorable outcome with regard to any insurance coverage or other
claims which the Company may have in the event that it is found liable for
damages.
38
<PAGE>
- -------------------------------------------------------------------------------
18. Basic and
Diluted
Net Income
Per Common
Share
Computation of basic and diluted net income per common share is performed as
follows:
<TABLE>
<CAPTION>
For the Year Ended 1997 For the Year Ended 1996 For the Year Ended 1995
------------------------ ------------------------ ------------------------
Income Shares Income Shares Income Shares
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Net Income
Per Common Share
Income available to
common stockholders $21,578 39,696,008 $21,638 40,266,971 $21,345 40,418,860
Effect of Dilutive Securities
Options 88,911 71,616 62,447
Diluted Net Income
Per Common Share
Income available to common
stockholders plus
assumed conversion $21,578 39,784,919 $21,638 40,338,587 $21,345 40,481,307
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Net Income
Per Common Share $ .54 $ .54 $ .53
Diluted Net Income
Per Common Share $ .54 $ .54 $ .53
====================================================================================================================================
</TABLE>
As of December 31, 1997, there were 729,700 options outstanding with exercise
prices ranging from $10.50 to $21.88 per share. The diluted earnings per share
calculation only included those with an exercise price range of between $10.50
and $13.13 depending on the average stock prices during the period. For the year
ended December 31, 1996, options outstanding of 780,100 had an exercise price
range from $10.50 to $23.13 per share. The diluted earnings per share
calculation included those with an exercise price range of between $10.50 and
$11.38. For the year ended December 31, 1995, there were 775,000 options
outstanding with an exercise price range of between $10.50 and $23.13 per share.
The diluted earnings per share calculation included those with an exercise price
range of between $10.50 and $11.38 per share.
- --------------------------------------------------------------------------------
Forward-Looking
Information Safe
Harbor
This Annual Report contains historical information and forward-looking
statements. Statements looking forward in time, including statements regarding
future growth and profitability, price increases, cost savings, broader product
lines, enhanced competitive posture and acquisitions, are included in this
Annual Report pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from any future performance suggested herein. Further,
the Company operates in an industry sector where securities values may be
volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided in
this Annual Report, please refer to the discussions of risk factors detailed in,
as well as the other information contained in, this Annual Report and the
Company's filings with the Securities and Exchange Commission.
39
<PAGE>
Six-Year Summary Selected Financial and Statistical Data
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------
(Thousands except per share data) 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $327,500 $290,196 $291,898 $274,244 $269,424 $298,371
Income (loss) from operations $ 38,361 $ 33,752 $ 33,441 $(16,727) $ 33,015 $ 46,653
Interest expense $ 4,057 $ 752 $ 620 $ 752 $ 984 $ 1,347
Net income (loss) (a)(b) $ 21,578 $ 21,638 $ 21,345 $ (8,609) $ 19,153 $ 17,983
Percent of pre-tax income (loss) to sales 10.1% 11.7% 11.0% (6.8)% 11.4% 14.7%
Net income (loss) per common share--basic (a)(b) $ .54 $ .54 $ .53 $ (.21) $ .47 $ .44
Net income (loss) per common share--diluted (a)(b) $ .54 $ .54 $ .53 $ (.21) $ .46 $ .43
Dividends declared per common share $ .32 $ .32 $ .80 $ .16 $ .16 $ .16
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at year end):
Working capital $ 61,216 $ 68,670 $ 84,584 $ 83,279 $ 94,664 $ 74,659
Total assets $423,457 $397,251 $338,001 $343,484 $337,329 $334,518
Long-term debt $ 72,297 $ 65,837 $ 5,608 $ 6,401 $ 6,477 $ 6,797
Treasury stock, at cost $ 20,066 $ 20,066 $ 12,328 $ 12,328 $ 1,615 --
- ------------------------------------------------------------------------------------------------------------------------------------
Other Selected Data (at year end):
Return (loss) on average shareholders' equity 10% 10% 10% (4)% 8% 8%
Ratio of total debt to total capitalization 27% 24% 6% 4 % 4% 5%
Current ratio 174% 204% 233% 226 % 347% 266%
Effective tax rate 35.3% 36.0% 33.8% (53.7)% 37.8% 34.9%
Treasury stock 1,761 1,761 1,006 1,006 154 --
Shares outstanding 39,743 39,675 40,419 40,419 40,949 40,904
Book value per outstanding common share $ 5.59 $ 5.47 $ 5.40 $ 5.62 $ 6.03 $ 5.84
Market value of common stock $ 10.75 $ 12.25 $ 12.00 $ 10.00 $ 13.00 $ 17.63
Price earnings ratio of stock prices 19.9 22.7 22.6 -- 27.7 40.1
Capital expenditures $ 34,411 $ 14,358 $ 12,676 $ 7,113 $ 15,114 $ 24,046
Number of registered shareholders 866 984 1,102 1,306 1,470 1,503
Number of employees 1,341 1,297 1,097 1,267 1,320 1,480
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) After a charge in 1992 of $10.65 million or $.26 per share resulting from
the cumulative effect of a change in accounting principle for income taxes.
(b) After a charge in 1994 of $24.25 million or $.59 per share resulting from a
restructuring of operations.
Quarterly Financial Data--Unaudited
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------- ----------------------------------------
(Thousands except per 1st 2nd 3rd 4th 1st 2nd 3rd 4th
share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $79,892 $88,803 $78,382 $80,423 $68,989 $74,945 $69,451 $76,811
Gross profit $30,873 $34,123 $30,618 $29,257 $25,760 $27,751 $26,239 $29,846
Net income $ 5,432 $ 7,250 $ 5,438 $ 3,458 $ 4,782 $ 6,085 $ 4,406 $ 6,365
===================================================================================================================================
Common Stock Data:
Net income per common
share (basic and diluted) $ .14 $ .18 $ .14 $ .09 $ .12 $ .15 $ .11 $ .16
===================================================================================================================================
Average common shares
outstanding 39,675 39,677 39,690 39,741 40,419 40,419 40,417 39,816
</TABLE>
Common Shares and Market Information
Common shares are traded on the New York Stock Exchange under the trading symbol
CCC. There were 866 registered shareholders at year end.
Quarterly Common Stock Price Ranges and Dividends
<TABLE>
<CAPTION>
1997 1996
---------------------------------- -------------------------------------
Fiscal Quarter High Low Dividend High Low Dividend
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First 12 7/8 10 5/8 $.080 13 10 3/4 $.080
Second 14 1/4 10 7/8 $.080 14 5/8 11 1/2 $.080
Third 15 12 $.080 14 9 1/2 $.080
Fourth 13 7/16 10 1/2 $.080 12 1/2 9 3/4 $.080
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-8 (No. 33-34019
and No. 333-01019) of Calgon Carbon Corporation of our report dated February
3, 1998, appearing on page 21 of the Annual Report to Stockholders which is
incorporated in this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
600 Grant Street
Pittsburgh, Pennsylvania 15219-2793
March 25, 1998
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,982
<SECURITIES> 0
<RECEIVABLES> 67,888
<ALLOWANCES> 0
<INVENTORY> 50,954
<CURRENT-ASSETS> 143,555
<PP&E> 339,320
<DEPRECIATION> 151,238
<TOTAL-ASSETS> 423,457
<CURRENT-LIABILITIES> 82,339
<BONDS> 0
0
0
<COMMON> 43,217
<OTHER-SE> 178,863
<TOTAL-LIABILITY-AND-EQUITY> 423,457
<SALES> 327,500
<TOTAL-REVENUES> 327,500
<CGS> 202,629
<TOTAL-COSTS> 289,139
<OTHER-EXPENSES> 1,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,057
<INCOME-PRETAX> 33,189
<INCOME-TAX> 11,716
<INCOME-CONTINUING> 21,578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,578
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
